Dodo bird  graphic makes Connecticut look good, or at least not worst!  For exactly how bad, click here
So who was Guy Fawkes?


OMG - now the government can pull an "I didn't know"
Breaking Laws in the Mortgage Bubble
MAY 15, 2015

The government won a big victory this week in a case against two banks that were found to have systematically deceived investors about shoddy mortgage securities they peddled during the housing bubble. “The magnitude of falsity, conservatively measured, is enormous,” wrote Judge Denise Cote of Federal District Court in Manhattan in a strongly worded 361-page ruling.

The banks are Nomura Holdings of Japan and the Royal Bank of Scotland. The investors are Fannie Mae and Freddie Mac, the government-run mortgage agencies. The case was brought by the Federal Housing Finance Agency, the overseer of Fannie and Freddie.

The government’s victory in this case raises an interesting question: If the relatively unknown housing finance agency could prevail over foreign banks, why haven’t far more powerful regulators and prosecutors at the Department of Justice and the Securities and Exchange Commission done more to expose and redress wrongdoing by big Wall Street banks in the mortgage bubble?
A judge ruled that the Royal Bank of Scotland misled investors during the housing bubble. Credit Warren Allott/Agence France-Presse — Getty Images

The post-bubble role of the housing finance agency has been important but relatively narrow: to recoup losses attributable to securities law violations and, in some cases, fraud by banks that sold mortgages to Fannie and Freddie. It has settled most of its suits, and it went to court against Nomura and R.B.S. when the two refused to settle. Assuming an expected appeal fails, the banks will owe damages estimated at about $500 million.

The Justice Department and the S.E.C., by contrast, have a broader obligation to enforce rights and laws and to punish and deter wrongdoing, a mission that comes with vast investigatory and enforcement powers. Yet in cases involving major banks and the mortgage bubble, they have acted as if their main job is to extract fines. They have relied almost exclusively on big settlements without demanding accountability. Banks have rarely been required to admit wrongdoing, and names have rarely been named.

Moreover, the Justice Department has approached the process in a way that has sidestepped the need for a judge to sign off on the mortgage-related settlements, a procedure intended to ensure that settlement deals are in the public interest.

The trial against Nomura and R.B.S. rebuts the widespread notion that banks’ greed during the bubble did not amount to lawbreaking, that somehow it was the housing crash, and not deceptive practices, that caused the bonds to collapse. And it is a reminder that the banks that settled, by avoiding a detailed public airing of their conduct, have been shielded from full accountability for the consequences of their behavior. This does not bode well for the stability of the economy or the rule of law.

About Town feels that housing is a lagging indicator for the economy...

Markets jump for joy on Fed decision
News of tapering of bond-buying is seen as vote of confidence for the economy
Article published Dec 19, 2013

Washington - The Federal Reserve has sent its strongest vote of confidence in the U.S. economy since the Great Recession struck six years ago: It's decided the economy is finally strong enough to withstand a slight pullback in the Fed's stimulus.  Yet the Fed also made clear it's hardly withdrawing its support for an economy that remains below full health. Chairman Ben Bernanke stressed at a news conference that the Fed would still work to keep borrowing rates low to try to spur spending and growth and increase very low inflation.

The Fed said in a statement after its policy meeting ended Wednesday that it will trim its $85 billion a month in bond purchases by $10 billion starting in January. And Bernanke said the Fed expects to make "similar moderate" cuts in its purchases if economic gains continue.  At the same time, the Fed strengthened its commitment to record-low short-term rates. It said it plans to hold its key short-term rate near zero "well past" the time when unemployment falls below 6.5 percent. Unemployment is now 7 percent.

The Fed's bond purchases have been intended to drive down long-term borrowing rates by increasing demand for the bonds. The prospect of a lower pace of purchases could mean higher loans rates over time. 
Nevertheless, Wall Street seemed elated by the Fed's finding that the economy has steadily strengthened, by its firm commitment to low short-term rates and by the only slight amount by which it's paring its bond purchases.  The Dow Jones industrial average soared nearly 300 points. Bond prices fluctuated, but by late afternoon the yield on the 10-year Treasury note had barely moved. It inched up to 2.89 percent from 2.88 percent.

"We're really at a point where we're getting to the self sustaining recovery that the Fed has been talking about," Scott Anderson, chief economist of Bank of the West. "It really seems like that's going to come together in 2014."

The Fed's move "eliminates the uncertainty as to whether or when the Fed will taper and will give markets the opportunity to focus on what really matters, which is the economic outlook," said Roberto Perli, a former Fed economist who is now head of monetary policy research at Cornerstone Macro.

But Perli noted that the Fed will continue to buy bonds every month to keep long-term rates down and remains strongly committed to low short-term rates. By keeping rates historically low, the Fed "will continue to remain very supportive of risky assets" such as stocks, Perli said.

The stock market has enjoyed a spectacular 2013, fueled in part by the Fed's low-rate policies. Those rates have caused many investors to shift money out of low-yielding bonds and into stocks, thereby driving up stock prices. Still, the gains have been unevenly distributed: About 80 percent of stock market wealth is held by the richest 10 percent of Americans.  In updated economic forecasts it issued Wednesday, the Fed predicted that unemployment would fall a bit further over the next two years than it thought in September. And it expects inflation to remain below the Fed's target level.

The Fed expects the unemployment rate to dip as low as 6.3 percent next year and 5.8 percent in 2015. Unemployment has fallen faster this year than policymakers had predicted.  And Fed policymakers predict that their preferred inflation index won't reach its target of 2 percent until the end of 2015 at the earliest. For the 12 months ending in October, the index is just 0.7 percent.  The Fed worries about very low inflation because it can lead people and businesses to delay purchases. Extremely low inflation also makes it costlier to repay loans.

In its statement, the Fed says it will reduce its purchases of mortgage- bonds and Treasury bonds each by $5 billion. Beginning in January, it will buy $35 billion in mortgage bonds each month and $40 billion in Treasurys.  The bond purchases have helped keep long-term interest rates low to encourage more borrowing and spending.

The Fed's actions were approved on a 9-1 vote.  The only member to object was Eric Rosengren, president of the Federal Reserve Bank of Boston. He called the move premature because unemployment remains high and inflation extremely low.  The Fed's action comes after encouraging reports that show the economy is accelerating:

The economy is improving consistently, and the Fed is "now recognizing the trend and decided to go with the flow," said John Silvia, chief economist at Wells Fargo.

Congressional Report Blames Corzine for MF Global’s Collapse
November 14, 2012, 1:34 pm

Congressional investigators on Wednesday took aim at a former colleague, Jon S. Corzine, blaming the onetime senator's risk-taking at MF Global for accelerating the brokerage firm's demise.

In excerpts from a broader MF Global report to be released on Thursday, Republican members of a Congressional panel outlined a withering critique of Mr. Corzine's 19-month tenure at the firm. The former Democratic senator and governor from New Jersey resigned as MF Global's chief executive last fall after the firm raided customer accounts during a futile fight for its life.

While the Republican report avoided pinning blame on Mr. Corzine for the missing customer money, sidestepping whether a crime was committed, it argued that his fixation with risk positioned him as a central player in the firm's collapse.

In a series of potential missteps, the report said, Mr. Corzine missed warning signs about MF Global's weak liquidity position and he torpedoed an overhaul of the firm's risk controls. Citing "a dereliction of his duty," the report claims that the moves arguably left customers vulnerable to the invasion of their accounts.

The findings from the oversight panel of the House Financial Services Committee further show that Mr. Corzine was the architect of a $6.3 billion bet on European debt - a trade so big that it spooked the markets and forced a run on the firm. When subordinates challenged Mr. Corzine's European gamble, according to the report, he imposed an "authoritarian atmosphere" in which he ejected the aides and installed sympathetic executives he knew from his days at Goldman Sachs.

"Choices made by Jon Corzine during his tenure as chairman and C.E.O. sealed MF Global's fate," Representative Randy Neugebauer, a Republican from Texas who is overseeing the report as chairman of the oversight panel, said in a statement.

The report is an aggressive rebuke of a former co-head of Goldman who was a longtime confidant of Washington and Wall Street elite. Yet Mr. Corzine's defenders are likely to dismiss the excerpts, which shed little new light on his actions, as a political attack on the former Democratic official.

The report is also unlikely to chip away at Mr. Corzine's legal defense. Federal authorities have all but officially removed the darkest cloud looming over Mr. Corzine: the threat of criminal charges.

And Mr. Corzine has noted that his bet on European debt, while alarming to some, ultimately proved profitable for the firms that took over the positions. Mr. Corzine, his supporters say, placed the wager after inheriting a firm that faced extinction following five consecutive quarters of losses.

Mr. Corzine's spokesman did not immediately respond to a request for comment.

The excerpts divulged on Wednesday offer a preview of a long-awaited Congressional report that is expected to deconstruct the firm's downfall. The House panel's full findings, built on more than 50 witness interviews and an analysis of more than 243,000 documents, will likely strike at an array of regulatory and management failures in the lead up to MF Global's October 2011 bankruptcy. The report will also examine the role that credit rating agencies played in the firm's undoing.

The panel's yearlong investigation builds on a parallel examination led by James Giddens, the court-appointed trustee seeking to recover money for MF Global's customers. The report's findings led Mr. Giddens to sue several top MF Global executives, including Mr. Corzine, saying they breached their fiduciary duties to the firm and its customers.

The various reports detail the latest chapter in the MF Global story. Farmers and ranchers, who traded futures contracts through MF Global to protect themselves from the price swings of their crops, have recouped about 82 percent of their money but are still owed millions of dollars.

And regulators continue to investigate how MF Global improperly transferred about $1 billion in customer money to pay its own bills as the firm spun out of control. The Commodity Futures Trading Commission could still file a civil enforcement action against Mr. Corzine for failing to supervise employees who tapped the customer accounts. The Securities and Exchange Commission, according to people briefed on the matter, is also building potential enforcement cases surrounding the firm's limited disclosures about the European bet.

But federal investigators do not expect to file criminal charges against top executives, the people briefed on the matter said. The investigators, citing internal e-mails, have concluded that a state of chaos and sloppy record-keeping caused the money to vanish. An e-mail reviewed by The New York Times shows that an MF Global employee explicitly assured Mr. Corzine that money he wanted to transfer belonged to the firm, not customers.

Lawmakers were unsatisfied. They hauled Mr. Corzine to Washington three times last year to explain the missing money. In unwavering testimony, Mr. Corzine explained that he never intended to authorize the misuse of customer funds.

    Copyright 2012 The New York Times Company
    Privacy Policy 620 Eighth Avenue New York, NY 10018

Hoping to Fend Off Suits, G.M. Is to Return to Bankruptcy Court
MAY 1, 2014

An unusual meeting took place this week at a law office high in a Times Square skyscraper. Lawyers from about 100 law firms participated, either in person or by phone. The agenda: solidifying a strategy for taking on General Motors in bankruptcy court.

Bankruptcy court was supposed to be a fading memory for the giant automaker. But on Friday, less than five months after declaring the era of “Government Motors” over and done with, the new G.M., which just completed its 17th consecutive profitable quarter, will be back before Judge Robert E. Gerber in the Federal Bankruptcy Court of the Southern District of New York, girding for a new fight.

On the surface, G.M. is merely asking the judge to enforce a provision of its July 10, 2009, bankruptcy reorganization that insulated the “new” company from lawsuits stemming from accidents that occurred before that date.

But the reason for the request is far from routine. The company is trying to shut down a rising tide of class-action lawsuits stemming from its recall of 2.6 million cars because of a dangerously defective ignition switch that it now links to 13 deaths.

Asking a judge to enforce part of a restructuring happens in many bankruptcy cases. But in this situation, some bankruptcy experts say, it may be a risky move. Objections have poured into the court from plaintiffs in cases around the country, alleging that the company committed fraud during the bankruptcy proceedings five years ago by not disclosing the potential liabilities from the faulty switch, a problem it now admits was known in parts of the company for more than a decade before the recall.

“I think it’s a gamble from G.M.’s perspective,” said David A. Skeel, a bankruptcy specialist at the University of Pennsylvania School of Law and the author of “Debt’s Dominion: A History of Bankruptcy Law in America.” “If I were the judge, I would not give them a carte blanche and say this litigation has got to stop. I suspect the response will be more nuanced than that.”

In fact, he and others say, the otherwise routine motion could potentially end up leading to a mini-trial of sorts, on whether or not fraud was committed. If that happens, Mr. Skeel said: “In a way, it’s we’re redoing the bankruptcy. It’s quite possible this trial could be a larger event than the real bankruptcy.”

If allegations of fraud become a focus, the proceedings could go a long way toward answering a question that two congressional investigations, countless news reports and other inquiries have not been able to ascertain so far — how high up in the company did the knowledge of the switch defect go? G.M. has largely declined to make employees available for questioning and has continually cited its own internal investigation.

The two lead lawyers representing G.M. in its motion to enforce the bankruptcy order did not return phone calls. But outside lawyers say the company may still have the upper hand. There is a generally accepted feeling that judges do not like to tamper with sales or restructuring plans and that the greater economic good of this one — which has been credited not only with saving the company, but also preventing the American economy from sinking deeper into recession — may be paramount.

Whatever the outcome for G.M. and the plaintiffs who have filed lawsuits against it, the result could have wider implications for American business.

“This may be an important case for teaching us how bankruptcy sales can relieve a company of its past mistakes,” said Richard Levin, head of the restructuring practice at Cravath, Swaine & Moore.

Some lawyers note that whatever Judge Gerber decides is likely to be appealed by the losing side and could possibly end up in the Supreme Court.

The bankruptcy court proceeding on Friday is a procedural conference — “No substantive matters will be decided at the conference, nor will evidence be taken,” wrote Judge Gerber in an order — but it sets the starting point of a process that could be lengthy and perilous.

In a quarterly filing with the Securities and Exchange Commission last week, G.M. said it was aware of 59 putative class-action suits filed on behalf of owners of cars with the defective switch, seeking compensation for economic losses, including diminution in value of the vehicles.

Lawyers for the myriad cases this week selected three among them to take the lead role before the judge on Friday and possibly beyond — Edward S. Weisfelner, head of the corporate bankruptcy and restructuring practice group at Brown Rudnick, who organized the large meeting in New York this week; Sander L. Esserman of Stutzman, Bromberg, Esserman and Plifka in Dallas; and Elihu Inselbuch of Caplin and Drysdale in New York.

“We are going to ask the new G.M. for some admissions and stipulated facts,” Mr. Weisfelner said. “The basic issues are that old G.M. knew about this defect, could reasonably ascertain who the affected consumers were, should have and could have given direct notice.”

He concluded: “These people were deprived of their due process.”

Part of G.M.’s strategy has been to take some of the emotion out of the bankruptcy court battle by moving for the dismissal only of the economic loss cases — and not any personal injury or wrongful death lawsuits tied to the ignition defect. While that might soften the public relations blow a bit, getting rid of the economic cases is probably more valuable to the company since the price tag for dozens of class actions is likely to be higher.

G.M. has hired Kenneth Feinberg, a lawyer who has set up victims’ compensation funds in numerous disasters, including the Boston Marathon bombings and the BP oil spill, to come up with a way to deal with the personal injury claims outside the courts.

After G.M. was shepherded through its 39-day bankruptcy proceedings by the federal government, the company had no intention of ever returning to court or revisiting that humbling chapter in its history. Executives portrayed G.M. as grateful for its $49.5 billion federal bailout, but intent on proving that it would never need help again to survive.

Once the new G.M. went public in 2010, its chief executive, Daniel Akerson, would rarely refer directly to the bankruptcy case, preferring to call it a “second chance.” And as the automaker began growing again and making big profits, Mr. Akerson asserted that G.M. was a new entity with little connection to its tumultuous past.

At a speech in December, he said the company’s “Government Motors” nickname had thankfully faded. “To be honest, we don’t hear it that much anymore,” he said. (Reached at his home recently, Mr. Akerson declined to discuss the ignition switch issue.)

When Mary T. Barra succeeded Mr. Akerson as chief executive this year, she took a similar tack. “There’s been a sense that since the restructuring, there has been a righting of the ship,” she said in an interview on Jan. 23.

But eight days later, Ms. Barra learned that the company’s safety investigators were recommending a recall of older-model Chevrolet Cobalts and other small cars for the potentially deadly flaw in their ignition switches — the beginning of a series of events that would place it on a path back to bankruptcy court.

The Democrats’ GM Fiction
Washington Times
By The Editors
September 10, 2012 4:00 A.M.

The Democrats have decided to run in 2012 as the bailout party. It is an odd choice — the 2008–09 bailouts were deeply unpopular among the general public, and even their backers were notably conflicted about the precedent being set and the ensuing moral hazard. But Democrats have nonetheless made one of the most abusive episodes in the entire bailout era their economic cornerstone: the government takeover of General Motors.

The GM bailout was always an odd duck: The Troubled Asset Relief Program (TARP) was created in order to preserve liquidity in the financial markets by heading off the collapse of key financial institutions that had made catastrophically bad bets on real-estate securities — nothing at all to do with cars, really. GM’s financial arm, today known as Ally Financial, was in trouble, but GM’s fundamental problem was that its products were not profitable enough to support its work-force expenses. A single dominant factor — the United Auto Workers union’s extortionate contracts with GM — prevented the carmaker from either reducing its work-force costs or making its products more efficiently. And its hidebound management didn’t help.

Admirers of the GM bailout should bear in mind that it was the Bush administration that first decided to intervene at the firm, offering a bridge loan on the condition that it draw up a deeply revised business plan. President Obama’s unique contribution was effectively to nationalize the company, seeing to it that the federal government violated normal bankruptcy processes and legal precedent to protect the defective element at the heart of GM’s troubles: the financial interests of the UAW. It did this by strong-arming GM’s bondholders into taking haircuts in order to sweeten the pot for the UAW. The Obama administration also creatively construed tax law to relieve GM of tens of billions of dollars in obligations — at the same time that Barack Obama & Co. were caterwauling about the supposed lack of patriotism of firms that used legal means rather than political favoritism to reduce their tax bills.

Mitt Romney’s proposal for a structured bankruptcy would have necessitated considerable federal involvement, too, but with a key difference: The UAW contracts would have been renegotiated, and GM’s executive suites would have been cleaned out, placing the company on a path toward innovation and self-sufficiency rather than permanent life support. Which is to say, Obama did for GM what he is doing by un-reforming welfare: creating a dependent constituency.

The Democrats cling to the ridiculous claim that the bailout of GM and its now-Italian competitor, Chrysler, saved 1.5 million U.S. jobs. This preposterous figure is based on the assumption that if GM and Chrysler had gone into normal bankruptcy proceedings, the entire enterprise of automobile manufacturing in the United States would have collapsed — not only at GM and Chrysler but at Ford and foreign transplants such as Toyota and Honda. Not only that, the Democrats’ argument goes, but practically every parts maker, supplier, warehousing agency, and services firm dedicated to the car industry would have collapsed, too. In fact, it is unlikely that even GM or Chrysler would have stopped production during bankruptcy: The assembly lines would have continued rolling, interest and debt payments would have been cut, and — here’s the problem — union contracts would have been renegotiated. Far from having saved 1.5 million jobs, it is not clear that the GM bailout saved any — only that it preserved the UAW’s unsustainable arrangement.

Bill Clinton bizarrely tried to claim that the bailout has been responsible for the addition of 250,000 jobs to the automobile industry since the nadir of the financial crisis. Auto manufacturers and dealerships have indeed added about 236,000 jobs since then, but almost none are at GM, which has added only about 4,500 workers, a number not even close to offsetting the 63,000 workers that its dealerships had to let go when the terms of the bailout unilaterally shut them down.

Ugly as the bank bailouts were, the federal government appears set to make its money back on most of them, with the exception of some smaller regional banks and CIT. Even AIG, one of the worst of the financial basket cases, is set to end up being a break-even proposition for U.S. taxpayers. But tens of billions of dollars will be lost on GM. The federal government put up more for a 60 percent interest in the firm than GM is worth today.

At their convention, Democrats swore that GM is “thriving,” but the market doesn’t think so: GM shares have lost half their value since January 2011. And while the passing of the Great Recession has meant growing sales for all automakers, GM is seriously lagging behind its competitors: Its sales are up 10 percent, a fraction of the increases at Kia, Toyota, Volkswagen, and Porsche. With its sales weak, its share price crashing, and its business model still a mess, some analysts already are predicting that GM will return to bankruptcy — but not until after the election.

The Obama administration talks up all of the “jobs” it saved at GM — but jobs doing what? Manufacturing automobiles that are not competitive without a massive government subsidy? Propping up an economically unviable enterprise just long enough to get Barack Obama reelected? As much as it will pain the hardworking men and women of GM to hear it, it is not worthwhile to save jobs at enterprises that cannot compete on their own merits. So long as the federal government is massively subsidizing the operation, a job at GM is a welfare program with a fairly robust work requirement. (And we all know how the Obama administration feels about work requirements.)

We have bankruptcy laws and bankruptcy courts for a reason. It may make sense to expedite the proceedings for very large firms such as GM in order to prevent disruptions in the supply chain that would, as Ford’s executives argued, harm other, healthier firms. But bankrupt is what GM was, and bankrupt is what GM is, a fact that will become blisteringly apparent should the government ever attempt to sell off the shares it owns in the company.

The GM bailout was a bad deal for GM’s creditors, for U.S. taxpayers, and, in the long run, for the U.S. automobile industry and our overall national competitiveness. No wonder the Democrats are campaigning on a fictionalized account of it.

The next Corzine Q’s
Last Updated: 12:48 AM, December 14, 2011
Posted: 12:07 AM, December 14, 2011

By playing the fool in two high-profile hearings, Jon Corzine so far has been able to deftly sidestep lawmakers’ questions about the now-infamous implosion of MF Global, including the disappearance of a whopping $1.2 billion in customer money that should have been kept safe in brokerage accounts. But new questions are about to arise.

Specifically: How did Corzine manage to convince regulators that a relatively small brokerage like MF Global was ready for big-time status, both as a risk-taking hedge fund and (even more startling) as a primary dealer of US government debt — a status that only a very few firms are allowed?

The likely explanation involves Corzine’s long experience at the nexus of politics and finance — as CEO of Goldman Sachs, then US senator and New Jersey governor, and of course as a leading Obama fund-raiser. In other words, crony capitalism.

Corzine is to appear before the House Financial Services Committee’s Subcommittee on Oversight and Investigations tomorrow, and informed sources tell me the panel is keenly interested in how Corzine (who’d been out of the brokerage business for over a decade) managed to take this firm from nothing to something almost overnight — that is, before its spectacular demise last month.

Keep in mind that being a primary dealer — with the rare privilege to underwrite US government debt sold at auction and then resell those bonds to investors — is no small-fry position. The coveted assignment is usually reserved for the biggest firms that are also considered the market’s safest bets.

The New York Fed selects the best and most financially solid firms for this task for obvious reasons: When markets become volatile, it wants to make sure the firm buying government bonds can withstand the volatility. In other words, the government wants to make sure its primary dealers can take a punch and won’t implode at the slightest turn of the markets.

Yet MF Global was anything but one of the market’s soundest outfits. Not only did a simple disclosure of its of its European debt exposure cause a severe cash-crunch, but the very fact that it lost more than $1 billion in customer funds during its final hours shows that (at minimum) MF Global lacked basic and routine controls.

So how did all of this manage to evade regulators, despite all the new rules promulgated in the aftermath of the 2008 financial crisis?

Well, William Dudley, who runs the New York Fed (which, again, selected MF Global as a primary dealer), is just one of Corzine’s old Goldman cronies to be found in the MF Global mess.

That the two worked together at Goldman doesn’t necessarily mean Corzine got a break from an old colleague. In fact, Corzine has said that he “never spoke” with Dudley about the primary dealer matter, at least to the “best of my recollection.”

But committee members are skeptical, not just about Corzine’s “best recollection,” but also because, according to a person close to the subcommittee, “MF Global tried to get primary-dealer status prior to Corzine . . . and once Corzine became CEO, MF Global got primary-dealer status.”

That status gave MF Global greatly added legitimacy, bringing in clients and letting CEO Corzine transform it into a risk-taking trading shop — without, it seems, the most rudimentary controls to protect customer cash.

Whose job was it to make sure those controls were in place? Certainly at the top of the list is the Commodity Futures Trading Commission, run by yet another Goldman alum, Gary Gensler.

The implosion of MF Global and the disappearance of customer cash may well turn out to involve massive fraud and deception. But the firm’s expansion to that point may involve something equally sinister but completely legal: The ability to work the system, which seems to be Corzine’s greatest feat.

Financial terrorism suspected in 2008 economic crash;  Pentagon study sees element
By Bill Gertz,
The Washington Times
8:54 p.m., Monday, February 28, 2011

Evidence outlined in a Pentagon contractor report suggests that financial subversion carried out by unknown parties, such as terrorists or hostile nations, contributed to the 2008 economic crash by covertly using vulnerabilities in the U.S. financial system.

The unclassified 2009 report "Economic Warfare: Risks and Responses" by financial analyst Kevin D. Freeman, a copy of which was obtained by The Washington Times, states that "a three-phased attack was planned and is in the process against the United States economy."

While economic analysts and a final report from the federal government's Financial Crisis Inquiry Commission blame the crash on such economic factors as high-risk mortgage lending practices and poor federal regulation and supervision, the Pentagon contractor adds a new element: "outside forces," a factor the commission did not examine.

"There is sufficient justification to question whether outside forces triggered, capitalized upon or magnified the economic difficulties of 2008," the report says, explaining that those domestic economic factors would have caused a "normal downturn" but not the "near collapse" of the global economic system that took place.

Suspects include financial enemies in Middle Eastern states, Islamic terrorists, hostile members of the Chinese military, or government and organized crime groups in Russia, Venezuela or Iran. Chinese military officials publicly have suggested using economic warfare against the U.S.

In an interview with The Times, Mr. Freeman said his report provided enough theoretical evidence for an economic warfare attack that further forensic study was warranted.

"The new battle space is the economy," he said. "We spend hundreds of billions of dollars on weapons systems each year. But a relatively small amount of money focused against our financial markets through leveraged derivatives or cyber efforts can result in trillions of dollars in losses. And, the perpetrators can remain undiscovered.

"This is the equivalent of box cutters on an airplane," Mr. Freeman said.

Paul Bracken, a Yale University professor who has studied economic warfare, said he saw "no convincing evidence that 'outside forces' colluded to bring about the 2008 crisis."

"There were outside players in the market" for unregulated credit default swaps, Mr. Bracken said in an e-mail. "Foreign banks and hedge funds play the shorts all the time too. But suggestions of an organized targeted attack for strategic reasons don't seem to me to be plausible."

Regardless of the report's findings, U.S. officials and outside analysts said the Pentagon, the Treasury Department and U.S. intelligence agencies are not aggressively studying the threats to the United States posed by economic warfare and financial terrorism.

"Nobody wants to go there," one official said.

A copy of the report also was provided to the recently concluded Financial Crisis Inquiry Commission, but the commission also declined to address the possibility of economic warfare in its final report.

Officials, who spoke on the condition of anonymity, said senior Pentagon policymakers, including Michael Vickers, an assistant defense secretary in charge of special operations, blocked further study, saying the Pentagon was not the appropriate agency to assess economic warfare and financial terrorism risks.

Mr. Vickers declined to be interviewed but, through a spokesman, said he did not say economic warfare was not an area for the Pentagon to study, and that he did not block further study.

Mr. Vickers is awaiting Senate confirmation on his promotion to be undersecretary of defense for intelligence.

Despite his skepticism of the report, Mr. Bracken agreed that financial warfare needs to be studied, and he noted that the U.S. government is only starting to address the issue.

"We are in an era like the 1950s where technological innovation is transforming the tools of coercion and war," he said. "We tend not to see this, and look at information warfare, financial warfare, precision strike, [weapons of mass destruction], etc. as separate silos. It's their parallel co-evolution that leads to interesting options, like counter-elite targeting. And no one is really looking at this in an overall 'systems' way. Diplomacy is way behind here."

Mr. Freeman wrote the report for the Pentagon's Irregular Warfare Support Program, part of the Combating Terrorism Technical Support Office, which examines unconventional warfare scenarios.

"The preponderance of evidence that cannot be easily dismissed demands a thorough and immediate study be commenced," the report says. "Ignoring the likelihood of this very real threat ensures a catastrophic event."

The report concluded that the evidence of an attack is strong enough that "financial terrorism may have cost the global economy as much as $50 trillion."

Because of secrecy surrounding global banking and finance, finding the exact identities of the attackers will be difficult.

But U.S. opponents in Russia who could wage economic warfare include elements of the former KGB intelligence and political police who regard the economy as a "logical extension of the Cold War," the report says.

Asked by The Times who he thought to be the most likely behind the financial attacks, Mr. Freeman said: "Unfortunately, the two major strategic threats, radical jihadists and the Chinese, are among the best positioned in the economic battle space."

Also, the report lists as suspects advocates of Islamic law, who have publicly called for opposition to capitalism as a way to promote what they regard as the superiority of Islam.

Further Pentagon Low Intensity Conflict office research into possible economic warfare or financial terrorism being behind the economic collapse by the Pentagon's Special Operations and was blocked, Mr. Freeman said.

The Pentagon report states that the evidence of financial subversion revealed that the first two phases of an attack on the U.S. economy took place from 2007 to 2009 and "based on recent global market activity, it appears that the predicted Phase III may be underway right now."

The report states that federal authorities must further investigate two significant events in the months leading up to the financial crisis.

The first phase of the economic attack, the report said, was the escalation of oil prices by speculators from 2007 to mid-2008 that coincided with the housing finance crisis.

In the second phase, the stock market collapsed by what the report called a "bear raid" from unidentified sources on Bear Stearns, Lehman Brothers and other Wall Street firms.

"This produced a complete collapse in credit availability and almost started a global depression," Mr. Freeman said.

The third phase is what Mr. Freeman states in the report was the main source of the economic system's vulnerability. "We have taken on massive public debt as the government was the only party who could access capital markets in late 2008 and early 2009," he said, placing the U.S. dollar's global reserve currency status at grave risk.

"This is the 'end game' if the goal is to destroy America," Mr. Freeman said, noting that in his view China's military "has been advocating the potential for an economic attack on the U.S. for 12 years or longer as evidenced by the publication of the book Unrestricted Warfare in 1999."

Additional evidence provided by Mr. Freeman includes the statement in 2008 by Treasury Secretary Henry M. Paulson Jr. that the Russians had approached the Chinese with a plan to dump its holdings of bonds by the federally backed mortgage companies Fannie Mae and Freddie Mac.

Among the financial instruments that may have been used in the economic warfare scenario are credit default swaps, unregulated and untraceable contracts by which a buyer pays the seller a fee and in exchange is paid off in a bond or a loan. The report said credit default swaps are "ideal bear-raid tools" and "have the power to determine the financial viability of companies."

Another economic warfare tool that was linked in the report to the 2008 crash is what is called "naked short-selling" of stock, defined as short-selling financial shares without borrowing them.

The report said that 30 percent to 70 percent of the decline in stock share values for two companies that were attacked, Bear Stearns and Lehman Brothers, were results of failed trades from naked short-selling.

The collapse in September 2008 of Lehman Brothers, the fourth-largest U.S. investment bank, was the most significant event in the crash, causing an immediate credit freeze and stock market crash, the report says.

In a section of who was behind the collapse, the report says determining the actors is difficult because of banking and financial trading secrecy.

"The reality of the situation today is that foreign-based hedge funds perpetrating bear raid strategies could do so virtually unmonitored and unregulated on behalf of enemies of the United States," the report says.

"Only recently have defense and intelligence agencies begun to consider this very real possibility of what amounts to financial terrorism and-or economic warfare."

As for Chinese involvement in economic sabotage, the decline in the world economy may have hurt Beijing through a decline in purchases of Chinese goods.

Treasury spokeswoman Marti Adams had no immediate comment on the report but said her department's views on the causes of the economic crash were well known.

© Copyright 2011 The Washington Times, LLC. Click here for reprint permission.

Bernanke says debt limit battle risks crisis
By Pedro Nicolaci da Costa
14 June 2011

WASHINGTON (Reuters) – Federal Reserve Chairman Ben Bernanke warned on Tuesday that a failure to lift the government's $14.3 trillion debt ceiling risks a potentially disastrous loss of confidence in America's creditworthiness.

Bernanke said in the absence of a quick resolution to the battle over the debt limit, the United States could lose its prized AAA credit rating, while the U.S. dollar's special status as a reserve currency might be damaged.

"Even a short suspension of payments on principal or interest on the Treasury's debt obligations could cause severe disruptions in financial markets and the payments system," Bernanke said in remarks prepared for delivery at an event sponsored by the Committee for a Responsible Federal Budget.

Inaction could also "create fundamental doubts about the creditworthiness of the United States, and damage the special role of the dollar and Treasury securities in global markets in the long term," Bernanke added.

Vice President Joe Biden and top lawmakers, set to resume budget negotiations on Tuesday, must work around a stark divide on taxes and healthcare as they look for trillions of dollars in savings that would give Congress the political cover to raise the debt ceiling before the government runs out of money.

The Treasury Department has warned the government will begin defaulting on its obligations -- whether debt payments or other bills coming due -- if Congress does not increase the limit by August 2.

"We could actually have a reprise of a financial crisis, if we play this too close to the line. So we're going be working hard over the next month," President Barack Obama warned on Tuesday.

Bernanke also repeated his calls for a long-term budget plan. He said that while a considerable portion of recent deficits was due to fallout from the recession, which led to lower revenues and higher stimulus spending, large "structural" budget issues remain.

Developing a plan now for how to reduce that debt load over time could bolster economic activity today by keeping borrowing costs down and boosting confidence, Bernanke argued.

"Maintaining the status quo is not an option," Bernanke said.

He urged the Congress and the administration to work together to come up with ways to bring down the debt.

"I hope, though, that such a plan can be achieved in the near term without resorting to brinkmanship," he said.

G.O.P. Stopgap May Avert Federal Shutdown
February 25, 2011

WASHINGTON — The prospect of an imminent federal government shutdown diminished Friday as House Republicans proposed a carefully calibrated stopgap measure that Democrats said could be acceptable.

Under the proposal, the law now keeping the government open would be extended two more weeks, until March 18, at the price of $4 billion in new spending cuts. In the interim, House and Senate leaders would try to negotiate a broader plan to finance the government at reduced levels through Sept. 30.

While the measure, which will be considered by the House and Senate next week, represents only a reprieve, it showed that both Republicans and Democrats were interested in easing the political tensions around the budget showdown.

As they adjust to the new power structure on Capitol Hill, both sides have said they hope to avoid an impasse that could shutter federal agencies. To make it harder for Democrats to object to the temporary plan, Republican architects of the proposal tried to make the cuts relatively painless.

They came up with the $4 billion by ending eight education, transportation and other programs that President Obama had previously sought to close down, a savings of almost $1.2 billion. They also reclaimed nearly $2.8 billion set aside for earmarks in the current budget; both the House and Senate have agreed to ban such pet projects.

“We hope the Senate is going to finally join us in these common-sense cuts to keep the government open and not continue to play chicken,” said Representative Eric Cantor, the Virginia Republican and majority leader.

Senate Democrats indicated they would be willing to go along with the proposal despite their insistence earlier this week that any temporary measure should be free of spending reductions. They had portrayed such a maneuver as a back-door way for House Republicans to begin enacting $61 billion in cuts that have met objections in the Senate.

“We are encouraged to hear that Republicans are abandoning their demands for extreme measures like cuts to border security, cancer research and food safety inspectors,” said Jon Summers, a spokesman for Senator Harry Reid of Nevada, the majority leader.

If approved, the measure would buy time for more talks on the depth of spending cuts.

If the House and Senate do not reach a deal by March 18 under the latest proposal, they will once again face the prospect of closing federal agencies or be forced to enact another temporary extension.

Republicans said their willingness to fashion a measure that involved relatively uncontroversial cuts and was free of the more ideologically charged provisions included in the $61 billion plan showed that they were sincere when they said their main interest was reducing spending, not shutting down the government.

“This is to get the government moving forward but to cut spending in government,” said Representative Kevin McCarthy of California, the No. 3 Republican. “I don’t see how Democrats can’t take these basic steps toward reining in government while keeping our government operational.”

But Democrats said their efforts to raise the alarm about a possible shutdown due to Republican demands for deep cuts in a variety of federal agencies had paid off. They said Republicans instead chose to advance a temporary measure with the same kind of spending trims that Democrats had been advocating.

"They feared a government shutdown, and so they are adopting some of our suggestions on what to cut," said Senator Charles E. Schumer of New York, the No. 3 Democrat in the Senate.

The House is expected to approve the temporary measure on Tuesday, leaving a few days for the Senate to act and send a measure to President Obama before the current stopgap bill expires at midnight Friday. The time frame leaves little opportunity for the Senate to alter the measure and send it back to the House.

Senate Republicans said Democrats had few good options with the clock ticking and encouraged them to accept the bill and move on to the negotiations over the broader spending legislation as well as the budget for 2012.

“By supporting the House bill, our friends on the other side of the aisle will have the chance to ensure that the government remains operational while we work with them to identify additional ways to shrink Washington spending this year,” said Senator Mitch McConnell of Kentucky, the Republican leader.

Striking a final deal will not be easy. Democrats contend that the $61 billion cut by the House in its marathon floor debate earlier this month reaches far too deeply into essential federal programs and strikes out at favored Obama administration initiatives like the new health care law. Senate Democrats have begun assembling their own package of cuts and expect to bring it forward next week as an alternative to the Republican plan.

At the same time, the new House speaker, John A. Boehner of Ohio, has little room for negotiation given the insistence by his rank and file, including 87 newly elected Republicans, on standing firm on the $61 billion in reduced spending that has already cleared the House.

But both sides agree that federal agencies face some level of significant spending cuts from the budgets they are currently operating under, a result that could cause some disruptions.

Europe’s Piecemeal Failure
December 5, 2010


WHEN I look at events in Europe today, with Ireland getting bailed out and talk of crises brewing elsewhere on the continent, I am reminded of the weeks leading up to the banking crisis in 2008. As the credit crunch began and banks found it increasingly difficult to get access to funding, policy makers faced a choice: deal with the problem in a piecemeal way, or address the root causes immediately.  For too long many policy makers opted to fudge their approach; they dealt with the problem bank by bank and refused to recognize the system’s fundamental flaws...long, thoughtful article here.

Senator Dodd didn't run again because of this?

Countrywide CEO Mozilo settles with SEC for $67.5M
By JACOB ADELMAN, Associated Press Writer
15 October 2010

LOS ANGELES – Countrywide Financial Corp. co-founder Angelo Mozilo and two other former executives have agreed to pay tens of millions of dollars to avoid a trial on civil fraud and insider trading charges, a federal judge said in court Friday.  Mozilo and the others were to face trial on the Securities and Exchange Commission's charges next week.  Mozilo agreed to repay $45 million in ill-gotten profits and $22.5 million in civil penalties. Former Countrywide President David Sambol will repay $5 million in profits and pay $520,000 in civil penalties, and former Chief Financial Officer Eric P. Sieracki will pay $130,000 in civil penalties.

Sambol's attorney Walter Brown said in a statement after the hearing that Bank of America Corp., which bought Countrywide in July 2008, would pay his client's $5 million in ill-gotten profits.

The payment comes on top of $600 million that Bank of America agreed to pay in August to end a class-action case filed by former shareholders against Countrywide.  Mozilo lawyer David Siegel did not return a message asking whether the former countrywide chairman's $45 million forfeiture would also be paid by the bank.

Messages left with Charlotte, N.C.-based Bank of America were not immediately returned.  Under the settlement, the three men did not admit wrongdoing.

"Mr. Sambol has agreed to settle the SEC lawsuit and put the matter behind him for the benefit of his family and loved ones," Brown said in the statement.

Sieracki's lawyer, Shirli Fabbri Weiss, said in a news release that all fraud-based claims against her client had been dropped and that his civil penalty was to settle fraud-based charges.  An SEC spokesman did not return a phone message.  The SEC accused the men of misleading shareholders about the quality of the loans on Countrywide's books. The civil complaint also accused Mozilo of acting on his inside knowledge of the company's precarious state when he sold shares between November 2006 and October 2007 ahead of its collapse, reaping more than $139 million.

Mozilo was not in court when the settlement was announced.  The former Countrywide chairman is the nation's highest-profile defendant yet to face trial for risky business practices leading to the housing collapse that sent the country into recession.  In legal filings, regulators portrayed the three defendants as engaging in a single-minded pursuit of market dominance, even if it meant knowingly taking disastrous risks.  The company was a major player in the market for high-risk subprime mortgages and became the biggest U.S. mortgage lender overall before it spiraled into disaster when the mortgage meltdown hit.

The settlement talks involving Mozilo were disclosed after U.S. District Judge John F. Walter filed a notice Thursday for trial lawyers to attend a status conference Friday.

Countrywide's lending practices are reportedly also the subject of a criminal probe in Los Angeles. Thom Mrozek, a spokesman for the U.S. attorney's office, declined to comment about the situation.  Countrywide was based in Calabasas, Calif.

Economic panel says recession ended in June 2009
By JEANNINE AVERSA, AP Economics Write
20 September 2010

WASHINGTON – The longest recession the country has endured since the Great Depression ended in June 2009, a group that dates the beginning and end of recessions declared Monday.  The National Bureau of Economic Research, a panel of academic economists based in Cambridge, Mass., said the recession lasted 18 months. It started in December 2007 and ended in June 2009. Previously the longest post World War II downturns were those in 1973-1975 and in 1981-1982. Both of those lasted 16 months.

The NBER decision makes official what many economists have believed for some time, that the recession ended in the summer of 2009. But it won't make much difference to most Americans — especially the nearly 15 million without jobs.  Americans are coping with 9.6 percent unemployment, scant wage gains, weak home values and the worst foreclosure market in decades.

President Barack Obama saw little reason to celebrate the group's finding that the recession had ended.  Appearing at a town-hall meeting sponsored by CNBC, Obama said times are still very hard for people "who are struggling," including those who are out of work and many others who are having difficulty paying their bills.

"The hole was so deep that a lot of people out there are still hurting," the president said. It's going "to take more time to solve" an economic problem that was years in the making, he added.

The economy started growing again in the July-to-September quarter of 2009, after a record four straight quarters of declines. Thus, the April-to-June quarter of 2009, marked the last quarter when the economy was shrinking. At that time, it contracted just 0.7 percent, after suffering through much deeper declines. That factored into the NBER's decision to pinpoint the end of the recession in June.  Any future downturn in the economy would now mark the start of a new recession, not the continuation of the December 2007 recession, NBER said. That's important because if the economy starts shrinking again, it could mark the onset of a "double-dip" recession. For many economists, the last time that happened was in 1981-82.

To make its determination, the NBER looks at figures that make up the nation's gross domestic product, which measures the total value of goods and services produced within the United States. It also reviews incomes, employment and industrial activity.  The economy lost 7.3 million jobs in the 2007-2009 recession, also the most in the post World War II period.

The Great Depression lasted much longer. The United States suffered through a 43-month recession that ended in 1933. Then, it slid back into recession, which lasted for 13 months. That ended in 1938.

The NBER normally takes its time in declaring a recession has started or ended.  For instance, the NBER announced in December 2008 that the recession had actually started one year earlier, in December 2007.

Similarly, it declared in July 2003 that the 2001 recession was over. It actually ended 20 months earlier, in November 2001.  Its determination is of interest to economic historians — and political leaders. Recessions that occur on their watch pose political risks.  In President George W. Bush's eight years in office, the United States fell into two recessions. The first started in March 2001 and ended that November. The second one started in December 2007.

NBER's decision means little to ordinary Americans now muddling through a sluggish economic recovery and a weak jobs market. Unemployment is 9.6 percent and has been stuck at high levels since the recession ended.  Many will continue to struggle.

Unemployment usually keeps rising well after a recession ends. Four months after the 2007 downturn ended, unemployment spiked to 10.1 percent in October 2009, which was the highest in just over a quarter-century. Some economists believe that marked the high point in joblessness. But others think it could climb higher — perhaps hitting 10.3 percent by early next year.

After the 2001 recession, for instance, unemployment didn't peak until June 2003 — 19 months later.  Word of the recession's official end comes just two months before Election Day. But the decision isn't likely to play a big role in November's congressional and gubernatorial elections.

Some Democrats might hail it as a sign of progress, but voters are guided by gut reactions far more than economists' pronouncements.

With unemployment still hovering just below 10 percent, some Democrats have urged Obama to stop boasting about any economic progress at all. They fear it annoys people who feel things are not getting better for themselves and their neighbors, and it makes politicians seem out of touch with ordinary Americans' worries.

Source for this nice Hartford Courant graphic: Bureau of Economic Analysis, U.S. Department of Commerce.

Link below is to "Bankrupt Cities and Towns" page...
In Michigan, a City Pleads for a Bankruptcy Option

December 27, 2010

HAMTRAMCK, Mich. — Leaders of this city met for more than seven hours on a Saturday not long ago, searching for something to cut from a budget that has already been cut, over and over.

This time they slashed money for boarding up abandoned houses — aside from emergencies, like vagrants or obvious rats, said William J. Cooper, the city manager. They shrank funds for trimming trees and cutting grass on hundreds of lots that have been left to the city. And Mr. Cooper is hoping that predictions of a ferocious snow season prove false; once state road funds run out, the city has set nothing aside to plow streets.

“We can make it until March 1 — maybe,” Mr. Cooper said of Hamtramck’s ability to pay its bills. Beyond that? The political leaders of this old working-class city beside Detroit are pleading with the state to let them declare bankruptcy — a desperate move the state is not even willing to admit as an option under the current circumstances.

“The state is concerned that if they say yes to one, if that door is opened, they’ll have 30 more cities right behind us,” Mr. Cooper said, as flurries fell outside his City Hall window. “But anything else is just a stop gap. We’re going to continue to pursue bankruptcy until the door is shut, locked, barricaded, bolted.”

Bankruptcy, increasingly common among corporations and individuals, remains rare for municipalities. Local leaders who want to win elections find it unappealing and often have other choices for solving financial woes. Besides, states have a say in whether a municipality may pursue bankruptcy at all, and they have every reason to avoid such an outcome, not least of all for fear of a creating a ripple effect that could cripple the municipal bond market and drive up the cost of borrowing.

Yet with anemic property tax revenues and forecasts of more dire financial times ahead, some experts and elected leaders fear more localities may have to at least consider bankruptcy.

“There could be many cities in this position next year,” said Summer Hallwood Minnick, director of state affairs for the Michigan Municipal League, who added that in this state, cities have already struggled with billions less than expected in state revenue sharing. “All our communities have done is cut, cut, cut. They’re down to four-day workweeks and the elimination of parks, senior centers, all of that. So if there’s anything else that happens, they will be over the edge.”

This month, the authorities in Rhode Island said the City of Central Falls could face bankruptcy if immediate, drastic changes — perhaps the city’s annexation into a neighboring municipality — fail. Some leaders in Harrisburg, Pa., which owes millions in debt payments tied to an incinerator project, say bankruptcy may eventually be the only choice.

Only about 600 cities, counties, towns and special taxation districts have filed for bankruptcy (known as Chapter 9 for these sorts of entities) since 1937, said James E. Spiotto, a municipal bankruptcy expert at Chapman & Cutler, a law firm in Chicago, and fewer than 250 in the last three decades. In part, it can be hard — even impossible — to do: about half the states have statutes authorizing such filings, but some of them set limits or require elaborate approval processes. Other states have no specific provision allowing cities to pursue bankruptcy, and at least one, Georgia, bans such moves.

So far, the financial misery of the past two years has not caused a surge in bankruptcy applications; about 15 municipalities pursued bankruptcy in the last two years. But if revenue forecasts continue as predicted, 2011 might bring a rise in cities faced with such a fate.

Hamtramck (pronounced ham-TRAM-eck) did not anticipate its current circumstances. Officials in Detroit, Hamtramck’s far larger next-door neighbor, announced this year that they had for years overpaid Hamtramck in a revenue sharing deal related to a General Motors Company plant that sits smack on the border of the two cities. The dispute is likely to be resolved, eventually, in court, but meanwhile, Detroit has stopped paying $2 million a year, and Hamtramck is watching a growing gap in its $18 million budget.

Here, the urgent search for services to cut has turned all attention to a realm that is also emerging at the center of budget debates in cities and states around the country: the costs of salaries, benefits and pensions of public workers.

Mr. Cooper, the city manager, says that everything else that could be cut already has been, while the city goes on spending 60 percent of its total general fund to pay for its police and firefighting forces — 75 current police officers and firefighters and about 240 former workers and spouses now on pensions. Mr. Cooper said that an entry-level police officer costs the city about $75,000 a year in salary and benefits, and yet repeated efforts to renegotiate contracts have failed. “They kind of have the Cadillac plan,” Mr. Cooper said, “and we’d kind of like the Chevy.”

The police and firefighters question whether the city’s bankruptcy talk is really just a scare tactic for negotiation. Earlier discussions with city officials, they say, have urged them to accept pay cuts, layoffs, increased worker payments to pensions and even a suggestion that officers might pay for a portion of their own bulletproof vests — all this while the city has opted not to increase taxes.

“Nobody likes the police until you need them,” said Jon Bondra, the incoming president of Hamtramck’s police union.

(Found, Mr. Cooper says, posted on the wall of the firefighters’ barracks: his name — crossed out — on a list of former city managers and the word, “Next?”)

Hamtramck, all 2.1 square miles of it, is a gritty city, a proud one, and a place “that can do more with less than anywhere on earth,” in the view of Greg Kowalski, 60, who has lived here since childhood. Immigrants have arrived in waves over time, leaving layers here like sedimentary rock — from Germany, Poland, Bosnia, Albania, Bangladesh, Yemen and more. Along Joseph Campau Street on a recent morning, a woman in a burqa strolled past Stan’s Grocery, which boasts about its Polish pierogi and kielbasa.

Hamtramck — once a community of more than 50,000 people but now less than half of that — grew up around an enormous auto factory that John and Horace Dodge built here a century ago. It remains a city woven together by union history, a fact that makes the turmoil filtering out from City Hall all the more pronounced.

“Look, if I was king of the world, I’d give them all a million dollars,” Charles Sercombe, the editor of The Hamtramck Review, the local newspaper, said of police officers and firefighters. “But this is the new economy, welcome to it.” He noted that his own job is now part time and he receives no health benefits.

Although Mr. Cooper says he believes bankruptcy, which could allow the city to “start over” with its labor contracts, is the only solution, the authorities in the state of Michigan have so far rejected the city’s request that the governor issue an executive order allowing Hamtramck to file for bankruptcy. An official from the state’s Treasury Department said that no city in Michigan has gone through bankruptcy, and that the governor has no such authority; the state has specific provisions for authorizing a bankruptcy filing, including intervention from an emergency financial manager and an emergency loan board. The current administration, which will be departing later this week, has urged Hamtramck to seek state assistance, including a possible emergency loan. .

Rick Snyder, a Republican who is to be sworn in as governor of Michigan on Saturday, said the circumstances in Hamtramck concerned him, particularly for what it might bode elsewhere. “We could have a large number of jurisdictions facing insolvency,” he said. “Major reinvention” will be a necessity, he added, including taking a serious look at the structure of local governments and the possibility, in some places, of consolidation of services.

A new fear is bubbling up along the streets here: that Hamtramck, in so much fiscal angst, may ultimately disappear (either through bankruptcy or, simply, default), and wind up sharing services with or becoming a part of Detroit, a place many here describe as painfully rundown and unsafe.

“I’m not going to wait for two hours for a cop to show up,” said Shannon Lowell, the co-owner of a coffee shop. “We’ve trimmed every bit of fat. What else are we going to do? Borrow money from our dying grandmother?”

Do you have a problem with this?  We do!
Let Treasury Rescue the States
July 7, 2010

Berkeley, Calif.

HERE in California, where people tiresomely boast that the state’s gross domestic product exceeds that of all but seven nations, I keep expecting a ballot initiative demanding admission to the Group of 8 industrialized nations. I’d consider voting for it, too; then maybe Washington would work as hard to synchronize its economic policy with Sacramento as it does with Tokyo and Berlin. The lack of coordination within the United States — and, equally important, the failure to recognize the states as macroeconomic players — helps explain our sluggish recovery.

To make matters worse, several states have country-sized G.D.P.’s, but none has the macroeconomic tools of an independent country. Every state except Vermont has some sort of balanced budget requirement that prevents it from weathering a recession by running up big deficits to keep teachers employed, students in college, welfare payments flowing and construction humming. Nor can New York and California stimulate their economies by, say, printing more currency. Instead, states are managing huge budget crises with the only tools they have, cutting spending and raising taxes — both of which undermine the federal stimulus.

That’s why the best booster shot for this recovery and the next would be to allow states to borrow from the Treasury during recessions. We did this for Wall Street and Detroit, fending off disaster. It’s even more important for states.

Here’s how this would work. States already receive regular federal matching grants to help pay for Medicaid, welfare, highway construction programs and more. For instance, the federal government pays a share of state Medicaid costs, from 50 percent to more than 75 percent, depending on a state’s wealth. The matching rates were temporarily sweetened by last year’s stimulus.

But Congress should pass legislation that would allow a state to simply get an “advance” on these future federal dollars expected from entitlement programs. The advance could then be used for regional stimulus, to continue state services and to hasten our recovery.

The Treasury Department, which writes the checks to the states, could be assured of repayment (with interest) by simply cutting the federal matching rate by the needed amount over, say, five years. Of course, when Treasury eventually collected what it was owed, the state would have to cut spending or find new revenue sources. But that would happen after the recession, when both tasks would likely prove easier economically and politically.

What would this cost the federal government? Nothing. There would be zero risk of default, and a guarantee of full repayment plus interest equal to what Treasury pays in the bond markets to borrow. Congress would need only to appropriate the administrative costs of this program, which would be minimal.

It seems clearer every day that there isn’t the political will for another traditional federal stimulus package large enough to be effective in a $14 trillion economy. This proposal, however, would merely shift the timing of federal payments to states to help offset economic swings. It would have the additional merit of finally forging the federal-state partnership that has been missing since 1787, when the Constitution created a federal government with sufficient legislative authority to shape a nationwide economy out of separate state economies.

Indeed, our best shot at devising United States economic policy may be to give the states the role of creating and carrying out the economic stimulus we so desperately need.

Christopher Edley Jr., the dean of the University of California, Berkeley, School of Law, was a White House budget official from 1993 to 1995.

The point of the day!
Senate votes to rein in mortgage lenders
By JIM KUHNHENN, Associated Press Writer
12 May 2010

WASHINGTON – Taking aim at deceptive lending, the Senate on Wednesday voted to ban mortgage brokers and loan officers from getting greater pay for offering higher interest rates on loans, and to require that borrowers prove they can repay their loans.  The Senate, however, rejected a measure that would have required homebuyers to make a minimum downpayment of 5 percent on their loans. The votes were part of the Senate's deliberations on a broad overhaul of financial regulations designed to avoid a repeat of the crisis that struck Wall Street in 2008.

President Barack Obama weighed in on the Senate debate Wednesday, criticizing efforts to exclude auto dealerships that offer car loans from the oversight of a proposed consumer financial protection bureau. Auto dealers — influential figures in their communities — have been aggressively lobbying for an exemption from the law, and the amendment, offered by Sen. Sam Brownback R-Kan., could win bipartisan backing.

"This amendment would carve out a special exemption for these lenders that would allow them to inflate rates, insert hidden fees into the fine print of paperwork, and include expensive add-ons that catch purchasers by surprise," Obama said in a statement.

The administration has fiercely tried to protect the consumer provisions of the bill. It has answered the political power of the auto dealers with an appeal on behalf of the military, arguing that soldiers and their families have been particularly targeted by deceptive dealers. On Wednesday, Holly Petraeus, wife of U.S. Central Command chief Gen. David Petraeus, made a plea for the bill's consumer protections to apply to car buyers.

"It's a fact that military personnel love their cars," she said. "Sadly, many of them end up paying far more for those cars than they should." Petraeus, director of the Council of Better Business Bureau's Military Line Program, said financial counselors at military installations find many of their customers in financial trouble with their auto payments, locked into loans of 15 percent or higher.

In a statement, Brownback argued auto dealers are already regulated by the Federal Trade Commission and by local and state agencies. "If any service member is the victim of predatory lending while trying to buy a car," he said, "I encourage him or her to seek out local and state authorities which already handle these investigations and can take care of the problem."

The Senate unanimously approved an amendment Wednesday that made clear that merchants and retailers that do not engage in a financial services would not be policed by the proposed consumer protection bureau. Critics had argued that the bill could affect small business owners such as orthodontists, who allow patients to pay over time.  Separately, the Senate overwhelmingly voted to let the Federal Reserve retain its supervision of smaller banks. The underlying regulation bill would have given the central bank oversight only over the largest financial institutions.

Regional Fed presidents have lobbied senators to allow them to continue watching over smaller bank holding companies and state-chartered community banks. Limiting the Fed's supervision only to bank holding companies with assets of more than $50 billion — as proposed by Senate Banking Chairman Christopher Dodd, D-Conn. — would have left many of the Fed's 12 regional banks with few institutions under their oversight.  The lending-related measures attempted to respond to one of the issues at the heart of the financial crisis — the abundance of bad mortgage-backed securities that nearly toppled Wall Street and knocked some of the nation's largest financial institutions to their knees.

"Credit was extended to people who couldn't pay their mortgages back, and those were passed throughout the world," said Sen. Bob Corker, R-Tenn. "So we had a systemic crisis, not only in this country, but around the world."

Senators voted 63-36 to amend an underlying financial regulation bill to place restrictions on how mortgage brokers and bank loan officers get compensated. The measure's lead sponsor, Sen. Jeff Merkley, D-Ore., argued that consumers were steered into higher rate mortgages that they were unable to pay, resulting in foreclosures and toxic mortgage-backed securities that poisoned the markets.  Borrowers would have to provide evidence of their income, either though tax returns, payroll receipts or bank documents. That provision seeks to eliminate so-called stated-income loans where borrowers offered no proof of their ability to pay.

But the Senate voted 57-42 against a Republican amendment offered by Corker that set tougher underwriting standards, including the downpayment requirement. That measure also would have eliminated a condition that mortgage lenders retain 5 percent of any mortgages they resell in the securities market.  Democrats opposed the Corker plan, citing both their desire to have banks keep some of the risk of the mortgages they write and their concern that the downpayment mandate would hurt lower income families.

Mortgage brokers opposed Merkley's measure, arguing it would create a two-tiered system separating mortgage brokers from bank lenders. They noted that the amendment would permit banks to receive greater payments from investors, such as large Wall Street firms, for bundled mortgages with higher interest rates.

"It's a legal incentivizing payment for those very loans that put the industry in this mess," said Roy DeLoach, executive vice president of the National Association of Mortgage Brokers.

Beware Of The Muni Bond Bubble: States And Cities Can Fail As Well
Posted 04/29/2010 06:15 PM ET

Greece and Spain both suffered S&P downgrades this week — Greece to junk — as bondholders realized the obvious. The nations cannot raise taxes and cut spending fast enough to pay their debt without killing off economic recovery.

But nothing has shaken another massive debt market: American municipal bonds.

You might think that investors would pause before pouring money into obligations of muni debt, particularly obligations of California, New York or Illinois. Like mid-2000s homeowners, state and local governments spent boom years using illusory gains to justify ever-higher spending and borrowing.

By 2008, state and local debt rose to $2.2 trillion — 49% higher, after inflation, than in 2000. The biggest partners in profligacy also promised more benefits to public workers in the future.

As the recession's severity became apparent, officials kept borrowing: States have already borrowed another $15 billion for operating costs over the past two years.

Yet gatekeepers consider municipal bonds low-risk. "We do not expect that states will default on general-obligation debt, even under the most stressed economic conditions," analysts at Moody's wrote in a February 2010 report...full story here.

Congress extends unemployment benefits for another 13 weeks.
"Irrational exuberance" gives way to bankruptcies - the Fed now calls for beginning of "restoration of fiscal balance."  "Overseer" of slave bankers; 
HOW IS THE AMERICAN ECONOMY LIKE A ROLLER COASTER RIDE? .  FED Chair. reappointed;  Government Motors to face off against Chrysler by fiat (pun intended) and...the only car company to NOT go under is...FORD!

AP IMPACT: Road projects don't help unemployment
By MATT APUZZO and BRETT J. BLACKLEDGE, Associated Press Writers
January 11, 2010

WASHINGTON – Ten months into President Barack Obama's first economic stimulus plan, a surge in spending on roads and bridges has had no effect on local unemployment and only barely helped the beleaguered construction industry, an Associated Press analysis has found.

Spend a lot or spend nothing at all, it didn't matter, the AP analysis showed: Local unemployment rates rose and fell regardless of how much stimulus money Washington poured out for transportation, raising questions about Obama's argument that more road money would address an "urgent need to accelerate job growth."

Obama wants a second stimulus bill from Congress that relies in part on more road and bridge spending, projects the president said are "at the heart of our effort to accelerate job growth."

Construction spending would be a key part of the Jobs for Main Street Act, a $75 billion second stimulus to revive the nation's lethargic unemployment rate and improve the dismal job market for construction workers. The House approved the bill 217-212 last month after House Speaker Nancy Pelosi, D-Calif., worked the floor for an hour; the Senate is expected to consider it later in January.

AP's analysis, which was reviewed by independent economists at five universities, showed that strategy hasn't affected unemployment rates so far. And there's concern it won't work the second time. For its analysis, the AP examined the effects of road and bridge spending in communities on local unemployment; it did not try to measure results of the broader aid that also was in the first stimulus like tax cuts, unemployment benefits or money for states.

"My bottom line is, I'd be skeptical about putting too much more money into a second stimulus until we've seen broader effects from the first stimulus," said Aaron Jackson, a Bentley University economist who reviewed AP's analysis.

Even within the construction industry, which stood to benefit most from transportation money, the AP's analysis found there was nearly no connection between stimulus money and the number of construction workers hired or fired since Congress passed the recovery program. The effect was so small, one economist compared it to trying to move the Empire State Building by pushing against it.

"As a policy tool for creating jobs, this doesn't seem to have much bite," said Emory University economist Thomas Smith, who supported the stimulus and reviewed AP's analysis. "In terms of creating jobs, it doesn't seem like it's created very many. It may well be employing lots of people but those two things are very different."

Transportation spending is too small of a pebble to quickly create waves in the nation's $14 trillion economy. And starting a road project, even one considered "shovel ready," can take many months, meaning any modest effects of a second burst of transportation spending are unlikely to be felt for some time.

"It would be unlikely that even $20 billion spent all at once would be enough to move the needle of the huge decline we've seen, even in construction, much less the economy. The job destruction is way too big," said Kenneth D. Simonson, chief economist for the Associated General Contractors of America.

Few counties, for example, received more road money per capita than Marshall County, Tenn., about 90 minutes south of Nashville.

Obama's stimulus is paying the salaries of dozens of workers, but local officials said the unemployment rate continues to rise and is expected to top 20 percent soon. The new money for road projects isn't enough to offset the thousands of local jobs lost from the closing of manufacturing plants and automotive parts suppliers.

"The stimulus has not benefited the working-class people of Marshall County at all," said Isaac Zimmerle, a local contractor who has seen his construction business slowly dry up since 2008. That year, he built 30 homes. But prospects this year look grim.

Construction contractors like Zimmerle would seem to be in line to benefit from the stimulus spending. But money for road construction offers little relief to most contractors who don't work on transportation projects, a niche that requires expensive, heavy equipment that most residential and commercial builders don't own. Residential and commercial building make up the bulk of the nation's construction industry.

"The problem we're seeing is, unfortunately, when they put those projects out to bid, there are only a handful of companies able to compete for it," Zimmerle said.

The Obama administration has argued that it's unfair to count construction jobs in any one county because workers travel between counties for jobs. So, the AP looked at a much larger universe: The more than 700 counties that got the most stimulus money per capita for road construction, and the more than 700 counties that received no money at all.

For its analysis, the AP reviewed Transportation Department data on more than $21 billion in stimulus projects in every state and Washington, D.C., and the Labor Department's monthly unemployment data. Working with economists and statisticians, the AP performed statistical tests to gauge the effect of transportation spending on employment activity.

There was no difference in unemployment trends between the group of counties that received the most stimulus money and the group that received none, the analysis found.

Despite the disconnect, Congress is moving quickly to give Obama the road money he requested. The Senate will soon consider a proposal that would direct nearly $28 billion more on roads and bridges, programs that are popular with politicians, lobbyists and voters. The overall price tag on the bill, which also would pay for water projects, school repairs and jobs for teachers, firefighters and police officers, would be $75 billion.

"We have a ton of need for repairing our national infrastructure and a ton of unemployed workers to do it. Marrying those two concepts strikes me as good stimulus and good policy," White House economic adviser Jared Bernstein said. "When you invest in this kind of infrastructure, you're creating good jobs for people who need them."

Highway projects have been the public face of the president's recovery efforts, providing the backdrop for news conferences with workers who owe their paychecks to the stimulus. But those anecdotes have not added up to a national trend and have not markedly improved the country's broad employment picture.

The stimulus has produced jobs. A growing body of economic evidence suggests that government programs, including Obama's $700 billion bank bailout program and his $787 billion stimulus, have helped ease the recession. A Rutgers University study on Friday, for instance, found that all stimulus efforts have slowed the rise in unemployment in many states.

But the 400-page stimulus law contains so many provisions — tax cuts, unemployment benefits, food stamps, state aid, military spending — economists agree that it's nearly impossible to determine what worked best and replicate it. It's also impossible to quantify exactly what effect the stimulus has had on job creation, although Obama points to estimates that credit the recovery program for creating or saving 1.6 million jobs.

Politically, singling out transportation for another round of spending is an easier sell than many of the other programs in the stimulus. The money can be spent quickly and provides a tangible payoff. Even some Republicans who have criticized the stimulus have said they want more transportation spending.

Spending money on roads also ripples through the economy better than other spending because it improves the nation's infrastructure, said Bernstein, the White House economist.

But that's a policy argument, not a stimulus argument, said Daniel Seiver, an economist at San Diego State University who reviewed AP's analysis.

"Infrastructure spending does have a long-term payoff, but in terms of an immediate impact on construction jobs it doesn't seem to be showing up," Seiver said. "A program like this may be justified but it's not going to have an immediate effect of putting people back to work."

Report: 10 states face looming budget disasters
By JUDY LIN, Associated Press Writer
November 11, 2009

SACRAMENTO, Calif. – In Arizona, the budget has grown so gloomy that lawmakers are considering mortgaging Capitol buildings. In Michigan, state officials dealing with the nation's highest unemployment rate are slashing spending on schools and health care.

Drastic financial remedies are no longer limited to California, where a historic budget crisis earlier this year grew so bad that state agencies issued IOUs to pay bills.

A study released Wednesday warned that at least nine other big states are also barreling toward economic disaster, raising the likelihood of higher taxes, more government layoffs and deep cuts in services.

The report by the Pew Center on the States found that Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin are also at grave risk, although Wisconsin officials disputed the findings. Double-digit budget gaps, rising unemployment, high foreclosure rates and built-in budget constraints are the key reasons.

"While California often takes the spotlight, other states are facing hardships just as daunting," said Susan Urahn, managing director of the Washington, D.C.-based center. "Decisions these states make as they try to navigate the recession will play a role in how quickly the entire nation recovers."

The analysis, "Beyond California: States in Fiscal Peril," urged lawmakers and governors in those states to take quick action to head off a wider catastrophe. The 10 states account for more than one-third of the nation's population and economic output, according to the report.

Historically, states have their worst tax revenue year soon after a national recession ends. At the same time, higher joblessness and underemployment mean more people need government-sponsored health care and social safety-net programs, further taxing state services.

California leads the most vulnerable states identified by the report, which describes it as having poor money-management practices. Since February, California has made nearly $60 billion in budget adjustments in the form of cuts to education and social service programs, temporary tax hikes, one-time gimmicks and stimulus spending, according to the Legislative Analyst's Office.

Many of those fixes are not expected to last. The state's temporary tax increases will begin to expire at the end of 2010, while federal stimulus spending will begin to run out a year after that.

Gov. Arnold Schwarzenegger estimates California will run a deficit of $12.4 billion to $14.4 billion when he releases his next spending plan in January. The governor warned that the toughest cuts are ahead.

"I think that we are not out of the woods yet," Schwarzenegger said this week.

At the same time, the Legislature is hamstrung by requirements that budget bills and tax increases be passed with a two-thirds majority, a mandate that the report labeled "a recipe for gridlock."

The Pew report was based on data available as of July 31 and scored all 50 states based on revenue changes, unemployment, foreclosures and budget requirements. It also gave them grades. California and Rhode Island scored worst with D-pluses, then New Jersey and Illinois with C-minuses.

In reviewing why some states are suffering more than others, Pew found that the 10 states tend to rely heavily on one type of industry, have a history of persistent budget shortfalls or face legal constraints making it extra difficult to implement major changes, such as tax increases.

Many require a supermajority vote for passing tax increases or budget bills.

Wisconsin officials issued a statement late Wednesday saying the Pew report was inaccurate. Wisconsin Department of Administration Secretary Michael Morgan said the state has balanced its budget by cutting spending and raising revenue. It projects a $270 million budget surplus for the period ending July 1, 2011, Morgan said in his statement.

Several state legislatures have been unable to enact long-term fixes. Instead, they asked voters or governors to make the call, or used accounting gimmicks to put off the hard choices until later.

For example:

• Arizona lawmakers relied on one-time fixes to balance recent budgets as the state's home foreclosure rate surpassed California's and the nationwide average. Among the many ideas being explored by the state are a plan to mortgage state buildings, then rent the property until the state regains ownership at the end of the contract.

• Michigan, where two of the Detroit Three automakers filed for bankruptcy protection this year, continues to offer tax incentives even as they take a toll on the state's pocketbook, leading to declining tax revenue. According to the Pew study, Michigan offered $6.3 billion more in total tax exemptions, credits and deductions than it actually collected in taxes in 2008.

• Illinois, which has run deficits every year since 2001, is facing an $11.7 billion budget gap for its next fiscal year, beginning in July, according to the Center on Budget and Policy Priorities. Pew's Government Performance Project ranked Illinois behind only California and Rhode Island for its lack of fiscal management on paying medical bills and pension liabilities.

• With Florida facing a shrinking population for the first time since World War II, Republican Gov. Charlie Crist and the GOP-controlled Legislature balanced a $5.9 billion shortfall with cuts, federal stimulus money and tax hikes, including a $1-a-pack tax increase on cigarettes. But the future remains uncertain.

"Florida continues to face the same challenges as last year, including a very austere budgetary environment," said Rep. David Rivera, a Miami Republican who chairs both of the Florida House's two appropriations councils.

U.S. unemployment rate hits 10.2 percent
By Lucia Mutikani

WASHINGTON (Reuters) – The U.S. unemployment rate unexpectedly jumped to 10.2 percent in October, breaching the politically sensitive double-digit barrier for the first time in 26-1/2 years, even though the pace of job losses slowed.

A Labor Department report showed on Friday that employers cut 190,000 jobs last month, more than the 175,000 markets had expected. Economists had looked for the jobless rate to rise to only 9.9 percent from 9.8 percent the prior month.

The government revised job losses for August and September to show 91,000 fewer jobs lost than previously reported.

U.S. stock index futures turned negative on the data, while government debt prices rose.

"The unemployment rate of 10.2 percent is problematic because it gives a sense of urgency to Washington, D.C. Washington will be looking for any increase in stimulus," said Tom Sowanick, co-president and chief investment officer at Omnivest Group.

President Barack Obama has called job creation priority No. 1, but the scope to take further steps to lift the economy is limited by record budget deficits.

Mounting unemployment could pose problems for the Democrats who control Congress as they head into congressional elections in November 2010. This week, Republicans wrested control of two state governorships away from Democrats in races where the weak economy figured prominently.

The labor market is being watched for signs whether the economic recovery that started in the third quarter can be sustained without government support. The economy grew at a 3.5 percent annualized rate in the July-September period, probably ending the most painful U.S. recession in 70 years.

Labor market sluggishness and weak wage growth suggest inflation is unlikely to get out of hand anytime soon, giving the Federal Reserve scope to maintain supportive policies.

The U.S. central bank on Wednesday held overnight interest rates close to zero percent and said it would keep them extraordinarily low as long as excess economic slack and a lack of inflation warning signs prevailed.

"The Fed will stay on hold even longer with less likelihood of giving a concrete answer to when and how to withdraw quantitative easing," said Joseph Trevisani, senior market analyst at FX Solution in Saddler River, New Jersey.

Payrolls have declined for 22 consecutive months now, throwing 7.3 million people out of work since December 2007, when the recession started.

However, the pace of layoffs has slowed sharply from early this year, when nearly three-quarters of a million jobs were lost in January. In October, job losses were across almost all sectors, with education and health services and professional and business services bucking the trend.

Manufacturing employment fell 61,000 last month, while construction industries payrolls dropped 62,000.

The service-providing sector cut 61,000 workers in October and goods-producing industries slashed 129,000 positions. Education and health services added 45,000 jobs, while government employment was flat.

The average workweek, which closely correlates with overall output and gives clues on when firms will start hiring, was steady at 33 hours in October. Average hourly earnings rose to $18.72 from $18.67 in September.

Peter Orszag and Tim Geithner add it up - yup, it's 13!  I guess Mr. Orszag of OMB had evens.

Geithner yawned at epic fraud
Last Updated: 11:11 PM, July 15, 2012
Posted: 10:36 PM, July 15, 2012

Tim Geithner had evidence of a financial crime of epic proportion — so he wrote a memo.

That’s about the only way you can sum up the then-New York Fed boss’ actions several years ago, when he was confronted with fairly compelling evidence that banks under his direct supervision were manipulating Libor — a key benchmark of global finance.

The Libor scandal has become pretty big news, with Barclays ousting its CEO and agreeing to pay a large fine even as it cooperates with civil and criminal law-enforcement authorities now investigating other big banks.

But it doesn’t end there: There’s also evidence that top regulators, including Geithner, now Treasury secretary, knew about and largely ignored the mess.

On Friday, the New York Fed released documents that supposedly exonerate Geithner. Selective leaks to friendly news outlets ensured kind first-day coverage, with one headline reading “Geithner tried to curb bank’s rate rigging in 2008.”

But that’s a bizarrely generous read of Geithner’s action (or inaction) on learning that Barclays actually admitted to one of his investigators that it had submitted false data for the computation of Libor, and that other banks were doing the same.

As I wrote last week, the New York Fed has long enjoyed a cozy relationship with the banks under its regulatory umbrella — ignoring even the stuff that brought down the financial system in 2008.

A close associate of former Clinton Treasury Secretary and top Citigroup exec Robert Rubin, Geithner has spent most of his professional life as a federal financial bureaucrat — a member of a community that keeps close ties with the heads of the major banks. Yet even by that standard, his behavior in the Libor scandal is incredible.

Libor, the London Interbank Offered Rate, is set by a UK banking trade group, which uses the big banks’ borrowing costs to compute a single benchmark rate that’s widely used on complex financial products as well as consumer loans.

In other words, rigging Libor is a pretty big deal. Yet Geithner treated it like a parking violation.

In 2007 and 2008, as the banking crisis began to heat up and big investors started demanding higher interest rates when lending to the banks, evidence began to build that banks were submitting falsely low borrowing costs to mask their financial distress.

Barclays was one such bank. Indeed, the New York Fed learned as early as December 2007 that Barclays may have been manipulating Libor — but Geithner’s crew waited until April 2008 to make its initial inquiry, documents show.

That’s when a New York Fed official contacted a trading executive at Barclays — who admitted the dirty deed with very little pressure: “We know that we’re not posting, um, an honest Libor.”

The trader’s rationale: If the bank posted its real borrowing costs, then spiking in the runup to the banking crisis, “It draws, um, unwanted attention on ourselves.”

The trader indicated that other banks were submitting fake info, too. The New York Fed regulator conducting the interview didn’t seem particularly outraged, answering with a simple “OK.”

Maybe the Fed official didn’t want to show her cards, but you’d think that a competent regulator hearing a concession like would get the wheels of justice moving pretty quickly. But not at Tim Geithner’s New York Fed.

Geithner was brought in right after the call — and his response was more of the same. He sent a single e-mail to his counterpart at the Bank of England recommending a handful of ways to address Libor rigging, including how UK regulators “should eliminate incentive to misreport.”

So here you have it: In Geithner’s world, rate-rigging fraud is “misreporting.”

His UK counterpart, Bank of England Governor Mervyn King, didn’t do much better. He e-mailed Geithner that he’d ask the trade group “to include in their consultation document the ideas contained in your note.”

Other than a few followup calls from his staff to traders, that’s about the end of Geithner’s real interest in the matter — until it came to light that the practices were much worse and more pervasive than even the Barclays trader had suggested, and that other big banks directly under the New York Fed’s jurisdiction were manipulating one of the world’s most important financial barometers.

Or, as Geithner put it, “misreporting.”

Orszag says he's leaving as budget head in July
By BEN FELLER, Associated Press Writer
22 June 2010

WASHINGTON – White House Budget Director Peter Orszag says he's stepping down next month, positioning him to be the first high-profile member of President Barack Obama's team to depart the administration.

Orszag confirmed his planned resignation in a brief interview with The Associated Press on Tuesday. He said he views passage of last year's economic recovery act as his most significant accomplishment.

White House Press Secretary Robert Gibbs said Tuesday that "a number of very talented candidates" were being considered to replace Orszag.

"Peter has served alongside and within a valuable economic team that has faced the greatest economic crisis any president has faced since the great depression. It is an enormous task," Gibbs said.

As director of the Office of Management and Budget, Orszag holds Cabinet-level rank and a pivotal role in shaping and defending how the administration spends the public's money. He quickly emerged from a bureaucratic post to become a camera friendly face of Obama's government, often in front on plans to confront the deficit and to spur the economy.

Speculation has for weeks held that Orszag would leave this year after a grueling, nonstop sprint as the head of the budget agency and a key adviser to Obama. During his tenure, Congress has passed the most expensive economic stimulus program in U.S. history and a massive health care reform law. Orszag has overseen Obama's first two budgets, too. Gibbs said Orszag decided to leave before work began on a third.

Orszag, 41, came to Obama's government from the position of director of the Congressional Budget Office, the agency charged with providing nonpartisan analyses of economic issues to lawmakers. He served during Bill Clinton's administration as an assistant to the president for economic policy and a senior adviser at the National Economic Council.

The move comes as Obama continues to face the steep economic challenges of reining in the deficit and rallying support for more stimulative spending. The economic recovery is plodding along but unemployment remains near 10 percent.

U.S. debt flirts with unlucky number
That's 13, as in $13 trillion
Washington Times
Wednesday, May 26, 2010
Stephen Dinan

News reports have jumped the gun in declaring it, lawmakers and staffers on Capitol Hill are awaiting it with a morbid glee, and some congressional aides suspect the government's slow-walking it.

It, in this case, is the nation's public debt, which has hovered just short of $13 trillion for days now, according to the obscure Treasury Department website that tracks this sort of thing.

The site updates every business day with the previous business day's total debt, right down to the penny, and has been within reach of $13 trillion for this entire week. The figure for Tuesday - the most recent available - stood at $12,995,779,490,444.52.

That's led some Republican congressional staffers to question whether the clock hadn't stalled out just below the Big 13, though Treasury says the site is being updated the same way it always has been.

Still, some private "debt clock" websites already have tolled the magic number, which several press outlets have reported and lawmakers have fired off statements on. One senator complained of "an unprecedented level of irresponsibility" in hitting the milestone.

Joyce Harris, a spokeswoman for the Bureau of the Public Debt, said she'd seen the press reports, but said they're based on private estimates and, according to the government, we're not there just yet.

"It's not an official number," she said. "The number for the debt is $12.995 trillion."

At that level, it amounts to more than $42,000 for every U.S. resident.

Part of the confusion is that Treasury only reports once a day, while outside calculations estimate the rise by the second, based on formulas that oftentimes go too high, too fast. They often have to reel those numbers back in after Treasury reports the actual figure -and there are even some days the debt drops, ever so slightly, because more old bills or bonds are cashed than are issued.

Still, the number has been on a steady rise as of late.

Ed Hall's debt_clock topped $13 trillion on Monday, but he dropped his clockback below that figure Wednesday afternoon. Meanwhile, topped $13 trillion on Wednesday, prompting several news reports and statements from Congress.

The fascination with $13 trillion far outstrips the significance of that particular number. But with Congress poised to pass bills spending tens of billions of dollars this week, the debt has gotten wrapped up in the debate.

The Republicans on the Joint Economic Committee are using their Twitter feed to give daily updates, and said that since President Obama took office, the debt has increased at a rate of $4.8 billion a day, or nearly three times the daily average of the Bush administration.

The debt passed the $12 trillion mark less than 200 days ago, and if the $13 trillion mark is hit in the next eight weeks, it will be the second-fastest $1 trillion jump in history. The fastest trillion came in late 2008 and early 2009, when the Wall Street bailout rapidly ballooned the debt from $11 trillion to $12 trillion.

Earlier this year, Congress and Mr. Obama raised the country's debt limit to $14.3 trillion, hoping it would to give the government enough room to spend through the end of this year.

Total public debt includes two pots of money. One is normal government debt held in the hands of consumers, such as Treasury bills and bonds, while the other is intragovernmental holdings, or money one part of the government borrows from another agency. That includes money borrowed from the Social Security trust funds.

Some analysts said the key figure is not the total public debt, but the debt held by the public, which stood at $8.478 trillion on Tuesday.

Rudy Penner, a former director of the Congressional Budget Office who is now at the Urban Institute, said in many ways, the debt number is so divorced from spending that it obfuscates the debate. He said the debt debate should be coupled with the spending debate, so lawmakers can couple the red ink with the policies that cause it.

Congress has yet to produce a budget this year for fiscal year 2011, which begins Oct. 1, and Mr. Penner said that's a key failure that should be getting more attention.

The Web page that tracks the debt can be reached from the site.

© Copyright 2010 The Washington Times, LLC. Click here for reprint permission.

US economists John Silvia and Mark Perry
John Silvia (left) debates with fellow economist Mark Perry (from our "across-the-pond" source, I-BBC).  2013 Economic theory for dogs.

Head-to-head: What next for US economy?
Page last updated at
12:06 GMT, Thursday, 29 October 2009

Official data has indicated that the US economy has come out of recession, but analysts warn the continuing recovery will be slow.

Here we bring together two US economists with differing views to discuss what is likely to happen next.

John Silvia is chief economist at Wells Fargo in Charlotte, North Carolina. He sees disappointment ahead for US workers and consumers, with a long-term decline in living standards.

Mark Perry is professor of economics at the University of Michigan-Flint and currently visiting economist at the American Enterprise Institute in Washington. He is more optimistic, expecting a resilient economy to produce job growth by late 2010 and deliver low prices for consumers.

Some fear US growth will fall when President Barack Obama's $787bn (£480bn) fiscal stimulus package comes to an end. What about the possibility of a "double-dip" recession, with a return to economic contraction?

John Silvia: I do not see the case for a double-dip or W-shaped recession/recovery.

Historically, the double dip of 1980-82 was driven by a sharp change in monetary policy.

This recovery is being led by federal spending and gradual recovery in consumer spending and business investment. I do not expect the Obama administration to make any drastic turn in fiscal policy.

In addition, low inflation will stay and allow the Fed to maintain low short-term rates, with only a limited decline in the balance sheet.

Mark Perry: I think the recession ended in June and I also see no chance of a double-dip recession. There will be strong growth in the third quarter (3.5% to 4%) and fourth quarter (4% to 5%), with more moderate growth in 2010, about 2.5% to 3%.

Without some kind of policy blunder, which is unlikely, there will be no double-dip.

Most of the fiscal stimulus hits next year, which will help economic growth.

We will have a "jobless recovery" again through 2010, as we did following the 1990-1991 and 2001 recessions. The unemployment rate is set to remain at 9.8% to 10% through mid-2010, gradually coming down below 9.5% by the end of 2010.

There is only a moderate risk of inflation, which should stay below 2% through next year.

Some signs of consumer recovery are already evident. Air travel was up in September and traffic volume has been up for several months in a row.

Strong global recovery in emerging markets such as China, Brazil, India will help to support the US recovery.

John Silvia: Strong growth in the second half of this year will give way to 2.4% growth in 2010, as we see the stimulus waning in the first half of next year. But the jobless recovery will set up both economic and political conflicts.

The jobless recovery suggests disappointing gains in personal income and spending, as many households realise that their standard of living has been diminished.

At the same time, state and local government budget constraints will continue to tighten as income and sales tax revenues remain disappointing.

Again, the jobless recovery and the Fed's caution suggests the weak housing market will continue. Local governments face a two-year-plus period of minimum gains in property tax revenues - and therefore an inability to deliver on local education expectations.

Unemployment and large federal deficits will mean Democratic losses in Congress of 30-plus seats in the House of Representatives and three seats in the Senate in the 2010 mid-term elections.

On top of that, the dollar will continue to decline and America's standard of living will continue to decline relative to other nations.

Mark Perry: I think the dollar's decline will stabilise before it can damage the economy and cause any decline in US standards of living.

The money supply has been flat this year for both M1 and M2, suggesting that the decline in the dollar today results from monetary stimulus in 2008, but that ended almost a year ago.

Since early 2009, the money supply has grown by only 1% to 2%, which will put a bottom on how far the dollar can fall. Also, the strength in foreign currencies relative to the dollar will help boost US exports - and make a positive contribution to real GDP this year and next year.

The global rebound and recovery will also help stimulate US exports and will help the US economy in ways that didn't happen previously. Global strength will help lift the US economy out of recession this year and next year.

Meanwhile, the stock market will continue to rise, because of huge productivity gains from the reduction in labour force, along with continued increases in output in the third and fourth quarters of 2009. Corporate profits will also rise, boosting stocks.

The housing market is coming back, with sales gains even now in places such as Florida and California. With house prices rising, the housing market will continue to improve, construction will pick up next year, and all of this will offset some of the effects of the weak job growth.

Low and stable interest rates moving forward, with low moderate inflation, will help the housing market and keep corporate and consumer borrowing costs low, providing momentum to growth.

John Silvia: I agree on the forward momentum. My issue is that the pace will be disappointing to a society and political class that has made significant promises in health care and education that will not be deliverable with just moderate growth.

Middle-income and low-income families will see their standard of living below their expectations.

There will be growth, yes, but not enough to keep voters happy. Attempts to provide that standard of living depend on protectionism for jobs, dollar depreciation and continued foreign financial support.

Mark Perry: Passing health care legislation, at least the public option part, is looking less and less likely to me, so that issue could be dead by the end of the year.

With falling prices for just about everything (clothing, food, air travel, housing, cell phone service, prescription drugs etc and historically low interest rates for home and car purchases), there has never been a better time to be a consumer in America, and that will offset some of the income losses. Also, job growth by end of 2010 will help boost confidence and incomes.

The US economy is resilient, and that goes for workers, consumers and companies. A strong economic recovery might surprise everybody.

Emerging from a deep recession will make the economy leaner, more productive and stronger, offsetting the headwinds mentioned by John.

Page last updated at 14:31 GMT, Thursday, 29 October 2009

US economy is growing once again

The US economy grew at an annual pace of 3.5% between July and September, its first expansion in more than a year.

The growth was helped by a substantial government spending plan, including a scrappage scheme to boost car sales.

The official figures indicate recession has ended, but some economists think there could be further setbacks.

The White House said it was "a welcome milestone", but stressed it would be some time before the economy made a full recovery.

Compared with the previous three months, the US economy grew by 0.9%. In the same period, and on the same measure, the UK economy unexpectedly stayed in recession after it shrank by 0.4%.

Global good news

BBC chief economics correspondent Hugh Pym said the 3.5% annualised growth rate was more than the 3.3% expected by most commentators.

Jon Polis
I've been out of work a few months here or there but never like this
Unemployed American Jon Polis

"The sheer scale of the stimulus in the US has made a big difference, it was much bigger in percentage terms than that in the UK," he said.

"That the US, the powerhouse of the world economy is growing once again, is good news for the global economy has a whole."

It is the first time US economy has last expanded since the second quarter of 2008, when it grew at an annual pace of 2.4%.

Official confirmation of whether the US is in or out recession will come from the National Bureau of Economic Research, the agency which considers a number of factors in coming to its decision.

Numerous boosts

The figures from the Commerce Department showed that a number of factors helped to lift the economy during the third quarter.

This recovery is being led by federal spending and gradual recovery in consumer spending and business investment
John Silvia, Wells Fargo

Spending on durable manufactured products soared at an annualised rate of 22.3%, the highest quarterly amount since 2001, led primarily by the impact of the cash for clunkers scheme lifting car sales.

The housing market also improved, with spending on housing products up 23.4%, its largest quarterly jump in 23 years.

Analysts said this big leap was sparked by the government's $8,000 tax credit for first-time house buyers.

Meanwhile, total government spending was up 7.9%, as the wider stimulus spending continued to take effect.

In addition, exports were also up strongly, increasing 21.4%, the biggest rise since 1996.

'Distorted by stimulus'

Gross Domestic Product, or GDP, measures the value of goods and services produced in a country, reflecting the health of the economy in one number.
The US uses a measure called annualised GDP, which takes the change over a three-month period and works out what the annual change would be if it continued at that pace over a whole year.
This latest figure is the first estimate for the three-month period between July and September. It will be revised twice in coming months.

"It's good to have the economy growing again," said Brian Bethune, economist at IHS Global Insight.

"But we don't think that rate of growth is sustainable because it is distorted by all the government stimulus.

"The challenge here is to get organic growth - growth that isn't helped by fiscal steroids."

Analysts cautious about the slow nature of the US economic recovery point to the fact that the unemployment rate currently stands at 9.8%, and that the labour market traditionally lags behind any wider economic recovery.

They also highlight the fact that the big car firms have already reported a sharp fall in September sales following the conclusion of the popular $3bn cash for clunkers scheme at the end of August.

"You can say that the recession is over, but it sure won't feel like that," said Dean Baker, co-director of the Centre for Economic Policy Research.

"There is a lot of downward momentum that isn't going to go."

U.S. must live within its means: Geithner
By Glenn Somerville and Walter Brandimarte

WASHINGTON (Reuters) – The United States must live within its means once its economy recovers if it is to preserve global confidence in the U.S. dollar's status, Treasury Secretary Timothy Geithner said on Friday.  The comments came as the Obama administration reported a record U.S. budget deficit for the fiscal year ended September of $1.4 trillion. At 10 percent of gross domestic product, it was the biggest U.S. fiscal shortfall since World War Two.  Rescuing the economy and some of the country's biggest banks from the worst recession since the Great Depression took a toll on U.S. finances, and the White House has forecast deficits of more than $1 trillion through fiscal 2011.

"Future deficits are too high, and the president is committed to working with Congress to bring them down to a sustainable level as the economy recovers," Geithner said in a statement accompanying the fiscal data.

Separately, White House economic adviser Lawrence Summers said financial firms that helped precipitate two years of economic crisis are going to have to bow to stiffer oversight of their activities to prevent it happening again.  Geithner and other policymakers will discuss the U.S. economic and budget outlook, and prospects for financial regulatory reform, at the Reuters Washington Summit on October 19-21.


On Friday, Geithner said the U.S. dollar's status as a key reserve currency carries special responsibilities that include keeping spending under control, Geithner said earlier on Friday in an interview on CNBC television.

"It is very important that Americans understand that we need to do everything possible to sustain confidence in our ability to keep inflation low and stable over time and to make sure we're getting our fiscal house in order," Geithner said.

Developments over the past year, when many investors put their money into U.S. Treasury securities and the dollar rose at times, showed there was still a great deal of confidence in U.S. economic management.

"The world wanted to be in Treasuries, in the safest and most liquid markets, and you saw the dollar rose when people were most concerned about the future of the world," he said.

"That is a very important thing. It's not something you can count on. It's something we can understand, and we can continue to foster, and we're going to do that," Geithner added.

The administration has to be careful not to withdraw economic stimulus too fast though, Geithner added. But he denied that the administration was ready to consider a second economic stimulus program.  Geithner said access to credit in the overall economy has improved dramatically but many small businesses that typically create many jobs still face borrowing constraints.  The Obama administration is working on measures to help small businesses get easier access to credit -- possibly by diverting some bank bailout funds to them -- but hasn't yet announced a program to do so.


Summers also argued for change to the banking system.  After two years of economic crisis and government rescue efforts, he said the banks at the center of the credit debacle had a moral imperative to be part of the solution.

"Financial institutions that have benefited from government support can, should, and must use this moment to think about what they can do for their country -- by accepting the necessary regulation to protect the American people," Summers told an audience of financial market participants. "Wall Street was no small part of the cause of the crisis and Wall Street needs to be part of the solution."

Summers, chairman of the National Economic Council, suggested banks had little choice in the matter.

"There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support," he said. "This has direct relevance on the changing nature of the social compact between the financial sector and the broader economy."

The Obama administration has been pressing for wide-ranging reforms in U.S. financial regulations. It scored a victory on Thursday when a House of Representatives' panel passed a bill to tighten regulation of financial derivatives -- contracts derived from existing securities or transactions that are blamed for amplifying the 2008 crisis.  New, tighter regulation doesn't mean, however, that financial firms will never go bust again. In fact, Summers said that such firms must be able to fail for market discipline to work.  In addition to that, though, profitability and prudence should be reconciled under any framework of financial regulation.

"The financial system has to be safe for failure," said Summers.

Summers also said officials need to avoid prematurely withdrawing measures meant to stimulate the economy after the worst recession in decades, noting discussion of any "exit strategy" would be different on Main Street than it would on Wall Street.

GDP Declines 1 Percent in 2Q, Better Than Expected
August 27, 2009
Filed at 10:01 a.m. ET

WASHINGTON (AP) -- The economy shrank at an annual rate of 1 percent in the spring, a better-than-expected showing and more evidence that the recession is drawing to a close.

Many analysts believe the economy is growing in the current quarter, but they caution that any rebound will not be accompanied initially by rising employment. Jobless claims figures released Thursday were better than expected, but remain well above levels associated with a healthy economy.

The Commerce Department's new estimate for the gross domestic product was unchanged from the initial figure it released last month. The drop, while representing a record fourth consecutive decline, was far smaller than the previous two quarters. It also was stronger than the 1.5 percent decline that private economists expected.

The report Thursday found that businesses slashed their inventories more than first reported and cut back more sharply on investment in new plants and equipment. But those reductions were offset by revisions that showed smaller dips in consumer spending, exports and housing construction.

The 1 percent rate of decline in the April-June quarter followed decreases of 6.4 percent in the first quarter and 5.4 percent in the final three months of 2008, the sharpest back-to-back declines in a half-century. The four straight quarterly declines in GDP, which measures the country's total output of goods and services, mark the first time that has occurred on government records that date to 1947.

The recession that began in December 2007 is the longest since World War II, and the deepest in terms of the drop in the GDP, which is down 3.9 percent from its previous peak.

But economists are heartened that the decline slowed to 1 percent in the spring. Many analysts think that the government's $787 billion economic stimulus plan and the Cash for Clunkers program to boost car purchases will lift GDP growth to around 2 percent in the current July-September quarter.

However, the return to economic growth will not mean more jobs, at least at first. Economists believe the unemployment rate, currently at 9.4 percent, will keep rising through the spring of next year.

The Labor Department said Thursday that first-time unemployment claims fell to a seasonally-adjusted 570,000, from an upwardly revised 580,000 the previous week. The tally of those continuing to claim benefits dropped to 6.13 million from 6.25 million, the lowest level since early April.  The weekly figures remain far above the roughly 325,000 that analysts say is consistent with a healthy economy. New claims last fell below 300,000 in early 2007.

White House economic adviser Christina Romer said Tuesday the unemployment rate is likely to keep rising and hit 10 percent this year. That could discourage consumer spending and weaken any recovery.

The government makes three estimates of the economy's performance for any given quarter. Each new GDP estimate is based on more complete information.  Economists had expected that the second look at GDP for the spring would show the economy contracting at a 1.5 percent rate because they believed companies had cut back more sharply on their inventories.

While inventories were cut more than initially estimated, that weakness was offset by upward revisions in other areas.

The government found that consumer spending, which accounts for about 70 percent of total economic activity, fell at an annual rate of 1 percent in second quarter, a slight improvement from the 1.2 percent decline reported last month. Residential construction and exports also were revised to show smaller declines.

Federal Reserve Chairman Ben Bernanke said last week the economy appeared to be ''leveling out,'' and was likely to begin growing again soon. President Barack Obama appointed Bernanke to another 4-year term Tuesday.

The Cash for Clunkers program, which provides consumers rebates of up to $4,500 for turning in old gas-guzzlers for fuel-efficient cars, has helped spur activity in the auto and related industries. The economy also has been helped by stabilization in the housing sector, as sales of new and existing homes have risen for four straight months.

White House forecasts 10-year deficit of $9T

By Associated Press

Wednesday, August 26, 2009

WASHINGTON — In a chilling forecast, the White House is predicting a 10-year federal deficit of $9 trillion — more than the sum of all previous deficits since America’s founding. And it says by the next decade’s end the national debt will equal three-quarters of the entire U.S. economy.

But before President Barack Obama can do much about it, he’ll have to weather recession aftershocks including unemployment that his advisers said Tuesday is still heading for 10 percent.

Overall, White House and congressional budget analysts said in a brace of new estimates that the economy will shrink by 2.5 to 2.8 percent this year even as it begins to climb out of the recession.

Those estimates reflect this year’s deeper-than-expected economic plunge.

The grim deficit news presents Obama with both immediate and longer-term challenges. The still fragile economy cannot afford deficit-fighting cures such as spending cuts or tax increases. But nervous holders of U.S. debt, particularly foreign bondholders, could demand interest rate increases that would quickly be felt in the pocketbooks of American consumers.

The White House Office of Management and Budget indicated that the president will have to struggle to meet his vow of cutting the deficit in half in 2013 — a promise that earlier budget projections suggested he could accomplish with ease.

“This recession was simply worse than the information that we and other forecasters had back in last fall and early this winter,” said Obama economic adviser Christina Romer.

The deficit numbers also could complicate Obama’s drive to persuade Congress to enact a major overhaul of the health care system — one that could cost $1 trillion or more over 10 years. Obama has said he doesn’t want the measure to add to the deficit, but lawmakers have been unable to agree on revenues that would cover the cost.  What’s more, the high unemployment is expected to last well into the congressional election campaign next year, turning the contests into a referendum on Obama’s economic policies.

“The alarm bells on our nation’s fiscal condition have now become a siren,” said Senate Minority Leader Mitch McConnell of Kentucky. “If anyone had any doubts that this burden on future generations is unsustainable, they’re gone — spending, borrowing and debt are out of control.”

Even supporters of Obama’s economic policies said the long-term outlook places the federal government on an unsustainable path that will force the president and Congress to consider politically unpopular measures, including tax increases and cuts in government programs.

“The numbers today portend the biggest budget fight we’ve probably had in decades in the United States,” said Stan Collender, a former congressional budget official.

The summer analyses by the White House budget office and by the Congressional Budget Office reached similarly bleak conclusions. The CBO’s 10-year deficit figure was smaller — $7 trillion — but that is because it assumes that all tax cuts put into place in the administration of former President George W. Bush will expire on schedule by 2011. Obama’s budget baseline, however, hews to his proposal to keep the tax cuts in place for families earning less than $250,000 a year.

Both budget offices see the national debt — the accumulation of annual budget deficits — as more than doubling over the next decade. The public national debt, made up of amounts the government owes to the public, including foreign governments, stood Tuesday at a staggering $7.4 trillion. White House budget officials predicted it would reach $17.5 trillion in 2019, or 76.5 percent of the gross domestic product.

That would be the highest proportion in six decades.

Not Jackson Hole (Bryce Canyon), but note that the rocks are pointing up!  Oops!  Read story above on estimated deficit!

Fed Chairman Says American Economy Is Poised to Grow
August 22, 2009

JACKSON HOLE, Wyo. — Ben S. Bernanke, the chairman of the Federal Reserve, offered his most hopeful assessment in more than a year on Friday, asserting that “the prospects for a return to growth in the near term appear good.”

In a much-awaited speech here to central bankers and economists from around the world, Mr. Bernanke went beyond the Fed’s most recent assessment that the nation’s economy was “leveling out” and that the recession was ending.

Noting that short-term lending markets are functioning “more normally,” that corporate bond issuance is strong and that other “previously moribund” securitization markets are reviving, Mr. Bernanke said that both the United States and other major countries were poised for growth.

In emphasizing not just the imminent end of the recession — the worst since at least the early 1980s if not since the Great Depression — but also the “good” chances of actual growth, Mr. Bernanke’s assessment was in some ways surprising.

Despite encouraging signs on many fronts, American retailers have reported unexpectedly weak sales in the last week — a sign that that consumer spending could drag down economic growth in the months ahead. And on Thursday, the Labor Department reported that new unemployment claims jumped again.

The Fed chairman’s added hopefulness may have reflected the unexpectedly good news from other parts of the world: Germany and Japan both reported positive economic growth this week, an unexpected rebound from their own recessions.

The Fed chairman cautioned that problems remained, and warned that regulators would have to impose much tougher capital requirements on major financial institutions to ensure that they can better withstand the kind of cash crunch that crippled the global financial system last fall.

“Strains persist in many financial markets across the globe,” Mr. Bernanke said, speaking at the Fed’s annual symposium at this resort in the Grand Tetons. “Financial institutions face significant additional losses, and many businesses and households continue to experience considerable difficulty gaining access to credit.”

Repeating the caution that Fed officials and most private forecasters have expressed in recent weeks, Mr. Bernanke predicted that the economic recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels.”

CIT branch
CIT provides funding for small and medium-sized firms

CIT shares rise as company emerges from bankruptcy
December 10, 2009

NEW YORK (Reuters) – CIT Group Inc's new shares rose as much as 6 percent from opening levels in their debut on the New York Stock Exchange on Thursday as the lender to small businesses emerged from one of the largest bankruptcies in U.S. history.

CIT, one of the biggest financial sector victims of the credit crisis, is also the only major firm in the sector to emerge from bankruptcy.

Others, such as Lehman Brothers, Washington Mutual and IndyMac have been unable to continue on their own.

But the comeback may not be easy.

"In the space they are working, it is a tough time trying to secure customers for a company that has gone bankrupt," said Robert Lutts, president and chief investment officer at Cabot Money Management.

"Today, executives making decisions in the financial area are making very low-risk decisions," Lutts said. "That means don't work with the problem childs of the world, and I think that is going to mean a tough sledding for CIT."

Hundreds of thousands of small and mid-sized businesses depend on CIT for financing, and company lawyers had said the company needed to get through bankruptcy quickly to avoid customer defections.

CIT's new stock was up 4.20 percent at $28.14 in mid-morning trading after opening at $27.00. The stock rose as much as 6 percent to $28.63.

The more than 100-year-old lender filed for bankruptcy last month after a debt exchange offer failed.

Earlier this week, it won approval from a New York bankruptcy judge for a prepackaged reorganization plan.

CIT's reorganization plan will reduce its debt by about $10.5 billion to about $55 billion and defer significant debt obligations for three years.

Under the plan, holders of CIT's unsecured debt will receive new notes representing 70 cents on the dollar of original debt, plus new common stock.

The company had won support from bondholders for the plan substantially in excess of the minimum amount required under U.S. bankruptcy law.

Common and preferred stockholders, including the U.S. government, will be wiped out.

CIT bankruptcy reassigned after recusal
November 2, 2009

NEW YORK (Reuters) – CIT Group Inc's bankruptcy case was reassigned on Monday to U.S. Bankruptcy Judge Allan Gropper following the recusal of Judge Robert Gerber, who had been assigned the case hours earlier.

A courtroom deputy for Gropper said Gerber recused himself from the case. The deputy did not give a reason for the recusal. Gerber's chambers had no immediate comment.

CIT, a source of financing to about one million small and mid-sized businesses, filed for Chapter 11 protection from creditors on Sunday after gathering support from most of its bondholders for its "prepackaged" reorganization.

The bankruptcy filing, one of the five largest in U.S. history, followed a failed debt exchange offer.

CIT said it hopes to emerge from bankruptcy by the end of the year and reduce its debt by $10 billion. The New York-based company intends to keep lending, and a quick reorganization is crucial if it expects to retain most customers.

Gropper has been a bankruptcy judge since 2000. His cases have included the reorganization of Northwest Airlines Corp, which later merged with Delta Air Lines Inc, and the current proceedings for the giant mall owner General Growth Properties Inc.

Before joining the bench, Gropper was a partner at White & Case, where he was involved in many of the largest U.S. bankruptcies, including Federated Department Stores and Texaco. He has degrees from Yale University and Harvard Law School.

According to its bankruptcy petition, CIT had $71 billion of assets and $64.9 billion of liabilities on June 30.

In morning trading, CIT shares fell 44 cents, or 61 percent, to 28 cents. The New York Stock Exchange said it would suspend trading in CIT prior to Tuesday's market open.

The case is In re CIT Group Inc, US Bankruptcy Court, Southern District of New York, Case No. 09-16565

CIT Group files for US bankruptcy
I-BBC - Page last updated at 22:06 GMT, Sunday, 1 November 2009

The US lender, CIT Group, has filed for bankruptcy protection, after a debt-exchange offer to bondholders failed.

However, the majority of bondholders have agreed a reorganisation plan that will reduce CIT's debt by $10bn (£6bn) while allowing it to go on operating.

The group's operating subsidiaries, including CIT Bank, were not included in the bankruptcy filing in New York.

CIT Group suffered as the credit crisis left it unable to fund itself, and the recession exposed it to many bad loans.

Under the reorganisation plan which has been approved by bondholders, creditors will end up owning the company.

The decision to proceed with our plan of reorganisation will allow CIT to continue to provide funding to our small business and middle market customers
Jeffrey Peek
Chairman and CEO, CIT Group

Most bondholders will also end up with new CIT debt worth about 70% of the face value of their old debt. Preferred shareholders, including the US government, will get money only after other creditors are paid back.

The government invested $2.33bn in CIT shares in December 2008 through the Troubled Asset Relief Programme (Tarp). It could have lost more, however, had it not declined to give more aid this year.

"The decision to proceed with our plan of reorganisation will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the US economy," said CIT's chairman and CEO, Jeffrey Peek, who will step down by the end of the year.

CIT's bankruptcy protection filing, showing $71bn in finance and leasing assets against total debt of $64.9bn, is the fifth biggest in US corporate history.

Many observers predict that if CIT is able to continue in business after emerging from bankruptcy protection, it will not be able to make anything like the same number of loans to small businesses.

That could mean that thousands of companies which are looking to raise money for investment will struggle to find the cash, the warn.

CIT Group files for prepackaged bankruptcy
November 1, 2009

NEW YORK (Reuters) – CIT Group Inc, a century-old commercial lender, filed for bankruptcy on Sunday, as the global credit crisis left it unable to fund itself and the recession left it with too many bad loans.

CIT's creditors have already approved its reorganization plan. Analysts have said that getting through bankruptcy is crucial for CIT if it wishes to keep its customers, which include Dunkin' Donuts franchisees and film production company Dark Castle Entertainment.

CIT's operating subsidiaries, including CIT Bank, are not included in the bankruptcy filing, and expect to continue operating, the company said in a statement.

CIT, which filed for bankruptcy protection in the Southern District of New York, plans to reduce its total debt by about $10 billion in bankruptcy.

Under the bankruptcy plan approved by bondholders, creditors will end up owning the company. Most bondholders will also end up with new CIT debt worth about 70 percent of the face value of their old debt. Preferred shareholders, including the U.S. government, will get money only after other creditors are paid back. Current common shareholders will receive nothing.

The U.S. government invested $2.33 billion in CIT preferred shares in December 2008 through the Troubled Asset Relief Program.

CIT financed itself mainly by borrowing from bond markets, which has proven to be a flawed strategy as the credit crunch that began in 2007 has made it much more expensive for troubled companies to fund themselves.

CIT near plan to turn over company to bondholders: sources
By Paritosh Bansal and Walden Siew
Wed Sep 30, 1:38 am ET

NEW YORK (Reuters) – CIT Group Inc (CIT.N) is nearing a plan that likely would hand the commercial lender over to its bondholders, sources familiar with the matter said on Tuesday.

CIT was preparing an exchange offer that would eliminate up to 40 percent of its more than $30 billion in outstanding debt, said the sources, who did not wish to be identified because they were not authorized to make public comments about the deal.

The plan would offer bondholders new debt secured by CIT assets, as well as nearly all of the equity in a restructured company, one source said.

If not enough bondholders agreed to the plan, the company could seek to restructure in bankruptcy court, the source said. This would result in one of the largest Chapter 11 bankruptcy-court filings in U.S. history.

A second source said that while some bondholders supported the plan, a majority was not yet on board.

CIT's board has yet to approve any course of action, the first source said.

CIT spokesman Curt Ritter declined to comment.

Although CIT received $2.3 billion in December under the Troubled Asset Relief Program (TARP), federal regulators this year declined further requests by CIT for funds.

U.S. taxpayers are likely to see much of their investment wiped out under a bankruptcy, but not under a successful exchange offer, the first source said, adding that U.S. regulators had been frequently briefed on the developments of the plan.

The lender to small and medium-sized businesses, as well as to commercial real estate borrowers, has until October 1 to present a restructuring plan to lenders.

CIT Group Wraps Debt Purchase, Dodges Bankruptcy
Filed at 9:52 a.m. ET
August 17, 2009

NEW YORK (AP) -- Commercial lender CIT Group Inc. said Monday its offer to repurchase outstanding debt at a discount -- a crucial step to help stave off bankruptcy -- was successful.

The embattled New York-based lender offered to buy $1 billion in debt that was set to mature Monday. CIT warned that if not enough bondholders were willing to sell the debt back to the company, it would likely have to file for bankruptcy protection.

The company said nearly 60 percent of the debt was tendered for purchase, barely topping the 58 percent minimum needed to complete the offer. CIT is paying $875 for every $1,000 tendered as part of the offer.

CIT will pay off the remaining notes that matured Monday but were not tendered for purchase as part of the offer.

''The completion of this tender offer is another important milestone as the company continues to make progress on the development and execution of a comprehensive restructuring plan,'' CIT Group said in a statement.

At the same time that CIT received $3 billion in emergency funding last month from its largest bondholders, it launched the offer to buy back outstanding debt in an effort to ease a cash crunch that nearly forced it out of business. CIT turned to and received funding from its bondholders only after negotiations for a government-led bailout failed.

Some experts feared that if CIT collapsed it would deal a crippling blow to an economy still bleeding hundreds of thousands of jobs a month despite a nearly $800 billion federal stimulus program.

The retail sector would be hit especially hard. CIT serves as short-term financier to about 2,000 vendors that supply merchandise to 300,000 stores, according to the National Retail Federation. Analysts say 60 percent of the apparel industry depends on CIT for financing.

It could continue to struggle with liquidity issues as more debt is due to mature next year.

Last week, CIT reached an agreement with the Federal Reserve Bank of New York that puts the company under the oversight of federal regulators. The agreement requires CIT to submit a plan for how it will maintain sufficient cash. It must also provide budgets through the end of 2010 that include details about how the company will meet current and future capital requirements.

Shares of CIT fell 11 cents, or 7.8 percent, to $1.30 shortly after Monday's market open.

CIT Delays Report, Could Have to File For Bankruptcy
Filed at 7:50 a.m. ET
August 11, 2009

NEW YORK (Reuters) - Troubled lender CIT Group Inc <CIT.N> said on Tuesday it has delayed filing its second-quarter report with regulators and said if it could not complete its debt tender or arrange other financing, it would file for bankruptcy.

CIT is still reviewing assets and businesses that it may sell as well as the related valuation adjustments that must be included in the quarterly report, it said in a filing with the U.S. Securities and Exchange Commission.

New York-based CIT, which last month secured $3 billion in emergency funding from bondholders, has been battling to restructure its debt and avoid bankruptcy.

The company has launched a tender offer for its outstanding $1 billion floating-rate notes due August 17. In a filing on Tuesday, it said if this offer were successful, it would use the proceeds from its emergency funding to complete the tender and make the payment on the August 17 notes.

The 101-year-old lender had already postponed its results, originally expected on July 23, while arranging the emergency funding. It said last month it expected a second-quarter loss of more than $1.5 billion.

Shares in the company slipped slightly to $1.46 in premarket trading, down from $1.48 on Monday.

More on CIT a NYTIMES editorial.
R.I.P., CIT?

Floyd Norris, Notions on High and Low Finance
July 13, 2009, 6:15 pm

There is widespread speculation that the CIT Group, one of the largest loan companies serving smaller businesses, could be forced into bankruptcy soon. CIT became a bank, like everyone else, but it appears that at least some people in the government view it as too unimportant to save.

CIT is mounting a campaign claiming it is important, and could yet succeed. Either way, the need for the government to make such a decision demonstrates how far the financial system is from being fixed.

The company’s most recent 10-Q sets out its problem:

    The Company’s business has been historically dependent upon access to the debt capital markets for liquidity and efficient funding, including the ability to issue unsecured term debt.

It can no longer issue such debt. In June, Standard & Poor’s and Fitch cut the company’s bond rating to junk, and Moody’s followed this week. It seems possible that the company will not last a full month after it stopped being investment grade at all the rating agencies, and perhaps not a week after it lost its last such rating. That sounds like a commentary on the tardiness of the rating agencies, or the perils of an industry so dependent on friendly credit markets.

That quarterly report said it would need to raise $10 billion by March of next year, but now had access to just $6.4 billion — unless the government came through with another bailout.

CIT is trying to shrink — by issuing few new loans — and to issue secured credit. In other words, even if it does survive, it has no plans to be much help to its customers.

If CIT does go under, the $2.3 billion it got from the TARP program will have done no one any good.

Despite the slight opening of financial markets since the winter panic eased, this country does not have a decently functioning financial system. It is the Federal Reserve and the Treasury that decide which financial companies stay in business, which is something you expect from a centrally planned socialist economy, not from the great bastion of the free enterprise system.

Many of the better-off banks were able to repay the TARP money to the government, but they remain dependent on F.D.I.C.-guaranteed loans. CIT would be O.K., at least in the short term, if it could get such loans.

There has been a lot of hand-wringing over the failure of the Obama stimulus plan to get the economy moving, but where attention is really needed is the failure to get the financial system going. That was never going to be easy, but the worst possible decision was to allow the banks to fudge their financial statements. The Obama administration did not lift a finger to prevent Congress from demanding such a move, which the Financial Accounting Standards Board made under duress.

It is not easy to be sure how much difference that made in financial statements, although it clearly allowed some banks to pretend their losses were less than they really were — at least as measured by market values. The banks claim those market values are ridiculously low, but they will not divulge exactly what assets they own, or where they value them.

We are back to a situation where no one knows which balance sheet can be trusted. In that climate, the easiest decision is to trust no one — or at least no one without a credit line backed by Uncle Sam. Citi is too important to fail, but CIT may not be.

What has been needed for a long time is a way to figure out how much toxic assets are worth, and to get them off bank balance sheets and into the hands of speculators with secure funding. Then the financial institutions, with solid capital and believable balance sheets, could go back to lending, both to the public and to each other. It is tragic that has not happened.

26 years ago=1983...interest rates were in double-digits...

467,000 Jobs Lost in June, Far More Than Expected

July 3, 2009

The pace of job losses quickened in June after falling sharply just a month earlier, casting a shadow over the Obama administration’s attempts to stanch months of stark declines in the labor market.

The American economy shed 467,000 jobs last month, and the unemployment rate rose to 9.5 percent, its highest level in 26 years, the Labor Department reported on Thursday. Job losses were widespread among the construction, manufacturing and business and professional services sectors.

Economists had expected 365,000 job losses for the month, and predicted unemployment would reach 9.6 percent.

The latest figures highlight a somber new reality for workers, economists said. As the recession enters its 20th month, private wages and salaries are falling, working hours are dwindling and more people are without work. In essence, economists say, months of deep, broad job losses are effectively making unemployment a way of life for millions.

The number of people who have been unemployed for more than 27 weeks has more than tripled since the recession began, to 4 million. The median time people go without a job has increased to nearly four months, from slightly more than two months at the outset of the recession in December 2007.

“We have never seen a duration of that magnitude,” Lynn Reaser, vice president for the National Association for Business Economics, said. “There are a lot of ramifications. A lot of these people become discouraged, and they drop out of the work force. It affects their spending, their whole psychological frame of mind.”

In the Brownsville section of Brooklyn, Jeffrey Jones, 40, is feeling the weight of eight months without work. He has not found anything since losing his job as a cook at a senior center in October, and he worries about paying rent and caring for his four children. His blood pressure is up, and some nights he stays up and watches television to distract himself from the worries that keep him from sleeping.

“I know I’m not supposed to be letting it stress me out,” he said. “The way I’m going now, I won’t be able to make it too much longer. I can’t go this long without doing something for my family.”

While the economy is no longer losing jobs at a pace of 600,000 each month, businesses are still cutting positions and imposing pay cuts and hiring freezes as the economy continues to contract. Consumers are saving 6.9 percent of their disposable income, and spending remains sluggish.

Even the White House has lowered its expectations for the job market, and now says that unemployment will hit 10 percent. Many economists say that job losses and unemployment will continue rising even after the economy begins growing again.

“I don’t see any job growth outside of health, education and government spending through the end of the year,” said John E. Silvia, chief economist at Wachovia Corporation.” As more people hunt futilely for jobs or give up their searches altogether, they burn through their savings, fall behind on bills and mortgages, and eventually add to the strains on already strapped aid programs, from government unemployment insurance to private food pantries.

“There are going to be massive, massive numbers of people who are out of work for long periods of time,” said Andrew Stettner, deputy director for the National Employment Law Project. “It’s one of the most important aspects of where the economy is right now.”

Although the number of people filing for unemployment insurance has leveled off recently, more workers are falling back on safety nets intended for the most troubled workers. More than 2.7 million people received emergency or extended unemployment benefits in the first week of June — the most recent period for which data was available — compared with 2 million at the beginning of the year.

As months pass without a job offer, people cut back where they can, turning off the cable, canceling vacations and shift their shopping habits to lower priced retailers.

Some people give up looking for jobs and join the 800,000 discouraged workers.

Others, like Domminique Werdlow, 37, of Houston, keep sending out résumés and sifting through online job boards. Since she lost her job as a customer-service trainer at Waste Management in January, Ms. Werdlow said her car has been possessed and that she now lives unemployment check to unemployment check.

“It’s not getting any better,” she said. “I really try to stay positive. If I really start looking at it, I’d be very depressed.”

Judge denies GM retirees' request for committee 
By BREE FOWLER, AP Auto Writer 
Posted on Jun 25, 2:34 PM EDT

NEW YORK (AP) -- A bankruptcy judge on Thursday ruled that a group representing General Motors Corp.'s salaried retirees cannot form a formal committee to negotiate with the automaker as it attempts to reorganize and emerge from Chapter 11 as a new company.

U.S. Judge Robert Gerber said that since GM had the right to modify or terminate the retirees' health care and life insurance benefits before they filed for bankruptcy protection, the retirees can't challenge the automaker's ability to do so now.

"While I do understand the importance of this to the retirees, I can't grant the retirees rights that they don't have outside of bankruptcy," Gerber said in issuing his ruling.

As part of its restructuring plan, GM plans to continue to pay health care and life insurance benefits for its 122,000 salaried retirees and their surviving spouses, but those benefits are expected to be reduced and the retirees will be forced to shoulder a larger share of their health care costs.

Retired hourly workers whose benefits are dictated by contracts with unions like the United Auto Workers are not affected.

Neil Goteiner, an attorney for the salaried retirees group, said that given what's at stake for the retirees, the cost of a committee was warranted.

"Your honor, this is truly a situation where you're dealing with widows and orphans," Goteiner said. "It's grossly unfair. They should get a chance to sit down and at least be the assistant captain of their fate."

But GM attorney Harvey Miller argued that the retirees shouldn't be able to form a committee since GM has always had the right to modify salaried retiree benefits and has done so in the past.

"There can still be discussions with GM and there is a group that periodically has had discussions with GM," Miller said. "This would simply add more costs."

Miller added that the formation of a committee could threaten to slow down the sale of GM's assets to a new company. The sale needs to go through as soon as possible if the company is to have any chance of success, he said.  As part of its plan to emerge from court protection, GM plans to sell the bulk of its assets to a new company that would be controlled by the U.S. government.  In exchange for up to $50 billion dollars in financing, the U.S. government will take a 60 percent ownership stake in the new company. The Canadian government would get 12.5 percent.

The United Auto Workers union will get 17.5 percent, which it will use to fund its retiree health care obligations, while GM's unsecured bondholders would own the remaining 10 percent.

Earlier in Thursday's hearing, Gerber gave GM final approval to access to its full $33.3 billion in bankruptcy financing. He had given preliminary approval earlier this month for GM to use $15 billion of the total.  The billions in U.S. and Canadian government financing is intended to keep the automaker going until it can emerge from Chapter 11.

Also on Thursday, Gerber denied a request from an unofficial committee of people with asbestos-related claims against GM to appoint a "tort czar" that would oversee all future claims against the old GM, not just those related to asbestos.  The asbestos group had previously filed a motion requesting formal committee status, but told the court Thursday that it was no longer pursuing that. The group has one representative on the case's unsecured creditors committee.

A pun on "mercy me" perchance?  Or is that "crikey" across the pond?

Goldman: Recession? What recession?
Robert Peston | 14:33 PM, Tuesday, 14 July 2009

I'm in a horrible rush, so have to keep my remarks on Goldman Sachs' second quarter results brief.

I could say "crikey" and leave it at that.

But I will translate. Just a few months after Wall Street and the City of London were in meltdown, Goldman has reported record net revenues for a three-month period of $13.8bn, which is a breathtaking 47% higher than those generated in the preceding three months and in the equivalent period of last year.

It's boom time again, especially in the trading of credit and currencies.  And oh how Goldman's 29,400 staff have been rewarded. Compensation for the three months was a handsome $6.65bn or $226,000 per employee.  That brings remuneration per employee for the first half of the year to a none-too-cheap $384,000.  And we're only halfway through the year.

The media and political reaction to Goldman's bounceback will be fascinating to observe.  It's true that the investment bank has consistently performed better than most of its rivals.  But when that cataclysmic storm broke over the financial system last autumn, Goldman - like the rest - had to turn to taxpayers for a crutch in the form of guarantees for its debt, access to central-bank liquidity and capital.

It has recently declared that it can stand on its own feet again without taxpayers to lean on.

But some may well ask whether taxpayers shouldn't have demanded a bit more for their succour, given that Goldman is once again the world's pre-eminent money-making machine.

Goldman's Cohen Sees Inflation At Bay
Filed at 11:40 a.m. ET

June 15, 2009

NEW YORK (Reuters) - One of Wall Street's most influential strategists said on Monday the U.S. Federal Reserve is unlikely to ratchet back efforts to stimulate the economy soon, and that it was too early to worry about inflation choking off what would likely be a fitful recovery.

Abby Joseph Cohen, senior investment strategist at Goldman Sachs Group Inc <GS.N>, said the U.S. central bank "would like to do as little as possible for as long as possible" to let the economy regain its footing, and allow businesses to rebuild inventories and invest more.

Inflation fears are "spectacularly premature" in light of rising unemployment and excess supply, Cohen said at the Reuters Investment Outlook Summit in New York.

"We just don't see that inflation is going to rear its ugly head any time soon. That doesn't mean we won't see some rebound in some prices," including in commodities, she said.

Cohen predicted a "dramatic surge" in U.S. corporate profits in the third quarter and especially the fourth quarter from depressed year-earlier levels.

She expects a slow economic recovery, with annualized growth in gross domestic product of just 1 percent from July to December, in part because consumers are saving more and providing less of a "spunk" to activity.

Cohen is well known for correctly forecasting a bullish run for U.S. stocks during the 1990s.


Having pushed benchmark interest rates to near zero, the Fed and the Treasury Department have tried to stimulate economic activity in other ways.

The central bank, for example, is aggressively buying mortgage securities and other debt to add liquidity. Meanwhile, the Treasury has pumped hundreds of billions of dollars to prop up banks and insurers.

"I don't see anything happening in the short run" to reduce the stimulus, Cohen said. "These were intended to be transitional. (Until policymakers) see that markets are moving normally, and the economy is behaving normally, they're going to be reluctant to reverse what they have done."

Cohen added, though: "We have to be very careful in terms of defining what 'normal' is."

The strategist praised early efforts by the Obama administration to stimulate the economy, including a focus on energy efficiency, and trying to bolster the U.S. middle class, which has "fallen behind over the last decade.

"They have been faced by a series of extraordinary problems, and in general I think they have gone about it in a very good way," she said.

Cohen also praised Ben Bernanke, whose term as Fed chairman ends next January.

"History is likely to show that he was an extraordinarily effective Fed chairman," she said. "Financial markets have stabilized, and the economy appears to be moving toward a stable position."

Six Flags Files for Bankruptcy
June 13, 2009, 11:26 am

Six Flags, the big theme park operator, filed for bankruptcy in early Saturday morning in Delaware after failing to reach an agreement with lenders over a plan to reorganize its debt outside of court.

Six Flags became only the latest company to prove unable to cope with its debt load at a time when previous solutions like refinancings are largely unavailable. The theme park operator, which had $2.4 billion in debt, faced nearly $300 million in payments to preferred stockholders due in August.

But the company is hoping to make its ride through bankruptcy a short one. In a statement, Six Flags said that it is seeking court approval for a pre-negotiated restructuring plan, one that has the unanimous approval of its lenders. That proposal would eliminate $1.8 billion in debt and slice off the $300 million in preferred stock payments.

“The current management team inherited a $2.4 billion debt load that cannot be sustained, particularly in these challenging financial markets,” Mark Shapiro, Six Flags’s chief executive, said in a statement. “As a result, we are cleaning up the past and positioning the Company for future growth.”

In its bankruptcy filing, Six Flags said that 37 of its subsidiaries, including parks like Great Adventure and Hurricane Harbor, had also sought court protection. The parks will continue to operate normally, but analysts have questioned whether attendance would fall off as some consumers shun waiting in line for roller coasters at a bankrupt theme park operator.

The filing is a blow to Dan Snyder, the owner of the Washington Redskins, who took control of Six Flags in 2005 after waging a proxy fight and holds about a 6 percent stake in the company. Mr. Snyder sought to turn around the company, installing a new management team led by Mr. Shapiro, and selling off underperforming parks.

He sought to clean up the remaining parks by banning smoking, increasing security and having more costumed characters like Tweety to roam around.

Other major investors in Six Flags include Bill Gates’s Cascade Investment, which held an 11.1 percent stake, and the hedge fund Renaissance Technologies, with a 5.5 percent stake.

Six Flags said in its statement that the filing comes despite a good 2008, in which the company cut its net loss to $135 million from $275 million a year ago. Its net loss for the first three months of 2009 narrowed nearly 7 percent from the same time in 2008, to $146.3 million.

But the company saw a 24 percent drop in revenue over the same period, as it suffered from lower attendance and spending at its parks.

Because the credit markets remain largely frozen for troubled companies, Six Flags was unable to refinance its massive debt load. The moribund real estate market also precluded the company from selling off property, like unused land in Maryland and New Jersey, to raise additional cash.

Six Flags’s primary advisers are the investment bank Houlihan Lokey Howard & Zukin and the law firm Paul Hastings Janofsky and Walker.

NYTIMES "Pay at the Top" interactive...
Talking Business: Geithner’s Plan on Pay Falls Short
June 13, 2009

It was another one of those Timothy Geithner moments.

On Wednesday, the Treasury secretary held a roundtable discussion with a group of about 20 government officials and outside experts; the subject was executive compensation. Kenneth R. Feinberg, the Treasury Department’s new “comp czar,” was there, as was Mary Schapiro, the new chairman of the Securities and Exchange Commission; Daniel K. Tarullo, the newest Federal Reserve governor; and Lucien Bebchuk, the Harvard Law School professor who has turned his academic interest in executive compensation into a crusade.

It was, I heard later, a terrific meeting — a spirited, high-level give-and-take about what the government could do to better align the interests of shareholders with that of top executives, to ensure pay was linked to performance and to rid the system of the kind of compensation incentives that caused so much excessive risk-taking and helped bring about the financial crisis.

“The discussion was surprisingly substantive,” said Nell Minow, the co-founder of the Corporate Library. “Geithner was very engaged in the discussion and genuinely interested in what everyone had to say.”

When the meeting ended, the doors were flung open and the media was invited in. Looking sternly into the cameras, Mr. Geithner read a statement in which he described executive compensation as a “contributing factor” to the crisis. Then he outlined a series of tough-sounding principles, including a “re-examination” of such egregious practices as golden parachutes, a need to align compensation practices with “sound risk management” and the importance of having compensation plans that “properly measure and reward performance.”

But then, as he so often does, he proceeded to follow these tough words with actual proposals that were less than inspiring. The only legislation his department planned to propose — indeed, the only legislation he deemed necessary — were bills that called for compensation committees to be made up of independent directors, along with “say-on-pay” legislation, which would give shareholders the right to vote on a company’s pay plan. That vote, however, would not be binding.

“Finally,” he said, “I want to be clear on what we are not doing. We are not capping pay. We are not setting forth precise prescriptions for how companies should set compensation, which can often be counterproductive. Instead, we will continue to work to develop standards that reward innovation and prudent risk-taking, without creating misaligned incentives.”

Later that afternoon, I called Ira Kay, who heads the executive compensation practice at Watson Wyatt & Company, to ask him what he thought of the government’s proposals. “I was relieved,” said Mr. Kay. I’ll bet he was.

Until the financial crisis, most people, myself included, did not make distinctions between different kinds of companies when it came to executive compensation. It was just one big problem, revolving primarily around the idea that there was something fundamentally wrong about executives taking home giant, multimillion dollar pay packages for mediocre performance or even outright failure — something, alas, that happens with annoying regularity in corporate America.

But if the near collapse of the financial system has taught us anything, it is that there should be a distinction. On the one hand, there are companies whose executives can make awful mistakes, even driving their corporations into bankruptcy, but whose actions have little or no effect on the rest of us. Most companies fall under this category.

And then there are those handful of companies — the too-big-to-fail banks and other large financial institutions that pose systemic risk — whose failure can wreak devastating havoc on the economy. For these latter companies, getting compensation right isn’t just a matter of fairness or improved corporate governance. It turns out to be critically important if we are to prevent a repeat of the calamity that has befallen us. But as difficult as it has been to overhaul executive compensation overall, it is going to be even more difficult to take the tougher measures that need to be taken with the banking system.

Let’s look first at the broader issue. In truth, for the first time in my memory, I think there is a decent chance that the compensation games will come to an end — though it won’t be by doing anything so radical as trying to cap pay, something that simply doesn’t work. (Mr. Geithner was right about that.)

Instead, it will be because boards have come under renewed pressure, thanks to the financial crisis, to control executive pay. It is also because, with the Democrats in charge, the issue is high on the agenda. (On Thursday, the House Financial Services Committee held a hearing on executive compensation.) Mr. Geithner’s two proposals will most likely breeze into law — and will certainly make a difference on the margins.

Most important, though, it is because the re-energized S.E.C., under Ms. Schapiro, is preparing a handful of new rules that will force companies to do a great deal more to spell out their compensation rationales, while making it easier for shareholders to express their displeasure if they feel boards have been too generous. In particular, the S.E.C. has begun laying the groundwork for a rule that will make it easier for shareholders to nominate directors — something that is tremendously difficult right now. Ms. Minow is among those who believe that the ability to replace incumbent directors is likely to have the biggest effect in reforming executive pay.

That’s the good news. The bad news is that for the banks, these measures won’t be enough. Banks, as we all now know, are different. Their deposits are insured by the government. When they run into problems, they have access to the Federal Reserve’s discount window. The government has a keen interest in the “safety and soundness” of banks, which is why they are so heavily regulated. Even in good times, taxpayers are at risk if a bank’s management makes too many risky bets. In bad times, excessive risk-taking by bankers can bring down an economy.

With the big banks, there is always a degree of moral hazard because they simply can’t be allowed to fail the way other companies can. Market discipline — or better corporate governance — just isn’t enough; even when a bank’s management is aligned with shareholders, they aren’t necessarily aligned with taxpayers. So it falls on the government to find ways to change the compensation incentives that encouraged the kind of crazy risk-taking that got us into so much trouble.

That is why, in his statement, Mr. Geithner stressed the importance of coming up with a compensation system that accounted for risk — he was speaking directly to the need to change the compensation system at banks. But none of his proposed solutions dealt with that problem. Neither he, nor anyone else in government, has yet figured out what to do about it.

Most of the ideas so far have been aimed at forcing bankers to have their bonuses paid in restricted stock that they could not cash in for years — until it was clear that the profits they had generated were not illusory. But to my mind, the problem really goes much deeper than that.

For one thing, the culture of bankers and traders, unlike at most nonbanks, rests on an “eat what you kill” mentality. That is why so many executives at, say, Merrill Lynch, felt justified in demanding big bonuses despite the firm’s huge losses. After all, they had made money on their trades — so why should they be punished because others had lost money for the firm?

For another thing, compensation at banks needs to be changed not just at the top, but also deep in the ranks, at the level of individual trader — or, indeed, anybody else who can put the firm’s capital at risk. This also makes it more difficult, because you can’t fix the problem with better corporate governance at the top. The changes have to be more systemic than that.

There is a third problem: once banks and investment banks were allowed to tear down walls between them, banking became a greedy profession. Look at all those banks panting to give back their bailout billions — in large part because they don’t want to have to deal with the executive compensation restrictions. And unlike other companies, where people glow with pride at the introduction of a new product, the key moment in the life of a banker is when he finds out what his bonus is for the year. None of this will be easy to change.

In his statement, Mr. Geithner stressed that the Federal Reserve was working on this problem as part of its job supervising banks. I got the strong sense this week that the Fed now views bank compensation as something it will begin to look at much more closely — and will eventually start regulating. The foolish and counterproductive distinction between banks that still have bailout money (which have onerous compensation rules) and those that gave it back (and thus have no rules) will go away, as it should. All banks pose risks to taxpayers, whether they still have bailout money or not. And all banks should have the same set of compensation rules.

There is another potential source of new ideas, though: Mr. Feinberg. A large part of his new job will be to determine the compensation for the most highly paid executives at the seven companies, including General Motors, Citigroup and American International Group, that have received the most government aid. But another part of his task, he told me this week, is to devise a compensation structure for all management ranks of those companies, not just the biggest earners.

Mr. Feinberg is, above all else, a practical man who likes solving problems, and he seemed to relish this latter aspect of his new role. “If this job has any long-term impact,” he said, “maybe we can come up with something that can serve as a model.”

Surely somebody needs to — and soon.

A $1.33 Trillion Drop in Net Worth in First Quarter
June 12, 2009

WASHINGTON (AP) — American households lost $1.33 trillion of their wealth in the first three months as the recession took a bite out of stock portfolios and dragged down home prices.

The Federal Reserve reported Thursday that household net worth fell to $50.38 trillion in the January-March quarter, the lowest level since the third quarter of 2004. The first-quarter figure marked a decline of 2.6 percent, or $1.33 trillion, from the final quarter of 2008.

Net worth represents total assets like homes and checking accounts, minus liabilities like mortgages and credit card debt.

The damage to wealth in the first quarter came from the sinking stock market. The value of Americans’ stock holdings dropped 5.8 percent from the final quarter of last year.

Another hit came from falling house prices. The value of household real-estate holdings fell 2.4 percent. Collectively, homeowners had 41.4 percent equity in their homes in the first quarter. That was down from 42.9 percent in the fourth quarter.

The latest snapshot of Americans’ balance sheets was contained in the Fed’s quarterly report called the flow of funds.

Despite the drop, the speed at which net worth shrunk slowed to start the year. During the recession’s deepest point in the October-December period, Americans’ net worth fell 8.6 percent, according to revised figures.

With wealth declining and unemployment rising, there are questions about how consumers — the lifeblood of the economy — will behave in the coming months.

If they continue to spend, even at a subdued pace, the recession probably will end this year as predicted by the Fed chairman, Ben S. Bernanke, and other economists. However, if consumers hunker down and cut spending again, that could delay any recovery. In the fourth quarter, Americans slashed spending at an annualized rate of 4.3 percent, the most in 28 years.

Beyond Outrage, Wall Street Payouts Fuel Connecticut's Economy, Tax Debate

The Hartford Courant
August 2, 2009

Five months after the national flap over AIG, outrage over Wall Street bonuses is back, and this time the stakes in Connecticut — for taxes and for economic health — are much higher.

Nearly 5,000 employees working for the nine large banks that accepted $175 billion in federal bailout money got million-dollar bonuses last year. In all, the banks handed out $32.6 billion in "performance-based" bonuses, New York Attorney General Andrew Cuomo disclosed Thursday in a report.

The payouts renewed angry calls for government controls on bonuses and prompted an immediate vote by the U.S. House for such controls — in a bill that would also give shareholders the right to nonbinding votes on executive pay.

In Connecticut, though, the debate takes on special meaning. It provides fodder for Democrats in the General Assembly as they try to push through a tax increase on the highest wage earners.

And even as the payments offend popular concepts of fairness, the billions in broader Wall Street bonuses are a financial boon to the state — much more than AIG's disputed $218 million paid to employees at a Wilton-based office of the failed insurance giant.

There is no public data showing how much of the nine big banks' bonus money went to Connecticut residents on the Fairfield County Gold Coast and elsewhere. But by all accounts the figure is large, and it boosts the state's coffers as well as its overall wealth.

"At minimum, we are talking $100 million for the state budget from direct income tax, let alone indirect spending by those receiving bonuses," said Peter Gioia, vice president for research at the Connecticut Business and Industry Association. "That may upset some people as taxpayers, but it should put a smile on people who own businesses."

The $100 million estimate assumes that the nine banks paid out about $2 billion of the $36 billion to Connecticut residents, based on the current state tax rate.

Whatever the right number, said Nicholas S. Perna, economic adviser for Webster Bank, "If Mr. Cuomo had been successful in banning all bonuses, the state budget would have been in even greater trouble."

Meanwhile, Democrats at the state Capitol have said for many months that the state should fill its two-year, $8.6 billion budget gap by increasing the tax on high-income residents.

"I think this makes it harder for Republicans to claim that raising taxes by just $20 a week on those making $600,000 a year is excessive," said Senate President Pro Tem Donald E. Williams Jr.

What Is Fair?

As Gioia and Perna point out, the so-called multiplier effect of the bonuses will help the state's economy as a whole, not just the few who got the money, since it will diffuse throughout the entire economy as it is spent.

But economic benefit is one thing and fairness is another.

"There ought to be some proportionality between executive bonuses and the health of the overall economy," said Jon Green, director of Connecticut Working Families. "Instead, Wall Street is content to continue to encourage risky gambling with other people's money. Have we learned nothing from the past year?"

Edward J. Deak, a professor of economics at Fairfield University, said he sees "a culture of 'me first'" at these banks, promoted by federal tax laws, that led to the large bonuses. Current law allows employers to deduct only the first $1 million in salaries for any one person for tax purposes, but leaves a loophole for performance-based pay, or bonuses.

"In this system, performance becomes a subjective standard," Deak said, "one that becomes looser and looser as more people want their share of the growing bonus pool."

The banks and insurance companies subject to federal oversight under the federal bailout program argue that they must be able to pay freely in order to attract and retain talent.  Pay expert Paul Hodgson, a senior research associate at The Corporate Library, a private group, takes aim at that notion.

"There has been a glut of bankers on the job market," he said, "and I find it hard to believe that there are top performers looking to leave their jobs if they don't get the same bonus as last year."

Spokesmen for three of the largest banks on the bailout list, Bank of America, JPMorgan Chase and Citigroup, declined to comment for this story.  The bonus amounts for 2008 were in line with the amounts paid in the past, said Jonathan Koppell, associate professor of politics and management Yale School of Management.

"I think it's surprising they were not lower considering the performance of the companies," Koppell said.

Fallout In Hartford

With seven-figure payouts to thousands of people, many, including key policymakers, doubt that all those bonuses could really have been earned.

"The government tried to help out the economy, by bailing these companies out, and it is disturbing that they took advantage of taxpayer generosity," said state House Speaker Christopher G. Donovan, D- Meriden. "We obviously need more regulation of the private sector."

Donovan, like Williams in the state Senate, believes Cuomo's report will advance the Democrats' argument for a tax hike on high earners — an increase opposed by most Republicans, including Gov. M. Jodi Rell.

"Gov. Rell believes this type of misuse of taxpayers' dollars is shameful. But this is a federal problem which requires a federal solution," said Rell spokesman Adam Liegeot. "Raising the state's income tax is not the answer. In fact, doing so would kill jobs in Connecticut. Gov. Rell will not allow that to happen."

State Attorney General Richard Blumenthal said his office is considering how it might obtain information about whether the bonuses actually compensate individuals for their performance and whether the recipients kept their jobs last year "by virtue of the government bailouts."

Nonetheless, he said, "We're dealing with the lifeblood of the American economy, so we're not going to simply start throwing grenades or making accusations."

Copyright © 2009, The Hartford Courant

Obama Names Overseer to Set Pay at Rescued Companies
June 11, 2009

WASHINGTON—The Obama administration on Wednesday appointed a compensation overseer with broad discretion to set the pay for 175 top executives at seven of the nation’s largest companies, which have received hundreds of billions of dollars in federal assistance to survive.

The mandate given to the new compensation official, Kenneth R. Feinberg, a well-known Washington lawyer, reflects the federal government’s increasingly intrusive role in the corporate affairs of deeply troubled companies. From his nondescript office in Room 1310 of the Treasury building, Mr. Feinberg will set the salaries and bonuses of some of the top financiers and industrialists in America, including Kenneth D. Lewis, the chief executive of Bank of America; Vikram S. Pandit, the head of Citigroup, and Fritz Henderson, the chief executive of General Motors.

The compensation of executives at some companies receiving aid provoked a firestorm of political outrage earlier this year. In revising a previous proposal to set pay limits, the administration has decided to take an approach that will leave the success or failure of the effort to curtail high compensation at the assisted companies in the hands of Mr. Feinberg. (Mr. Feinberg himself will not receive any government compensation.)

The announcement by the Treasury secretary, Timothy F. Geithner, was part of broader recommendations on executive pay that will affect all publicly traded companies. Mr. Geithner called on Congress to adopt “say on pay” legislation giving shareholders the ability to hold non-binding votes on compensation levels. While in the Senate, Barack Obama sponsored such legislation, which was opposed by many large companies.

“This financial crisis had many significant causes, but executive compensation practices were a contributing factor. Incentives for short-term gains overwhelmed the checks and balances meant to mitigate against the risk of excess leverage,” Mr. Geithner said. “By outlining these principles now, we begin the process of bringing compensation practices more tightly in line with the interests of shareholders and reinforcing the stability of firms and the financial system.”

Mr. Geithner said the administration would seek legislation to give more authority, and promote more independence, by the committees of corporate boards that set compensation for top executives. The proposal would be similar to a provision in the Sarbanes-Oxley law of 2002 responding to a spate of accounting scandals that gave more authority, and imposed more exacting standards, on audit committees of corporate boards.

The latest plan restricting executive compensation at troubled institutions attempts to walk a fine line between satisfying public demand for controlling excessive pay and not spooking Wall Street, which the administration is hoping to rely on to help buy the troubled mortgage-backed assets at weaker banks.

Mr. Geithner told reporters on Tuesday that financial institutions are still worried about the “political risk” of becoming subject to greater government regulation if they participate in the Public-Private Investment program to buy toxic assets and relieve the balance sheets of the most troubled banks.

Instead of deciding compensation levels himself, Mr. Geithner decided to appoint Mr. Feinberg, a well-known mediator whose last high-profile assignment was putting a financial value on the lives of victims of the 9/11 attack, to decide the pay for the top 25 executives at the American International Group, Citibank, Chrysler, Chrysler Credit, General Motors, GMAC and Bank of America.

For 80 other financial institutions that have received federal assistance, Mr. Feinberg will develop the overall compensation structure, but without setting the exact level of pay. For these 80 companies, the goal is to reduce excessive risk-taking by executives whose compensation is tied to performance. Mr. Feinberg will also determine whether it would be in the public interest to force any executives at companies receiving assistance who might have been overpaid to return some of that pay.

Mr. Feinberg became a nationally known figure after the Bush administration assigned him to help settle possible lawsuits by the families of victims of the terrorist attacks on Sept. 11. His job was to put a value on the lives of the victims and offer government settlements to avoid lawsuits. Mr. Feinberg met with many of the families and spoke around the country about how intellectually challenging and emotionally difficult the assignment became. He often sought refuge by cloistering himself in a room in his home to listen to his extensive opera collection.

Before that assignment, he was appointed by federal district judges to help resolve several difficult product liability lawsuits. He played central roles in resolving cases involving victims of asbestos, Agent Orange and the Dalkon Shield, a birth control device that injured more than 200,000 women. He was also one of three arbitrators who determined the fair market value of the Zapruder film that captured the assassination of President John F. Kennedy, resolving a dispute between the heirs of Abraham Zapruder, who shot the footage, and the government, which acquired the 26-second film.

The announcement is the third attempt by Washington to respond to public outrage over high pay at companies receiving taxpayer assistance. On Feb. 4, the administration announced a proposal to set a $500,000 cap on cash compensation for the most senior executives at troubled companies getting “exceptional assistance,” and restrictions on cashing in on stock incentives.

That plan did little to quell outrage as details of bonuses were disclosed at several major companies receiving federal assistance. Two weeks after the Obama plan was announced, Congress approved a $787 billion economic stimulus bill that included more restrictions on the pay of executives at institutions receiving aid. The provision, inserted by Senator Christopher J. Dodd, the Connecticut Democrat, over the objections of the administration, instructed Treasury to come up with tougher rules for the five most senior officers and the 20 highest-paid employees at the most-troubled companies.

The legislation also barred top executives from receiving bonuses exceeding a third of their annual pay. Moreover, any bonus would have to be in the form of long-term incentives, like restricted stock, which could not be cashed out until the company had repaid the government.

That legislation was the basis for the appointment of Mr. Feinberg.

Mr. Dodd recommended the appointment of Mr. Feinberg to Mr. Geithner last month, a person briefed on that conversation said.

Editorial: Congress, the Banks and Derivatives
June 7, 2009

The Obama administration has made a serious proposal to regulate derivatives — the multitrillion-dollar market in financial contracts that malfunctioned so disastrously last year. The plan goes further than many thought politically possible, especially in its call for federal oversight of all large derivatives dealers. But it does not go far enough.

Those dealers — including big banks like JPMorgan Chase, Goldman Sachs and Morgan Stanley — trade derivatives mainly as one-to-one private contracts, largely without any regulation. The plan would allow regulators to impose rules on dealers and track their activities and presumably put a timely halt to abuses. But it does not demand the full transparency that would come from trading all derivatives on exchanges, like stocks.

Exchange trading allows the market as a whole — investors, economists, researchers — to see how derivatives are structured, priced and traded. Such knowledge is the best defense against speculative excesses.

The plan would require that derivatives that are deemed “standardized” — off-the-shelf contracts with mostly boilerplate language — be traded through a central clearinghouse or on an exchange. But the plan would also allow for “customized” derivatives — no one knows yet with certainty what the difference would be — to continue to be traded privately.

The danger of perpetuating a freewheeling market in customized derivatives is real. The decision to rope them off looks like a sop to the banks, which have fought against disclosure and transparency. They know that customers who rely on derivatives — including investment funds, major corporations and wealthy individuals — would likely pay less if they could compare prices.

The question now is whether Congress will try to improve the plan. Gretchen Morgenson and Don Van Natta Jr. reported in The Times last week on the banks’ post-meltdown lobbying efforts. Lawmakers are being pressed, and plied with contributions, to favor the lightest regulations and the largest loopholes.

Senator Tom Harkin has introduced legislation that would require exchange trading for derivatives. Representative Collin Peterson has introduced a bill that would tighten the regulation of derivatives’ clearinghouses. He acknowledges that his bill is not as strong as he would like but that Congressional politics left him no choice, telling The Times, “The banks run the place.”

Fed Chief Calls for Plan to Curb Budget Deficits
June 4, 2009

The Federal Reserve chairman, Ben S. Bernanke, said on Wednesday that the United States needed to develop a plan to restore fiscal balance, even as the government racks up huge budget deficits as it tries to spend its way out of the worst economic crisis since the Great Depression.

In remarks to the House Budget Committee, Mr. Bernanke said that the government must address the immediate problems of a crippling recession that has erased trillions of dollars in household wealth, hobbled people’s stock portfolios and raised unemployment to its highest levels in a generation. Still, he said, the government needed to think about putting its fiscal house back in order.

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” he said in prepared remarks.

The deficit is expected to reach $1.8 trillion this year as the country spends feverishly on financial bailouts, a sweeping stimulus package, lending programs, rescues for the automobile industry and more. Those are the highest budget deficit projections as a share of gross domestic product since World War II.

President Obama has vowed to reduce the budget gap by half by the end of his term, a promise made even as tax revenue is falling and the administration is trying to cobble together a potentially costly overhaul of the health care system. And the country faces trillions more in Social Security and Medicare obligations as baby boomers retire in coming years.

“Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance,” Mr. Bernanke said.

Lately, financial markets have started to quaver on worries about the government’s spending plans, and how they are piling more obligations onto the country’s $11 trillion national debt.

Investors in the bond markets, where the Treasury Department goes to raise money to keep the government running, are getting skeptical about the scale of Washington’s spending. The yields on Treasury notes have risen to their highest points in five months as investors who thronged to the safety of government debt begin to invest their money elsewhere.

“These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings,” Mr. Bernanke said.

But Mr. Bernanke made no mention of whether the Fed would increase its purchases of $300 billion worth of government securities. Such a move could help to push down interest rates on longer-term Treasury notes, but it could raise the prospects for inflation down the road.

The movement away from Treasuries, which rose to record prices at the height of the credit crisis, is a good thing on some levels. It suggests that investors are becoming more confident in riskier investments like stocks and corporate bonds.

But rising interest rates on Treasury notes make it costlier for the government to raise money. And higher yields on government debt can also push up interest rates on mortgages and other loans, making borrowing more expensive for consumers and homeowners.

In his testimony, Mr. Bernanke said that some corners of the once-frozen financial markets were edging toward normal. Major banks deemed in need of additional capital are raising money by issuing billions in common stock and notes, and markets for short-term loans among banks are functioning more smoothly, Mr. Bernanke said.

He noted that some financial institutions are weaning themselves off government-backed loan programs as they seek to pay back the money they took under the $700 billion financial bailout.

“It is encouraging that the private sector’s reliance on the Fed’s programs has declined as market stresses have eased, an outcome that was one of our key objectives when we designed our interventions,” he said.

Mr. Bernanke again cited numerous flickers of stability and growth in the economy and said that the economy’s swift declines were slowing and predicted growth would resume later this year. But he swatted away any hopes of a swift recovery, and said that the economy would probably to heal slowly.

“We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly,” he said in his remarks. “In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes.”

New G.M. Plan Gets Support From Key Bondholders
May 29, 2009

A proposal by General Motors to let bondholders receive up to a 25 percent stake if they do not oppose its bankruptcy reorganization — a bigger share than G.M. offered the autoworkers union — has received the support of a group representing many of the company’s largest debtholders.

In a regulatory filing, G.M. also set Saturday afternoon as the deadline for other bondholders to support the plan. The company is expected to seek bankruptcy protection by Monday, the deadline set by the Obama administration.

“Unless a sufficient number of bondholders sign statements backing the plan, the amount of stock and warrants for bondholders would be “substantially reduced or eliminated,” G.M. said in the regulatory filing. A person briefed on the matter said G.M. was seeking support from investors holding about 50 percent of G.M.’s $27 billion in bond debt. The plan already has the support of about 35 percent, according to people briefed on the matter.

In a regulatory filing, G.M. filled in many of the details of how it would look once it completed its reorganization plan, crafted under the eye of the Treasury Department. It said the government, which will provide bankruptcy financing of about $50 billion, initially would hold 72.5 percent of G.M., with the United Automobile Workers union receiving 17.5 percent, and bondholders receiving 10 percent

But the percentages held by the bondholders and the union could conceivably be larger because each are being offered warrants in the new G.M., which would be created in bankruptcy.

Under the terms of the plan, bondholders would initially receive 10 percent. They could then exercise their warrants for an additional 7.5 percent when the new G.M. rises to about $15 billion in value. The second set of warrants for the final 7.5 percent would be exercisable when new G.M. rises to $30 billion in value.

The union would initially receive a 17.5 percent stake to finance a health care trust for its retirees. It has also received warrants to raise that holding to 20 percent — but as Thursday’s filing made clear, those warrants are exercisable only if new G.M.’s value hits $75 billion.

Once the union and bondholders achieve their full stakes, the government’s share would drop to 55 percent.

The hope is to create a new G.M. by late August, people with knowledge of the matter said.

On Thursday, the committee representing holders of about 20 percent of the bonds’ value, said they voted unanimously in favor of the proposal. In a statement, the group said it “believes that when contrasted with the alternative — uncertain and costly bankruptcy court litigation — that it represents the best alternative for bondholders in the current difficult and dire situation.”

Another group of bondholders, representing about 30 percent of G.M.’s debt, is in talks with the Treasury, people with knowledge of the discussions said.

Earlier this week, bondholders overwhelmingly rejected a debt exchange offer that would have swapped their bonds for 10 percent of the company’s equity. Bondholders rejected the initial offer because they were upset that the U.A.W.’s health care trust, to which G.M. owes $20 billion, received a larger stake than the debt holders, who were owed $27 billion.

Under the proposal, bondholders conceivably will outrank the health care trust, once the warrants are exercised. Not only does that soothe any ruffled feelings, but it will create good will with the lenders G.M. will need to tap after it emerges from bankruptcy. On the other hand, the union will hold debt and preferred stock that helps guarantee its health care trust will be financed even if the new company falters.

G.M. and the Treasury are striving to resolve several issues before G.M. files for protection. Last week, G.M. reached a deal with the U.A.W. on contract concessions, while the company announced plans to eliminate brands including Hummer, Saturn, Saab and Pontiac. It also seeks to close dealerships and has announced plans to shut several plants.

Thursday’s announcement came after German and American negotiators in Berlin failed to agree on a crucial bridge loan to sustain Opel and the rest of G.M.’s European operations in the event of a bankruptcy filing, following a marathon negotiating session that stretched till nearly 5 a.m. Thursday.

Neither G.M. nor the Treasury Department are willing to invest significant sums of money in the company’s European operations, which they believe hold little value, people briefed on the matter said. G.M. and Treasury officials believe that the company would not be significantly hurt if Opel were forced into insolvency.

But officials did manage to narrow the field of potential suitors for Opel to two companies — Fiat, the Italian automaker, and Magna, a Canadian auto-parts giant. A Belgian private equity firm as well as a Chinese automaker were knocked out of contention.

Where this recession is reaching...

How Does the Current Crisis Compare to the Great Depression?
By Price Fishback
A Guest Post at the "Freakonomics" blog on the NYTIMES
May 11, 2009

Over the past couple of decades, every time we have experienced a slowdown in the American economy, the media mentioned the possibility that this is the next Great Depression. Maybe this is a natural response to the relative lack of downturns over the past 20 years. After experiencing a downturn once every three to seven years for nearly two centuries, the U.S. economy has been averaging a downturn about once every nine or ten years since the early 1980’s. As declines in the economy have become rarer, perhaps people have become more sensitive to them.

In the 1920’s, Soviet economist Nikolai Kondratiev argued for the existence of 40- to 60-year economic super-cycles. Since the Great Depression ended nearly 70 years ago, maybe we are overdue for the next one.

The events of the last year naturally have stimulated comparisons to the Great Depression. Two years ago, few would have ever guessed that there would be no pure major investment banks left on Wall Street. The banking industry is struggling, as many financial institutions face uncertainty about the values of their assets, particularly financial instruments related to mortgages. The U.S. and most of the rest of the world are in recession. Meanwhile, the stock market has lost roughly 40 percent of its value from the all-time peak it reached in late 2007.

How does this compare to the Great Depression? We won’t know the final outcome of this recession for a while, but I can safely say that the current situation is nowhere near as bad as the situation during the 1930’s. There may be surface similarities on some dimensions, but there are far more differences than there are similarities.

Since the start of the recession in late 2007, the monthly unemployment rate has risen from 4.9 percent to 7.6 percent in January 2009. Before thinking about the Great Depression, realize that unemployment rates have exceeded 7 percent in 139 months since World War II. This includes 32 months between 1974 and 1977, 76 months between 1980 and 1986, and 21 more between 1991 and 1993. The Great Depression was far more disastrous. One year after the stock market crash of 1929, the unemployment rate had risen from 2 percent to 10.8 percent. The next year it was 16.8 percent. Then unemployment rates rose above 20 percent for four straight years!

It does not end there. The unemployment rate exceeded 14 percent for five more years until finally dropping below 10 percent again in 1941. These rates include emergency workers, but these were people who were working for their relief payments at hourly wages that were roughly half the norm on other government projects. We treat people receiving unemployment benefits today as unemployed, and all they are required to do is seek work.

Do I sound like your grandparent talking about walking barefoot and backward several miles through the snow to go to school? There’s more. Real G.D.P. fell during the last two quarters, but real G.D.P. in the fourth quarter of 2008 was almost identical to real G.D.P. in the fourth quarter of 2007. Since World War II, there have been 28 quarters where real G.D.P. was below the same quarter in the prior year. How does this compare with the Great Depression? In 1930, Americans produced 8.6 percent fewer final goods and services than in 1929, in 1931 15 percent less, and in 1932 and 1933 roughly 26 percent less than in 1929. It is hard to conceptualize such a drop in G.D.P.

Consider this: the 1932 and 1933 figures would have been the equivalent of shutting down all production of goods and services west of the Mississippi River. Annual real G.D.P. did not reach its 1929 level again until 1936. We are experiencing pain now, but the problems of the Great Depression were several magnitudes greater.

Goldman Would Use Share Sale to Return Bailout Money
April 15, 2009

Six months after accepting a financial lifeline from Washington, a newly profitable Goldman Sachs is pushing to return the billions of taxpayer dollars that it received in an effort to extricate itself from heightened government control.  Goldman, which rode out the final, tumultuous months of 2008 with the help of a federal rescue, reported strong quarterly profits on Monday and said that it would seek to raise money in the capital markets to repay the government.

If successful, Goldman would become the first major bank to return funds received under the Troubled Asset Relief Program, or TARP. Such a step would probably enable Goldman — long one of the most lucrative places to work on Wall Street — to free itself from government-imposed restrictions on compensation.

Many analysts welcomed the news as the latest in a series of signs that the financial industry is stabilizing. But others warned of a looming divide between a handful of banks like Goldman, which may be strong enough to return their TARP money, and the many others that are too weak to go without government funds.  It is unclear how quickly Goldman, which was also a beneficiary of a separate government rescue of the American International Group, might be allowed to return the $10 billion it accepted last October.

In a conference call Tuesday morning, Goldman’s chief financial officer, David A. Viniar, said Goldman never viewed the taxpayer money as long-term capital.

“We view it as our duty to return the funds as long as we can do it without negatively impacting our financial profile,” Mr. Viniar said.

While Goldman’s latest results bolster its case for untangling itself from TARP, federal regulators are nonetheless concerned about the health of the broader financial industry and the implications such a move might have for other institutions. Goldman is not allowed to return the money without the approval of the Treasury and the Federal Reserve, which both declined to comment on Monday.

“The issue is really, will the government give Goldman special dispensation to get out first?” said Brad Hintz, an analyst at Sanford C. Bernstein. “Goldman can walk the halls of Congress waving a check, but is it in the best interest of the marketplace for them to pay it back?”

Goldman indicated in early February that it would seek to repay the funds, and since then, several other banks have said they would like to do the same. Not all banks, however, are likely to bounce back as quickly as Goldman, despite expectations that other banks will report strong results for the first quarter.  Goldman announced profits of $1.66 billion in the quarter or $3.39 a share, marking a strong comeback from a loss in late 2008. Goldman’s profit was propelled by record revenues of $6.56 billion in its fixed income, currency and commodities unit, where mortgage and other credit instruments are traded. Over all, Goldman’s revenues were $9.43 billion, up 13 percent from the first quarter a year ago.

Mr. Viniar said Tuesday morning that the bank was able to generate much of its revenues by trading “plain vanilla” investments. Margins were higher-than usual, he said, in part because of the disappearance of some of Goldman’s former competitors, like Bear Stearns and Lehman Brothers.

“Many of our traditional competitors have retreated from the marketplace,” Mr. Viniar said.

Goldman reported its results a day ahead of schedule, setting a positive tone for a slew of other bank results expected in the coming week. While several small banks have returned TARP money, Goldman so far is alone among large institutions.

Last Tuesday, Lloyd C. Blankfein, Goldman’s chief executive, visited Washington to speak before an industry conference, and to meet with Treasury Secretary Timothy F. Geithner. Though rumors have swirled about Goldman’s payback, it was only last week in that meeting that Mr. Blankfein formally asked to return the money and detailed his plan to raise more private capital. Goldman said on Monday that it would seek to raise $5 billion by selling new common stock and use the proceeds, along with other funds, to repay the government.

The amount Goldman owes will be higher than the $10 billion because of warrants that the government was granted that must be valued by an independent firm. Goldman said in a statement on Monday that returning the TARP money depends on the results of a stress test that federal bank examiners are in the process of evaluating for Goldman and other big banks.

Goldman did not address the bonds that it issued with government backing last fall.

While Goldman reported a strong first quarter, it also reported a loss of $1 billion in the month of December, underscoring how quickly its fortunes can change. That month was reported on its own because Goldman is changing the timing of its fiscal year by a month, to match the calendar year. The loss was in part related to write-downs on high-yield bonds, as well as deterioration in real estate.

Goldman did not detail its reasons for wanting to return the TARP money, but the bank’s chief financial officer, David A. Viniar, addressed the topic at a conference in early February.

“We just think that operating our business without the government capital would be an easier thing to do,” Mr. Viniar said. “We’d be under less scrutiny, and under less pressure. Not that we’d be out of the public eye; we’re still going to be in the public eye.”

Since then, the government added new requirements for companies that accepted taxpayer money, including stronger rules about bonuses. In a speech last week, Mr. Blankfein criticized one of the other new rules, which centered on visas issued by banks for foreign workers.  The capital markets have been virtually dead for months, so it is unclear how Goldman’s stock offering will fare. Only two companies — HSBC, the big British bank, and Xstrata, a mining company — have issued more than $5 billion in equity this year, without government backing, according to Dealogic.

Some analysts were skeptical about Goldman’s intention to return the money. “If you look at most of the conditions in place that forced TARP onto the banks, those conditions have not changed,” said Roger Freeman, an analyst with Barclays Capital. Since the end of November, Goldman had reduced the number of its employees by more than 2,000, to 27,898, according to the statement. In the last year, the bank has cut 4,000 jobs.

“Given the difficult market conditions, we are pleased with this quarter’s performance,” Mr. Blankfein said in the release. “Our results reflect the strength and diversity of our client franchise, the resilience of our business model and the dedication and focus of our people.”

Some Banks, Citing Strings, Want to Return Aid
March 11, 2009

WASHINGTON — The list of demands keeps getting longer.

Financial institutions that are getting government bailout funds have been told to put off evictions and modify mortgages for distressed homeowners. They must let shareholders vote on executive pay packages. They must slash dividends, cancel employee training and morale-building exercises, and withdraw job offers to foreign citizens.

As public outrage swells over the rapidly growing cost of bailing out financial institutions, the Obama administration and lawmakers are attaching more and more strings to rescue funds.

The conditions are necessary to prevent Wall Street executives from paying lavish bonuses and buying corporate jets, some experts say, but others say the conditions go beyond protecting taxpayers and border on social engineering.

Some bankers say the conditions have become so onerous that they want to return the bailout money. The list includes small banks like the TCF Financial Corporation of Wayzata, Minn., and Iberia Bank of Lafayette, La., as well as giants like Goldman Sachs and Wells Fargo.

They say they plan to return the money as quickly as possible or as soon as regulators set up a process to accept the refunds. On Tuesday, Signature Bank of New York announced that because of new executive pay restrictions in the economic stimulus package, it notified the Treasury that it intended to return the $120 million it had received from the government only three months ago.

Other institutions like Johnson Bank of Racine, Wis., initially expressed interest in seeking bailout funds but have now changed their minds. Bank executives told The Milwaukee Journal Sentinel that one reason they rejected the government money was to avoid any disruption in the bank’s role in the local community, including supporting the zoo or opera company if they chose to.

One of the biggest concerns of the banks is that the program lets Congress and the administration pile on new conditions at any time.

The demands to modify mortgages or forestall evictions are especially onerous, some bank executives and experts say, because they could prompt some institutions to take steps that could lead to greater losses.

“We are taking an approach that wants the banks to help the economy and whether it is ultimately good for a particular bank is secondary,” said L. William Seidman, the former senior regulator during the savings and loan bailout. “Weak banks are being asked to do things that will erode their position.”

A senior Treasury official involved in the bailout effort said the administration was carefully trying not to do anything that could harm the banks and was giving financial incentives to modify mortgages. The official said the restrictions were part of a larger effort to clean up bank balance sheets and assist the economy.

“We’re having to take some very unpleasant actions when the alternatives are so much worse,” said the official, who spoke on condition of not being identified.

But a growing chorus of industry experts are warning that asking weak banks to carry out the government’s economic and social policies could increase the drain on the public purse. These experts say that the financial assistance, while helpful in the short run, could force weak banks to engage in lending practices that will lose even more money, and that the government inevitably will become more heavily involved in dictating how banks do business.

“I honestly believe the people in power pushing this policy see it as a win-win — as something that is good for the banking industry and good for homeowners and others,” said Douglas J. Elliott, a former investment banker who is now an economics fellow at the Brookings Institution. “But there is a slippery slope and there are potentially significant negative consequences.”

Mr. Elliott says that by modifying loans, banks that are already fragile could wind up losing more money.

“What gets us in real trouble,” he said, “is when we try to fudge things and pretend that something is in the direct interest of both the government and the financial institutions when it in fact costs the banks money or increases their risk levels.”

Take Fannie Mae and Freddie Mac, the housing-finance companies that the government now controls. In recent months, they have been told to spend billions of dollars buying bundles of mortgages for which there are no other buyers, and to let homeowners refinance their loans — even if they have no equity.

Such commands are echoes of the 1990s, when Fannie and Freddie tried to balance dueling mandates that required them to make a profit for their shareholders and to serve a public mission of increasing homeownership.

In service of both shareholders and what they asserted was the public good, they borrowed extensively in order to buy and hold mortgages in their own investment portfolios. They purchased billions of dollars in risky subprime mortgages.

As a consequence of having a public mandate, they also had a credit line with the Treasury and their risky business strategies were viewed by the markets as being guaranteed by the government.

To satisfy both mandates, the companies also faced fewer restrictions and were allowed to take on more debt than other financial companies. But when buyers began defaulting and home prices plunged, the companies nearly collapsed and last fall were placed under government conservatorship. Mr. Elliott said that some banks participating in the bailout program are now in the same conflicting position that Fannie Mae and Freddie Mac were in.

He and other experts also worry that, by relying on weak banks to carry out the administration’s or Congress’s policies, officials are not biting the bullet and shutting down weak banks that may be insolvent.

At the height of the savings and loan crisis in the 1980s and 1990s, Congress and regulators adopted new rules known as “prompt corrective action” that required the government to quickly close weak financial institutions if they could not raise money to absorb mounting losses.

The rules were a response to a consensus that keeping weak institutions open longer, under an earlier practice known as forbearance, damaged healthy banks competing with the government-subsidized ones and ultimately destabilized the banking system. By shutting weakened institutions before their losses grew, prompt corrective action was also seen as less costly to taxpayers and the deposit insurance fund.

Administration officials say that some of the banks at issue today are simply too large to be seized by the government, making comparisons to the savings and loan crisis less meaningful.

Moreover, they say, the public outrage over the growing cost of the bailout makes it politically imperative that they exert greater control over the way the money is being spent.

But by keeping weak banks operating, the markets continue to sink and taxpayer costs are mounting, outside experts said. “The current policy is likely to result in weaker banks,” Mr. Seidman said. “And keeping insolvent banks in operation does not benefit the system.”

Some community bankers, whose institutions are stronger than the large money center banks, agree.

C. R. Cloutier, the president of MidSouth Bank of Lafayette, La., and a survivor of the savings and loan debacle, said that his institution received $20 million from the rescue fund because he and his board believed it was patriotic and would help them offer loans during a recession.

But faced with what he says is an unwarranted stigma of participating in the program, as well as the new restrictions on banks taking the money, he is now considering whether to return the money, as other institutions have sought to do.

“Two things you learn in the banking business,” Mr. Cloutier said. “The first is, concentration is bad. We now have 64 percent of deposits in eight institutions. The second rule is, your first loss is your best loss. Get it over with. Don’t pump water in a dead fish.”

Op-Ed Columnist
Obama’s Ball and Chain

March 4, 2009

Two signs of the times: First, a banker friend remarked to me that you know your bank is in trouble when its share price is less than the cost of taking money out of one of its A.T.M.’s.

Second, go to Google and type in these four letters: m-e-r-e. Before you go any further, Google will list the possible things or people you’re searching for, and at the top of that list will be the name “Meredith Whitney.” She comes up before “merengue” and “Meredith Viera.” Who is Meredith Whitney? She is a banking analyst who became famous for declaring last year, long before others, that Citigroup was up to its neck in bad mortgages and would not likely survive in its present form.

Do you know how many people have to be searching for you if all you have to do is put in four letters and your name pops up first? A lot! But I am not surprised. Our banking system is in so much trouble that everyone is searching for the silver-bullet solution — and the person who can describe it. Alas, there is no silver bullet.

I’m worried. We’ve just elected a talented young president with many good instincts about how to propel our country forward, extend health care to more people, make our tax code fairer and launch a green industrial revolution. But do you know what I fear? I fear that his whole first term could be eaten by Citigroup, A.I.G., Bank of America, Merrill Lynch, and the whole housing/subprime credit bubble we inflated these past 20 years.

I hope my fears are exaggerated. But ask yourself this: Why couldn’t former Treasury Secretary Hank Paulson solve this problem? And why does it seem as though his successor, Tim Geithner, won’t even look us in the eye and spell out his strategy? Is it because they don’t get it? No. It is because they know — like Roy Scheider in the movie “Jaws,” when he first saw the great white shark — that “we’re gonna need a bigger boat,” and they’re too afraid to tell us just how big.

This problem is more complicated than anything you can imagine. We are coming off a 20-year credit binge. As a country, too many of us stopped making money by making “stuff” and started making money from money — consumers making money out of rising home prices and using the profits to buy flat-screen TVs from China on their credit cards, and bankers making money by creating complex securities and leverage so more and more consumers could get in on the credit game.

When this huge bubble exploded, it created a crater so deep that we can’t see the bottom — because that hole is the product of two inter-related excesses. Some banks are in trouble because of the subprime mortgage securities they have on their books that are now worth only 20 cents on the dollar because of widespread defaults.

And many other banks — the ones that took on the most leverage like Citigroup and Bank of America — are in trouble because of all the loans on their books that can’t now be repaid, such as auto loans, commercial real estate loans, credit card loans, corporate loans. Most of the big banks have not marked down these loans yet because if they did, they would be insolvent. The subprime toxic securities will take billions to bail out; the loans could take trillions.

Climbing out of such a deep crater is going to be tricky. Any big step we try to take could trigger other problems — the full dimensions of which we don’t understand. We need to create a “bad bank” to buy and hold the toxic mortgage assets or have the government buy the first batch and create a market, but that would likely involve bailing out banks that have behaved very recklessly. It is a price I’d pay to save the system, but even doing that is very complicated. Buying securitized toxic mortgages is not like buying a yacht off the books of a bankrupt savings-and-loan.

Nationalizing Citigroup may sound good on paper, but putting Citigroup into receivership could trigger all kinds of defaults on derivative contracts that it has written. It may be inevitable, but we’d better understand all of Citigroup’s counterparty risks so we don’t inadvertently set off more falling dominos, à la Lehman Brothers.

At the moment, the Obama team seems to prefer a gradual attempt to nurse these sick banks back to health with repeated blood transfusions — $30 billion more to A.I.G. today, another $40 billion to Citigroup tomorrow. And Lord only knows how much Bank of America will need after its weekend fling with Merrill Lynch has left it with Toxic Asset Disease. The Federal Reserve and the Treasury seem to be trying to give these banks enough capital to survive the next two years, as they de-leverage and de-risk their portfolios — and then hope for the best.

If they are right, the president (and the rest of us) will just have a wrenching first year and then be able to gradually put the banking crisis behind him.

For now, though, the banks still threaten to consume the Obama presidency. Indeed, I’m sorry to report that if you just type two letters into Google — “b-a” — the first thing that comes up is not Barack Obama. It’s “Bank of America.” Barack Obama is third

Bernanke: Economy Suffering 'Severe Contraction'
Filed at 5:32 p.m. ET

February 24, 2009

WASHINGTON (AP) -- The economy is suffering a ''severe contraction,'' Federal Reserve Chairman Ben Bernanke told Congress on Tuesday. But he planted a glimmer of hope that the recession might end this year if the government managed to prop up the shaky banking system, and Wall Street rallied.

Bernanke said the economy is likely to keep shrinking in the first six months of this year after posting its worst slide in a quarter-century at the end of 2008.

Bernanke said he hoped the recession will end this year, but that there were significant risks to that forecast. Any economic turnaround will hinge on the success of the Fed and the Obama administration in getting credit and financial markets to operate more normally again.

''Only if that is the case, in my view there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery,'' Bernanke told the Senate Banking Committee.

That -- along with the Fed chief's remarks that regulators don't intend to nationalize banks -- was enough to buoy Wall Street. The Dow Jones industrials added more than 236 points and the Standard & Poor's 500 index also rose, a day after both hit their lowest levels since 1997.

Among the risks to any recovery are if economic and financial troubles in other countries turn out to be worse than anticipated, which would hurt U.S. exports and further aggravate already fragile financial conditions in the United States.

Another concern is that the Fed and other Washington policymakers won't be able to break a vicious cycle where disappearing jobs, tanking home values and shrinking nest eggs are forcing consumers to cut back sharply, worsening the economy's tailspin. In turn, battered companies lay off more people and cut back in other ways.

''To break that adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets,'' Bernanke said.

In an effort to revive the economy, the Fed has slashed a key interest rate to an all-time low and Obama recently signed a $787 billion stimulus package of increased government spending and tax cuts.

In addition, Treasury Secretary Timothy Geithner has revamped a controversial $700 billion bank bailout program to include steps to partner with the private sector to buy rotten assets held by banks as well as expand government ownership stakes in them -- all with the hopes of freeing up lending. The Obama administration also will spend $75 billion to stem home foreclosures.

Those and other bold steps -- including a soon-to-be-operational program to boost the availability of consumer loans -- for autos, education, credit cards and other things -- should over time provide relief and promote an economic recovery, Bernanke said. That program is ''about to open,'' he told lawmakers, without providing an exact date.

Sen. Christopher Dodd, D-Conn., chairman of the panel, and other senators suggested expanding that program overseen by the Fed and Treasury, to help squeezed local governments.  Radical actions by the government since last fall when the financial crisis intensified have relieved some credit and financial strains, Bernanke said.

''Nevertheless, despite these favorable developments, significant stresses persist in many markets,'' he said.

Although Bernanke didn't mention any financial institutions by name, Citigroup Inc. -- the industry's troubled titan -- apparently is in line for additional government help.

Sen. Bob Corker, R-Tenn., worried the government was ''creeping'' toward bank nationalization through a new option announced by the administration Monday. The new plan allows the government to greatly expand its ownership in a bank by converting preferred shares into common shares.

''It is not nationalization,'' Bernanke said.

Looking ahead, Corker was skeptical about the effectiveness of bank-rescue efforts saying he saw a continuation of ''sort of dead-man walking, zombie bank.''

Critics worry the Fed's actions have the potential to put ever-more taxpayers' dollars at risk and encourage ''moral hazard,'' where companies feel more comfortable making high-stakes gambles because the government will rescue them.

The public's anger over the government's bailout efforts is understandable, the Fed chief said. ''A lot of this goes against American values of self reliance and responsibility,'' Bernanke said.

Stress tests on the nation's biggest banks, which regulators will start conducting Wednesday, are designed to give regulators a better idea of how much additional capital and the type needed for banks to lend if the crisis were to grow worse than anticipated, Bernanke said. Regulators will assess banks' capital needs over a two-year horizon.

''The outcome of the stress test is not going to be fail or pass,'' he said, stressing that the goal is to return banks to health -- not take them over.

''We've always worked with banks to make sure that they're healthy and stable, and we're going to work with them. I don't see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize the bank when it just isn't necessary,'' he said.

Separately Tuesday, the Fed issued a guidance letter that said banks need to be careful when they decide to pay dividends to shareholders that could raise ''safety and soundness concerns.''

The new guidance was intended for all banks the Fed regulates but was particularly aimed at banks ''experiencing financial difficulties and/or receiving public funds.'' The letter said the bank holding company should inform the Fed if it is planning to pay a dividend that exceeds earnings for a given quarter or that could effect's the bank's capital position in an adverse way.

All the negative forces have battered consumers and businesses. ''The economy is undergoing a severe contraction,'' Bernanke said.

The nation's unemployment rate is now at 7.6 percent, the highest in more than 16 years, and it will climb higher -- even in the best-case scenario that an economic recovery happens next year.  The Fed expects the jobless rate to rise to close to 9 percent this year, and probably remain above normal levels of around 5 percent into 2011. The recession, which started in December 2007, already has killed a net total of 3.6 million jobs.

Fed policymakers think that a ''full recovery'' of the economy is likely to take more than two or three years, Bernanke said.

To brace the economy, many analysts predict the Fed will leave its key rate at record lows through the rest of this year.

Debt burden tests global investments
Washington Times
Patrice Hill
Thursday, January 15, 2009

President-elect Barack Obama will be testing the limits of the global markets' ability to absorb U.S. government debt by piling an $800 billion stimulus plan on top of more than $1 trillion in new obligations already scheduled this year.

Wall Street analysts worry that China, Japan and other nations that readily helped finance U.S. debt in the past won't have the willingness or wherewithal to buy what will amount to three to four times the previous yearly record of Treasury-issued debt of $455 billion. Some analysts predict a calamity such as the failure of a U.S. bond auction, which could drive interest rates sharply higher just as the economy is struggling to recover.

Others are less worried, but evidence is mounting that the debt burden could rise to unmanageable levels. The mere mention by Mr. Obama in a news conference last week that the U.S. could run deficits exceeding $1 trillion for several years sent a shudder through the Treasury bond market, where those deficits must be financed, sending interest rates temporarily higher.

A bond auction failed last week in Germany, which has comparatively little debt to finance, raising concerns about whether the United States faces similar problems on a much larger scale. Wall Street rating agencies Moody's and Standard & Poor's Corp. said they are closely watching the surge in debt and the willingness of foreign investors to finance it.

"Fiscal risk has noticeably increased," said S&P analyst Nikola G. Swann, while "the country's exposure to a change in international investors' willingness to add to their portfolio of U.S. dollar assets grows with each year."

On Thursday, the Senate Budget Committee will hold a hearing on the so-called debt bubble and is expected to ask a panel of economists about the ability of world markets to finance the growing U.S. obligations.

"In a world where you are running a deficit profile of staggering proportions, it all comes down to the confidence of foreign investors," said Alex Jurshevski, a strategist at Recovery Partners who expects the Treasury to borrow as much as $2 trillion more this fiscal year to finance its bank bailout program as well as budget deficits that are burgeoning as a result of the recession and the massive stimulus Mr. Obama is planning.

A flight to safe-haven Treasury bills since the fall has made it easy thus far for the nation to finance its increased debts, but analysts say that trend is abnormal and should not be taken for granted. Moreover, when as much as $2 trillion in new debt in the next year is combined with $4.3 trillion of outstanding debt that is coming due and must be rolled over, Treasury will have to find buyers for $6.3 trillion of debt, Mr. Jurshevski said.

"This is unparalleled," and will test the "entente cordiale" the United States has with China, Japan and other Asian and oil-producing nations that in the past have purchased about half of outstanding U.S. debt in a tacit exchange for U.S. consumers buying their products, Mr. Jurshevski said. The unstated agreement has enabled the U.S. to run gigantic budget and trade deficits with little consequence because the financing has been readily available.

China, the largest holder of U.S. debt, has invested about $1 trillion of its foreign reserves in U.S. bonds, but the yearly addition to its reserves from export earnings is expected to drop to $177 billion this year from a high of $415 billion last year. That leaves the Asian giant with much less money to invest at a time when new U.S. debt is potentially quadrupling. With its economy deteriorating fast, China also has a massive stimulus program as well as social welfare and unemployment programs to finance at home.

Oil-exporting states like Russia and Qatar that were brimming with surplus revenues as oil hit a record high of $147 a barrel in July also have seen their economic fortunes and revenues nose-dive in the past six months as the price of oil fell to as low as $30 per barrel.

As the financial reversal set in during the second half of last year, China, the oil states and other foreign investors started selling off some of their U.S. holdings of Fannie Mae's and other mortgage and corporate bonds, in a move that helped precipitate the September U.S. financial crash. The Treasury temporarily benefited as those investors - along with investors fleeing stricken stock and commodity markets - parked their money in T-bills and other short-term debt instruments that are considered the equivalent of "cash" on Wall Street.

But now that the surplus nations are also in severe economic downturns with critical needs to fund at home, Mr. Jurshevski questions whether they will be able or willing to take on exponentially more U.S. debt - particularly at the near-zero yields that Treasury instruments are offering. He thinks that some attempted auctions of U.S. debt will fail to find buyers, and that will force up interest rates across the board as the Treasury ups the ante to attract investors.

Ian Campbell, an analyst with, said the failure of a German 10-year bond auction on Jan. 7 should serve as a warning to the United States and Britain, which also is heaping unprecedented amounts of debt into the markets in an effort to revive its economy and banking system. Germany was unable to find buyers for one-third of its bond issue, even though its budget is close to balance.

"The U.K. and U.S. have deficit-spent, consumed and imported their way into trouble, and now are planning an ill-afforded government spending and tax cut binge to get them out of it," driving their public debt to post-World War II highs well over 8 percent of economic output, Mr. Campbell said. "Are investors ready to take it?"

Moody's Investors Service this week said the difficulty Germany and a few other European governments have had issuing bonds shows that heavy borrowing plans on both sides of the Atlantic will test the limits of the debt markets.

"Issuance of government debt and government-guaranteed debt at all levels of the rating scale is rapidly swelling," said Arnaud Mares, Moody's senior vice president. "The proposition that the highest-rated governments are totally immune to liquidity risk is being put to the test."

After the German auction failure, Moody's suggested that governments may have to offer a mix of more short-term debt versus long-term debt to satisfy investors' appetites for instruments where they can put their money for a few months while they wait out the turmoil in global stock markets. But Mr. Jurshevski said the skewing of fast-rising government debt toward short-term bills that must be rolled over every few months poses dangers in itself.

The only alternative for the U.S. if investors balk at buying Treasury bonds, analysts say, may be for the Federal Reserve to buy the debt - a prospect recently raised by Fed Chairman Ben S. Bernanke. The central bank would finance its purchases of U.S. debt by printing money. But that would scare off foreign investors even more, analysts say, as the flood of dollars into the economy and markets raises the risk of setting off inflation once the economy recovers.

Some economists say that Americans will start saving more and purchasing more of their own bonds, enabling the U.S. to finance its own deficits after depending heavily on foreigners for decades. The paltry U.S. savings rate recently has ticked up from near zero to about 2.8 percent.

Richard Berner, chief economist at Morgan Stanley, said he expects the savings rate to surge to 6 percent this year, but ironically that would occur only as a result of Americans saving a substantial share of the $300 billion tax cut Mr. Obama is planning.

Peter Schiff, president of Euro Pacific Capital, said he expects the Fed to absorb all the debt, creating a big inflation problem for the U.S. in the long run. The mere suggestion by Mr. Bernanke that the Fed will buy U.S. debt has set off a speculative frenzy, with investors snapping up Treasuries and hoping to sell them to the Fed in the future, he said.

Mr. Schiff faulted Mr. Obama for not telling the public of the dangers of so much borrowing, while touting the benefits of the stimulus legislation.

"The truth is that the only way out of this mess is less government, more savings and increased production. Obama's plan will prevent all three," he said. "He intends to force-feed more consumer spending and debt into an economy already suffering from an excess of both."

Op-Ed Contributors
The End of the Financial World as We Know It
January 4, 2009

AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.

This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?

Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?  Read the two article op-ed here.

Michael Lewis, a contributing editor at Vanity Fair and the author of “Liar’s Poker,” is writing a book about the collapse of Wall Street. David Einhorn is the president of Greenlight Capital, a hedge fund, and the author of “Fooling Some of the People All of the Time.” Investment accounts managed by Greenlight may have a position (long or short) in the securities discussed in this article.

The Reckoning: By Saying Yes, WaMu Built Empire on Shaky Loans
December 28, 2008

“We hope to do to this industry what Wal-Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s-Home Depot did to their industry. And I think if we’ve done our job, five years from now you’re not going to call us a bank.”

— Kerry K. Killinger, chief executive of Washington Mutual, 2003

SAN DIEGO — As a supervisor at a Washington Mutual mortgage processing center, John D. Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers’. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank was known, was all about saying yes.

Yet even by WaMu’s relaxed standards, one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer.  Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

“I’d lie if I said every piece of documentation was properly signed and dated,” said Mr. Parsons, speaking through wire-reinforced glass at a California prison near here, where he is serving 16 months for theft after his fourth arrest — all involving drugs.

While Mr. Parsons, whose incarceration is not related to his work for WaMu, oversaw a team screening mortgage applications, he was snorting methamphetamine daily, he said.

“In our world, it was tolerated,” said Sherri Zaback, who worked for Mr. Parsons and recalls seeing drug paraphernalia on his desk. “Everybody said, ‘He gets the job done...’ ”  Full story here.

Bernanke’s How-To on Rate Increase Lacks a When
February 11, 2010

WASHINGTON — “At some point.” “At the appropriate time.” “When the time comes.”

On Wednesday, the Federal Reserve’s chairman, Ben S. Bernanke, outlined a strategy — but not a timetable — for scaling back the extraordinary measures it began taking in 2007 to prop up the economy as financial markets teetered on collapse.

The Federal Reserve has eased borrowing by lowering short-term interest rates to nearly zero and built up a $2.2 trillion balance sheet by scooping up assets like mortgage-backed securities and vast sums of Treasury bonds and notes.

Eventually, to avoid inflation, both actions will have to be reined in. But Mr. Bernanke, in a 10-page statement, provided few hints as to how long that period will be.

“Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding,” he wrote. “We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively.”

However, Mr. Bernanke did provide new details of a major concern: how, as the recovery proceeds, to gradually shrink the balance sheet, which along with a vast array of assets also includes $1.1 trillion that banks are holding with the Fed.

Mr. Bernanke suggested that a new policy tool — the interest rate on excess reserves, which the Fed began paying in October 2008 — would be a vital part of the Fed’s strategy.

Increasing that interest rate, he said, will have the effect of pushing up other short-term interest rates, including the benchmark fed funds rate — the rate at which banks lend to each overnight.

It is even possible, Mr. Bernanke said, that the Fed “could for a time use the interest rate paid on reserves, in combination with targets for reserve quantities,” to communicate its policy stance to the markets. Since 1994, the fed funds rate has been the much-watched centerpiece of statements by the Federal Open Market Committee, the Fed’s crucial policy-making arm.

For days, economists have been trying to forecast what Mr. Bernanke would say about the sequence of steps and the combination of tools the Fed will use to tighten credit. On that subject, Mr. Bernanke offered only hints of his thinking.

“One possible sequence would involve the Federal Reserve continuing to test its tools for draining reserves on a limited basis, in order to further ensure preparedness and to give market participants a period of time to become familiar with their operation,” he wrote. “As the time for the removal of policy accommodation draws near, those operations could be scaled up to drain more significant volumes of reserve balances to provide tighter control over short-term interest rates. The actual firming of policy would then be implemented through an increase in the interest rate paid on reserves.”

But Mr. Bernanke suggested that “if economic and financial developments were to require a more rapid exit from the current highly accommodative policy” — that is, if fears emerge about inflation — the Fed “could increase the interest rate paid on reserves at about the same time it commences significant draining operations.”

Along with raising the interest rate on reserves, Mr. Bernanke discussed three other options for draining reserves. The first involves reverse repurchase agreements, in which the Fed would sell securities from its portfolio with an agreement to repurchase them at a later date.

The second involves term deposits — similar to certificates of deposit — to banks. That would convert part of the banks’ reserves into deposits that could not be used for short-term liquidity needs and would not be counted as reserves.

A third tool involves redeeming or selling securities. That strategy could carry risk, as the Fed’s large portfolio of mortgage-backed securities is helping to prop up the housing market and keep mortgage-interest rates low.

Mr. Bernanke did note that the balance sheet would shrink a bit on its own, over time, as assets like mortgage-backed securities and debt guaranteed by Fannie Mae and Freddie Mac are prepaid or mature. “In the long run, the Federal Reserve anticipates that its balance sheet will shrink toward more historically normal levels and that most or all of its security holdings will be Treasury securities,” he wrote.

Mr. Bernanke also reviewed the controversial lending assistance it extended to “help avoid the disorderly failure” of Bear Stearns, which was sold to JPMorgan Chase, and the American International Group, which was bailed out by the government. Mr. Bernanke said that the credit extended under those arrangements totaled about $116 billion, or about 5 percent of the balance sheet.

“These loans were made with great reluctance under extreme conditions and in the absence of an appropriate alternative legal framework,” he said, emphasizing that he did not believe that the loans would result in any losses to taxpayers.

As part of its special lending programs to inject liquidity into the market, the Fed modified its discount window — its traditional program for direct lending to banks — to make terms more generous and to make nonbanks eligible for borrowing. That effort is winding down, and Mr. Bernanke said that “before long, we expect to consider a modest increase in the spread” between the discount rate — the rate at which the Fed directly lends to banks — and the fed funds rate. He emphasized the change “should not be interpreted as signaling any change in the outlook for monetary policy.”

Mr. Benanke’s statement was prepared for a House committee hearing that had been scheduled for Wednesday but was postponed because of snow. Mr. Bernanke decided to release the statement anyway.

Also on Wednesday, the president of the Federal Reserve Bank of Dallas, Richard W. Fisher, said in a speech that Fed officials had been “constantly discussing internally the ways and means to shrink our balance sheet back to historical norms,” trying both to minimize disruptions to the credit market while avoiding inflationary pressures.

Mr. Fisher focused on the federal deficit, saying that the government’s borrowing relied on foreign savings and the instability in countries like Greece. “We cannot count forever on the largess or the misfortune of others to mask our own imbalances here at home — for fiscal profligacy in Washington today hinders our ability to address fiscal challenges tomorrow,” he said.

Mr. Fisher echoed fears expressed by Mr. Bernanke over a proposal in Congress that would subject the central bank’s monetary policy to audits by the Government Accountability Office, a move that the Fed believes would jeopardize its independence.

“As bad as the situation is, I know one thing that would make it worse, and that is if the Congress took the easy way out by turning to the Fed to simply print our legislators’ way out of their misery, devaluing the debt they have incurred through their spendthrift ways,” Mr. Fisher warned.

Greenspan: U.S. recovery "extremely unbalanced"
By David Lawder
Feb. 23, 2010

WASHINGTON (Reuters) – Former Federal Reserve Chairman Alan Greenspan said on Tuesday the U.S. economic recovery was "extremely unbalanced," driven largely by high earners benefiting from recovering stock markets and large corporations.

Small businesses and the jobless are still suffering from the aftermath of a credit crunch that was "by far the greatest financial crisis, globally, ever" -- including the 1930s Great Depression, said Greenspan in an address to a Credit Union National Association conference.

"It's really an extraordinarily unbalanced system because we're dealing with small businesses who are doing badly, small banks in trouble, and of course there is an extraordinarily large proportion of the unemployed in this country who have been out of work for more than six months and many more than a year," said Greenspan, who headed the Fed from 1987 to 2006.

With both housing starts and auto sales "dead in the water," he said he thought it would be difficult to make the case that the economy is poised for a strong rebound.

Greenspan did see signs pointing toward a modest recovery in job creation, saying that staffing levels at U.S. firms, which were deeply cut, remain below what is sustainable in the long run. But unemployment rate could still remain stubbornly high.

"The reason why the unemployment rate is going to be sticky is that as soon as employment starts picking up, a lot of the people who have not been seeking jobs are going to come back into the labor force, and they will keep the official unemployment rate in the 9 percent area, something like that," Greenspan said.

He also said it was important for U.S. policy makers to prevent perceived expectations of inflation that could push up yields on long-term U.S. Treasury securities, which would raise mortgage interest rates and prevent a recovery in the housing market.

The 10-year Treasury yield is the "one statistic that I watch every morning and every afternoon," he said.

Mr. "Irrational Exuberance" himself...
Greenspan says Fed balance sheet an inflation risk
October 2, 2009

WASHINGTON (Reuters) – Former Federal Reserve Chairman Alan Greenspan said on Friday that the Fed risks igniting a burst of inflation if it does not withdraw its extensive support for the economy at the right moment.

"You cannot afford to get behind the curve on reining in this extraordinary amount of liquidity because that will create an enormous inflation down the road," Greenspan said at a forum hosted by The Atlantic magazine, the Aspen Institute and the Newseum.

In its battle against the worst financial crisis in 70 years, the Fed has chopped interest rates to zero and flooded the financial system with hundreds of billions of dollars in the process. In so doing, it has more than doubled the size of its balance sheet to over $2 trillion.

The Fed has said that with high unemployment and a record level of factory idleness, none of the pressures that would ignite inflation is on the horizon. A government report on Friday that showed a weaker-than-expected job market in September is likely to provide additional support for that view.

Greenspan said the economy is "undergoing a disinflationary process," and stressed that the Fed faces no urgent need at the moment to unwind its monetary stimulus.

Still, his comments echo concerns raised by some policymakers who worry that delays in shrinking the Fed's bloated balance sheet will tempt fate and recommend action sooner rather than later.

"It's critically important the Fed's doubling of its balance sheet be reversed," Greenspan said. "If you allow it to sit and fester, it would create a serious problem.

Greenspan chaired the Fed from 1987 until his retirement in 2006. Hailed by many as a sage during his Fed tenure for a long period of prosperity, his legacy has been called into question over the long period of ultra-low interest rates and the Fed's hands-off approach to overseeing the financial industry before the global economic crisis.

NY Labor Union Chief to Chair New York Fed
August 24, 2009; Filed at 1:42 p.m. ET

WASHINGTON (AP) -- The Federal Reserve Bank of New York has named a top state labor union official its chairman, the bank announced Monday.

Denis M. Hughes, president of the New York State AFL-CIO, has been deputy chairman since January 2007. He became acting chairman in May after the surprise resignation of Stephen Friedman. News reports had raised questions about Friedman's ties to Goldman Sachs Group Inc.

Hughes, 59, has been a director of the New York Fed since January 2004. The Fed's Board of Governors appointed him chairman for the remainder of this year.

The board also designated Lee Bollinger, president of Columbia University, as vice chairman of the New York Fed for the remainder of 2009. Bollinger, 63, has been a director since January 2007, and was reappointed for a three-year term beginning Jan. 1, 2010.

On Washington: U.S. Budget Is Scrutinized by a Big Creditor
July 29, 2009

No sooner had President Obama greeted nearly 200 of the bankers, bureaucrats and policymakers who could make or break his economic plans on Monday than they started grilling his economic team with the hardest questions about his economic strategy.

How long are these huge deficits sustainable, they wanted to know. How long do you keep stimulating the economy, and when do you break for the exits? If the dollar nosedives compared other major currencies, what’s the administration’s Plan B?

The questions were mostly asked in Chinese — by a delegation from Beijing that, diplomatic niceties aside, has come to check in on the investment of more than $1.5 trillion that China has made in United States government-issued securities.

“We are concerned about the security of our financial assets,” China’s assistant finance minister, Zhu Guangyao, said with uncharacteristic bluntness during a briefing for reporters covering the “U.S.-China Strategic and Economic Dialogue” on Monday.

It was a comment that underscored how much the global financial crisis has changed the subtle balance of power in meetings of “the G-2,” the shorthand now used to describe sessions between the world’s largest economy and its fastest-rising economic power. Gone, probably forever, are the days when American delegations would show up in Beijing with advice about how the Chinese could become a “responsible stakeholder” in the world — the phrase coined by the Bush administration. The demands that the Chinese let their currency appreciate, clean up their banks or get rid of the subsidies for state-owned enterprises have been toned down.

You do not talk to your biggest creditor that way — especially when you have a record-sized loan application pending.

Throughout the two-day conference, which ends Tuesday, the subtext has been that Mr. Obama must persuade more than just Blue Dog Democrats, moderate Republicans and skeptical economists that he has a plausible long-term plan to bring down a record-breaking federal deficit. He also has to convince the occupants of the Great Hall of the People, whom he needed to show up at this week’s $200 billion Treasury auction, and the many auctions that will follow.

They will show up — but the lingering question for the next few years is how often, and how enthusiastically they will bid.

There is little real danger, despite the periodic warnings from cable-television doomsayers, that the Chinese will sell off their huge holdings in American debt. As one senior Chinese official involved in the country’s investment strategy put it several weeks ago, “As the biggest holder of Treasuries, we would suffer the most from starting a panic.” The euro and the yen do not seem especially attractive — China’s most expensive import is oil, and oil is still priced in dollars.

But domestic pressure is growing on the Chinese government to proceed with care. One of the first big investments by China’s state-run sovereign wealth fund was a $3 billon stake in the Blackstone Group; when it went sour two years ago, the Chinese press printed angry screeds about how the government had gambled and lost the country’s assets.

When Fannie Mae went into freefall last year, Chinese officials were on the phone to the United States Treasury, demanding an explanation about how their investment in the mortgage agency’s bonds would be protected. There were no threats made about the future of Chinese investments in the United States, but the message was clear. Ultimately, China was protected when the Bush administration took over control of the housing lender in September, one of the government’s first steps to try to halt a broader financial implosion.

Now, with the immediate crisis past, China’s questions have taken a different turn. The sessions yesterday — attended by the Treasury secretary, Timothy Geithner; by the chairman of the Federal Reserve, Ben Bernanke; and by the director of the National Economic Council, Lawrence H. Summers — were dominated by questions about how quickly the United States could halt the huge deficit spending.

“I think there were serious questions about what the economic outlook is, what our plans are for withdrawing some of the stimulus — you know, when we think the right time to do that is, to bring our fiscal deficit down to a sustainable level,” the Treasury’s coordinator for China affairs, David Loevinger, said on Monday evening.

The administration, Mr. Loevinger said, brought along Peter Orszag, the budget director, to make the case to the Chinese. He “was very clear — and he was also backed up by Summers on this — that the fiscal stimulus we’ve put in place was necessary and it’s the right thing and it’s designed to extend through 2011, but it’s not sustainable at the current rate and that we’re committed by the end of the Obama administration to bring it down to a sustainable level,” he said.

Even five years ago, it would have been hard to imagine any administration trotting out its budget director to justify fiscal strategy to the Chinese. But as Mr. Obama said, slightly amending a phrase that once was commonly used to describe the United States-Japan relationship, the interchange between the America and China now is as “important as any bilateral relationship in the world.”

Mr. Obama has a big agenda for it — joint action on global warming, on containing North Korea and Iran, on nudging the Chinese away from their neuralgic views of Taiwan and Tibet. So far the Chinese have insisted that they have no plans to use their financial leverage to influence American policy — just as Mr. Obama has said he will not use the government’s role as the majority shareholder in General Motors to dictate what kind of cars the company makes.

Skeptics abound on both pledges. Financial crises can change the balance of power as surely as wars do — but it may be a few years before we know how that power is employed.

SEC Top Examiner Lori Richards to Leave Agency
Filed at 3:44 p.m. ET
July 8, 2009

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission's top inspector and examiner, Lori Richards, plans to leave the agency August 7, the SEC said on Wednesday.

Richards, director of the compliance inspections and examinations unit since it was created in 1995, leaves after a controversial year in which her division and the SEC enforcement unit were accused of failing to spot Bernard Madoff's $65 billion investment fraud.

The division was created under former Chairman Arthur Levitt and has been criticized for being unable to respond effectively to the changes on Wall Street.

Richards has spent more than two decades at the SEC in various capacities including administrator for the agency's enforcement program in Los Angeles and senior adviser to Levitt.

Richards, who will be taking some time to explore "new opportunities," said she first started talking about leaving in May but wanted to stay to implement changes to her division.

Those changes include improving the tools available to examiners to detect fraud and improving surveillance and risk-based targeting, as well as examiners' training and expertise in fraud detection, among other things.

When asked whether any of the criticism played a part in her decision to leave, Richards said: "Absolutely not."

"I have been focused for 14 years on making the exam program as vigorous as it could possibly be to provide oversight of the securities industry," Richards said in an interview.

The division's associate director and chief counsel John Walsh will serve as its acting director when Richards leaves.

Friedman Resigns as Chairman of New York Fed

May 7, 2009, 5:57 pm

Stephen Friedman, the chairman of the New York Federal Reserve Board, abruptly resigned on Thursday, days after questions arose about his ties to Goldman Sachs.

Mr. Friedman was chairman of the New York Fed at the same time he was a member of Goldman’s board. He also had a substantial stake in the firm as the Fed was crafting a solution to keep Wall Street banks afloat. Denis M. Hughes, deputy chair of the board, will take over as the interim chairman, the New York Fed said in a statement. (Read Mr. Friedman’s letter after the jump.)

Because the New York Fed approved a request by Goldman to become a bank holding company, the chairman’s involvement in Goldman was a violation of Fed policy, The Wall Street Journal said in an article earlier this week.

The New York Fed asked for a waiver, which, after about two and a half months, the Fed granted, the newspaper said. During that time, Mr. Friedman bought 37,300 more Goldman shares in December, which have since risen $1.7 million in value.

In his resignation letter, Mr. Friedman said his public service on the board was being characterized as “improper” despite his compliance with the rules. “The Federal Reserve System has important work to do and does not need this distraction,” he said.

“With respect to Steve’s purchases of Goldman shares in December of 2008 and January of 2009, which have been the object of some attention lately, it is my view that these purchases did not violate any Federal Reserve statute, rule or policy,” Thomas C. Baxter, the general counsel of the New York Fed, said in a statement. “I enjoyed working with Steve, and will miss his contributions in the boardroom.”

Many voices on these matters

Bernanke’s Exit Dilemma: Does anyone really believe the Fed will contract the money supply as the economy starts to show growth?
The Wall Street Journal
AUGUST 4, 2009, 12:41 A.M. ET

Federal Reserve Chairman Ben Bernanke assured readers of this page (“The Fed’s Exit Strategy,” July 21) that he has the tools to prevent the huge reserves he’s pumped into the banks from generating an inflation that would abort an economic recovery.

But does the Fed have the guts to use those tools? Will it risk censure from Congress and the Obama administration if it tightens money at the crucial juncture when inflationary omens accompany a reviving economy? Mr. Bernanke signaled the probable choice by writing that “economic conditions are not likely to warrant tighter monetary policy for an extended period.”

The Fed’s past record of judging when and how to use its tools for regulating the money supply is not impressive, particularly in times of economic distress. Its financing of large federal deficits in the mid-1970s sent inflation up to an annual rate approaching 15% before Jimmy Carter repented in October 1979 and installed Paul Volcker at the Fed with orders to kill the monster.

More recently, the Fed’s continued easing of interest rates during the 2003 economic recovery created the credit bubble that collapsed last year with such devastation.

The Fed’s difficulties in getting money policy right stretch back to its creation in 1913. In 1930 it starved the banks, creating a string of failures that worsened the effects of the 1929 stock market crash. In 1937, it starved them again, contributing to a prolongation of the Depression that had been manufactured in Washington by the clumsy taxation and interventionist policies of Herbert Hoover and FDR.

To be sure, the Fed has had its good years. It financed the 20-year period of low-inflation growth and prosperity that began in 1983 when the Reagan tax cuts became fully effective.

View Full Image
Getty Images

But because of its often self-contradictory double mandate to promote both monetary stability and full employment—plus the rap it has taken from economists like Mr. Bernanke for stinginess in the 1930s—it often overreacts to recessions with excessive generosity. With its federal-funds interest rate target at near zero, the spigots are now wide open. And as Mr. Bernanke promises, they will likely remain that way for an “extended period.”

Quite apart from the question of the Fed’s will, there is another large issue. Mr. Bernanke’s assurances to the contrary, there can be doubts about whether his tools are really adequate to deal with the powerful inflationary pressures the politicians are in the midst of creating in the form of a mountainous and rising federal deficit.

Mr. Bernanke showed that he is well aware of that danger when, in his semiannual report to Congress on July 21, he pleaded with that body to bring the deficit under control. The federal budget deficit is projected at an incredible $1.8 trillion for the fiscal year ending Sept. 30, almost half of proposed federal spending. The Treasury’s financing needs will be even higher than that when you count in the various “investments” the government has made in auto, housing and other dubious ventures.

But the day after he issued that plea, President Barack Obama was pleading with the American people to support his nationalized health plan. This plan would yet add hundreds of billions more to the deficit.

The Fed has been financing a significant part of the government’s profligacy, and it is riding a runaway horse. Even if it has the means to cope with present financing needs, will it be able to do so when, and if, the economy actually recovers and it has to finance both a recovery and a spending-crazed government?

Martin Hutchinson, a former merchant banker who blogs as “Prudent Bear,” wrote in May that the German Weimar Republic was monetizing 50% of government expenditure when it brought on the ruinous hyperinflation that destroyed the mark in the early 1920s. The Fed in May 2009 had monetized 15% of federal expenditures over the preceding six months—well short of the rate that destroyed the German economy, but not negligible.

The Treasury (and Congress) has been depending on the Fed’s massive buying of Treasury bonds to keep the government’s financing costs within reasonable bounds—as weakening international demand puts downward pressure on bond prices and upward pressure on the interest rate the Treasury must pay. The yield on the 10-year Treasury bond is below where it was a few weeks ago but well above early this year when investors world-wide were seeking the safety of U.S. Treasurys. Even massive Fed support hasn’t been enough to prevent slippage in bond prices this year.

The Fed has more than doubled the size of its balance sheet in the last year to over $2 trillion. As of July 30, it held $695 billion in Treasurys, up $216 billion from a year earlier. In addition, it has added nearly half a trillion of mortgage-backed securities it purchased to keep Fannie Mae and Freddie Mac, now wards of the government, afloat.

Adjusted reserve balances of member banks exploded in late 2008, soaring to $950 billion from $100 billion in four months as the Fed has pumped liquidity into the banking system. They peaked at nearly $1 trillion in May. The reserves provide banks with a shield against runs but they also are high-octane fuel for bank lending, which means they can touch off another credit bubble, and the accompanying inflation, when credit demand picks up again.

In his Journal op-ed, Mr. Bernanke listed ways he can keep this monster in check. The Fed can pay interest on the bank reserves it holds. This would lessen the incentive of banks to find private borrowers and keep some reserves out of the credit stream, damping inflation potential. But the net effect would be to add still more liquidity to the system, which would run counter to the longer-term goal of mopping up liquidity.

He said that the Fed could also sell securities to the banks with an agreement to repurchase them, but these “reverse repos” would only mop up liquidity temporarily.

The standard way for the Fed to soak up liquidity, mentioned last on Mr. Bernanke’s list, is to sell Treasurys to the banks. That would draw down bank reserves and reduce their inflationary potential. Under the Basel I international banking rules, Treasurys are zero-risk investments and don’t have to be matched at 8% of their value with additional capital, as does private lending.

With the huge volume of Treasury financing coming down the road, the Fed will have plenty of bonds to sell (it already has, in fact). But the Fed buys Treasurys primarily by creating new money, or in other words by inflating the money supply. Will it have the nerve or even the capacity to “sterilize” inflation by reselling the bonds to soak up bank liquidity? Again, there are those political pressures. Will the Fed’s admittedly bright money managers be able to strike a balance between warding off inflation and leaving the banks with sufficient liquidity to finance an economic recovery?

As to that huge volume of mortgage-backed securities the Fed is now holding, what is to be done with them? They are “toxic,” which is why the Fed bought them as a means of keeping Fannie and Freddie solvent. They are “guaranteed” by Fannie and Freddie, which means they now are guaranteed by the U.S. Treasury. So they are yet another liability to add to all the other liabilities being piled on the Treasury. The Fed already has financed them once; will it have to finance them again when they come up for redemption?

In short, there are very good reasons to doubt that the Fed can cope with the political problems of avoiding inflation. The technical problems don’t look very easy either.

Mr. Melloan is a former deputy editor of the Journal editorial page. His book, “The Great Money Binge,” will be published in November by Simon & Schuster.

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

Cash-Strapped States Turn to Furloughs


April 24, 2009

Gay marriages were supposed to start in Iowa this Friday. But because of a crimped state budget, court employees will be on mandatory furlough that day and the courts will be closed. Gay couples cannot start filing for their marriage licenses until Monday.

As they try to cope with gaping budget deficits, at least 15 states from every region — including Alabama and Georgia; California, Washington and Arizona; and New York, New Hampshire and Massachusetts — are in various stages of considering or implementing furloughs.

“This may very well be the most widespread use, or consideration of use, at least since the emergence of the post-World War II economic boom,” Robert Bruno, professor of labor relations at the University of Illinois, Chicago, said of furloughs.

But furloughs can be problematic for states in a way they may not be for a private company, where demand for a product has dropped. Government services remain in even greater demand in a weak economy. Furloughs often mean fewer workers handling a larger load. For instance, there are already signs of disability claims piling up in seven states.

“The word ‘furlough’ sounds nice and fluffy, like, ‘This isn’t painful, we aren’t doing layoffs,’ ” said Hetty Rosenstein, director of the largest state-worker union in New Jersey, where an appeals court last week upheld a plan to make state workers take two furlough days by June 30, the end of the fiscal year, and 12 more in the next fiscal year.

“But,” Ms. Rosenstein added, “furloughs are fundamentally a cut in pay. And furloughs are a cut in service. If you don’t have people working, the work isn’t going to magically get done.”

The longest state furloughs so far appear to be 24 days in Alabama, the same number proposed in Minnesota.

Private companies, too, are increasingly turning to furloughs as they try to ride out the recession; a Watson Wyatt survey released this week found that 17 percent of 141 companies surveyed had imposed furloughs in April, up from 11 percent in February.

But with state and local governments, furloughs can affect critical services like police and fire protection, prison guard duty and hospital care. States and local governments have to select which workers they furlough, which can undermine the idea that furloughs spread the pain equally.

For the most part, it is too soon to judge the impact of furloughs on the delivery of public services, but there are early signs of a ripple effect.

One stark example has been in the Social Security Administration, a program paid for by the federal government but administered by state workers. Officials said earlier this month that in seven states, 2,700 of those workers had been furloughed, further delaying the processing of tens of thousands of disability claims, which already take an average of 488 days to resolve.

In California, services in several counties were already curbed due to layoffs before the state instituted furloughs for the first time in its history in February, when it ordered 90 percent of its 238,000 employees to take off two days of unpaid leave per month.

Now, at the Orange County Social Services Agency, Herman Martinez, an eligibility specialist and president of the local unit of the American Federation of State, County and Municipal Employees, said the agency cannot keep up with applications for public assistance, which have only grown in the economic downturn. “It’s a whole can of worms for us to try to service the most needy and vulnerable clients,” Mr. Martinez said.

In Iowa, furloughs have delayed the start of gay marriages by only one business day but they have also reduced the time that the public has access to the courts. All courts are closed every other Friday through June, which means clerks are falling behind in their case loads. To help them make up for lost time, their offices are closed to the public early on Tuesdays and Thursdays.

“That gives them an opportunity to catch up with paperwork, but it further limits access of the public to the court,” said Steve Davis, a spokesman for the state’s Supreme Court.

Furloughs allow companies and agencies to keep valued employees, are easier and faster to implement than layoffs and are not as demoralizing, analysts say. Workers often accept them because they are presented as the only alternative to layoffs, although some unions resist.

In New Jersey, the state worker unions are angry that they did not have the chance to negotiate the furlough package, which was imposed unilaterally, as it was in California.

“Conditions have gotten so hard that employees who would have been less inclined to accept furloughs have a sense that there’s a permanent economic restructuring going on, something deeper and more lasting, and that means employees have fewer options,” said Mr. Bruno, the labor-relations professor. “The power has shifted to the employer, and employees are more desperate.” While employees often worry that furloughs will not actually prevent layoffs, some have been able to negotiate better job security. In Connecticut, state union leaders have tentatively agreed to unpaid furloughs as part of a package that would guarantee no layoffs for two years. In New York, Gov. David A. Paterson has said that if the state employee unions do not agree to proposed furloughs and pay cuts, he will lay off some 9,000 of the state’s 200,000 workers.

Utah has found an alternative to furloughs. State workers there have been on a mandatory four-day work-week since August as a way to cut energy costs. Salaries have not been cut because offices are open an hour earlier and close an hour later.

“We’re just repacking how we do the 40 hours,” said Jeff Herring, Utah’s executive director of human resources. But he said the move had reduced costs in many ways; overtime payments and absenteeism are down, for example, and online services have been expanded, which has cut the waiting time at places like the Department of Motor Vehicles. Employee morale is up, internal surveys say. But the energy savings has not been as great as anticipated.

President Obama’s stimulus package could eventually relieve some of the pressure on state budgets. But for now, states are relying more on furloughs, though their long-term value is still being assessed.

“Furloughs can save you money and help you avoid layoffs, at least initially,” said Alan Ehrenhalt, editor of Governing magazine. “But employees do lose income, services are disrupted, and it turns out you can’t really close all the things on Friday you thought you could, so the savings aren’t as great. And you’re not solving any long-term problem.”

Democrats Try Trickle-Down Economics: Growing government won't stimulate the real economy.
Wall Street Journal
Feb. 5, 2009

As a presidential candidate, Barack Obama attacked "trickle down economics" as "bankrupt" and an "old, discredited" philosophy that "didn't work." He was wrong. Even worse, though, is that he and congressional Democrats are embracing a Democratic version of trickle-down economics that won't work.

It's embodied in the House-passed "stimulus" bill, H.R. 1, whose deeply flawed assumption is that spending $1 trillion to grow government will trickle down to help people who lost jobs. The Democrats' spending is horribly mismatched with industries that have suffered job loss.

Since December 2007, Americans lost 791,000 jobs in manufacturing, 681,000 jobs in professional and business services, 632,000 jobs in construction, 522,000 jobs in retail, 167,000 jobs in hospitality, and 576,000 jobs in the rest of the service industry. It would be logical for policy makers to focus on job creation in these sectors.

Instead, Democrats want to spend $88 billion to increase the federal share of Medicaid. What American will be hired by a small business, factory, retail shop, hotel, restaurant or service company because of this spending? The answer is very few.

In H.R. 1, there's $41 billion set aside for school districts, $1.5 billion for university research grants, $2 billion for Energy Department labs, and $3 billion for the National Science Foundation. Yet education is one of the few sectors that added jobs last year.

There's also $4 billion for health programs like obesity control and smoking cessation, $2 billion for the National Institutes of Health, $462 million for the Centers for Disease Control, and $900 million for pandemic flu preparations. Health care also added jobs last year.

It is not surprising that the stimulus package is laden with new spending programs. Congressional appropriators, not job creators, wrote H.R. 1. Much of it is spending Democrats couldn't get approved in the normal course of affairs. And it should not shock Americans that Democratic appropriators would funnel tax dollars to the Association of Community Organizations for Reform Now, unions and other liberal special interests. Putting budgets of political allies above the budgets of struggling families is apparently the new Democratic trickle-down economics.

Mr. Obama has only his own lack of engagement and leadership to blame. He outsourced the drafting of the bill to House Appropriations Committee Chairman David Obey through inaction. He refused to get his administration's hands dirty in crafting the legislation by laying out a detailed plan in December. Then saying he looked forward to Congress passing a bill for him to sign on Inauguration Day was an invitation for liberal spenders to roll him. They did.

The package's size is disturbing. The federal government's discretionary, nonsecurity spending was $391 billion in fiscal 2008 and $393 billion was requested for this fiscal year. H.R. 1 contains $317 billion in additional fiscal 2009 discretionary nonsecurity spending. If passed, this 81% increase would be history's largest.

Nor will Democrats treat this additional spending as a one-time expense. They'll simply start next year's budget writing with a new baseline of $712 billion for the federal government's discretionary domestic budget, nearly doubling it in just a year. This is only part of the Democrats' spending damage. In H.R. 1, they also add $308 billion in new "mandatory" spending (for entitlement programs), which would help produce a 25% increase in 2009, the largest increase in mandatory spending in more than three decades.

And later...
Obama Calls Wall Street Bonuses ‘Shameful’
January 30, 2009

WASHINGTON — President Obama fired a warning shot at Wall Street on Thursday, branding bankers “shameful” for giving themselves $18.4 billion in bonuses as the economy was spinning out of control and the government was spending billions to bail out many of the nation’s most prominent financial firms.

Speaking from the Oval Office with Treasury Secretary Timothy F. Geithner by his side, Mr. Obama lashed out at the industry over a report, compiled by the New York State comptroller, Thomas P. DiNapoli, which found that over all, financial executives received the same level of bonuses as they had in 2004, when times were more flush.

It was a pointed and unusual flash of anger — if a premeditated one — from the president, and it suggested that he intended to use his platform to take a hard line against excesses in executive compensation.

“That is the height of irresponsibility,” Mr. Obama said angrily. “It is shameful, and part of what we’re going to need is for folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility.

“The American people understand that we’ve got a big hole that we’ve got to dig ourselves out of, but they don’t like the idea that people are digging a bigger hole even as they’re being asked to fill it up,” Mr. Obama said, adding that “there will be time for them to make profits and there will be time for them to make bonuses. Now is not that time.”

News of the report, and Mr. Obama’s remarks, came a day after the president met privately at the White House with business leaders, including Richard D. Parsons, the new chairman of the board of Citigroup. This week, Citigroup, which received an infusion of taxpayer money last year, canceled its plans, at the administration’s urging, to buy a $50 million business jet.

Mr. Obama did not spare the company in his remarks on Thursday, although he did not mention Citi by name. “Secretary Geithner already had to pull back on one institution that had gone forward with a multimillion-dollar plane it purchased at the same time as they are receiving TARP money,” he said, using the acronym for the government’s $700 billion Troubled Assets Relief Program, intended to rescue shaky financial firms. “We shouldn’t have to do that, because they should know better.”

Mr. DiNapoli’s report was compiled based on the annual December-January bonus season, mostly through personal income tax collections. In an interview published on Thursday, he said it was unclear if banks had used taxpayer money for bonuses.

“The issue of transparency is a significant one,” Mr. DiNapoli said in the interview, “and there needs to be an accounting about whether there was any taxpayer money used to pay bonuses or to pay for corporate jets or dividends or anything else.”

Earlier Thursday, the White House press secretary, Robert Gibbs, said Mr. Obama had a one-word reaction to the report: “Outrageous.” He announced in advance that Mr. Obama would put forth his views in person, which he did at the end of a meeting with Mr. Geithner.

Earlier photo, in flusher times, of Rubin and Greenspan...and in 2009, Greenspan and Geithner (pictured at right, replace his photo for Rubin) on evaluation of the situation.

Talking Business...New York and London: Twins in Finance and Folly
May 9, 2009


I can’t tell you how many times I heard the words “Glass-Steagall” here this week.

“Should we have a new Glass-Steagall?” asked Liam Halligan, the chief economist with Prosperity Capital Management, a London-based asset manager, who also writes a weekly column for The Telegraph. He felt very strongly that the answer was yes.

“We’ll see a Glass-Steagall-like environment,” predicted Michael Spencer, the billionaire founder of ICAP, a large interdealer broker whose headquarters is in the City of London.

“We need to bring back Glass-Steagall,” said Terry Smith, the chief executive of Tullett Prebon, another big interdealer broker.

Every time I heard the phrase, it caught me up short. Glass-Steagall, of course, was an American law passed during the Depression to separate investment banking and commercial banking. It was dismantled 66 years later, in 1999, because it was viewed by the American political establishment, starting with Treasury Secretary Robert Rubin, as an outmoded relic of an earlier age. Glass-Steagall never existed in Britain.

And it wasn’t just Glass-Steagall that kept coming up in conversations here. Londoners were conversant with the ins and outs of the stress tests and President Obama’s recovery plan. They knew that Representative Barney Frank was busy reining in bonuses. They had opinions on how Timothy F. Geithner, the Treasury secretary, was doing. No matter how much I pressed people to talk about how London was dealing with the financial crisis, they kept turning the conversation back to America. What kind of regulations were likely to emerge? Was the American banking system going to shrink? And so on.

All of which served as a useful reminder that, for all the talk in recent years about whether the City of London was “overtaking” Wall Street as the world’s financial capital, they have really become one and the same. All the big financial institutions operate in both places — with surprisingly little distinction between what the London office does and what the United States office does. The financial products unit of the American International Group traded credit-default swaps in both Wilton, Conn., and London, for instance.

Hedge funds are as large a part of the financial world in the City of London as they are on Wall Street. Banks in London chased the same deals, hired the same traders and followed the same business practices as their American competitors. “The right way of thinking about New York and London is that they are Siamese twins,” said Martin Wolf, the economics columnist for The Financial Times. “They were the same institutions doing the same things with the same set of regulations.”

Which is why it is only natural that Londoners would be closely tracking America’s response to the crisis — and thinking about whether old laws like Glass-Steagall should be revived. Because it turns out that, having hitched its wagon to Wall Street more than a decade ago, the City of London cannot afford to untether itself. It simply has too much at stake.

I had heard, before coming here, that the mood in London was darker than it is in New York, but I didn’t really find that to be the case. Like us, Londoners are starting to wonder, ever so cautiously, whether the worst is over. People talked about consuming less conspicuously and saving more. Although plenty of financial executives have lost their jobs, I also met a man named Michael Tory, who went down with the ship at Lehman Brothers in London and has now co-founded a new advisory business, Ondra Partners.

“There has been a profound inversion,” he said. “People have lost faith in the large firms, and now any start-up is viewed as lower risk.” Well, maybe. Certainly, he was as optimistic as anyone I’ve met in finance this year. And there was still a lot of deal-making in the air.

Whereas American anger is mostly reserved for the banking industry, the British are primarily angry at their politicians. People are dumbfounded at the risks their banks took, and stunned that some of them have needed huge government bailouts — unlike with us, bank failure is almost completely foreign to their experience.

But they also feel the path to ruin was paved by the country’s regulators. These days, the reputation of the former chancellor of the Exchequer, Gordon Brown, who presided over the bubble when Tony Blair was prime minister, is as tattered as that of Alan Greenspan, the former Federal Reserve chairman. The difference is that Mr. Greenspan is retired — while Mr. Brown is the current prime minister.

“Since 1997, the City has been a metaphor for New Labor,” said Philip Augar, author of “Chasing Alpha,” a book that chronicles the events that led to the financial crisis in London. (Labor took power in 1997.) At the time, he said, the asset management business was struggling, mired in a series of scandals, and there was fear in the City that Mr. Blair’s Labor Party would make things worse. But that didn’t happen.

“Gordon Brown instituted a lot of pro-City policies,” Mr. Augar said. “He cut the capital gains tax. He combined about nine different regulators into the F.S.A.” — the Financial Services Authority — “which adopted something it called ‘proportional regulation.’ ” Mr. Brown himself had a more apt phrase: “light touch regulation,” he called it. In other words, he consciously aligned regulation in Britain with the free-market, deregulatory approach being promoted by Mr. Greenspan and Mr. Rubin.

Mr. Augar says he believes that the regulatory environment helped bring about the “Americanization” of the City of London, and that it was ultimately ruinous. All the big American investment banks raced to London — which they saw as a place to do business not just in Britain but all over the Continent. After the abolition of Glass-Steagall, the commercial banks came roaring in as well.

British banking had for hundreds of years been a safe, even stodgy business — even during the Depression, banks remained relatively healthy. But in their desire to compete with the American invaders, banks like the Royal Bank of Scotland transformed themselves into turbo-charged, high-growth institutions, just like our own. They traded mortgage-backed securities, made unwise loans, did deals for the deal’s sake and not necessarily for the sake of the client, and used credit-default swaps to lower regulatory capital requirements to absurd levels. Finance became the dog instead of the tail.

Needless to say, not everyone agrees with Mr. Augar’s thesis. A number of people pointed, in particular, to the Royal Bank of Scotland, which, in addition to its poor lending, did itself in by buying the Dutch bank giant ABN Amro at the very peak of the market. “Was Royal Bank of Scotland buying ABN an example of the American disease?” asked Alan Gemes, the global head of financial services for the consulting firm Booz & Company. “No. American banks and U.K. banks fell prey to the same problem.”

But I would argue that, even if there weren’t any Americans on the premises, the Royal Bank of Scotland did indeed get caught up in the Americans’ game. The ABN Amro deal sounds to me just like the Bank of America-Merrill Lynch deal. Had the ethos of the City of London not changed so drastically, it would never have made so foolish a deal.

Now, of course, Britain is paying the price. The Royal Bank of Scotland has been partly nationalized, and the government has spent billions of pounds propping up the banking system. The country is drowning in debt. Mr. Brown’s Labor government is running large deficits in an effort to stimulate the economy.

If that, too, sounds like the response of the Obama administration to the financial crisis, it is indeed quite similar. Here’s the big difference. New York is a big city in a big country, and our national banks, as big as they are, are much smaller as a percentage of gross domestic product. London is a big city in a small country, and during the bubble, its banks became truly immense, outsize really, given the size of the country they operated in.

Royal Bank of Scotland grew from a regional Scottish bank to the largest bank in the world by assets — some $3.8 trillion. Citigroup’s assets, by comparison, were a “mere” $2.2 trillion — and for that matter, the gross domestic product of all of Britain itself is only $2.1 trillion. The big banks combined probably had five times the asset base of the country’s G.D.P.

So everything the government does in response to the crisis has larger potential consequences — a greater likelihood of inflation down the line, and a far higher level of debt as a percentage of G.D.P. Because the City of London was such an outsize source of tax revenue, the subsequent hit to the tax rolls has been worse. British taxpayers are much more likely to be paying for generations to atone for the sins of light-touch regulation. No wonder Mr. Brown is in so much political trouble.

Which brings me back to Glass-Steagall. In any banking crisis, said Mr. Gemes, the Booz & Company consultant, banks revert to being national institutions rather than international ones. In the United States, the political focus, for instance, is on persuading banks to start lending to American companies. In London, the big British banks have all tempered their once grandiose ambitions, at least for now.

But Glass-Steagall? It is highly unlikely that Britain would ever take such a drastic step. Just a few days ago, Barclays reported profits that were almost entirely attributable to its new investment banking division — the one it bought from the ashes of Lehman Brothers. Besides, although no one will say this out loud, Britain can’t regulate unilaterally anymore — it is simply too dependent on American institutions. Its regulatory response will be to mimic whatever the Obama administration decides to do.

“If regulation is transformed in London it is because of what the U.S. does,” Mr. Wolf said. “The U.S. will say, ‘You are to follow us.’ We now have no regulatory autonomy.”

It’s tough being a Siamese twin.

Rubin Is Stepping Down at Citigroup
January 10, 2009 - a day ahead

Robert E. Rubin, the former Treasury secretary who is an influential director and senior adviser at Citigroup, will step down after coming under fire for his role in the bank’s current troubles, the bank confirmed Friday.

Since joining Citigroup in 1999 as an adviser to the bank’s senior executives, Mr. Rubin, 70, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has made one misstep after another.

When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.

“This is not a decision that I have come to lightly,” Mr. Rubin said in a statement from the bank. “But as I enter my 70’s and with all that is now in place at Citi, I believe the time has come for me to make these changes.”

Mr. Rubin has moved seamlessly between Wall Street and Washington. After making his millions as a trader and an executive at Goldman Sachs, he joined the Clinton administration.

As chairman of Citigroup’s executive committee, Mr. Rubin was the bank’s resident sage, advising top executives and serving on the board while, he insisted repeatedly, steering clear of daily management issues.

In December, federal regulators approved a radical plan to stabilize Citigroup in an arrangement in which the government could soak up billions of dollars in losses at the struggling bank.

The complex plan calls for the government to back about $306 billion in loans and securities and directly invest about $20 billion in the company. Under that plan, Citigroup agreed to certain executive compensation restrictions, which will be reviewed by regulators.

Once the nation’s largest and mightiest financial company, Citigroup lost 86 percent of its value in the stock market in the last year as the bank confronted a crisis of confidence.

With more than $2 trillion in assets and operations in more than 100 countries, Citigroup is so large and interconnected that its troubles could spill over into other institutions. Citigroup is widely viewed, both in Washington and on Wall Street, as too big to be allowed to fail.

Biden Defends Expanded Recovery Plan
December 22, 2008

WASHINGTON — Vice President-elect Joseph R. Biden Jr. defended on Sunday plans for an expanded economic recovery plan against charges it would unwisely inflate the national deficit, saying bluntly that the incoming administration’s first and most urgent goal was “keeping the economy from absolutely tanking.”

Faced with worsening forecasts for the economy, President-elect Barack Obama is expanding his economic recovery program and will seek to create or save 3 million jobs in the next two years, up from a goal of 2.5 million jobs set just last month, several advisers to Mr. Obama said Saturday.

Mr. Obama and Mr. Biden had spoken during the presidential campaign of a stimulus plan worth perhaps $150 billion to $200 billion. Now, Mr. Biden confirmed: “There’s going to be real significant investment, whether it’s $600 billion, or more or $700 billion. The clear notion is, it’s a number no one thought about a year ago.”

What had changed, he said on ABC’s “This Week,” was that “the economy is in much worse shape than we thought.” He said that economists of all stripes agreed that “the scope of this package has to be bold; it has to be big.”

Yet, even Mr. Obama’s more ambitious goal would not fully offset as many as 4 million jobs that some economists are projecting might be lost in the coming year, according to the information he received from advisers in the past week. That job loss would be double the total this year and could push the nation’s unemployment rate past 9 percent if nothing were done.

The new job target was set after a meeting last Tuesday in which Christina D. Romer, who is Mr. Obama’s choice to lead his Council of Economic Advisers, presented information about previous recessions to establish that the current downturn was likely to be “more severe than anything we’ve experienced in the past half-century,” according to an Obama official familiar with the meeting.

Officials said they were working on a plan big enough to stimulate the economy but not so big to provoke major opposition in Congress. Mr. Obama’s advisers have projected that the multifaceted economic plan would cost $675 billion to $775 billion. It would be the largest stimulus package in memory and would most likely grow as it made its way through Congress, although Mr. Obama has secured Democratic leaders’ agreement to ban spending on pork-barrel projects.

Mr. Biden said, as Mr. Obama has before, that the plan will aim not just to create jobs, but to do so in ways that will benefit the country over the long term. Examples, he said, would be inbuilding a “smart” nationwide electric grid that makes it easier to transmit wind- and solar-generated energy; or in transferring medical data from paper to electronic form, with near-term costs but long-term savings.

For now, the vice president-elect said, the urgent goal was “to stem this bleeding” in jobs; the fast-rising deficit would be dealt with later.

The message from Mr. Obama was that “there was not going to be any spending money for the sake of spending money,” said Lawrence H. Summers, who will be the senior economic adviser in the White House.

Mark Zandi, chief economist of Moody’s, who was an adviser to Senator John McCain’s presidential campaign, said, “My advice is, err on the side of too big a package rather than too little.” In an interview, Mr. Zandi, who lately has advised Democratic leaders in Congress, also said he would probably soon raise his own recommendation of a $600 billion stimulus.

Besides new spending, the Obama plan would provide tax relief for low-wage and middle-income workers of roughly $150 billion, Democrats familiar with the proposal said. The government would probably reduce the withholding of income or payroll taxes so that most workers received larger paychecks as soon as possible in 2009, an Obama adviser said.

The sorts of jobs Mr. Obama would propose to create involve construction work on roads, mass transit projects, weatherization of government buildings and installation of information technology in medical facilities, among others.

The outlines for Mr. Obama’s emerging plan, which he is developing in consultation with Congress, including some Republicans, were mostly settled last Tuesday when he met for four hours with economic and policy advisers. Mr. Obama and his family left Saturday for a two-week vacation in Hawaii, his native state, but the advisers will take his guidance — including instructions to be “bolder,” according to one — and complete a draft in time for his return on Jan. 2.

The new Congress convenes on Jan. 6. The House and Senate, with larger Democratic majorities, will work to pass a bill for Mr. Obama to sign shortly after his inauguration, on Jan. 20.

The Obama blueprint covers five main areas of spending and tax breaks: health, education, infrastructure, energy, and support for the poor and the unemployed.

Mr. Summers said the president-elect set short- and long-term themes in choosing the plan’s components: “Creating jobs for people who need them, and doing things that need to be done to lay the foundation for an economy that works for middle-class families.”

At the meeting on Tuesday, Ms. Romer also laid out recommendations from private sector analysts and liberal to conservative economists for a government stimulus that ranged from $800 billion to $1.3 trillion over two years. Those consulted included Martin Feldstein, a conservative economist and longtime Republican presidential adviser, who is at the low end, and Lawrence B. Lindsey, a Federal Reserve governor and Bush administration economist, who has recommended up to $1 trillion.

Even before the election, Mr. Feldstein was publicly arguing that whoever was elected should immediately begin working with Congress on a big spending package. Since then, Mr. Feldstein has also been revising his assessment upward as the economy weakened further. “Without action,” he wrote in an e-mail exchange, “the economy will continue to decline rapidly.”

Many decisions about the details have not been made, or are tentative pending consultations with Congress. Several hundred billion dollars could go to states and cities to finance public works and subsidize their health and education programs so that local governments do not have to raise taxes and cut essential programs, steps that would be counterproductive economically.

The Obama team has a list of $136 billion in infrastructure projects from the National Governors Association that consists mostly of transit construction but also includes port expansions and renewable energy programs. For education, besides money to build and renovate schools, Mr. Obama will call for money to train more teachers, expand early childhood education and provide more college tuition aid.

Federal money to local governments would come with a “use it or lose it” clause under Mr. Obama’s plans, advisers say. The president-elect will also propose to direct some money to public and private partnerships for major projects like a national energy grid intended to harness alternative energy sources such as wind power.

For those “most vulnerable” because of the recession, as the Obama team describes the needy and jobless population, the president-elect will propose expanding the length of unemployment compensation, as well as food aid and additional support.

With millions more Americans losing their health care coverage, either through job losses or because they can no longer afford to pay for insurance, Mr. Obama will propose major new spending to subsidize states’ share of Medicaid and their children’s health programs, and to expand health care coverage for those who lose insurance from their employers.

Mr. Obama plans a down payment on his campaign promise to help pay for hospitals and other medical providers to computerize their health records to save billions in paperwork and administrative costs. He might also propose subsidies to train more nurses, both to create jobs now and address a looming shortage in the health professions.

Mr. Obama has spoken in recent days with the Senate majority leader, Harry Reid, and the House speaker, Nancy Pelosi. Last week, Mr. Reid’s office sent an e-mail message to senators saying that in conversations with the Obama transition team, “we have communicated our willingness to work within these parameters as closely as possible and urge all offices to do the same.”

2007 hearing before Senate Committee - Countrywide second from left.

June 5, 2009
S.E.C. Accuses Countrywide’s Ex-Chief of Fraud

WASHINGTON — The government is charging Angelo R. Mozilo, the former chief executive of the mortgage lender Countrywide Financial, and two other company executives with civil fraud.  The Securities and Exchange Commission said Thursday afternoon that its case also accused Mr. Mozilo of illegal insider trading. Countrywide was a major player in the subprime mortgage market, the collapse of which in 2007 touched off the financial crisis that has gripped the United States and global economies.

Mr. Mozilo is the highest-profile person to face formal charges from the federal government in the wake of the crisis.  Mr. Mozilo has denied any wrongdoing. His lawyer did not immediately return an e-mail message seeking comment Thursday afternoon.  Civil fraud charges were also filed against Countrywide’s former chief operating officer, David Sambol, and the former chief financial officer, Eric Sieracki.

Paul Kranhold, a spokesman for Mr. Sambol, declined to comment because he had not seen the charges yet. An e-mail message to Mr. Sieracki’s lawyer, Shirli Fabbri Weiss, was not immediately returned.

The S.E.C. and federal prosecutors have undertaken wide-ranging investigations of companies across the financial services industry, touching on mortgage lenders, the Wall Street investment banks that bundled home mortgages into securities sold to investors and other market players.  The S.E.C.’s scrutiny of Mr. Mozilo’s stock sales began in the fall of 2007 with an informal inquiry.

The filing of the agency’s civil lawsuit in federal court in Los Angeles is a striking turn for Mr. Mozilo, the man who 40 years ago co-founded what grew into the nation’s largest mortgage lender. He moved the company in 1969 to suburban Los Angeles from New York, guiding Countrywide through numerous boom-and-bust housing cycles.  After the mortgage crisis hit, the Calabasas, Calif.-based Countrywide was forced to cut thousands of jobs and saw its shares plummet. Its downward spiral ended in it being bought by Bank of America last July for about $2.5 billion. Countrywide itself is the target of multiple lawsuits related to the mortgage meltdown.

Mr. Mozilo’s influence stretched from the California real estate market through the corridors of power in Washington.

The Democrats were roiled a year ago by revelations that Senator Christopher J. Dodd, the Connecticut Democrat who is chairman of the Senate Banking Committee, and Senator Kent Conrad, the North Dakota Democrat who is chairman of the Budget Committee, obtained mortgages at favorable rates through a V.I.P. program dispensed by Countrywide for so-called "friends of Angelo."

Mr. Dodd insisted that the controversy over the two loans he received did not compromise his ability to lead Congress’s efforts to address the effects of the subprime mortgage meltdown.

Mr. Mozilo sold about $130 million in Countrywide stock in the first half of 2007 through a prearranged 10b5-1 trading plan. These plans, popular among corporate executives, allow a company insider to set up a program in advance for such transactions and proceed with them even if he or she comes into possession of significant nonpublic information.

North Carolina’s state treasurer, who asked the S.E.C. in 2007 to investigate Mr. Mozilo’s stock sales, raised questions about changes made to Mr. Mozilo’s plan in the months before the company’s stock plunged, which allowed Mr. Mozilo to significantly increase his sales of Countrywide shares.

Mr. Mozilo had sold company shares through prior arrangements since 2004; the pace of his sales began to quicken in October 2006 when he put a new plan into effect. Mr. Mozilo has said that he did so to reduce his stake in Countrywide and diversify his personal investments in an orderly fashion before his retirement, which was slated for December 2009.

Inept Handling Of Conflicts Leave Dodd Politically Exposed 
By Morgan McGinley 
Published on 12/14/2008

For the first time in his Senate career, Christopher J. Dodd, the senior Democratic senator from Connecticut, is politically vulnerable. In part, that's because both the Senate Ethics Committee and the Public Integrity unit of the Justice Department are looking into mortgage loans he got from Countrywide Financial.

The Justice Department investigation is broader. It seeks details not just of Dodd's loans but also of other loans made under Countrywide's VIP program meant to seek better loan terms for FOAs (Friends Of Angelo, a reference to then-Countrywide company Chairman Angelo Mozillo). NBC news has reported that the program made mortgage loans to a variety of politically powerful Washington insiders over a number of years.

Dodd, who is cooperating with the Senate investigation, says he got market interest rates from Countrywide that were available from other mortgage companies, that he did not know he was getting any special treatment and has not met Mozillo . He was just remortgaging because industry-wide rates had fallen, he says. But the pertinent question for Dodd, the Senate banking committee chairman and longtime member, is why in the world he would go for a loan to one of the largest brokers in the country, a firm selling mortgages to Fannie Mae and Freddie Mac, businesses that come under the scrutiny of Dodd's committee?

Why didn't Dodd go to The Savings Institute in his hometown of Willimantic, or either of the local banks in Norwich, where he started his political career, or even smaller shoreline banks whose business is not directly subject to the powerful role of his Senate committee?

And now that he is the subject of an ethics probe, why doesn't Connecticut's senior senator make available to the public and the media all the documents relating to his loans from Countrywide? His excuse - that he is awaiting completion of the Senate Ethics Committee probe - is a lame one that damages him politically.  Dodd's handling of the matter has involved bad political judgment. The senator uncharacteristically displays a political tin ear on this issue and he is paying dearly for his handling of the matter.

First, he denied that he had sought or knew he was getting any favorable treatment. A week later, he said he knew he was part of Countrywide's VIP program, but said he thought the arrangement was “more of a courtesy.”

But Robert Feinberg, a former loan officer for Countrywide in charge of the company's VIP program, told The Wall Street Journal that he spoke directly to Dodd and to his wife, indicatating to them that they were getting a special deal because they were “Friends of Angelo.” Feinberg said Dodd and his wife got a “float down.” This means that even after allegedly getting a premium rate, the rate was reduced again without any additional charge because rates had fallen between the time of the negotiation and the closing.

Dodd has denied that he and his wife had spoken with Feinberg about special treatment on the re-mortgaging.

Approval ratings sink

Dodd, for many years the state's most popular politician, saw his approval rating fall to 51 percent in a Quinnipiac Poll last July. This is the lowest rating ever for Dodd. Further, 59 percent of those polled said Dodd's loans from Countrywide deserve more investigation.

Connecticut Democrats say they have fielded a lot of questions from the public about Dodd's housing loans.  Dodd's political exposure is all the more visible because he has been in the middle of the congressional group negotiating the bailouts for Wall Street and the rescue plan for Detroit's automakers.  Dodd's efforts to try to get relief for average Americans on mortgages that were punitive was a welcomed act, one that failed because of a lack of support from the Bush administration.

And Dodd may be right on another count, the possible loss of much of the United States' industrial base if Congress fails to help the automobile companies.  But regardless of the conclusions reached by the ethics committee or the Justice Department, any political opponent is certain to resurrect the question of the loans.  The other thing hurting Dodd is that he has received about $13 million in campaign contributions from financial organizations over the length of his Senate career, including $6 million in the past several years.

These contributions are legal under the federal rules for campaign donations, but they could be politically damaging because the public asks: what is the Senate banking committee chairman doing getting all this money from financial institutions? The public gets it: the campaign contribution system involves an inherent conflict of interest between an elected official's duties and the taking of money from businesses the politician is regulating.

Eighteen of Dodd's top 20 contributors have been financial institutions. Dodd himself, questioned by The Hartford Courant about this potential conflict of interest, said:

”It's an ugly system and I hate it. I never have, nor would I ever let a campaign contribution affect what I care about. What I champion, how I vote, how I hold hearings. Ever!”

The investigations now going on may entirely clear Dodd, whose Senate record has been free of any similar controversy.  But what will remain are his poor judgment regarding loans from Countrywide and his willingness to take huge amounts of money from an industry his committee regulates.

Tribune Files for Bankruptcy
December 8, 2008, 1:55 pm

The Tribune Company filed for bankruptcy protection in a federal court in Delaware on Monday, as the owner of The Los Angeles Times, The Chicago Tribune and the Chicago Cubs baseball team struggled to cope with rising debt and falling ad revenue.

Tribune, which was acquired last year by billionaire real estate investor Samuel Zell, had hired bankruptcy advisers like Lazard and the law firm Sidley Austin in recent weeks as it negotiated with creditors over debt covenants. (Read the bankruptcy petition here.)

It is only the latest — and biggest — sign of duress for the newspaper industry yet. Several newspaper companies have struggled to cope with declining revenues and mounting debt woes. Tribune has pared back the newsrooms of many of its papers, and it sold off Newsday to Cablevision’s Dolan family earlier this year. It is unclear what Tribune’s filing means for other newspaper publishers on the brink.

In a court filing, Tribune said it had nearly $13 billion in debt, compared to $7.6 billion in assets. Most of that debt was taken on when Mr. Zell acquired the company — a deal he struck using mostly borrowed money. All of the now privately held company’s equity is owned by an employee stock-ownership plan.

Tribune has sought to ameliorate its woes by selling off assets like the Chicago Cubs, but the company still faces a looming debt crunch.

While Tribune must contend with hefty interest payments over the next year, its most pressing problem was a maintenance covenant on some of its debt that limits the company’s borrowings to no more than nine times earnings before interest, depreciation and amortization.

Even if the company continues to make interest payments, failure to maintain that level of debt means technical default — which does not always lead to a bankruptcy filing, though in Tribune it apparently did. Other newspaper publishers have halted making interest payments on their debt, but have yet to file.

The top creditors listed by Tribune in its court filing include big banks like JPMorgan Chase, Merrill Lynch and Deutsche Bank. JPMorgan listed some of the firms it had syndicated its debt to as well; that list comprises private investment firms like Kohlberg Kravis Roberts’s KKR Financial, Highland Capital Management and Davidson Kempner Capital Management.

A CreditSights analyst, Jake Newman, wrote in a research report published last month that Tribune avoided technical default in the third quarter partially through some accounting adjustments. “We think the company will have difficulty meetings its year-end covenant compliance,” Mr. Newman wrote.

Tribune hired Lazard several weeks ago to assess its options, these people said. It also hired Sidley, a longtime outside adviser to Tribune that has a well-respected bankruptcy practice as well.

In its filing Monday, Tribune also said that it has retained Alvarez & Marsal, a restructuring adviser, as a consultant. Alvarez & Marsal is also advising Lehman Brothers, the collapsed investment bank whose filing was the largest corporate bankruptcy in American history.

Tribune’s problems have long been reflected in the price of its bonds. Tribune bonds maturing Aug. 15, 2010 with a 4.88 percent coupon traded at $13.25 on Friday, suggesting severe levels of distress.

–Michael J. de la Merced

The Employment Crash
NYTIMES Editorial
December 7, 2008

The headline numbers in the employment report for November were worse than dreadful — and they did not reflect the true extent of the weak and worsening outlook for American jobs.

Employers axed 533,000 jobs last month, the worst monthly loss since December 1974, bringing the number of lost jobs in the last year to 1.9 million. Worse, two-thirds of the losses were in the past three months, a sign of an intensifying downturn and of more job cuts ahead.

The unemployment rate for November — which rose to 6.7 percent, or 10.3 million people — also understates the weakness in the job market.

Job loss in a recession is related to the number of jobs created while the economy was expanding. Job creation during the Bush-era business cycle was the weakest since the end of World War II, so there are simply not as many workers to lay off as in past downturns. Instead, workers’ hours have been cut, sharply increasing the number of people working part time who want full-time jobs. Involuntary part-timers and out-of-work people who are discouraged from job hunting because their prospects are dim are measured in the underemployment rate, which at 12.5 percent is now the highest since the government started keeping track in 1994.

Joblessness and the threat of joblessness will depress already dismal consumer spending, which in turn will depress business investment, leading to higher unemployment. Rising unemployment will also fuel more foreclosures, which will further destabilize the financial system and reinforce economic weakness.

One in 10 borrowers in America were either delinquent or in foreclosure in the third quarter, according to the Mortgage Bankers Association, a stunning tally that does not even reflect the drag of rising unemployment in October and November. Unemployment among 25- to 34-year-olds, which includes most first-time homebuyers, is rising fast. Yet, rather than attack foreclosures directly, the Bush administration’s latest economic rescue proposal is to try to spur home buying by reducing mortgage rates. Good luck.

The political reality is that any serious response to unemployment and foreclosures will probably not occur until the Obama administration takes over. Members of Congress should be working now on another round of economic stimulus, consisting of bolstered unemployment compensation and food stamps and aid to states and localities, including money for creating jobs by rebuilding the nation’s infrastructure. An anti-foreclosure plan to rework troubled mortgages en masse is long overdue and should also be passed, either as part of the stimulus or as a stand-alone measure.

Beyond stimulus, President-elect Barack Obama will need a larger recovery plan that puts employment, rising wages and savings at the center of the agenda. The selection of a strong labor secretary, whose input will be as valued as that of Mr. Obama’s Wall-Street-oriented economic advisers, is crucial. The work force needs a champion who has the president’s full attention.

Consumers saving up for Xmas?
Consumers Unexpectedly Trimmed Borrowing in Oct.
Filed at 3:01 p.m. ET
December 5, 2008

WASHINGTON (AP) -- U.S. consumers unexpectedly cut back on their borrowing in October as the economy sunk deeper into recession.

The Federal Reserve says consumer credit fell at an annual rate of 1.6 percent in October. That compares with a 3.1 percent growth rate logged in September, and marks the deepest cutback since August.

Economists expected consumers to boost their borrowing by around $2 billion in October from the previous month. Instead, consumer debt dropped by $3.5 billion to $2.58 trillion.

The Fed's measure of consumer borrowing does not include any debt secured by real estate, such as mortgage or home equity loans.

Click above for side comment, then below for our expanation of why the world is worried - who's going to buy their STUFF if the US consumer can't or won't?

A Shopping Guernica Captures the Moment

November 30, 2008

From the Great Depression, we remember the bread lines. From the oil shocks of the 1970s, we recall lines of cars snaking from gas stations. And from our current moment, we may come to remember scenes like the one at a Long Island Wal-Mart in the dawn after Thanksgiving, when 2,000 frantic shoppers trampled to death an employee who stood between them and the bargains within.

It was a tragedy, yet it did not feel like an accident. All those people were there, lined up in the cold and darkness, because of sophisticated marketing forces that have produced this day now called Black Friday. They were engaging in early-morning shopping as contact sport. American business has long excelled at creating a sense of shortage amid abundance, an anxiety that one must act now or miss out.

This year, that anxiety comes with special intensity for everyone involved — for shoppers, fully cognizant of the immense strains on the economy, which has made bargains more crucial than ever; for the stores, now grappling with what could be among the weakest holiday seasons on record; and for policy makers around the planet, grappling with how to substitute for the suddenly beleaguered American consumer, whose proclivities for new gadgets and clothing has long been the engine of economic growth from Guangzhou to Guatemala City.

For decades, Americans have been effectively programmed to shop. China, Japan and other foreign powers have provided the wherewithal to purchase their goods by buying staggering quantities of American debt. Financial institutions have scattered credit card offers as if they were takeout menus and turned our houses into A.T.M.’s. Hollywood and Madison Avenue have excelled at persuading us that the holiday season is a time to spend lavishly or risk being found insufficiently appreciative of our loved ones.

After 9/11, President Bush dispatched Americans to the malls as a patriotic act. When the economy faltered early this year, the government gave out tax rebate checks and told people to spend. In a sense, those Chinese-made flat-screen televisions sitting inside Wal-Mart have become American comfort food.

And yet the ability to spend is constricting rapidly. Credit card limits are getting cut. Millions of Americans now owe the bank more than the value of their homes, making further borrowing impossible. The banks themselves are hunkered down, just hoping to survive.

Live within our means and save: This new commandment has entered the conversation, colliding with the deeply embedded imperative to spend. And yet much of the distress is less the product of extravagance than the result of the fact that in many households the means are nowhere near enough for traditional middle-class lives.

Wages for most Americans have fallen in real terms over the last eight years. Pensions have been turned into 401(k) plans that have just relinquished half their value to an angry market. Health benefits have been downgraded or eliminated altogether. Working hours are being slashed, and full-time workers are having to settle for jobs through temp agencies.

Indeed, this was the situation for the unfortunate man who found himself working at the Valley Stream Wal-Mart at 5 a.m. Friday, a temp at a company emblematic of low wages and weak benefits, earning his dollars by trying to police an unruly crowd worried about missing out.

In a sense, the American economy has become a kind of piñata — lots of treats in there, but no guarantee that you will get any, making people prone to frenzy and sending some home bruised.

It seemed fitting then, in a tragic way, that the holiday season began with violence fueled by desperation; with a mob making a frantic reach for things they wanted badly, knowing they might go home empty-handed.

All Fall Down
November 26, 2008

I spent Sunday afternoon brooding over a great piece of Times reporting by Eric Dash and Julie Creswell about Citigroup. Maybe brooding isn’t the right word. The front-page article, entitled “Citigroup Pays for a Rush to Risk,” actually left me totally disgusted.

Why? Because in searing detail it exposed — using Citigroup as Exhibit A — how some of our country’s best-paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye. But it wasn’t only the bankers. This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics.

So many people were in on it: People who had no business buying a home, with nothing down and nothing to pay for two years; people who had no business pushing such mortgages, but made fortunes doing so; people who had no business bundling those loans into securities and selling them to third parties, as if they were AAA bonds, but made fortunes doing so; people who had no business rating those loans as AAA, but made a fortunes doing so; and people who had no business buying those bonds and putting them on their balance sheets so they could earn a little better yield, but made fortunes doing so.

Citigroup was involved in, and made money from, almost every link in that chain. And the bank’s executives, including, sad to see, the former Treasury Secretary Robert Rubin, were clueless about the reckless financial instruments they were creating, or were so ensnared by the cronyism between the bank’s risk managers and risk takers (and so bought off by their bonuses) that they had no interest in stopping it.

These are the people whom taxpayers bailed out on Monday to the tune of what could be more than $300 billion. We probably had no choice. Just letting Citigroup melt down could have been catastrophic. But when the government throws together a bailout that could end up being hundreds of billions of dollars in 48 hours, you can bet there will be unintended consequences — many, many, many.

Also check out Michael Lewis’s superb essay, “The End of Wall Street’s Boom,” on Lewis, who first chronicled Wall Street’s excesses in “Liar’s Poker,” profiles some of the decent people on Wall Street who tried to expose the credit binge — including Meredith Whitney, a little known banking analyst who declared, over a year ago, that “Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust,” wrote Lewis.

“This woman wasn’t saying that Wall Street bankers were corrupt,” he added. “She was saying they were stupid. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money, and imagine what they’d fetch in a fire sale... For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: You’re wrong. You’re still not facing up to how badly you have mismanaged your business.”

Lewis also tracked down Steve Eisman, the hedge fund investor who early on saw through the subprime mortgages and shorted the companies engaged in them, like Long Beach Financial, owned by Washington Mutual.

“Long Beach Financial,” wrote Lewis, “was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, Calif., a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.”

Lewis continued: Eisman knew that subprime lenders could be disreputable. “What he underestimated was the total unabashed complicity of the upper class of American capitalism... ‘We always asked the same question,’ says Eisman. ‘Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.’ He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S.& P. couldn’t say; its model for home prices had no ability to accept a negative number. ‘They were just assuming home prices would keep going up,’ Eisman says.”

That’s how we got here — a near total breakdown of responsibility at every link in our financial chain, and now we either bail out the people who brought us here or risk a total systemic crash. These are the wages of our sins. I used to say our kids will pay dearly for this. But actually, it’s our problem. For the next few years we’re all going to be working harder for less money and fewer government services — if we’re lucky.

Economy Faces ‘Significant Weakness,’ Fed Says
November 20, 2008

WASHINGTON (AP) — The Federal Reserve on Wednesday sharply lowered its projection for economic activity this year and next, and signaled that additional interest rate reductions may be needed to help combat the worst financial crisis in more than a half-century.

With the economy forecast to lose traction, or even jolt into reverse, unemployment will move higher, the Fed predicted.

Facing the likelihood of “significant weakness” in the economy, some Fed officials suggested “additional policy easing could well be appropriate at future meetings,” according to documents from the Fed’s most recent deliberations on interest rate policy at the end of October.

At that Oct. 29 session, the Fed lowered rates to 1 percent, a level seen only once before in the last half-century. Many economists predict the Fed will lower rates again at its last meeting of the year on Dec. 16, to help brace the sinking economy.

Even while hinting that another rate reduction could be forthcoming, Fed officials worried that the effectiveness of previous rate cuts “may have been diminished by the financial dislocations, suggesting that further policy action might have limited efficacy in promoting a recovery in economic growth,” the documents said.

To help ease financial turmoil and spur banks to lend money more freely again to customers, the Fed has taken a series of other unprecedented steps, including offering short-term cash loans and buying mounds of short-term debt that companies rely on to pay day-to-day expenses like payrolls and supplies.

Under its new economic forecast, the Fed now believes gross domestic product could be flat or grow by 0.3 percent this year. G.D.P. could actually shrink or expand by 1.1 percent next year. Both sets of projections are lower than the Fed’s forecasts delivered to Congress in July.

G.D.P. is the value of all goods and services produced within the United States and is the best measure of the country’s economic health.

These forecasts are based on what the Fed calls its “central tendencies,” which exclude the highest three forecasts and the lowest three forecasts made by Fed officials. The Fed also gives a range of all forecasts that showed some Fed officials projecting a 0.3 percent dip this year, followed by a deeper 1 percent contraction next year.

The prospects for weaker economic activity will push up unemployment. The Fed projected that the national unemployment rate will rise to 6.3 percent to 6.5 percent this year. The rate in October was 6.5 percent, and last year the rate averaged 4.6 percent.

Next year, the Fed expects the jobless rate to climb to be 7.1 percent to 7.6 percent — also higher than its summer forecast.

Inflation, meanwhile, is expected to be lower this year and next compared with the Fed’s previous forecast. A global economic slowdown is sapping demand for energy, food and other commodities, driving down prices and reducing inflation risks.

Lawmakers Told More Is Needed to Aid Economy
November 19, 2008

Top financial officials warned Congress on Tuesday that the economy continued to need urgent attention, with the credit markets remaining tight, millions of homeowners sliding toward foreclosure and the government’s relief payments unlikely to flow into the markets for a few more months.

Ben S. Bernanke, chairman of the Federal Reserve, described signs of only modest improvement in the credit markets, warning that “overall, credit conditions are still far from normal, with risk spreads remaining very elevated.”

And, in a statement prepared for a hearing Tuesday morning before the House Committee on Financial Services, he strongly urged banks to improve the flow of loans to their most creditworthy borrowers.

“There are some signs that credit markets, while still quite strained, are improving,” Mr. Bernanke said. He pointed to some technical improvements: banks were charging one another less for short-term lending; money market mutual funds and the commercial paper market were stabilizing.

But now that banks’ access to capital had improved, he said, they must ease their grip on lending. “It is imperative that all banking organizations and their regulators work together to ensure that the needs of creditworthy borrowers are met in a manner consistent with safety and soundness,” Mr. Bernanke said.

At the same hearing, Sheila C. Bair, chairman of the Federal Deposit Insurance Corporation, said she planned to continue her campaign to get relief into the hands of troubled homeowners.

She said a program that her agency had proposed to the Treasury Department would modify mortgages and ease repayment terms, which could prevent “as many as 1.5 million avoidable foreclosures by the end of 2009.”

But, in her statement, she also projected a gloomy picture for foreclosures, saying that over the next two years, four million to five million mortgage loans will enter foreclosure if nothing is done.

That means that even with the approach she advocates, delinquencies would continue at about the same rate as in the last year or two.

Appearing along with Ms. Bair and Mr. Bernanke, Treasury Secretary Henry M. Paulson Jr. said in his prepared testimony that the Bush administration decided this week to defer reaching much more deeply into the $700 billion in bailout funds approved by Congress in October until the next administration takes over Jan. 20.

“If we have learned anything throughout this year,” Mr. Paulson said, “we have learned that this financial crisis is unpredictable and difficult to counteract.”

Having spent most of the money provided by Congress, which split the October package into two equal parts and told the Treasury to come back for renewed permission to spend the second half, Mr. Paulson said it would be “only prudent” to reserve the remainder until next year, in the interest of maintaining “not only our flexibility but that of the next administration.

Some lawmakers have suggested that some money might be diverted to the auto industry, an idea that Mr. Paulson has not supported.

Bailout to Nowhere
Published: November 14, 2008
Not so long ago, corporate giants with names like PanAm, ITT and Montgomery Ward roamed the earth. They faded and were replaced by new companies with names like Microsoft, Southwest Airlines and Target. The U.S. became famous for this pattern of decay and new growth. Over time, American government built a bigger safety net so workers could survive the vicissitudes of this creative destruction — with unemployment insurance and soon, one hopes, health care security. But the government has generally not interfered in the dynamic process itself, which is the source of the country’s prosperity.

But this, apparently, is about to change. Democrats from Barack Obama to Nancy Pelosi want to grant immortality to General Motors, Chrysler and Ford. They have decided to follow an earlier $25 billion loan with a $50 billion bailout, which would inevitably be followed by more billions later, because if these companies are not permitted to go bankrupt now, they never will be.

This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends.

Granting immortality to Detroit’s Big Three does not enhance creative destruction. It retards it. It crosses a line, a bright line. It is not about saving a system; there will still be cars made and sold in America. It is about saving politically powerful corporations. A Detroit bailout would set a precedent for every single politically connected corporation in America. There already is a long line of lobbyists bidding for federal money. If Detroit gets money, then everyone would have a case. After all, are the employees of Circuit City or the newspaper industry inferior to the employees of Chrysler?

It is all a reminder that the biggest threat to a healthy economy is not the socialists of campaign lore. It’s C.E.O.’s. It’s politically powerful crony capitalists who use their influence to create a stagnant corporate welfare state...full article here.

U.S. jobless rate soars again

Article Last Updated: 11/07/2008 08:48:38 AM EST

WASHINGTON - The nation's unemployment rate bolted to a 14-year high of 6.5 percent in October as another 240,000 jobs were cut, the government reported this morning. It was stark proof the economy is almost certainly in a recession.

The new snapshot, released by the Labor Department, shows the crucial jobs market deteriorating at an alarmingly rapid pace.

The jobless rate zoomed to 6.5 percent in October from 6.1 percent in September, matching the unemployment rate in March 1994. Employers have cut jobs each month this year.

Unemployment has now surpassed the high seen after the last recession in 2001. The jobless rate peaked at 6.3 percent in June 2003.

Employers got rid of 240,000 jobs in October, marking the 10th straight month of payroll reductions.

Job losses in August and September turned out to be much deeper. Employers cut 127,000 positions in August, compared with 73,000 previously reported. A whopping 284,000 jobs were axed last month, compared with the 159,000 jobs first reported.

So far this year, a staggering 1.2 million jobs have disappeared.

But Have We Learned Enough?

Published: October 25, 2008

LIKE most economists, those at the International Monetary Fund are lowering their growth forecasts. The financial turmoil gripping Wall Street will probably spill over onto every other street in America. Most likely, current job losses are only the tip of an ugly iceberg.

But when Olivier Blanchard, the I.M.F.’s chief economist, was asked about the possibility of the world sinking into another Great Depression, he reassuringly replied that the chance was “nearly nil.” He added, “We’ve learned a few things in 80 years.”

Yes, we have. But have we learned what caused the Depression of the 1930s? Most important, have we learned enough to avoid doing the same thing again?

The Depression began, to a large extent, as a garden-variety downturn. The 1920s were a boom decade, and as it came to a close the Federal Reserve tried to rein in what might have been called the irrational exuberance of the era.

In 1928, the Fed maneuvered to drive up interest rates. So interest-sensitive sectors like construction slowed.

But things took a bad turn after the crash of October 1929. Lower stock prices made households poorer and discouraged consumer spending, which then made up three-quarters of the economy. (Today it’s about two-thirds.)

According to the economic historian Christina D. Romer, a professor at the University of California, Berkeley, the great volatility of stock prices at the time also increased consumers’ feelings of uncertainty, inducing them to put off purchases until the uncertainty was resolved. Spending on consumer durable goods like autos dropped precipitously in 1930.  Next came a series of bank panics. From 1930 to 1933, more than 9,000 banks were shuttered, imposing losses on depositors and shareholders of about $2.5 billion. As a share of the economy, that would be the equivalent of $340 billion today.

The banking panics put downward pressure on economic activity in two ways. First, they put fear into the hearts of depositors. Many people concluded that cash in their mattresses was wiser than accounts at local banks.  As they withdrew their funds, the banking system’s normal lending and money creation went into reverse. The money supply collapsed, resulting in a 24 percent drop in the consumer price index from 1929 to 1933. This deflation pushed up the real burden of households’ debts.

Second, the disappearance of so many banks made credit hard to come by. Small businesses often rely on established relationships with local bankers when they need loans, either to tide them over in tough times or for business expansion. With so many of those relationships interrupted at the same time, the economy’s ability to channel financial resources toward their best use was seriously impaired.  Together, these forces proved cataclysmic. Unemployment, which had been 3 percent in 1929, rose to 25 percent in 1933. Even during the worst recession since then, in 1982, the United States economy did not experience half that level of unemployment.

Policy makers in the 1930s responded vigorously as the situation deteriorated. But like a doctor facing a patient with a new disease and strange symptoms, they often acted in ways that, with the benefit of hindsight, appeared counterproductive.  Probably the most important source of recovery after 1933 was monetary expansion, eased by President Franklin D. Roosevelt’s decision to abandon the gold standard and devalue the dollar. From 1933 to 1937, the money supply rose, stopping the deflation. Production in the economy grew about 10 percent a year, three times its normal rate.

Less successful were various market interventions. According to a study by the economists Harold L. Cole and Lee E. Ohanian, both of the University of California, Los Angeles, and the Federal Reserve Bank of Minneapolis, President Roosevelt made things worse when he encouraged the formation of cartels through the National Industrial Recovery Act of 1933. Similarly, they argue, the National Labor Relations Act of 1935 strengthened organized labor but weakened the recovery by impeding market forces.

LOOKING back at these events, it’s hard to avoid seeing parallels to the current situation. Today, as then, uncertainty has consumers spooked. By some measures, stock market volatility in recent days has reached levels not seen since the 1930s. With volatility spiking, the University of Michigan’s survey reading of consumer sentiment has been plunging.

Deflation across the economy is not a problem (yet), but deflation in the housing market is the source of many of our present difficulties. With so many homeowners owing more on their mortgages than their houses are worth, default is an unfortunate but often rational choice. Widespread foreclosures, however, only perpetuate the downward spiral of housing prices, further defaults and additional losses at financial institutions.

The Fed and the Treasury Department, intent on avoiding the early policy inaction that let the Depression unfold, have been working hard to keep credit flowing. But the financial situation they face is, arguably, more difficult than that of the 1930s. Then, the problem was largely a crisis of confidence and a shortage of liquidity. Today, the problem may be more a shortage of solvency, which is harder to solve.

What’s next? Perhaps the most troubling study of the 1930s economy was written in 1988 by the economists Kathryn Dominguez, Ray Fair and Matthew Shapiro; it was called “Forecasting the Depression: Harvard Versus Yale.” (Mr. Fair is an economics professor at Yale; Ms. Dominguez and Mr. Shapiro are at the University of Michigan.)

The three researchers show that the leading economists at the time, at competing forecasting services run by Harvard and Yale, were caught completely by surprise by the severity and length of the Great Depression. What’s worse, despite many advances in the tools of economic analysis, modern economists armed with the data from the time would not have forecast much better. In other words, even if another Depression were around the corner, you shouldn’t expect much advance warning from the economics profession.

Let me be clear: Like Mr. Blanchard at the I.M.F., I am not predicting another Great Depression. We have indeed learned a lot over the last 80 years. But you should take that economic forecast, like all others, with more than a single grain of salt.

Stocks fall on belief global recession is at hand 
By TIM PARADIS, AP Business Writer 
Posted on Oct 24, 3:40 PM EDT

NEW YORK (AP) -- Wall Street joined world stock markets in a pullback Friday, with the Dow Jones industrials dropping 175 points and all the major indexes falling more than 2 percent. The growing belief that a punishing economic recession is at hand had investors abandoning stocks.

While the market came off its worst lows of the day, the final hour of trading remains a crucial period, with many inventors trying to square away their positions at the last minutes. In the past few weeks, some of the market's worst volatility has come in the last 30 minutes of the session.

The pullback on Wall Street wasn't as steep as some observers had feared though the pace of selling at times accelerated. Massive declines occurred overseas Friday after another round of grim corporate news stirred fears about global economies. Investors also grew nervous after U.S. stock futures - the bets traders place on where the market will go - fell so sharply that selling halts were imposed.

But the session began and then progressed with more orderly selling than in other drops in the past month, including two that slashed more than 700 from the Dow industrials in a single day. Still, investors' anxiety was clear Friday. The limits on futures and gyrations in everything from gold to the dollar underscored the fear and uncertainty that has gripped markets since the mid-September bankruptcy of investment bank Lehman Brothers Holdings Inc. and the subsequent freeze-up in the world's credit markets.

The urgency to resuscitate lending since then was aimed at avoiding some of the problems that have nonetheless spread around the world. A profit warning Friday from electronics maker Sony sent its shares tumbling in Japan and offered only the latest example that companies are girding for a slowing economy and a pullback among consumers worried about falling home prices and losses on their investments.

And in Germany, Daimler's stock fell sharply after the automaker reported lower third-quarter earnings and abandoned its 2008 profit and revenue forecast. That followed news in the U.S. late Thursday from Microsoft Corp., which issued a weaker-than-expected forecast for its fiscal second quarter, pointing to the economy.

"People have been saying that we're in a recession. This is the realization," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York.

It is clear that many investors are convinced the world economy is headed for a severe downturn even as governments have raced to jump-start credit markets on the hope that a return of more normal lending levels by banks and other financial houses will fan economic activity.

But some say the recent pullbacks have been set off by forced selling, keeping some bargain-seeking traders from entering the market.

"There's nothing new going on," said Scott Bleier, president of market advisory service "This is all about the unwinding of massive leverage."

Bleier attributed the declines to margin calls and investors in hedge funds and mutual funds cashing out. A margin call occurs when investors are forced to sell holdings, like stock, to raise cash at the demands of brokers.

"Market participants' fear is not that the economy is slowing," he said. "The fear is there is an endless supply of things for sale, regardless of price."

Steve Gross, principal at alternative investment and advisory firm Penso Capital Markets, said most large hedge funds have already slashed their positions. Instead, he sees a lack of demand.

"There are no buyers at all," he said.

Fearing more carnage in world equity markets, big hedge funds and other institutional investors have been pulling out their money en masse. Meanwhile, some individual investors who have seen their holdings decimated in recent weeks have been yanking money from the market, even as many market observers say it is wiser to wait out the market's decline.

Jason Weisberg, a New York Stock Exchange trader for Seaport Securities, contends the selling has been overdone.

"Technically we're way oversold," he said. "We have these downdrafts on very light volume. But all that being said, historically speaking this is all unprecedented."

In the final half-hour of trading, the Dow fell 175.78, or 2.02 percent, to 8,515.47 after falling 504 in the early going and trading down more than 400 at times. Still, the blue chips remained above the 8,000 level; at its recent low of Oct. 10, the Dow traded as low as 7,882.51. The Dow hasn't closed below that level since March 31, 2003, when it ended at 7,992.13.

Broader stock indicators also fell. The S&P 500 index declined 18.52, or 2.04 percent, to 889.59, and the Nasdaq composite index fell 33.84, or 2.11 percent, to 1,570.07.

The Russell 2000 index of smaller companies fell 12.97, or 2.65 percent, to 476.95.

Declining issues outpaced advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 1.17 billion shares.

Friday was the 79th anniversary of the day that, according to many market historians, the October 1929 stock market crash began. Selling began on Thursday, Oct. 24, and accelerated the following week on the days that have since become known as Black Monday and Black Tuesday, Oct 28 and 29.

At its lows Friday, the Dow was down 42 percent from its Oct. 9, 2007, record close of 14,164.53, while the S&P 500 was off 46 percent from its peak of a year ago. The Nasdaq was down 48 percent.

"We've moved from credit market concerns to economic concerns and people really don't know what the impact on the economy is going to be, they don't know the full impact. The market abhors uncertainty," said Ben Halliburton, chief investment officer of Tradition Capital Management in Summit, N.J.

Demand for U.S. Treasurys remained high as investors sought safe places to put their money. The three-month bill, regarded as the safest asset around, fell to 0.85 percent from 0.94 percent late Thursday.

There were signs that credit markets continue to thaw but are doing so more slowly amid growing economic fears. The rate on three-month loans in dollars - a key bank-to-bank lending benchmark known as the London Interbank Offered Rate, or Libor - fell to 3.52 percent from 3.54 percent on Thursday.

The rates have fallen steadily for 10 days as confidence in the banking industry has been helped by government rescue measures. However, the improvements were smaller Friday on concerns about the health of the global economy.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.71 from 3.66 percent late Thursday.

Gold futures briefly fell to their lowest level in 21 months Friday as the dollar strengthened and the drop in the world's stock markets led investors to sell commodities to offset massive losses in equities. Gold regained much of what it lost later in the day though prices remain down by about 20 percent since the start of the month.

Ordinarily, gold is seen as a safe-haven investment during market upheavals.

The dollar has risen as a safety holding despite fears about the U.S. economy. Investors appear more worried about the stability of emerging markets. That's hurting the euro, for example, because in Europe Iceland, Hungary, Ukraine and Belarus are all in talks with the International Monetary Fund to discuss possible loans. Investors are pulling money out of countries in Latin America and Asia amid worries about vulnerable countries.

Other commodities declined. Light, sweet crude fell $4.21 to $63.63 on the New York Mercantile Exchange. The sell-off, another sign that investors fear a severe recession, came despite OPEC's announcement that it will cut production by 1.5 million barrels a day in a bid to shore up sagging prices.

The pullback in global markets comes ahead of a planned meeting next week of the Federal Reserve's interest rate committee. Policymakers are scheduled to announced a decision on interest rates on Wednesday.

Investors had been bracing for a rocky start on Wall Street after futures contracts for the Dow and the S&P 500 fell so low they triggered "circuit breakers," which froze selling until the market's 9:30 a.m. EDT open. That slide raised the possibility that these emergency breaks intended to prevent panic selling could be triggered during the regular session - something that hasn't happened since 1997. But the Dow's decline was well short of the 10 percent, or 1,100-point, decline that would be needed to halt trading.

The panicky feeling ahead of the opening bell Friday came after Japan's Nikkei stock average fell a staggering 9.60 percent. In Europe, Germany's benchmark DAX index lost 4.96 percent, France's CAC40 dropped 3.54 percent while Britain's FTSE 100 sank 5 percent after the government said its gross domestic product fell 0.5 percent in the third quarter, putting the country on the brink of recession.

Hong Kong's Hang Seng index fell 8.3 percent. Markets in India, Thailand, Indonesia and the Philippines were also down sharply as investors bailed from emerging markets to cut their exposure to risky assets and meet redemption needs at home. Stocks fell so sharply in Russia that the two main exchanges closed early.

Alan Greenspan and John Snow testify - there are a lot of lines from "Casablanca" that apply here...Bernie Madoff center:  how did he do it?  How about India?

What We Don’t Know Will Hurt Us
February 22, 2009

AND so on the 29th day of his presidency, Barack Obama signed the stimulus bill. But the earth did not move. The Dow Jones fell almost 300 points. G.M. and Chrysler together asked taxpayers for another $21.6 billion and announced another 50,000 layoffs. The latest alleged mini-Madoff, R. Allen Stanford, was accused of an $8 billion fraud with 50,000 victims.

“I don’t want to pretend that today marks the end of our economic problems,” the president said on Tuesday at the signing ceremony in Denver. He added, hopefully: “But today does mark the beginning of the end.”

Does it?

No one knows, of course, but a bigger question may be whether we really want to know. One of the most persistent cultural tics of the early 21st century is Americans’ reluctance to absorb, let alone prepare for, bad news. We are plugged into more information sources than anyone could have imagined even 15 years ago. The cruel ambush of 9/11 supposedly “changed everything,” slapping us back to reality. Yet we are constantly shocked, shocked by the foreseeable. Obama’s toughest political problem may not be coping with the increasingly marginalized G.O.P. but with an America-in-denial that must hear warning signs repeatedly, for months and sometimes years, before believing the wolf is actually at the door.

This phenomenon could be seen in two TV exposés of the mortgage crisis broadcast on the eve of the stimulus signing. On Sunday, “60 Minutes” focused on the tawdry lending practices of Golden West Financial, built by Herb and Marion Sandler. On Monday, the CNBC documentary “House of Cards” served up another tranche of the subprime culture, typified by the now defunct company Quick Loan Funding and its huckster-in-chief, Daniel Sadek. Both reports were superbly done, but both could have been reruns.

The Sandlers and Sadek have been recurrently whipped at length in print and on television, as far back as 2007 in Sadek’s case (by Bloomberg); the Sandlers were even vilified in a “Saturday Night Live” sketch last October. But still the larger message may not be entirely sinking in. “House of Cards” was littered with come-on commercials, including one hawking “risk-free” foreign-currency trading — yet another variation on Quick Loan Funding, promising credulous Americans something for nothing.

This cultural pattern of denial is hardly limited to the economic crisis. Anyone with eyes could have seen that Sammy Sosa and Mark McGwire resembled Macy’s parade balloons in their 1998 home-run derby, but it took years for many fans (not to mention Major League Baseball) to accept the sorry truth. It wasn’t until the Joseph Wilson-Valerie Plame saga caught fire in summer 2003, months after “Mission Accomplished,” that we began to confront the reality that we had gone to war in Iraq over imaginary W.M.D. Weapons inspectors and even some journalists (especially at Knight-Ridder newspapers) had been telling us exactly that for almost a year.

The writer Mark Danner, who early on chronicled the Bush administration’s practice of torture for The New York Review of Books, reminded me last week that that story first began to emerge in December 2002. That’s when The Washington Post reported on the “stress and duress” tactics used to interrogate terrorism suspects. But while similar reports followed, the notion that torture was official American policy didn’t start to sink in until after the Abu Ghraib photos emerged in April 2004. Torture wasn’t routinely called “torture” in Beltway debate until late 2005, when John McCain began to press for legislation banning it.

Steroids, torture, lies from the White House, civil war in Iraq, even recession: that’s just a partial glossary of the bad-news vocabulary that some of the country, sometimes in tandem with a passive news media, resisted for months on end before bowing to the obvious or the inevitable. “The needle,” as Danner put it, gets “stuck in the groove.”

For all the gloomy headlines we’ve absorbed since the fall, we still can’t quite accept the full depth of our economic abyss either. Nicole Gelinas, a financial analyst at the conservative Manhattan Institute, sees denial at play over a wide swath of America, reaching from the loftiest economic strata of Wall Street to the foreclosure-decimated boom developments in the Sun Belt.

When we spoke last week, she talked of would-be bankers who, upon graduating, plan “to travel in Asia and teach English for a year” and then pick up where they left off. Such graduates are dreaming, Gelinas says, because the over-the-top Wall Street money culture of the credit bubble isn’t coming back for a very long time, if ever. As she observes, it took decades after the Great Depression — until the 1980s — for Wall Street to fully reclaim its old swagger. Not until then was there “a new group of people without massive psychological scarring” from the 1929 crash.

In states like Nevada, Florida and Arizona, Gelinas sees “huge neighborhoods that will become ghettos” as half their populations lose or abandon their homes, with an attendant collapse of public services and social order. “It will be like after Katrina,” she says, “but it’s no longer just the Lower Ninth Ward’s problem.” Writing in the current issue of The Atlantic, the urban theorist Richard Florida suggests we could be seeing “the end of a whole way of life.” The link between the American dream and home ownership, fostered by years of bipartisan public policy, may be irreparably broken.

Pity our new president. As he rolls out one recovery package after another, he can’t know for sure what will work. If he tells the whole story of what might be around the corner, he risks instilling fear itself among Americans who are already panicked. (Half the country, according to a new Associated Press poll, now fears unemployment.) But if the president airbrushes the picture too much, the country could be as angry about ensuing calamities as it was when the Bush administration’s repeated assertion of “success” in Iraq proved a sham. Managing America’s future shock is a task that will call for every last ounce of Obama’s brains, temperament and oratorical gifts.

The difficulty of walking this fine line can be seen in the drama surrounding the latest forbidden word to creep around the shadows for months before finally leaping into the open: nationalization. Until he started hedging a little last weekend, the president has pointedly said that nationalizing banks, while fine for Sweden, wouldn’t do in America, with its “different” (i.e., non-socialistic) culture and traditions. But the word nationalization, once mostly whispered by liberal economists, is now even being tossed around by Lindsey Graham and Alan Greenspan. It’s a clear indication that no one has a better idea.

The Obama White House may come up with euphemisms for nationalization (temporary receivership, anyone?). But whatever it’s called, what will it mean? The reason why the White House has been punting on the new installment of the bank rescue is not that the much-maligned Treasury secretary, Timothy Geithner, is incapable of getting his act together. What’s slowing the works are the huge political questions at stake, many of them with consequences potentially as toxic as the banks’ assets.

Will Obama concede aloud that some of our “too big to fail” banks have, in essence, already failed? If so, what will he do about it? What will it cost? And, most important, who will pay? No one knows the sum of the American banks’ losses, but the economist Nouriel Roubini, who has gotten much right about this crash, puts it at $1.8 trillion. That doesn’t count any defaults still to come on what had been considered “good” mortgages and myriad other debt, whether from auto loans or credit cards.

Americans are right to wonder why there has been scant punishment for the management and boards of bailed-out banks that recklessly sliced and diced all this debt into worthless gambling chips. They are also right to wonder why there is still little transparency in how TARP funds have been spent by these teetering institutions. If a CNBC commentator can stir up a populist dust storm by ranting that Obama’s new mortgage program (priced at $75 billion to $275 billion) is “promoting bad behavior,” imagine the tornado that would greet an even bigger bank bailout on top of the $700 billion already down the TARP drain.

Nationalization would likely mean wiping out the big banks’ managements and shareholders. It’s because that reckoning has mostly been avoided so far that those bankers may be the Americans in the greatest denial of all. Wall Street’s last barons still seem to believe that they can hang on to their old culture by scuttling corporate jets, rejecting bonuses or sounding contrite in public. Ask the former Citigroup wise man Robert Rubin how that strategy worked out.

We are now waiting to learn if Obama’s economic team, much of it drawn from the Wonderful World of Citi and Goldman Sachs, will have the will to make its own former cohort face the truth. But at a certain point, as in every other turn of our culture of denial, outside events will force the recognition of harsh realities. Nationalization, unmentionable only yesterday, has entered common usage not least because an even scarier word — depression — is next on America’s list to avoid.

Greenspan Says He Was Mystified by Subprime Market
NYTIMES "Dealbook"
February 12, 2009, 7:50 am

Alan Greenspan, the former chairman of the Federal Reserve, told CNBC in a documentary to be shown Thursday night that he did not fully understand the scope of the subprime mortgage market until well into 2005 and could not make sense of the complex derivative products created out of mortgages.

“So everybody in retrospect now knows that that boom was developing under the markets for quite a period of time, but nobody knew it,” Mr. Greenspan told CNBC’s David Faber. “In 2004, there was just no credible information on that. It wasn’t until we got well into 2005 that the first inklings that that was developing was emerging,” he said.

Mr. Greenspan’s critics have argued that the former Fed chairman expanded the money supply well beyond the growth in the nation’s gross domestic product by keeping interest rates too low for too long.  The Fed’s “easy money” policy created an excess of cash that inflated equity and asset prices, leading to both the technology bubble of the late 1990s and the housing bubble in this decade.

While Mr. Greenspan acknowledges that he could have done something to avert the housing crisis, he contends his hands were tied.

“If we tried to suppress the expansion of the subprime market, do you think that would have gone over very well with the Congress?” Mr. Greenspan said. “When it looked as though we were dealing with a major increase in home ownership, which is of unquestioned value to this society — would we have been able to do that? I doubt it.”

Mr. Greenspan said that if he had taken steps to prevent the crisis, the outcome would have been painful.

“We could have basically clamped down on the American economy, generated a 10 percent unemployment rate,” he said. “And I will guarantee we would not have had a housing boom, a stock market boom or indeed a particularly good economy either.”

Mr. Greenspan also lays the blame on the ratings agencies and the people that trusted their judgment for the proliferation of the mortgage derivatives that were a major part of the current financial crisis.

“What we have created in this world is an aura around the credit rating agencies about certification from them is the Good Housekeeping Seal of Approval, ” Mr. Greenspan said. “I will tell you the record of a lot of the forecasters of ratings have not been distinguished. They never were.”

The interview is part of a two-hour documentary, “House of Cards,” to be shown on CNBC on Thursday at 8 p.m. and 12 a.m. Eastern time.

–Cyrus Sanati

In India, Crisis Pairs With Fraud

January 10, 2009

“It is with deep regret, and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice.”

Thus begins, in calm but painful fashion, one of the most extraordinary corporate confessions ever written, a letter sent Wednesday from B. Ramalinga Raju, the founder and chairman of Satyam Computer Services, to the company’s board. Among the startling facts Mr. Raju proceeds to disclose is that most of the cash on the company’s balance sheet does not exist, that Satyam’s revenue has been overstated for years, and that its real profit for the quarter that ended Sept. 30 was only $12.5 million — rather than the $136 million the company had reported to investors. Mr. Raju, in other words, had been cooking the books.

Satyam is a company I had been reading a lot about in the business papers during my recent trip to India. Mr. Raju, 54, founded the company 21 years ago, and turned it into what appeared to be one of India’s glittering technology success stories, a consulting and outsourcing powerhouse that rivaled the likes of Infosys and WiPro, with 53,000 employees, and 185 Fortune 500 companies among its roster of clients. Mr. Raju himself was a much-admired chief executive who won awards for entrepreneurship and established philanthropies to help Indians who lived in rural poverty.

When I was in India, however, Mr. Raju was grabbing headlines for a less exalted reason. He had tried to push through a deal to buy two companies in which he held ownership interests — Maytas Infra and Maytas Properties, which were run by his sons. (Maytas is Satyam spelled backward.) Satyam’s directors had rubber-stamped the deal — but to the surprise of the Indian business community, accustomed to seeing such inside deals go through, Satyam’s shareholders revolted.

Institutional investors denounced Mr. Raju for seeking to buy infrastructure and real estate companies that were far afield from technology outsourcing. Indian mutual fund managers complained anonymously in the business pages that Mr. Raju was using shareholders’ money to give himself and his sons a rich and undeserved payday. The board was raked over the coals in the press for approving the deal. The stock was pummeled.

And lo and behold, the investor backlash succeeded: Mr. Raju beat a hasty retreat and withdrew the offer to buy the two companies. Even after the deal fell through, it remained big news, and everyone I interviewed had an opinion about it. Some thought it gave India a black eye, because it exposed the country’s lackadaisical attitude toward corporate governance. Others thought it would ultimately be good for India, because it showed all Indian investors that they did not have to roll over every time a corporate executive tried to pull a fast one. No one, however, realized the truth. As Mr. Raju put it in his letter, “The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones.” When the deal fell through, the jig was up.

And thus came the final bit of proof — as if one was needed — that the credit crisis had hit India. Here in the United States, the extraordinary Ponzi scheme that Bernard L. Madoff is accused of running was exposed when the credit crisis caused his investors to seek wholesale redemptions — money he did not have. The credit crisis also helped bring Mr. Raju’s fraud to light. He had been keeping the company afloat by borrowing against his Satyam shares. But when the Indian stock market crashed last fall — and Mr. Raju could not meet the margin calls — his lenders began selling his shares. He made his confession because he no longer had any means to funnel money into the company. Any halfway decent financial crisis has to have its signature fraud, and thanks to Mr. Raju, India now has one.

Every bubble develops its own mythology — its variation of that old mantra, “It’s different this time.” In the United States, during the housing bubble, the mythology was that we could build an economy out of endless debt, and no harm would come because the foundation upon which that debt was built — the price of housing — was indestructible.

India had a different mythology. It was called “decoupling.” The Indian economy, so the theory went, had become decoupled from the American economy, so that even if our economy ran into trouble, theirs would continue humming along. Indeed, India might even find itself in a position to take advantage of our troubles, by selling us more outsourcing services that would lower corporations’ overhead costs.

In the United States, we tend to think of Indian business as one giant outsourcing operation. But Indian economists are quick to point out that outsourcing is a much smaller part of the economy than we in the West realize: less than 10 percent. In fact, unlike China, which had built its economy around low-cost exports — and was thus obviously vulnerable to an economic downturn in the West — only 22 percent of India’s overall economy is export-related. India has been growing at a rate of 9 to 10 percent a year not so much because of its exports but because it has a thriving domestic economy, with a newly emergent middle class.

As India took comfort in the decoupling theory, it became easy to overlook the signs that a bubble was forming. The stock market was rising rapidly, and those new members of the middle class were jumping in with both feet.

The mutual fund industry went from $5 billion in assets to around $40 billion almost overnight. The price of real estate was skyrocketing. Companies were growing at a breakneck pace of 50 to 60 percent a year.

Foreign investment was pouring into the country. And some Indian companies were piling up debt — like the Tata Group, which borrowed money last year to make its triumphant purchase of Jaguar and Land Rover for $2.3 billion. The deal was struck around the time Bear Stearns was collapsing — proof, surely, that decoupling was real.

Perhaps if we had just lived through a stock market bubble, rather than a credit bubble, the decoupling theory might have held up. Stock market bubbles tend to be self-contained. But as we have learned, credit is different. When a credit bubble bursts it becomes a contagion that jumps oceans and national borders, spreading from bank to bank, institution to institution, even person to person, until the entire financial system is bereft of confidence. No country, it turns out, is immune, no matter how robust its domestic economy.

Starting early last year, the Indian stock market began a slow and steady decline. Foreign investors started pulling out, as they sold off liquid Indian securities to raise cash for their own needs. For the same reason, all that foreign capital that had flowed into the country suddenly began to dry up. Banks, seeing the liquidity crisis spread across the Western world, started preserving their own capital — and thus loans became increasingly difficult to come by. Sure enough, the Indian domestic economy slowed down.

Then came the Lehman Brothers bankruptcy — and like everywhere in the world, for the next six weeks, business in India came to a near standstill.

“When liquidity dries up, it doesn’t matter where you are,” said Jamshid Pandole, a managing partner of Inspire Capital Management, a hedge fund firm that invests in the Indian market. Icici Bank, the country’s largest privately held bank, actually had a short-lived run on the bank when it disclosed that it had a small amount of Lehman Brothers bonds in its portfolio.

And now? India’s stock market is down 60 percent from its highs. The country is woefully short of the capital it needs to meet its growth expectations, which have been reduced to 5 percent this year, instead of the 9 percent that had become routine.

“It’s still growth,” said Neeraj Bhargava, the chief executive of WNS, a rapidly expanding outsourcing company based in Mumbai. “But for us, 5 percent practically feels like a recession.”

In New Delhi, a huge airport construction project is stalled because the developer cannot get the funds he needs to finish it. Tata, which is struggling under its debt load, has asked the British government for a £1 billion loan to tide over troubled Jaguar. The stock of all the big technology consulting companies — most of whom had Wall Street firms as clients — has been hammered, and their profits are dropping, as a result of the credit crisis.

And decoupling? Nobody believes in it anymore. “Decoupling is a myth,” said Anand G. Mahindra, vice chairman and managing director of Mahindra & Mahindra, a conglomerate that is one of the country’s biggest companies. He should know. Mahindra & Mahindra is perhaps best known in India as a manufacturer of cars and trucks, mainly for the domestic economy. Last month, the company cut production and temporarily shut some plants because demand for vehicles had fallen off significantly.

And, of course, there is Mr. Raju and the Satyam fraud. In many ways, the Satyam scandal is having the same effect in India that the Madoff scandal is having here. Mr. Madoff was an important, highly respected figure on Wall Street, just as Mr. Raju was an important, highly respected figure in the Indian business world.

They were the last people anyone suspected of committing huge fraud. To have it then turn out that the two frauds went on for years, under the noses of regulators and accountants, made them all the more shocking. They will both wind up causing immense pain and suffering. Many people who trusted Mr. Madoff have lost everything, while it seems a sure bet that many of the 53,000 Satyam employees will wind up jobless.

Of course, it is also true that thanks to Mr. Madoff, the hedge fund industry will never be the same. Regulation that the country has long needed, but which the fund industry fought off, will surely be enacted in the next year or so, allowing regulators to more closely track hedge funds, to prevent a recurrence.

And it seems pretty likely that the Satyam scandal will have a similar effect in India. In their aftermath, financial crises generally lead to new, tougher rules that protect investors, and sniff out fraud. If that turns out to be one final way India is coupled with America, it will not be such a bad thing.

Talking Business: How India Avoided a Crisis
December 20, 2008


“What has taken a number of us by surprise is the lack of adequate supervision and regulation,” Rana Kapoor was saying the other day. “This was despite the fact that Enron had happened and you passed Sarbanes-Oxley. We don’t understand it. Maybe it’s because we sit in a more controlled economy but ....” He smiled sweetly as his voice trailed off, as if to take the sting off his comments. But they stung nonetheless.

Mr. Kapoor is an Indian banker, a former longtime Bank of America executive with a Rutgers M.B.A. who, along with his business partner and brother-in-law, Ashok Kapur, was granted government permission four years ago to start a private bank, which they called Yes Bank. In the United States, Yes Bank is the kind of name a go-go banker might give to, say, a high-flying mortgage lender in the middle of a bubble. (You can even imagine the slogan: “Yes is part of our name!”) But Yes Bank is not exactly the Washington Mutual of India. One news release it hands out to reporters who come calling is an excerpt from a 2007 survey by The Financial Express: “#1 on Credit Quality amongst 56 Banks in India,” reads the headline.

I arrived in Mumbai three weeks after the terrorist attacks that killed 200 people — including, tragically, Yes Bank’s co-founder Mr. Kapur, who had served as the company’s nonexecutive chairman and was gunned down while having dinner at the Oberoi Hotel. (His wife and two dinner companions miraculously escaped.)

My hope in traveling to Mumbai was to learn about the current state of Indian business in the wake of both the credit crisis and the attacks. But in my first few days in this grand, sprawling, chaotic city, what I mainly heard, especially talking to bankers, was about America, not India. How could we have brought so much trouble on ourselves, and the rest of the world, by acting in such an obviously foolhardy manner? Didn’t we understand that you can’t lend money to people who lack the means to pay it back? The questions were asked with a sense of bewilderment — and an occasional hint of scorn. Like most Americans, I didn’t have any good answers. It was a bubble, I would respond with a sheepish shrug, as if that were an adequate explanation. It isn’t, of course.

“In India, we never had anything close to the subprime loan,” said Chandra Kochhar, the chief financial officer of India’s largest private bank, Icici. (A few days after I spoke to her, Ms. Kochhar was named the bank’s new chief executive, in a move that had long been anticipated.) “All lending to individuals is based on their income. That is a big difference between your banking system and ours.” She continued: “Indian banks are not levered like American banks. Capital ratios are 12 and 13 percent, instead of 7 or 8 percent. All those exotic structures like C.D.O. and securitizations are a very tiny part of our banking system. So a lot of the temptations didn’t exist.”

And when I went to see Deepak Parekh, the chief executive of HDFC, which was founded in 1977 as the country’s first specialized mortgage bank, practically the first words out of his mouth were these: “We don’t do interest-only or subprime loans. When the bubble was going on, we did not change any of our policies. We did not change any of our systems. We did not change our thought process. We never gave more money to a borrower because the value of the house had gone up. Citibank has a few home equity loans, but most banks in India don’t make those kinds of loans. Our nonperforming loans are less than 1 percent.”

Yet two years ago, the Indian real estate market — commercial and residential alike — was every bit as frothy as the American market. High-rises were being slapped up on spec. Housing developments were sprouting up everywhere. And there was plenty of money flowing into India, mainly from private equity and hedge funds, to fuel the commercial real estate bubble in particular. Goldman Sachs, Carlyle, Blackstone, Citibank — they were all here, throwing money at developers. So why did the Indian banks stay on the sidelines and avoid most of the pain that has been suffered by the big American banks?

Part of the reason is cultural. Indians are simply not as comfortable with credit as Americans. “A lot of Indians, when you push them, will say that if you spend more than you earn you will get in trouble,” an Indian consultant told me. “Americans spent more than they earned.”

Mr. Parekh said, “Savings are important. Joint families exist. When one son moves out, the family helps them. So you don’t borrow so much from the bank.” Even mortgage loans tend to have down payments in India that are a third of the purchase price, a far cry from the United States, where 20 percent is the new norm. (Let’s not even think about what they used to be.)

But there was also another factor, perhaps the most important of all. India had a bank regulator who was the anti-Greenspan. His name was Dr. V. Y. Reddy, and he was the governor of the Reserve Bank of India. Seventy percent of the banking system in India is nationalized, so a strong regulator is critical, since any banking scandal amounts to a national political scandal as well. And in the irascible Mr. Reddy, who took office in 2003 and stepped down this past September, it had exactly the right man in the right job at the right time.

“He basically believed that if bankers were given the opportunity to sin, they would sin,” said one banker who asked not to be named because, well, there’s not much percentage in getting on the wrong side of the Reserve Bank of India. For all the bankers’ talk about their higher lending standards, the truth is that Mr. Reddy made them even more stringent during the bubble.

Unlike Alan Greenspan, who didn’t believe it was his job to even point out bubbles, much less try to deflate them, Mr. Reddy saw his job as making sure Indian banks did not get too caught up in the bubble mentality. About two years ago, he started sensing that real estate, in particular, had entered bubble territory. One of the first moves he made was to ban the use of bank loans for the purchase of raw land, which was skyrocketing. Only when the developer was about to commence building could the bank get involved — and then only to make construction loans. (Guess who wound up financing the land purchases? United States private equity and hedge funds, of course!)

Then, as securitizations and derivatives gained increasing prominence in the world’s financial system, the Reserve Bank of India sharply curtailed their use in the country. When Mr. Reddy saw American banks setting up off-balance-sheet vehicles to hide debt, he essentially banned them in India. As a result, banks in India wound up holding onto the loans they made to customers. On the one hand, this meant they made fewer loans than their American counterparts because they couldn’t sell off the loans to Wall Street in securitizations. On the other hand, it meant they still had the incentive — as American banks did not — to see those loans paid back.

Seeing inflation on the horizon, Mr. Reddy pushed interest rates up to more than 20 percent, which of course dampened the housing frenzy. He increased risk weightings on commercial buildings and shopping mall construction, doubling the amount of capital banks were required to hold in reserve in case things went awry. He made banks put aside extra capital for every loan they made. In effect, Mr. Reddy was creating liquidity even before there was a global liquidity crisis.

Did India’s bankers stand up to applaud Mr. Reddy as he was making these moves? Of course not. They were naturally furious, just as American bankers would have been if Mr. Greenspan had been more active. Their regulator was holding them back, constraining their growth! Mr. Parekh told me that while he had been saying for some time that Indian real estate was in bubble territory, he was still unhappy with the rules imposed by Mr. Reddy. “We were critical of the central bank,” he said. “We thought these were harsh measures.”

“For a while we were wondering if we were missing out on something,” said Ms. Kochhar of Icici. Banks in the United States seemed to have come up with some magical new formula for making money: make loans that required no down payment and little in the way of verification — and post instant, short-term, profits.

As Luis Miranda, who runs a private equity firm devoted to developing India’s infrastructure, put it: “We kept wondering if they had figured out something that we were too dense to figure out. It looked like they were smart and we were stupid.” Instead, India was the smart one, and we were the stupid ones.

Ms. Kochhar said that the underlying risks of having “a majority of loans not owned by the people who originated them” was not apparent during the bubble. Now that those risks have been made painfully clear, every banker in India realizes that Mr. Reddy did the right thing by limiting securitizations. “At times like this, you tend to appreciate what he did more than we did at the time,” said Mr. Kapoor. “He saved us,” added Mr. Parekh.

As the credit crisis has spread these past months, no Indian bank has come close to failing the way so many United States and European financial institutions have. None have required the kind of emergency injections of capital that Western banks have needed. None have had the huge write-downs that were par for the course in the West. As the bubble has burst, which lenders have taken the hit? Why, the private equity and hedge fund lenders who had been so eager to finance land development. Us, in others words, rather than them. Why is that not a surprise?

When I asked Mr. Kapoor for his take on what had happened in the United States, he replied: “We recognize it as a problem of plenty. It was perpetuated by greedy bankers, whether investment bankers or commercial bankers. The greed to make money is the impression it has made here. Anytime they wanted a loan, people just dipped into their home A.T.M. It was like money was on call.”

So it was. And our regulators, unlike theirs, just stood by and let it happen. The next time we’re moving into bubble territory, perhaps we can take a page from Mr. Reddy’s book — sometimes it’s better to apply the brakes too early than too late. Or, as was the case with Mr. Greenspan, not at all.

None of this is to say that the global credit crisis hasn’t affected India. It certainly has. I’ll be back after the holidays with more columns from India, including how Sept. 15 — the day Lehman Brothers defaulted — changed everything, even here, on the other side of the world.

Madoff Surrounded by Mob of Cameras After Court
Filed at 8:21 a.m. ET

December 18, 2008

NEW YORK (AP) -- Free on $10 million bond during an investigation into an alleged $50 billion investment fraud, Bernard Madoff had to push his way through a swarm of media to reach his posh Manhattan apartment, where he is under a nighttime curfew.

He must be at the Upper East Side residence from 7 p.m to 9 a.m. and wear an ankle-bracelet to monitor his movements. His wife was ordered to surrender her passport.

Cameras awaited Madoff as he walked out of the courthouse Wednesday toward his black SUV. Minutes later, a smirking Madoff was swarmed by more cameras as he entered his apartment building, with the scrum at one point turning into a shoving match between Madoff and a journalist.

He was then fitted with an electronic-monitoring bracelet, according to his lawyer, Ira Lee Sorkin, and placed under house detention in the $7 million apartment.

Madoff's chaotic commute came on a day when the fallout over the scandal spread through the nation's capital, with the Securities and Exchange Commission taking more heat and Congress jumping into the fray.

The chairman of the House capital markets subcommittee, Rep. Paul Kanjorski, D-Pa., announced an inquiry that will begin early next month into what may be the biggest Ponzi scheme ever and how the government failed to detect it. The SEC is also looking into the relationship between Madoff's niece and a former SEC attorney who reviewed Madoff's business.

Madoff, who has already surrendered his passport, made his appearance in the courthouse to shore up conditions of his bail package. The judge had required him to find two additional co-signers to vouch for Madoff, but he was apparently unable to find anyone as the cloud of scandal swirls around him.

Judge Gabriel W. Gorenstein responded by approving a modification to the bail package. As a result, Madoff had to sign over his Upper East Side apartment and his homes in Palm Beach and the Hamptons.

In Washington, SEC Chairman Christopher Cox again found himself on the defensive after days of withering criticism that his agency did not do enough to root out the fraud.

''We have thus far no evidence of any wrongdoing by any SEC personnel,'' Cox told reporters at SEC headquarters. ''We need to go about this in a thorough, professional way.''

SEC Inspector General David Kotz is looking into the agency's failure to uncover the alleged fraud in Madoff's operation. One area Kotz said he will examine is the relationship between a former SEC attorney, Eric Swanson, and Madoff's niece, Shana, who are now married.

As an SEC attorney, Swanson was part of a team that examined Madoff's securities brokerage operation in 1999 and 2004. Neither review resulted in any action against Madoff. In a statement about Swanson's role, the SEC compliance office cited its strict rules prohibiting employees from participating in cases involving firms where they have a personal interest.

A spokesman for Swanson said that he and Shana Madoff met at a breakfast in October 2003, started dating in April 2006 and married last year.

Another potential conflict also emerged in Washington on Wednesday.

U.S. Attorney General Michael Mukasey removed himself from the probe because his son, Marc Mukasey, is representing Frank DiPascali, a top financial officer at Madoff's investment firm. The Justice Department refused to say when Mukasey became aware of the conflict but confirmed he was removing himself from all aspects of the case.

DiPascali was the Madoff employee who had the most day-to-day contact with the firm's investors. Several described him as the man they reached by phone when they had questions about the firm's investment strategy, or wanted to add or subtract money from their accounts.

The events unfolded the day after Cox delivered a stunning rebuke to his own career staff, blaming them for a decade-long failure to investigate Madoff.

Credible and specific allegations regarding Madoff's financial wrongdoing going back to at least 1999 were repeatedly brought to the attention of SEC staff, Cox said. He said he was gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate the allegations or at any point to seek formal authority from the politically appointed commission to pursue them.

Cox's critics said that targeting the staff was Cox's attempt to salvage his own reputation.

''He put in place the people he is now shifting the blame to,'' said Ross Albert, a former SEC senior special counsel and federal prosecutor and now a private attorney in Atlanta.

Senate Majority Leader Harry Reid, D-Nev., suggested Cox bears some of the responsibility for what went wrong.

''I served in Congress with Christopher Cox, but I don't think he's going to make the All-Star team,'' said Reid.

Kotz said his office would move as quickly as possible to complete the inquiry into why regulators didn't pursue Madoff more aggressively.

Kanjorski, the lawmaker, said his inquiry will examine the alleged fraud and try to determine why regulators ''failed to detect these substantial evasions.''

Greenspan "Shocked" At Credit System Breakdown
Published: October 23, 2008
Filed at 10:24 a.m. ET

WASHINGTON (Reuters) - Former U.S. Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is "shocked" at the breakdown in U.S. credit markets and that he expects the unemployment rate to jump.

Despite concerns he had in 2005 that risks were being underestimated by investors, "this crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said in remarks prepared for delivery to the House of Representatives Committee on Oversight and Government Reform.

"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief," he said.

Banks and other financial institutions need public support, such as the recently approved $700 billion bailout package, to avoid serious retrenchment, he said.

Greenspan was hailed as one of the most accomplished central bankers in U.S. history when he retired in January 2006. However, his decision to keep interest rates low during his final years at the Fed has been blamed in part for the housing bubble and crash that has led to the current deep financial crisis.

The former Fed chair said stabilization of U.S. housing markets -- a necessary precondition for the economy to heal -- is "many months in the future."

At the heart of the breakdown of credit markets was the securitization system that stimulated appetite for loans made to borrowers with spotty credit histories, Greenspan said.

"Without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults accordingly far fewer," he said.

"The consequent surge in global demand for U.S. subprime securities by banks, hedge and pension funds supported by unrealistically positive rating designations by credit agencies was, in my judgment, the core of the problem," he added.

The Absent Gorilla:  Social Security, Medicare • Presidential candidates step gingerly around entitlements dilemma
Hartford Courant editorial
October 17, 2008

One of these years, unless something is done about it, the federal government will be unable to meet its Medicare and Social Security obligations. There will be too many old Americans and not enough revenue to pay for their health care and retirement income.

Some, like former U.S. Comptroller General David Walker, the Concord Coalition and the Heritage Foundation, are waving the warning flags, talking in apocalyptic but reality-based terms of the government being scores of trillions of dollars in the hole in the not-too-distant future and unable to make good on what aging Americans feel entitled to.

But there has been little said about entitlement reform on the campaign trail this fall. Presidential and congressional candidates don't want to touch this hot topic with the proverbial 10-foot pole. They have approached it only in the most general terms.

In the final debate between Barack Obama and John McCain on Wednesday night, the issue was raised, sort of, by moderator Bob Schieffer. He asked, in light of mounting national debt and huge projected budget deficits, what spending cuts each man would make if elected. Mr. Obama said he would cut a $15 billion subsidy to insurance companies and would go over the budget line by line and cut programs that don't work. Mr. McCain favors a spending freeze — but would exempt the military and veterans budgets. He said he'd veto all earmarks, which this year total about $18 billion. These are inadequate answers on the part of both presidential candidates.

The world faces the prospects of a long, deep recession. But the fallout from that might not be nearly so bad as what America's elderly will suffer if Medicare and Social Security crash.

"D" stands for a few things...


Economic indicators up more than expected in April 
By TALI ARBEL, AP Business Writer    
Posted on May 21, 2009 11:30 AM EDT

NEW YORK (AP) -- A private research's group forecast of economic activity rose more than expected in April, the first gain in seven months and fresh evidence that the recession could end later this year.

The Conference Board said Thursday its index of leading economic indicators, designed to forecast economic activity in the next three to six months, rose 1 percent last month. Economists surveyed by Thomson Reuters expected a 0.8 percent increase.

Conference Board economist Ken Goldstein said that means declines in activity could switch to growth in the overall economy in the second half of the year. The recession began in December 2007.

In April, the index posted its biggest gain since November 2005, said Ian Shepherdson, chief U.S. economist at High Frequency Economics. It is now even with its level from last November.

The index is derived from 10 components including stock prices, the money supply, jobless claims and new orders by manufacturers.

The Conference Board said strengths among the components exceeded weaknesses for the first time in more than a year. "This is more broad-based. It's not just the stock market rally," Goldstein said.

Seven indicators rose, including stock prices, as the Dow Jones industrials are up by about a third since March. Consumer expectations, the average work week, manufacturers' new orders for consumer goods and deliveries by vendors grew, while initial jobless claims dropped, also a positive.

However, some analysts expressed reservations about the strength of the gain.

"How strong the upturn will be is still in doubt, and it is possible that the improvement in (consumer) sentiment seen the last couple months, which has lifted the index of leading indicators, could stall out," Deutsche Bank chief U.S. economist Joseph LaVorgna wrote in a research note. He doesn't expect the economy to grow until early 2010.

Weekly claims for jobless aid had been dragging the index down. The U.S. unemployment rate stands at 8.9 percent and is expected to hit double digits later this year or in 2010.

The Labor Department on Thursday said new requests for jobless benefits fell to a seasonally adjusted 631,000, down from a revised figure of 643,000. Claims had reached a 14-week low of 605,000 earlier this month, which many economists thought heralded an easing in the wave of layoffs.

Earlier this week, computer giant Hewlett-Packard Co. said it would cut 6,400 jobs, or 2 percent of its work force, while credit-card issuer American Express Co. said it was slashing 4,000 jobs. Beleaguered auto makers General Motors Corp. and Chrysler LLC recently announced they will terminate their contracts with around 2,000 dealerships nationwide, which likely will result in shutdowns for many. The National Automobile Dealers Association, a trade group, said the auto makers' decisions could result in 100,000 job losses.

Meanwhile, the Conference Board said building permits, manufacturers' orders for capital goods and the real money supply weighed down the index last month.

The recession was precipitated by a crisis in housing, and while homebuilders' confidence has ticked higher, both building permits and housing construction fell to record low annual rates in April, the government said earlier this week.

Jobless Rate Rises to 6.7% as 533,000 Jobs Are Lost
December 6, 2008

With the economy deteriorating rapidly, the nation’s employers shed 533,000 jobs in November, the 11th consecutive monthly decline, the government reported Friday morning, and the unemployment rate rose to 6.7 percent.

The decline, the largest one-month loss since December 1974, was fresh evidence that the economic contraction accelerated in November, promising to make the current recession, already 12 months old, the longest since the Great Depression. The previous record was 16 months, in the severe recessions of the mid-1970s and early 1980s.

“We have recorded the largest decline in consumer confidence in our history,” said Richard T. Curtin, director of the Reuters/University of Michigan Survey of Consumers, which started its polling in the 1950s. “It is being driven down by a host of factors: falling home and stock prices, fewer work hours, smaller bonuses, less overtime and disappearing jobs.”

The jobless rate was up from 6.5 percent in October. The job losses far exceeded the 350,000 figure that was the consensus expectation of economists.

Over all, the job losses since January now total more than 1.9 million, with most coming in the last three months as consumers and businesses cut back sharply in response to the worsening credit crisis.

The report on Friday by the Bureau of Labor Statistics included sharp upward revisions in job-loss figures for October (to 320,000 from the previously reported 240,000) and for September (to 403,000 from 284,000).

The employment report increased the likelihood that Congress, with the support of President-elect Barack Obama, will enact a stimulus package by late January that could exceed $500 billion over two years. More than half that money would probably be channeled into public infrastructure spending. Many economists consider such investments an effective way to counteract, through federally financed employment, the layoffs and hiring freezes spreading through the private sector.

“Basically $100 billion of public investment in such things as roads, bridges and levees would generate two million jobs,” Robert N. Pollin, an economist at the University of Massachusetts, said. “That would offset the two million jobs that we are now on track to lose by early next year.”

The manufacturing sector has been particularly hard hit, losing more than half a million jobs this year. That is nearly half the 1.2 million jobs lost since employment peaked in December and, in January, began its uninterrupted decline. The cutbacks seem likely to accelerate as the three Detroit automakers close more factories and shrink payrolls even more as they try to qualify for the federal loans they asked Congress this week to approve.

While manufacturing has led the way, the job cuts are rising in nearly every sector of the economy. “My sense is there is just a collapse in demand,” said Marc Levinson, research director for the union Unite Here, whose 450,000 members are spread across apparel manufacturing, hotels, casinos, industrial laundries, airport concessions and restaurants. “Our members are being laid off big time,” Mr. Levinson said.

The latest jobs report came during a week of compelling evidence that the American economy is falling precipitously. On Monday, the National Bureau of Economic Research ruled that a recession — the 12th since the Depression — had begun last December, even earlier than many people had thought.

That news was followed by fresh reports of cutbacks or declines in construction spending, home sales, consumer spending, business investment and exports. And companies in every industry sector announced layoffs this week, including AT&T, the telecommunications company, with 12,000 job cuts; DuPont, the chemical company, 2,500; and Viacom, the media company, 850.

Even retail sales in the Christmas season were off sharply. The International Council of Shopping Centers on Thursday described November sales at stores open at least a year as the weakest in more than 30 years.

With all this in mind, and particularly the shrinking employment rolls, economists are estimating that the gross domestic product is contracting at an annual rate of 4 percent or more in the fourth quarter, after a decline of 0.3 percent in the third quarter.

“Our G.D.P. forecast for 2009 is now minus 1.8 percent, rather than minus 1 percent,” HIS Global Insight, a forecasting and data gathering service, informed its clients in an e-mail message this week, explaining that all the latest bad news left it no choice but to issue a sharp downward revision.

“We see the unemployment rate at 8.6 percent by the end of 2009,” Global Insight said.

Consumer Price Decline Prompts Fear of Deflation
November 20, 2008

In another sign that the struggling economy continues to slow, consumer prices tumbled by a record amount in October, carried lower by skidding energy and transportation prices, raising the specter of deflation.

A key measure of how much Americans pay for groceries, clothing, entertainment and other goods and services, fell 1 percent in October, according to the Labor Department, the biggest drop in the 61-year history of the consumer price index. Much of the decline could be traced to a sharp drop of 14 percent in the price of gasoline, but the cost of a broad range of goods including clothes, milk and vegetables also fell sharply.

A sustained drop in prices could worsen the slowdown by straining businesses and workers. It could also blunt the impact of interest rate cuts and other actions by the Federal Reserve and force policy makers to use more unconventional tools to revive the economy.

“This month, it’s more than slowing, it’s outright contraction,” said James O’Sullivan, United States economist at UBS. “And yes, if you extrapolate that, it’s deflation.”

In a speech Wednesday at a Washington conference, the vice chairman of the Fed, Donald L. Kohn, said the risk of deflation remained slight but was increasing. “Whatever I thought that risk was, four or five months ago, I think it is bigger now even if it is still small,” Mr. Kohn said. The Fed, he added, needs to be aggressive, if necessary, to prevent a drop in prices.

The United States is not alone. Consumer prices also dipped in Britain, France, Germany and the Netherlands in October, though the declines were much smaller than the fall in America.

“The risk to the economy from pricing has rapidly moved from that of rapid inflation to the disinflation that is now moving through the system,” Joseph Brusuelas, chief economist of Merk Investments, wrote in a note.

While lower prices, particularly in the case of gasoline, may feel like good news, analysts say a broad and sustained decline in consumer prices would be bad for the economy. Businesses that are forced to cut prices to attract buyers will likely also be forced to cut workers, eliminate overtime or cap wages.

The talk about falling prices is all the more remarkable because just a few months ago many economists were concerned about inflation and the prospect of stagflation, in which inflation and unemployment rise simultaneously.

“It’s funny that just a few months ago everyone was wringing their hands over inflation,” said Nariman Behravesh, chief economist at Global Insight. “It’s gone. It’s over.”

But the data suggest that several years of growth in conspicuous consumption have been quickly revered and in many respects the nation is entering into a more frugal era.

For instance, room rates at luxury hotels fell 5.4 percent in the 28 days ended on Nov. 15, compared with a 1.3 percent increase at mid-scale hotels that do not serve food, estimated Smith Travel Research, a firm that studies the industry. Over all, hotel prices fell 1.6 percent in October, according to the Labor Department.

Retailers are resorting to drastic discounts to lure customers into stores. Executives at Nordstrom, the department store chain, said on a recent conference call with analysts that the company had lowered its regular prices on more than 800 clothing styles by an average of 22 percent.

Saks, another department store, is promising customers who spend more than $2,000 loans that carry no interest and require no payments for 12 months.

Economists said the tumbling consumer prices offered more evidence that Americans have tightened their spending as job losses mounted and easy credit dried up.

“We’re looking at a pretty deep recession now,” Mr. Behravesh said. “ All of a sudden, any pricing power that companies might have had is gone. You’re going to see discounting like crazy going on. All kinds of sales. You’re going to see all kinds of prices being slashed.”

A report on the beleaguered real estate market showed that housing starts fell 4.5 percent in October, to a seasonally adjusted 791,000. Housing starts last month were 38 percent lower than their October 2007 levels.

Talks of another Depression are overblown
Norwalk HOUR column
Thursday, October 16, 2008

Q: I'm hearing more talk about a stock market crash and another depression. I read an article on MarketWatch saying that we're in a meltdown and that criticized financial journalists for not telling it like it is. What's your take on this?

A: Columnist Jon Friedman did use the term "meltdown" and criticized financial journalists for using what he calls wimpy, sugar-coated language.

In speaking with Friedman recently, he said: "It is a meltdown. We are seeing a historic change where nothing will ever be the same. It's ludicrous for the media to parse words and not tell people what's going on."

Friedman pointed to how stocks came "roaring back" after the one-day, 22 percent stock market crash on Oct. 19, 1987, whereas stocks have continued to fall in this decline. He also said "now, all of these layoffs are happening, including to some of the smartest people in investment banking ... these jobs are going away and we won't need people to do investment banking."

Friedman actually is wrong about the 1987 stock market recovery being so quick. In fact, it actually took about 15 months for the market to make back that one day's loss of 22 percent and nearly two years to recoup that quick bear market decline totaling 36 percent.

I also think he is off base regarding the investment-banking industry, which has had few job losses thanks to the absorption of failed companies into healthy ones (e.g. Bear Stearns taken over by JP Morgan, Lehman by Barclays, etc.).

I also see a different problem with some of the media coverage. In recent weeks, I have observed an escalation among many in the media using explosive, inflammatory language. More and more reporters are using terms like "crash" when referring to the stock market and "depression" while discussing the economy.

During the Great Depression of the 1930s, our nation's unemployment broke 25 percent and our gross national product plunged by half by the time the Depression ended. Our current unemployment is a tad over 6 percent and our gross domestic product hasn't eve yet had a down quarter so it has yet to decline from its peak.

"It seems to me the media is using the most super-heated possible language," says Don Luskin, chief investment officer for Trend Macrolytics, who added, "If the media is holding back at all, which I don't think it is, maybe it's because they don't want to just be the conduit for the administration's or Congress's hype."

For sure, the stock market has suffered a significant decline the past 12 months -- amounting to about 25 percent from the peak to the most recent low. And much of the housing and financial sectors have suffered major declines. High energy prices hurt the airline and auto industries. The unemployment rate has increased and now stands above 6 percent. But, there are reasons for optimism:

* Diversity of our economy

* Growth of emerging markets provides growing markets for our goods

* Increased productivity

* Energy prices have dropped significantly and inflationary concerns waning

* Tax rates and interest rates are low.

Financial expert Eric Tyson is a Fairfield County resident, and a smart guy.  Author of "Mind Over Money" (CDS Books), "Investing for Dummies" and "Personal Finance for Dummies" (Wiley), via e-mail:


Canada Says Deficit Larger Than Expected
May 25, 2009
Filed at 4:58 p.m. ET

TORONTO (AP) -- Canada's finance minister said Monday the federal deficit will be substantially more than projected because the economic slowdown has been worse than expected.

Finance Minster Jim Flaherty predicted in January a deficit in Canada for the first time in more than a decade, and said Monday that the financial shortfall for 2009-2010 will be higher that the orginal forecast of 34 billion Canadian dollars ($30 billion).

Flaherty said lower tax revenues and increased spending on unemployment insurance are two of the major reasons.

Canada's central bank has projected that then country's gross domestic product fell 7.3 percent in the first three months of 2009, dropping at the steepest pace in decades.

Canada has avoided bank bailouts and none of its major financial institutions have failed. However, Canada and its economically hard-hit neighbor, the United States, have the largest trading relationship in the world and the financial crisis and the global sell-off of commodities have hit Canada hard since last fall.

The government unveiled a $32 billion economic stimulus package in January.

But Alberta's once-booming oil sands sector has cooled as every major company has scrapped or delayed some expansion plans.

Canada lost a record 273,300 jobs in the first three months of the year.

Goldman CEO Opposed to Full Bank Nationalization
Filed at 9:50 a.m. ET

March 8, 2009

FRANKFURT (Reuters) - Goldman Sachs' <GS.N> chief executive said he opposed the full nationalization of banks, but thought government stakes could be sensible in extreme situations, in an interview with German weekly Welt am Sonntag.

"I don't think that nationalization is a good solution. It is decisive that the financial system is being stabilized and governments have to act in a pragmatic manner," Lloyd Blankfein was quoted as saying.

"In extreme situations, it can be meaningful when the government takes a stake. However, full control should be avoided," he added.

Asked about the case of stricken German property lender Hypo Real Estate <HRXG.DE>, which has already received 87 billion euro ($110 billion) in state guarantees, Blankfein said: "There can be extreme situations, where there is no alternative. Then the following must apply: If the tax-payer raises the whole capital of a company, it has to belong to him. Otherwise, the state is in danger of taking only risks, without having the opportunities."

Blankfein also commented on the cases of U.S. bank Citigroup <C.N> -- in which the U.S. government will hike its stake to 36 percent -- as well as struggling carmaker General Motors <GM.N>.  Asked whether it would only be a matter of time until both companies would be fully nationalized, Blankfein said that, so far, both companies were still not completely state-owned.

"Secondly, the main point was to avert immediate threats. In the case of Citigroup, a real systemic risk for the financial markets had to be contained. In the case of General Motors, the social implications of a sudden breakdown would have been huge," he said.

The Bush administration in December approved a $17.4 billion bailout for GM and Chrysler LLC <CBS.UL>, requiring the administration of President Barack Obama to determine by March 31 whether both companies can be commercially viable.

Blankfein said that the company would remain committed to its business in Germany, adding that it is the "central economy in continental Europe and for us the bridge to eastern Europe."

He also pointed to uncertainty within the European Union with regard to state finances, particularly about who would contribute what, should a member of the EU run into financing problems.

"How much has to be raised by the single state and how much will be contributed by the European Union? Those questions are unanswered. Unanswered questions make the markets feel insecure."

The market crisis has highlighted differences between economies in the single euro zone with some countries, such as Ireland, seeing their deficits balloon and there has been much talk about how euro zone states can maintain solidarity.

($1=.7909 Euro)

Who Got AIG's Bailout Billions?
Filed at 8:30 a.m. ET

March 8, 2009

NEW YORK (Reuters) - Where, oh where, did AIG's bailout billions go? That question may reverberate even louder through the halls of government in the week ahead now that a partial list of beneficiaries has been published.  The Wall Street Journal reported on Friday that about $50 billion of more than $173 billion that the U.S. government has poured into American International Group Inc since last fall has been paid to at least two dozen U.S. and foreign financial institutions.

The newspaper reported that some of the banks paid by AIG since the insurer started getting taxpayer funds were: Goldman Sachs Group Inc, Deutsche Bank AG, Merrill Lynch, Societe Generale, Calyon, Barclays Plc, Rabobank, Danske, HSBC, Royal Bank of Scotland, Banco Santander, Morgan Stanley, Wachovia, Bank of America, and Lloyds Banking Group.  Morgan Stanley and Goldman Sachs declined to comment when contacted by Reuters. Bank of America, Calyon, and Wells Fargo, which has absorbed Wachovia, could not be reached for comment.

The U.S. Federal Reserve has refused to publicize a list of AIG's derivative counterparties and what they have been paid since the bailout, riling the U.S. Senate Banking Committee.  Federal Reserve Vice Chairman Donald Kohn testified before that committee on Thursday that revealing names risked jeopardizing AIG's continuing business. Kohn said there were millions of counterparties around the globe, including pension funds and U.S. households.

He said the intention was not to protect AIG or its counterparties, but to prevent the spread of AIG's infection.  The Wall Street Journal, citing a confidential document and people familiar with the matter, reported that Goldman Sachs and Deutsche Bank each got about $6 billion in payments between the middle of September and December last year.

Once the world's largest insurer, AIG has been described by the United States as being too extensively intertwined with the global financial system to be allowed to fail.

The Federal Reserve first rode to AIG's rescue in September with an $85 billion credit line after losses from toxic investments, many of which were mortgage related, and collateral demands from banks, left AIG staring down bankruptcy.  Late last year, the rescue packaged was increased to $150 billion. The bailout was overhauled again a week ago to offer the insurer an additional $30 billion in equity.

AIG was first bailed out shortly after investment bank Lehman Brothers was allowed to fail and brokerage Merrill Lynch sold itself to Bank of America Corp.  Bankruptcy for AIG would have led to complications and losses for financial institutions around the world doing business with the company and policy holders that AIG insured against losses. 

Representative Paul Kanjorski told Reuters on Thursday that he had been informed that a large number of AIG's counterparties were European.

"That's why we could not allow AIG to fail as we allowed Lehman to fail, because that would have precipitated the failure of the European banking system," said Kanjorski, a Democrat from Pennsylvania who chairs the House Insurance Subcommittee.


As part of its business, AIG insured counterparties on mortgage-backed securities and other assets. The collapse of the U.S. subprime mortgage market, which triggered a global financial crisis, left the insurer and some of its policy holders facing possible ruin as the value of assets declined.

U.S. regulators failed to recognize how much risk AIG was piling on in credit-default swaps, and by the time they understood, they had no choice but to pour in billions of public dollars, Kohn and other officials told the Senate panel.  Senators were outraged by the lack of details about where the bailout money has gone.

"That we find ourselves in this situation at all is ... quite frankly, sickening," said Senator Christopher Dodd, the Democrat who chairs the committee. "The lack of transparency and accountability in this process has been rather stunning."

Eric Dinallo, superintendent of New York State's Insurance Department, railed on Friday against AIG's failed business model, likening its insuring credit-default swaps as gambling with somebody else's money.

"It's like taking insurance on your neighbor's house and even maybe contributing to blowing it up," he said at a panel sponsored by New York University's Stern School of Business.

U.S. lawmakers have said they are running out of patience with regulators' refusal to identify AIG's counterparties.

Battle Over UBS Secret Accounts Heads to Court
Filed at 11:53 a.m. ET
February 23, 2009

MIAMI (AP) -- The battle between the Internal Revenue Service and Swiss bank UBS AG is heading to court.

The IRS wants a federal judge to order UBS to turn over about 52,000 names of wealthy Americans with secret accounts. UBS contends that doing that would be a violation of Swiss law and could force the bank to lose its license to do business.

A hearing was set Monday. The IRS is pushing U.S. District Judge Alan Gold to issue an immediate ''show cause'' order requiring UBS to demonstrate why it can keep the names of its U.S. customers secret. UBS wants more time to make its arguments.

The IRS says U.S. taxes haven't been paid for years on those accounts, which hold about $14.8 billion in assets.

Japan's economy shrinks at fastest pace in 35 years
Norwalk Hour
By TOMOKO A. HOSAKA, Associated Press
Posted on 02/15/2009

Japan's economy contracted in the fourth quarter at the fastest pace in 35 years as a collapse in global demand battered the world's second-largest economy.

Japan's gross domestic product, or the total value of the nation's goods and services, dropped at an annual pace of 12.7 percent in the October-December period, the government said today.  That's the steepest drop for Japan since the oil shock of 1974. It far outpaces declines of 3.8 percent in the U.S. and 1.2 percent in the euro zone.  The contraction underscores the vulnerability of Asia's export-driven economies during global downturns and point toward more cuts in jobs, production and profits in the coming months.

A survey of economists by the Kyodo news agency had projected an 11.6 percent fourth-quarter contraction.  Japan had its third straight quarter of decline. The GDP fell 1.8 percent in the July-September period. 
Fourth-quarter GDP fell 3.3 percent from the previous three-month period, and for 2008, it contracted 0.7 percent -- the first decline in nine years, according to the Cabinet Office.  With recovery nowhere in sight, Japan is now in the midst of its worst downturn since World War II, analysts say.

"Since October, economic indicators have deteriorated at a pace that defies any rule of thumb," Tetsufumi Yamakawa, chief Japan economist at Goldman Sachs, said in a recent report. "There has been an unprecedented large decline in exports and production-related indicators in particular, not only in Japan but throughout Asia."

Japan's real exports plummeted a record 13.9 percent in the fourth quarter, the government said, as the deepening global slowdown choked off demand for the country's cars and gadgets. An appreciating yen also hurt the country's exporters, including Toyota Motor Corp. and Sony Corp.

Japanese electronics company Pioneer Corp. said last week it will cut 10,000 jobs globally, joining a growing list of the country's corporate giants scrambling to slash their payrolls. Sony Corp. is shedding 8,000 workers, while Nissan Motor Co. and NEC Corp. are each cutting 20,000.

Japan slipped into recession in the third quarter after its GDP contracted an annualized 3.7 percent in the April-June period.  A recession is commonly defined as two consecutive quarters of negative growth, though many economists using other parameters say the current downturn actually began in late 2007.  Media reports over the weekend said Japan may be considering additional measures to shore up its economy with fresh spending likely to top 10 trillion yen ($109 billion).

Lawmakers are debating a record 88.5 trillion yen ($963 billion) budget for the fiscal year starting in April. The Yomiuri Shimbun said once parliament passes the budget, Prime Minister Taro Aso -- who faces dismal approval ratings -- will announce the extra economic measures.  Japan's central bank, which lowered its key interest rate to 0.1 percent in December, has introduced various steps to try to thaw a corporate credit crunch. But there is little it can do to address the unprecedented decline in external demand.

The Bank of Japan policy board is scheduled to start a two-day meeting Wednesday.

In stock markets, the benchmark Nikkei 225 index was down 0.99 percent at 7,702.24.

Laid-Off Foreigners Flee as Dubai Spirals Down
February 12, 2009

DUBAI, United Arab Emirates — Sofia, a 34-year-old Frenchwoman, moved here a year ago to take a job in advertising, so confident about Dubai’s fast-growing economy that she bought an apartment for almost $300,000 with a 15-year mortgage.

Now, like many of the foreign workers who make up 90 percent of the population here, she has been laid off and faces the prospect of being forced to leave this Persian Gulf city — or worse.

“I’m really scared of what could happen, because I bought property here,” said Sofia, who asked that her last name be withheld because she is still hunting for a new job. “If I can’t pay it off, I was told I could end up in debtors’ prison.”

With Dubai’s economy in free fall, newspapers have reported that more than 3,000 cars sit abandoned in the parking lot at the Dubai Airport, left by fleeing, debt-ridden foreigners (who could in fact be imprisoned if they failed to pay their bills). Some are said to have maxed-out credit cards inside and notes of apology taped to the windshield.

The government says the real number is much lower. But the stories contain at least a grain of truth: jobless people here lose their work visas and then must leave the country within a month. That in turn reduces spending, creates housing vacancies and lowers real estate prices, in a downward spiral that has left parts of Dubai — once hailed as the economic superpower of the Middle East — looking like a ghost town.

No one knows how bad things have become, though it is clear that tens of thousands have left, real estate prices have crashed and scores of Dubai’s major construction projects have been suspended or canceled. But with the government unwilling to provide data, rumors are bound to flourish, damaging confidence and further undermining the economy.

Instead of moving toward greater transparency, the emirates seem to be moving in the other direction. A new draft media law would make it a crime to damage the country’s reputation or economy, punishable by fines of up to 1 million dirhams (about $272,000). Some say it is already having a chilling effect on reporting about the crisis.

Last month, local newspapers reported that Dubai was canceling 1,500 work visas every day, citing unnamed government officials. Asked about the number, Humaid bin Dimas, a spokesman for Dubai’s Labor Ministry, said he would not confirm or deny it and refused to comment further. Some say the true figure is much higher.

“At the moment there is a readiness to believe the worst,” said Simon Williams, HSBC bank’s chief economist in Dubai. “And the limits on data make it difficult to counter the rumors.”

Some things are clear: real estate prices, which rose dramatically during Dubai’s six-year boom, have dropped 30 percent or more over the past two or three months in some parts of the city. Last week, Moody’s Investor’s Service announced that it might downgrade its ratings on six of Dubai’s most prominent state-owned companies, citing a deterioration in the economic outlook. So many used luxury cars are for sale , they are sometimes sold for 40 percent less than the asking price two months ago, car dealers say. Dubai’s roads, usually thick with traffic at this time of year, are now mostly clear.

Some analysts say the crisis is likely to have long-lasting effects on the seven-member emirates federation, where Dubai has long played rebellious younger brother to oil-rich and more conservative Abu Dhabi. Dubai officials, swallowing their pride, have made clear that they would be open to a bailout, but so far Abu Dhabi has offered assistance only to its own banks.

“Why is Abu Dhabi allowing its neighbor to have its international reputation trashed, when it could bail out Dubai’s banks and restore confidence?” said Christopher M. Davidson, who predicted the current crisis in “Dubai: The Vulnerability of Success,” a book published last year. “Perhaps the plan is to centralize the U.A.E.” under Abu Dhabi’s control, he mused, in a move that would sharply curtail Dubai’s independence and perhaps change its signature freewheeling style.

For many foreigners, Dubai had seemed at first to be a refuge, relatively insulated from the panic that began hitting the rest of the world last autumn. The Persian Gulf is cushioned by vast oil and gas wealth, and some who lost jobs in New York and London began applying here.

But Dubai, unlike Abu Dhabi or nearby Qatar and Saudi Arabia, does not have its own oil, and had built its reputation on real estate, finance and tourism. Now, many expatriates here talk about Dubai as though it were a con game all along. Lurid rumors spread quickly: the Palm Jumeira, an artificial island that is one of this city’s trademark developments, is said to be sinking, and when you turn the faucets in the hotels built atop it, only cockroaches come out.

“Is it going to get better? They tell you that, but I don’t know what to believe anymore,” said Sofia, who still hopes to find a job before her time runs out. “People are really panicking quickly.”

Hamza Thiab, a 27-year-old Iraqi who moved here from Baghdad in 2005, lost his job with an engineering firm six weeks ago. He has until the end of February to find a job, or he must leave. “I’ve been looking for a new job for three months, and I’ve only had two interviews,” he said. “Before, you used to open up the papers here and see dozens of jobs. The minimum for a civil engineer with four years’ experience used to be 15,000 dirhams a month. Now, the maximum you’ll get is 8,000,” or about $2,000.

Mr. Thiab was sitting in a Costa Coffee Shop in the Ibn Battuta mall, where most of the customers seemed to be single men sitting alone, dolefully drinking coffee at midday. If he fails to find a job, he will have to go to Jordan, where he has family members — Iraq is still too dangerous, he says — though the situation is no better there. Before that, he will have to borrow money from his father to pay off the more than $12,000 he still owes on a bank loan for his Honda Civic. Iraqi friends bought fancier cars and are now, with no job, struggling to sell them.

“Before, so many of us were living a good life here,” Mr. Thiab said. “Now we cannot pay our loans. We are all just sleeping, smoking, drinking coffee and having headaches because of the situation.”

A New York Times employee in Dubai contributed reporting.

Global Worries Over U.S. Stimulus Spending
January 30, 2009

DAVOS, Switzerland — Even as Congress looks for ways to expand President Obama’s $819 billion stimulus package, the rest of the world is wondering how Washington will pay for it all.

Few people attending the World Economic Forum question the need to kick-start America’s economy, the world’s largest, with a package that could reach $1 trillion over two years. But the long-term fallout from increased borrowing by the United Stated government, and its potential to drive up inflation and interest rates around the world, seems to getting more attention here than in Washington.

“The U.S. needs to show some proof they have a plan to get out of the fiscal problem,” said Ernesto Zedillo, the former Mexican president who helped steer his country through a financial crisis in 1994. “We, as developing countries, need to know we won’t be crowded out of the capital markets, which is already happening.”

Mr. Zedillo said that Washington, unlike most other countries, had the option of simply printing more money, because the dollar was a reserve currency for the rest of the world.

Over the long run, that could force long-term interest rates higher and drive down the value of the dollar, undermining the benefits that come with its special status.

Until now, most fears about surging government debt have focused on borrowing by European countries like Spain, Greece and especially Britain, which is also in the midst of a sizable bank bailout. That recently forced the British pound to a 23-year low against the dollar.

While the dollar’s status as refuge in a time of turmoil should prevent that kind of sell-off for now, a number of financial specialists warned that if fundamental factors like the lack of American savings and bloated budget deficits did not change, the dollar could eventually fall sharply .

“There aren’t that many safe havens,” said Alan S. Blinder, a Princeton economist who is a former vice chairman of the Federal Reserve in Washington, explaining why the dollar’s status as a reserve currency is unlikely to be threatened.

Instead, it is the dollar’s long-term value against other currencies that is vulnerable. “At some point, there may be so much Treasury debt, that investors may start wondering if they are overloaded in dollar assets,” Mr. Blinder said.

While the focus in Washington has been on putting together a stimulus package that will attract broader political support when it comes up for a vote in the Senate, here in Davos the talk has been about the coming avalanche of Treasury debt needed to pay for the plan on top of the bailout measures approved last fall, like the $700 billion Troubled Asset Relief Program, or TARP.

The stimulus was approved Wednesday by the House without Republican support, and could grow larger — mostly likely with additional tax cuts — to attract a bipartisan coalition.

American officials maintain they are aware of the challenge. A top White House adviser, Valerie Jarrett, promised in Davos on Thursday that once the stimulus plan achieved its intended affect, the United States would “restore fiscal responsibility and return to a sustainable economic path.”

To be sure, Congress and the White House will ultimately need to refill the government’s coffers, but how they might do that is barely on the radar screen in Washington at this point.

“Even before Obama walked through the White House door, there were plans for $1 trillion of new debt,” said Niall Ferguson, a Harvard historian who has studied borrowing and its impact on national power. He now estimates that some $2.2 trillion in new government debt will be issued this year, assuming the stimulus plan is approved.

“You either crowd out other borrowers or you print money,” Mr. Ferguson added. “There is no way you can have $2.2 trillion in borrowing without influencing interest rates or inflation in the long-term.”

Mr. Ferguson was particularly struck by the new borrowing because the roots of the current crisis lay in an excess of American debt at all levels, from homeowners to Wall Street banks.

“This is a crisis of excessive debt, which reached 355 percent of American gross domestic product,” he said. “It cannot be solved with more debt.”

While Mr. Ferguson is a skeptic of the Keynesian thinking behind President Obama’s plan — rather than borrowing and spending to stimulate the economy, he favors corporate tax cuts — even supporters of the plan like Mr. Zedillo and Stephen Roach of Morgan Stanley have called on the White House to quickly address how it will pay for the spending in the long-term.

“It’s huge,” Mr. Roach, the chairman of Morgan Stanley Asia, said. “President Obama has now laid out a scenario of multiyear, trillion-dollar deficits.”

The stimulus is widely expected to pass, but once it does, Mr. Roach said the focus would shift to “who foots the bill and what is the exit strategy. We don’t have the answer to either question.”

Mr. Zedillo, who remembers how Mexico was forced to tighten its belt when it received billions from Washington to keep its economy from collapsing in 1994, was even more blunt.

“People are not stupid,” Mr. Zedillo said. “They see the huge deficit, the huge spending, and wonder what comes next.”

Marc Rich Is One Victim Unlikely to Go to Court

January 9, 2009
Many investors who have lost money as clients of the financier Bernard L. Madoff have done what anyone might be expected to do in that situation: seek recourse through the courts.

But one victim, Marc Rich, would seem unlikely to go that route because of his own legal issues. Mr. Rich is the commodities trader who fled to Switzerland in 1983 to escape prosecution on charges of financial crimes and later received a pardon from President Bill Clinton on the last night of his administration in 2001.

Monika Meili, a spokeswoman for Mr. Rich’s office in Zug, told Bloomberg News on Thursday, “We can confirm that the Marc Rich Group and Marc Rich have an insignificant exposure held indirectly, which has no material impact on the overall financial situation of the group.”

The loss was $10 million to $15 million, according to someone with long knowledge of Mr. Rich’s finances who insisted on anonymity because he had not been authorized to speak.

He and another person, also knowledgeable about Mr. Rich’s finances, said the loss stemmed from Mr. Rich’s association with the money manager J. Ezra Merkin.

Mr. Merkin, a hedge fund investor whose Park Avenue firm said until recently that it had $5 billion under management, has invested for Mr. Rich for years. Mr. Merkin told his clients last month that he had entrusted more than $1 billion of their money to Mr. Madoff and that the likelihood of recovery was difficult to gauge. At least two of those clients, New York University and New York Law School, have sued Mr. Merkin, claiming he mishandled their money and misrepresented how he operated.

Mr. Merkin’s lawyer Andrew J. Levander was traveling on business and was not available, his office said.

Andy Merrill, a spokesman for Mr. Merkin. said, “As a matter of policy, they don’t comment on specific investors.”

The idea that Mr. Rich, once a fugitive, may now turn to an American court to seek redress struck some lawyers as fraught with problems and unlikely at best. “I don’t think you’ll ever see Marc Rich personally,” as a plaintiff in an American courtroom, said John F. Fornaciari, a Washington defense lawyer at Sheppard Mullin, who stifled a laugh about the legal complications stemming from the flight from justice and the contested pardon.

“If there’s some way for him to sue because the investments were made by a corporation, and it was arguably corporate money, and it had a president and it wasn’t him, and they lost money in the Madoff scandal, then that corporation might be able to sue without him being required to show up,” Mr. Fornaciari said. “But if there’s anything that required him to show up, he’s not coming.”

Gerald B. Lefcourt, a former president of the National Association of Criminal Defense Lawyers, also gauged the likelihood of Mr. Rich’s pressing a claim as “little or none.”

“He’ll never appear for discovery proceedings that will be required, and he’s not going to be sympathetic to any party, including the courts, after his failure to appear, notwithstanding the fact he was pardoned,” Mr. Lefcourt said. The pardon backfired in some ways by igniting public outrage and inviting prosecutorial interest in the process for a man who has generally sought to keep a low profile. For that reason, one longtime associate said he doubted Mr. Rich, who he said was not an acquaintance of Mr. Madoff’s, would seek any relief from the courts.

Born in Antwerp, Belgium, 74 years ago, Mr. Rich moved to the United States as a boy and rose to become a swashbuckling figure in international finance. He married Denise Eisenberg, now a songwriter, in 1966. They divorced 30 years later, but he relied heavily on her contacts as a Democratic fund-raiser to help obtain his pardon. He also enlisted scores of other influential people, including Ehud Barak, then prime minister of Israel, and the conductor Zubin Mehta, to help persuade Clinton administration officials to grant the pardon.

Mr. Rich apparently knew Mr. Merkin through the Fifth Avenue Synagogue, where he was once a member. Mr. Merkin’s father, Hermann, was a founder of the synagogue a half-century ago and Mr. Merkin is its current president.

Many of the charitable institutions that once welcomed Mr. Merkin into their inner sanctums, boards and investment committees because of his investment acumen and success have been politely accepting his resignation from those roles in recent weeks as he battles to save his reputation and fortune from angry creditors.

Rabbi Yaakov Kermaier of the Fifth Avenue Synagogue, several of whose members have also had serious financial setbacks in recent weeks because of their association with Mr. Madoff or Mr. Merkin, said in an e-mail message this week that Mr. Merkin’s term was winding down, though not because of the scandal.

“The elections for synagogue president (and other officers) are in the spring, though the formal nomination process begins months earlier,” the message said. “Ezra Merkin’s presidential term concludes this coming spring, and because of constitutional term limits, he is ineligible to run for another term as president. Ezra has led our community with extraordinary dedication and integrity, and I sincerely hope that after he concludes his presidential term, he will continue to serve our congregation in other capacities.”

Austria Names Supervisor for Fraud-Hit Medici Bank
Filed at 10:59 a.m. ET
January 2, 2009

VIENNA, Austria (AP) -- The Austrian government appointed a supervisor Friday to oversee Medici Bank, which is reeling from more than $3 billion in losses blamed on Wall Street money manager Bernard Madoff.

Austria's Financial Markets Authority said it named Gerhard Altenberger to the post. Altenberger, a state financial inspector, will oversee all bank operations to ensure the stricken private lender ''carefully adheres to all legal and contractual obligations,'' the agency said in a statement.

Medici disclosed in December that it suffered huge losses it blamed on Madoff, who U.S. prosecutors say defrauded investors worldwide of $50 billion. Medici has said its biggest losses came from its Herald USA Fund and Herald Luxemburg Fund, which totaled $2.1 billion (euro1.5 billion). Both funds, along with other Medici investments, were exposed to alleged the scam.

Medici CEO Peter Scheithauer and Werner Tripolt, who oversaw the bank's executive committee, both resigned Friday.

Manufacturing Cools Around the World
January 3, 2009 - another forward-dated story!

HONG KONG — Manufacturing activity slumped in some of the world’s leading economies in December, data on Friday showed, heralding more pain for consumers and businesses.

A closely watched index of purchasing managers in the euro zone showed manufacturing hit a low in December, falling to 33.9 from 35.6, with all figures below 50 showing a contraction in manufacturing.  Similarly grim readings in Australia, China and India highlighted how the Asia-Pacific region has become caught up in the global turmoil.  A report from the United States on Friday was also widely expected to show manufacturing there contracting at its fastest pace in nearly three decades last month.  In China, the purchasing managers’ index by the brokerage firm CLSA showed the manufacturing sector had contracted for a fifth consecutive month. The survey showed the steepest decline in its history.

“With five back to back P.M.I.s signaling contraction, the manufacturing sector, which accounts for 43 percent of the Chinese economy, is close to technical recession,” said Eric Fishwick, head of economic research at CLSA in Hong Kong, in a note accompanying the release.

The data added to the flood of statistical evidence from across Asia-Pacific showing that the region is slowing faster than previously thought as demand withers in the United States and Europe.

Australia’s a manufacturing index showed a seventh month of contraction, and a similar survey in India showed activity down for a second month in December. In South Korea, December data showed exports plummeted 17.4 percent from a year earlier.

President Lee Myung-bak of South Korea pledged on Friday that the government would go into “emergency” mode to pull the country out of its economic crisis.  And in Singapore, the economy shrank 12.5 percent in the last quarter of 2008 from the previous period, prompting the trade and industry ministry to lower its growth forecast for 2009. The ministry now expects Singapore’s economy to shrink up to 2 percent, with only 1 percent growth at best. Previously, it had expected up to 2 percent growth.

Asian stock markets took Friday’s figures in stride, with the Hang Seng index in Hong Kong gaining 4.5 percent. Stocks in Shanghai fell a moderate 0.7 percent, and the benchmark indexes in South Korea and Singapore both rose more than 2 percent. Shares in Europe were higher. In London, the FTSE 100 was 1.1 percent higher while the CAC 40 in Paris was up 2.2 percent and the DAX in Frankfurt, 2 percent.

Futures on Wall Street point to a higher opening.  Still, the worsening data, combined with a stream of company profit warnings, production cuts and layoffs, raises the pressure on policymakers to step up their efforts to bolster their economies.  India was due late on Friday to announce its second stimulus package in a month, and countries across the region are widely expected to announce more interest rate cuts in coming weeks.

The central bank in India on Friday cut interest rates for the fourth time in less than three months. The Reserve Bank of India said in a statement that it had cut the repurchase rate to 5.5 percent from 6.5 percent and the reverse-repurchase rate to 4 percent from 5 percent. The so-called cash reserve ratio, or the proportion of deposits banks must hold in reserve, was also cut to 5 percent from 5.5 percent, releasing 200 billion rupees or about $4.1 billion into the banking system.

“China’s economic outlook for 2009 will be best characterized as ‘getting worse before getting better,’ laying the foundation for a firmer recovery in 2010,” said Qing Wang, chief economist for Greater China at Morgan Stanley in Hong Kong.

Mr. Wang expected the pace of growth to continue to slow in the first six months, before existing stimulus measures can take effect. “The authorities have already made delivering economic growth a top policy priority by adopting a campaign-style policy execution approach,” he said.  Mr. Wang expects interest rates to be cut aggressively by another 1.35 percentage points this year. The country’s important one-year lending rate is 5.31 percent. He added that a $586 billion stimulus package announced in November “is unlikely to be the first and only stimulus package for the entire year.”

The package includes substantial infrastructure spending, which will begin to lead to increased activity once weather conditions allow construction to begin in the spring. “The stimulus package provides a short-term buffer for the economy, and other policy measures such as health care and land reforms will be a long-term growth driver. This should help the stock market at least to stabilize in 2009,” Yi Tang, general manager at Edmond de Rothschild Asset Management in Hong Kong.

“We are seeing some encouraging signs that institutional investors are starting to consider putting money back into equities in China and the rest of Asia, hopefully in the next month or two,” he said. “But it will take longer for retail investors — who are worried about their job prospects and the wider economy — to go back into the market.”

The Great Unraveling

December 17, 2008

Hong Kong

The stranger, a Western businessman, slipped into the chair next to me at an Asia Society lunch here in Hong Kong and asked me a question that I can honestly say I’ve never been asked before: “So, just how corrupt is America?”

His question was occasioned by the arrest of the Wall Street money manager Bernard Madoff on charges of running a Ponzi scheme that bilked investors out of billions of dollars, but it wasn’t only that. It’s the whole bloody mess coming out of Wall Street — the financial center that Hong Kong moneymen had always looked up to. How could it be, they wonder, that such brand names as Bear Stearns, Lehman Brothers and A.I.G. could turn out to have such feet of clay? Where, they wonder, was our Securities and Exchange Commission and the high standards that we had preached to them all these years?

One of Hong Kong’s most-respected bankers, who asked not to be identified, told me that the U.S.-owned investment company where he works made a mint in the last decade cleaning up sick Asian banks. They did so by importing the best U.S. practices, particularly the principles of “know thy customers” and strict risk controls. But now, he asked, who is there to look to for exemplary leadership?

“Previously, there was America,” he said. “American investors were supposed to know better, and now America itself is in trouble. Whom do they sell their banks to? It is hard for America to take its own medicine that it prescribed successfully for others. There is no doctor anymore. The doctor himself is sick.”

I have no sympathy for Madoff. But the fact is, his alleged Ponzi scheme was only slightly more outrageous than the “legal” scheme that Wall Street was running, fueled by cheap credit, low standards and high greed. What do you call giving a worker who makes only $14,000 a year a nothing-down and nothing-to-pay-for-two-years mortgage to buy a $750,000 home, and then bundling that mortgage with 100 others into bonds — which Moody’s or Standard & Poors rate AAA — and then selling them to banks and pension funds the world over? That is what our financial industry was doing. If that isn’t a pyramid scheme, what is?

Far from being built on best practices, this legal Ponzi scheme was built on the mortgage brokers, bond bundlers, rating agencies, bond sellers and homeowners all working on the I.B.G. principle: “I’ll be gone” when the payments come due or the mortgage has to be renegotiated.

It is both eye-opening and depressing to look at our banking crisis from China. It is eye-opening because it is hard to avoid the conclusion that the U.S. and China are becoming two countries, one system.

How so? Easy, in the wake of our massive bank bailout, one can now look at China and America and say: “Well, China has a big-state-owned banking sector, next to a private one, and America now has a big state-owned banking sector next to a private one. China has big state-owned industries, alongside private ones, and once Washington bails out Detroit, America will have a big state-owned industry next to private ones.”

Yes, an exaggeration to be sure, but the truth is the differences are starting to blur. For two decades, a parade of U.S. officials came to China and lectured Beijing on the necessity of privatizing its banks, said Qu Hongbin, the chief economist for China at HSBC. “So, slowly we did that, and now, all of a sudden, we see everybody else nationalizing their banks.”

It’s depressing because China in many ways feels more stable than America today, with a clearer strategy for working through this crisis. And while the two countries are looking more alike, they appear to be on very different historical trajectories. China went crazy in the 1970s, with its Cultural Revolution, and only after the death of Mao and the rise of Deng Xiaoping has it managed to right itself, gradually moving to a market economy.

But while capitalism has saved China, the end of communism seems to have slightly unhinged America. We lost our two biggest ideological competitors — Beijing and Moscow. Everyone needs a competitor. It keeps you disciplined. But once American capitalism no longer had to worry about communism, it seems to have gone crazy. Investment banks and hedge funds were leveraging themselves at crazy levels, paying themselves crazy salaries and, most of all, inventing financial instruments that completely disconnected the ultimate lenders from the original borrowers, and left no one accountable. “The collapse of communism pushed China to the center and [America] to the extreme,” said Ben Simpfendorfer, chief China economist at Royal Bank of Scotland.

The Madoff affair is the cherry on top of a national breakdown in financial propriety, regulations and common sense. Which is why we don’t just need a financial bailout; we need an ethical bailout. We need to re-establish the core balance between our markets, ethics and regulations. I don’t want to kill the animal spirits that necessarily drive capitalism — but I don’t want to be eaten by them either.


NYTIMES biographical long Sunday story and Barron's report from 2001 on Madoff...

Madoff on this page, too;  also here and here.  Housing bubble story from the NYTIMES.  Read about another Ponzi scheme...judge's ruling on bail...

Ponzi on the Potomac
National Review (from POLITICO)
By: Gov. Tim Pawlenty
February 1, 2010 04:59 AM EST

The U.S. attorney general recently announced that the Justice Department is beefing up its efforts to fight financial fraud such as Ponzi schemes. Good. The agency should start by reviewing the spending habits of the federal government, which is running the largest Ponzi scheme our country has ever seen.

In a Ponzi scheme, organizers create the illusion of profit for early investors by siphoning money from later participants. It works until there is not enough income to pay the promised dividends, exposing the fraud and leaving everyone broke. That is essentially what the federal government is doing, as it continues to spend and promise far more than can ever be paid for by current and future revenues.

Last week, the U.S. Senate increased the nation’s debt ceiling by an additional $1.9 trillion. That vote was necessary to further the Ponzi scheme. It should serve as a wake-up call that this level of spending is unsustainable.

The debate is no longer between competing political philosophies — it is a matter of basic mathematics. Here is a sampling of the facts:

• Federal government spending has grown nearly seven times faster than median income since 1970, according to the U.S. Census Bureau and Office of Management and Budget.

• At more than $12 trillion, the federal debt is already more than 80 percent of the nation’s gross domestic product and growing fast.

• The federal government’s total debt, including unfunded liabilities, means about $600,000 of debt for every U.S. household.

Sooner or later, the federal government’s scheme will come crashing down, and the loss will be mammoth.

But it doesn’t have to end that way. If our country takes bold and decisive action soon, the worst effects can still be avoided.

We should start with the obvious. When the bathtub is overflowing, a wise first response is to turn off the faucet. The federal government’s spending-increase spigot needs to be shut off.

This will require a national understanding and acceptance of the problem: We need to admit our addiction to the illusion of government “free stuff” and demand that spending be cut in almost all areas.

This will not be easy. In recent decades, the national debt has grown regardless of which party is in power because too many politicians seek support by spending more, even though a sound economic future demands they spend less.

That’s why we need an amendment to the U.S. Constitution to require a balanced budget with limited exceptions for war, natural disasters and other emergencies. Every state but one has a balanced budget requirement, and while such requirements make for difficult decisions, they work.

The president also should be given line-item veto authority power as a budget enforcement tool. The experience of the states shows that this is an effective way of preventing excessive spending.

Spending reduction tools alone will not meet this challenge. We must also grow the economy. To that end, Congress should reject federal legislation that places additional burdens on growth, such as the proposed health care overhaul, cap-and-trade bill, labor union card check and tax increases.

Instead, lawmakers should support policies that promote economic growth. For example, the Bush tax cuts should be made permanent and tax burdens on individuals and businesses should be further reduced. To better compete overseas, Congress should finally pass the pending free-trade agreements with South Korea and Colombia, and re-enact trade promotion authority. And we should pass health care reforms that would empower consumers to make smarter medical choices and lead to more competition and lower costs.

Like most other states, Minnesota still faces its share of economic challenges. However, during my two terms as governor, we have dramatically slowed the growth of state government spending and moved the state out of the Top 10 in tax burden. In the current budget biennium, we actually reduced overall spending for the first time in the state’s 150-year history. It has not been easy in a liberal state such as Minnesota, especially during challenging economic times. But it’s possible with a balanced budget requirement, line-item veto authority, pro-growth policies and a lot of hard work and determination.

Ponzi schemes succeed because people want to believe in a free lunch as long as the easy money is rolling in. But a day of reckoning always arrives, and ours is right around the corner. The sooner we open our eyes, the sooner we can clean up this mess.

Civil Madoff-related fraud charges dismissed
By LARRY NEUMEISTER, Associated Press Writer
Feb. 2, 2010

NEW YORK – Finding accusations "speculative and flimsy," a judge has dismissed civil securities fraud charges against a New York brokerage firm and its executives that resulted from a probe into Bernard Madoff's epic fraud.

The charges brought by the Securities and Exchange Commission were dismissed Monday against Cohmad Securities Corp., its chairman, Maurice "Sonny" Cohn, his daughter, Chief Operating Officer Marcia Cohn, and vice president and broker Robert Jaffe.

U.S. District Judge Louis L. Stanton gave the SEC permission to refile the charges but only if it can provide facts to back them up.

"Nowhere does the complaint allege any fact that would have put defendants on notice of Madoff's fraud," Stanton wrote. "Rather, the complaint supports the reasonable inference that Madoff fooled the defendants as he did individual investors, financial institutions and regulators."

Madoff, 71, is serving a 150-year prison sentence after admitting that he operated a giant Ponzi scheme for at least two decades, cheating thousands of individuals, charities, celebrities and institutional investors out of billions of dollars.

Clifford Thau, a lawyer for Cohmad and the Cohns, welcomed the ruling, saying in a statement: "We remain confident that the SEC will not be able to allege any new facts that will cure the deficiencies that Judge Stanton found in the SEC's complaint."

Messages for comment left with the SEC and a lawyer for Jaffe were not immediately returned.

Criminal and civil investigators have been probing the history of the Madoff company, his employees, his relatives and anyone who promoted his private investment business to find those culpable for the financial disaster that was revealed by Madoff in December 2008.

Last year, the SEC accused the defendants in a lawsuit of securities fraud, saying they collected several hundred million dollars in fees from Madoff to solicit affluent though financially unsophisticated people to trust their money to him.

The regulators said the defendants were crucial to Madoff's success because they gave the impression that one could only invest with Madoff as a favor through special access.

In his ruling, the judge noted that Madoff had operated his business since 1960 and that Maurice Cohn is Madoff's former neighbor.

Cohmad was formed in 1985 and Marcia Cohn joined in 1988, three years before Madoff says he began operating his business as a fraud, the judge said. He also noted that the Cohns worked in Cohmad's New York office on the same floors as Madoff's legitimate market-making business.

Jaffe, who lives in Palm Beach, Fla., previously headed Cohmad's Boston office. He is a son-in-law of Carl Shapiro, a prominent Boston-area businessman and philanthropist whose family was said to have lost hundreds of millions of dollars from their investments with Madoff.

In its complaint, the SEC said Madoff directed Cohmad and the Cohns to maintain a cloud of secrecy about his business and banned all written marketing materials, cold calls and emails. It said he also told the defendants he would not accept investors in the finance and banking industry because sophisticated investors ask too many questions.

The Cohns countered the allegations by saying an aura of exclusivity is a common marketing tactic.

The judge rejected the SEC's conclusion that the defendants' fraudulent intent could be inferred from allegations that Cohmad failed to disclose the full extent of its relationship with Madoff in its regulatory filings and books and records.

He said the argument "that that concealment was because any defendant knew that Madoff was committing fraud is speculative and flimsy."

Madoff Arrives at Federal Prison in North Carolina
July 15, 2009

The convicted swindler Bernard L. Madoff arrived at a federal prison in Butner, N.C., on Tuesday to start serving a 150-year sentence.

A spokeswoman for Federal Bureau of Prisons, Linda Thomas, said Mr. Madoff arrived at the Butner Federal Correctional Complex on Tuesday morning, after a brief stay at an Atlanta prison while in transit from the Metropolitan Correctional Center in Lower Manhattan.

Mr. Madoff, 71, has a projected release date of Nov. 14, 2139, assuming he gets early release credit for good behavior while in prison. He is listed in Bureau of Prisons records as prisoner No. 61727-054.

Mr. Madoff pleaded guilty in March to fraud charges after he admitted that he ran a multibillion-dollar Ponzi scheme that wiped out thousands of investors and ruined charities.

Mr. Madoff had requested that he be kept in a federal prison in Otisville, N.Y., and Judge Denny Chin, who presided over the case, had recommended that he stay in the Northeast.

The Butner Federal Correctional Complex, located about 45 miles northwest of Raleigh, includes two medium-security facilities, a low-security facility and a hospital, according to the Bureau of Prisons Web site. Within the federal prison system, it is perhaps best known for its hospital facility to treat elderly or ill prisoners.

Among the prison’s other inmates are the founder of Adelphia Communications, John Rigas, and Mr. Rigas’s son Timothy, who were found guilty of securities fraud in 2004.

Madoff Sentenced to 150 Years in Prison for Ponzi Scheme
June 30, 2009

A federal judge sentenced Bernard L. Madoff to 150 years in prison on Monday for operating a huge Ponzi scheme that devastated thousands of people, calling his crimes “extraordinarily evil.”

In pronouncing the sentence — the maximum he could have handed down — Judge Denny Chin turned aside Mr. Madoff’s own assertions of remorse and rejected the suggestion from Mr. Madoff’s lawyers that there was a sense of “mob vengeance” surrounding calls for a long prison term.

“Objectively speaking, the fraud here was staggering,” the judge said. “It spanned more than 20 years.”

After victims told a packed courtroom that he should be shown no mercy in the case, Mr. Madoff stood up from the defense table to acknowledge the damage he had inflicted and expressed regret.

“I’m responsible for a great deal of suffering and pain, I understand that,” Mr. Madoff told the court. “I live in a tormented state now, knowing all of the pain and suffering that I’ve created. I’ve left a legacy of shame, as some of my victims have pointed out, to my family and my grandchildren.”

Addressing his victims seated in the courtroom, he said: “I will turn and face you. I’m sorry. I know that doesn’t help you.”

Prosecutors said that Mr. Madoff deserved the maximum sentence — representing a life sentence and more for the disgraced 71-year-old financier — for perpetrating one of the biggest investment frauds in Wall Street history. Mr. Madoff’s own lawyers said he should receive only 12 years, a sentence that would offer him the chance to walk out of prison at age 83.

Mr. Madoff wore a dark suit, white shirt and a tie and sat at a polished wood table, surrounded by his lawyers. Prosecutors sat opposite them, and the viewing gallery was crowded with onlookers.

The hearing opened shortly after 10 a.m. with statements from victims of the Madoff scheme, which took in some $65 billion before it collapsed. Mr. Madoff’s victims stood up and told wrenching stories of how they had lost everything in his scheme, and were now working several jobs and living hand-to-mouth. They fought through tears, connected Mr. Madoff to villains from Dante’s Inferno, spoke of their feelings of betrayal and mistrust, and described how their families had lost money that would have gone to caring for disabled relatives.

“How could someone do this to us?” said Dominic Ambrosino, a retired New York City corrections officer who said he lost his life savings with Mr. Madoff and was the first victim to speak. “We worked honestly and so hard.”

Another victim, Sharon Lissauer, who said she invested all of her savings with Mr. Madoff, told the court: “He should spend his whole life in jail. He’s ruined so many people’s lives. He killed my spirit and shattered my dreams.”

After Mr. Madoff’s victims finished speaking, his lawyer, Ira Lee Sorkin, stood up and said the government’s request for a 150-year sentence bordered on absurd. He called Mr. Madoff a “deeply flawed individual,” but a human being nonetheless.

“Vengeance is not the goal of punishment,” Mr. Sorkin said.

Still, Mr. Sorkin added that Mr. Madoff expects to “live out his years in prison.”

But in meting out the maximum sentence, Judge Chin pointed out that no friends, family or other supporters had submitted any letters on Mr. Madoff’s behalf, attesting to the strength of his character or good deeds he had done.The hearing on Monday marked a climactic moment in the criminal case against Mr. Madoff, whose name has become synonymous with greed and fraud on Wall Street. Dozens of photographers and television camera crews from New York to Britain to China waited outside the federal district courthouse on Pearl Street as reporters, legal teams and Mr. Madoff’s victims filed toward the courtroom where Mr. Madoff will be sentenced.

“We’re hoping for a big sentence only as a deterrent,” Cynthia Friedman, who said she lost her life savings with Mr. Madoff, said outside the courtroom. “He can’t hurt us anymore.”

It was a scene reminiscent of the morning in March when Mr. Madoff walked into the same courthouse with his lawyers and pleaded guilty to a series of counts of fraud, theft and perjury. This time, however, Mr. Madoff was brought to court from his jail cell at the Metropolitan Correctional Center in Lower Manhattan.

Mr. Madoff’s case was playing out amid a tangle of lawsuits, criminal and civil investigations, and competing claims for restitution prompted by revelations of the outsize fraud at Bernard L. Madoff Investment Securities.

It will be at least another three months before the judge makes a decision on repaying the victims. Prosecutors requested more time to sift through Mr. Madoff’s records to determine how much was lost and how many people are owed.

Mr. Madoff’s accountant, David G. Friehling, was charged with securities fraud in March, and is so far the only other person to face criminal charges connected to the Ponzi scheme. A New York financier whose clients lost $2 billion with Mr. Madoff has been charged with fraud and deception in a civil suit by the New York State attorney general.

The inspector general of the Securities and Exchange Commission is examining how regulators failed for years to catch Mr. Madoff. Investment funds that channeled money to Mr. Madoff have been sued, and two have agreed to return millions they withdrew before Mr. Madoff’s December arrest.

Mr. Madoff will most likely return to his cell at the Metropolitan Correctional Center as federal prison officials determine where he will serve his sentence.

For decades, Mr. Madoff built his reputation — and his client base — on the promise of healthy returns that flowed in as reliably as the tides. Big hedge funds and notables like Elie Wiesel and Sandy Koufax entrusted their money to Mr. Madoff’s investment business, but so did hundreds of retirees and smaller investors.

But the reliable returns and monthly investment statements simply masked a Ponzi scheme that attracted new money to pay existing investors and finance his operating costs.

When the cash ran out, the illusion imploded.

Banco Santander to Pay $235 Million in Madoff Case
Zachery Kouwe

May 26, 2009, 12:22 pm

Banco Santander, which funneled $3 billion of its clients’ money to Bernard L. Madoff, agreed Tuesday to pay $235 million to settle potential legal claims by the trustee liquidating Mr. Madoff’s now-defunct brokerage firm.

The Spanish bank’s settlement with the trustee, Irving H. Picard, would raise the amount of assets the trustee has recovered for victims of Mr. Madoff’s enormous Ponzi scheme to more than $1.2 billion. As of Memorial Day, letters for commitments in excess of $116 million had been sent by Mr. Picard’s office to 237 victims of the Madoff fraud.

Mr. Picard said Santander, which had 17 million euros of its own capital exposed to the fraud, settled for 85 percent of the original claim against it. The bank steered money to Mr. Madoff through its Geneva-based hedge fund unit, Optimal Investment Services, which earned more than $100 million in fees from clients in 2006 and 2007.

Santander is one of several banks that have offered to compensate its clients who lost money in the fraud. In his lawsuit, Mr. Picard claimed that Optimal “should have known” about the fraud. He has sued several feeder funds that invested with Mr. Madoff for more than $10 billion.

Spanish prosecutors have said they are investigating Santander’s relationship with Mr. Madoff’s firm and are looking into into a trip made by one of the bank’s executives to visit Mr. Madoff a few weeks before he confessed to running a worldwide, multibillion-dollar Ponzi scheme.

Mr. Madoff pleaded guilty to fraud charges in March and is being held in jail in Manhattan ahead of his sentencing on June 29.

Receivers to Control 3 Madoff - Linked Merkin Funds
Filed at 12:42 p.m. ET

May 19, 2009

NEW YORK (Reuters) - Receivers would take control of three hedge funds run by prominent money manager Ezra Merkin and linked to the Madoff fraud, lawyers for New York's top legal officer and Merkin said on Tuesday.

The lawyers said in court they had reached an agreement in principal for one receiver to handle Ariel Fund Ltd and Gabriel Capital LP and a second receiver to control Ascot Partners LP as part of an effort to recover money for defrauded investors.

"We believe this resolution in principal will be in the public interest and serve the victims of the fraud," David Markowitz, an attorney for New York Attorney General Andrew Cuomo told State Supreme Court Justice Richard Lowe.

The judge gave Cuomo's office and Merkin's lawyers until May 28 to finalize the agreement, which comes after the attorney general sued Merkin for civil fraud in April, accusing him of steering $2.4 billion to confessed swindler Bernard Madoff and lying to investors.

Madoff, 71, a former nonexecutive chairman of Nasdaq, pleaded guilty in March to running a fraud of up to $65 billion, Wall Street's biggest investment scheme. He is jailed awaiting sentencing on June 29 and he is likely to spend the rest of his life in prison.

Merkin's lawyer, Andrew Levander, said in a written statement on Tuesday that the fund founder was working closely with Cuomo's office.

"As part of his continuing efforts to maximize the returns to investors in the Funds, Mr. Merkin has agreed in principle to appoint Guidepost Partners LLC, a leader in global investigations, security, and compliance, as the receiver for the Funds while he remains available to consult regarding the wind-down at no cost to the Funds," the statement said.

When Cuomo sued Merkin, Levander said Merkin performed extensive due diligence on Madoff, but he too was misled just like other investors, which number as many as 7,000, according to court documents.

Merkin also has been sued for more than $500 million by a trustee appointed in Manhattan federal bankruptcy court who is winding down the brokerage arm of Bernard L. Madoff Investment Securities LLC. Merkin faces numerous lawsuits by investors.

The proposal to appoint receivers also needs to be reviewed by lawyers for New York University, one of the institutions that sued Merkin.

The cases are People v J. Ezra Merkin and Gabriel Capital Corp 450879/2009 and New York University v Gabriel Capital Copr, J. Ezra Merkin, et al 603803/2008 in New York State Supreme Court
Madoff Trustee Starts ‘Hardship Program’ for Victims
NYTIMES "Deal Book"
May 8, 2009, 2:10 pm

The trustee charged with recovering assets for investors defrauded by Bernard L. Madoff has started a “hardship program” for individual victims to accelerate payments from the Securities Investor Protection Corporation.

The program, announced on Friday by the trustee, Irving H. Picard, requires individual victims to file an additional claim by July 2 to be eligible for an accelerated payment of up to $500,000 from S.I.P.C. Feeder funds, partnerships and other business entities are not eligible for the program, the trustee said.

In order to qualify, the trustee plans to evaluate each application based on various indicators of hardship. They include an inability to pay for necessary living expenses like food, housing, transportation and medical expenses; the necessity to return to work at the age of 65 or older; or declaring personal bankruptcy.

Hundreds of victims of Mr. Madoff’s vast global Ponzi scheme, many who are retirees, have lost their entire life savings and have been forced to sell their homes and move in with relatives. Mr. Picard is liquidating Mr. Madoff’s former firm and collecting assets, which will eventually be divided up among the victims of the fraud.

S.I.P.C., which provides insurance to customers of failed brokerage firms, can reimburse Madoff victims up to $500,000 each depending on how much they ultimately lost from the fraud.

Madoff investors ordered to return false profits 
Published on 4/24/2009

New York -- (AP) The trustee unraveling Bernard Madoff's Ponzi scheme is threatening legal action to recover $735 million from investors who unwittingly made money off the swindle.

For decades, Madoff paid steady profits to his clients, telling them the money came from the stock market. But the gains were fictitious. Madoff pleaded guilty last month to stealing from some investors to pay bogus profits to others.

Trustee Irving Picard has sent letters to 223 investors, ordering them to return money they withdrew before the scheme collapsed. He wants the money to be divided evenly among all victims. Lawyers representing some of those investors expressed dismay over the letters and said they would challenge their legality.

Madoff Is Jailed After Pleading Guilty
March 13, 2009

Bernard L. Madoff pleaded guilty Thursday to all the charges against him and expressed remorse for a vast Ponzi scheme that bilked investors out of billions of dollars.

Standing before Judge Denny Chin in United States District Court in Manhattan, Mr. Madoff was sworn in and reminded that he was under oath. Noting that he had waived indictment, Judge Chin asked, “How do you now plead,” guilty or not guilty?

“Guilty,” Mr. Madoff responded.

His formal confession will cost him his liberty. Rather than letting him remain free on bail and return to his apartment on the Upper East Side of Manhattan, Judge Chin ordered Mr. Madoff immediately jailed as he awaits sentencing.

“He has incentive to flee, he has the means to flee, and thus he presents the risk of flight,” Judge Chin said. “Bail is revoked.”

The 11 counts of fraud, money laundering, perjury and theft to which Mr. Madoff pleaded guilty carry maximum terms totaling 150 years. Sentencing was scheduled for June 16.

Dressed in a gray suit, Mr. Madoff, 70, appeared in a courtroom packed with journalists, lawyers and some of his victims. Flanked by his lawyers, he stood up and began to answer questions from Judge Chin about whether he understood the ramifications of his guilty plea, whether he was satisfied with his legal representation and whether he was competent to enter the guilty plea.

At first, Mr. Madoff’s voice was barely audible as he acknowledged the litany of crimes.

“Try to keep your voice up so that I can hear you, please,” Judge Chin said. At one point, Mr. Madoff asked for water.

In recounting how he sustained a 20-year fraud whose collapse erased as much as $65 billion that his customers thought they had in their accounts, Mr. Madoff said, “I believed it would end shortly and I would be able to extricate myself and my clients from the scheme.”

“I cannot adequately express how sorry I am for what I have done,” he said. “I am deeply sorrowful and ashamed.”

Although Mr. Madoff admitted to operating what he called “a Ponzi scheme through the investment advisory side of my business,” he said all other aspects of his enterprise, operated by his sons and brother, were legitimate, profitable and successful.

The court session marked the first time since his arrest by federal agents on Dec. 11 that Mr. Madoff had spoken publicly about how he ran what was perhaps the largest fraud in Wall Street history, a global scheme that ensnared hedge funds, nonprofit groups and celebrities, and devastated the life savings of thousands of people.

During the 75-minute court hearing, a few victims were permitted to speak up against accepting the plea. One was Maureen Ebel, who said: “If we go to trial we have more of a chance to comprehend the global scope of this horrendous crime. We can hear and bear witness to the pain that Mr. Madoff has inflicted on the young, the old and the infirm.”

A federal prosecutor, Marc O. Litt, said the government was continuing its investigation and was looking for assets and anyone else who might be criminally responsible for the fraud.

It remains unclear where the billions of dollars that his victims lost has gone, and whether those victims will ever see any meaningful restitution. Prosecutors have said the government is seeking $170 billion in forfeited assets from Mr. Madoff, apparently representing all the money that ran through Madoff accounts traceable to the crimes.

A court-appointed trustee liquidating Mr. Madoff’s business has so far only been able to identify about $1 billion in assets to satisfy claims.

This week, the government said Mr. Madoff had 4,800 client accounts at the end of November supposedly containing $64.8 billion in customer savings. But the government said Mr. Madoff’s business “held only a small fraction of that balance.”

As Mr. Madoff arrived at the courthouse early Thursday morning, helicopters buzzed overhead and television news trucks lined the street. The day’s events marked a coda in the saga of a man whose name has become shorthand for an entire era of greed and deceit on Wall Street.

With the promise of steady, unwavering returns, Bernard L. Madoff Investment Securities enticed thousands of investors including boldface names like Senator Frank Lautenberg of New Jersey, the Hall of Fame pitcher Sandy Koufax and a charity run by the Nobel Peace Prize laureate Elie Wiesel.

This week, the government offered more details on how Mr. Madoff ran the fraud that had financed his lush lifestyle of a beachfront mansion in the Hamptons, an estate near the French Riviera and yachts in New York, Florida and the Mediterranean.

Prosecutors said that Mr. Madoff concocted an elaborate charade to make it seem like he was running a legitimate investment business when, in reality, “no such business was actually being conducted.” He hired employees with little training or experience and directed them to generate false monthly account statements.  He shuttled millions between banks in New York and London to make it seem as if he was “conducting securities transactions in Europe on behalf of investors when, in fact, he was not conducting such transactions,” prosecutors said. And they said he repeatedly lied to regulators from the Securities and Exchange Commission to cover up his scheme.

Madoff Waives Indictment, to Plead Guilty
Filed at 3:48 p.m. ET
March 10, 2009

NEW YORK (Reuters) - There was a "fair expectation" that accused swindler Bernard Madoff will plead guilty on Thursday to criminal charges in Wall Street's biggest fraud, his lawyer said in court on Tuesday.

Asked by Judge Denny Chin in U.S. District Court in Manhattan whether Madoff, 70, will plead guilty to 11 criminal counts by U.S. prosecutors on Thursday, his lawyer, Ira Lee Sorkin, said: "I think that is a fair expectation."

U.S. prosecutor Marc Litt said there was no plea agreement with Madoff.

At a court hearing in New York over potential conflicts of interest for Sorkin, Madoff said "Yes I am" when asked by the judge whether he was satisfied with his attorney continuing to represent him.

U.S. prosecutors have said Madoff, out on $10 million bail but under 24-hour house arrest and electronic surveillance in his luxury Manhattan apartment, ran the biggest Ponzi scheme in history. A Ponzi scheme is one in which early investors are paid with the money of new clients.

The purported swindle ran for decades with amazingly consistent returns of between 10 and 12 percent, but collapsed in last year's market meltdown, shocking thousands of investors worldwide.

Prosecutors indicate Madoff plea may be in works
By LARRY NEUMEISTER, Associated Press Writer

Posted on Mar 6, 4:02 PM EST

NEW YORK (AP) -- Prosecutors filed court papers Friday indicating Bernard Madoff may be ready to plead guilty to charges arising from one of the biggest financial frauds in history. Madoff, 70, is scheduled for court twice next week, including a Tuesday appearance to waive any potential conflicts of interest involving his lawyer, and a Thursday morning arraignment. A defendant must enter a plea - guilty or not guilty - at an arraignment.

The U.S. attorney's office suggested Friday in a brief court filing that the money manager is ready to waive an indictment and one of Madoff's lawyers said he had already done so. A waiver of indictment is a necessary procedural step before a defendant enters a guilty plea.

Prosecutors have a deadline of next Friday to bring an indictment against Madoff under the speedy-trials law.

Madoff has been confined to his Manhattan penthouse since his arrest in early December after authorities said he told his family that he had engaged in a $50 billion fraud. Authorities have since said money lost by investors might be less than $17 billion and the higher amount may represent false profits.

Madoff has never contested the allegations and recently surrendered millions of dollars in major assets, actions that typically precede plea deals.

Investigators have spent the last three months trying to untangle Madoff's complicated financial operation while attempting to return what is left of his assets to investors who lost billions. Madoff's cooperation could be key to explaining the mysteries and intricacies of his business, and also explain if others were involved in the fraud.

Daniel J. Horwitz, a Madoff defense lawyer, would only say "we've waived the right to indictment and the case will proceed by information."

Typically, a defendant is brought before a judge, waives indictment and enters a guilty plea the same day to a charging document known as an "information." It resembles an indictment but is brought by prosecutors rather than a grand jury.

Prosecutor's spokeswoman Rebekah Carmichael declined to comment.

Matthew Fishbein, a former chief of the criminal division in the federal prosecutor's office in Manhattan who is now in private practice, said a waiver of indictment is often followed quickly by a guilty plea but it does not have to be imminent.

"This seems to be a more complicated information and more back and forth going on. It may simply be that this basically buys them some time," he said.

Madoff already has surrendered rights to his business and any of the assets held by the business. A trustee overseeing his assets said he has identified nearly $1 billion in assets that are available to reimburse investors who have lost money.

Shortly after his arrest, Madoff offered to relinquish many of his and his wife's assets, including properties in Palm Beach, Fla., and Antibes, France, as well as his boats and cars, according to a Jan. 13 court filing signed by Horwitz and fellow defense attorney Ira Sorkin.

Madoff’s Lawyers Fight Efforts to Take Assets
From Diana Henriques, a DealBook colleague:
March 2, 2009, 8:13 pm

Lawyers for Bernard L. Madoff have asked that prosecutors be barred from seizing the Madoff’s New York City apartment and $62 million in bonds and cash that they say belong to Mr. Madoff’s wife, Ruth, and “are unrelated to the alleged Madoff fraud.”

The request was acknowledged, but not granted, in court documents filed on Monday both by federal prosecutors and the trustee overseeing the liquidation of Mr. Madoff’s estate for the benefit of customers who say they have lost billions they entrusted to Mr. Madoff over many years.

Mr. Madoff’s assets were frozen in December after he was arrested on charges of operating a worldwide Ponzi scheme, with losses he allegedly said were as high as $50 billion. In January, his wife agreed to a voluntary asset freeze when prosecutors, citing the couple’s effort to mail out expensive jewelry to family and friends, sought to revoke her husband’s bail.

Since then, a court-appointed trustee, Irving H. Picard of Baker & Hostetler, has been working to identify and sell assets of the estate. In an application on Monday to United States District Judge Louis L. Stanton, Mr. Picard asked that Mr. Madoff be allowed to “voluntarily transfer” other assets — including his stake in his brokerage firm, artwork at his offices and corporate tickets for various entertainment events — to the trustee for liquidation for the benefit of his former customers.

Judge Stanton granted the request, opening the way for a series of asset sales that could increase the value of the estate. Mr. Picard has been attempting for more than two months to find a buyer for the legitimate operations of Mr. Madoff’s firm, Bernard L. Madoff Investment Securities. His application may indicate that a buyer has been found — an event which may provide a substantial infusion of cash into the estate, which so far totals less than $1 billion.

Judge Stanton did not lift the asset freeze covering the real estate the Madoffs own: Mrs. Madoff’s apartment in Manhattan and her home in Palm Beach and their home in Montauk, N. Y. But he did rule that prosecutors could seize other Madoff property under federal forfeiture laws without violating the asset freeze.

Texas Financial Firm Accused by U.S. of $8 Billion Fraud

February 18, 2009

HOUSTON — Stopping what it called a “massive ongoing fraud,” the Securities and Exchange Commission on Tuesday accused Robert Allen Stanford, the chief of the Stanford Financial Group, of fraud in the sale of about $8 billion of high-yielding certificates of deposit held in the firm’s bank in Antigua. Also named in the suit were two other executives and some affiliates of the financial group.

In the complaint, filed in Federal District Court in Dallas, the S.E.C. accused Mr. Stanford and two associates — James M. Davis, a director and chief financial officer of Stanford Group and the Antigua-based bank affiliate, and Laura Pendergest-Holt, the chief investment officer of both organizations — with misrepresenting the safety and liquidity of the uninsured CDs.

The CDs were sold by Stanford International Bank through the firm’s registered broker-dealer and investment adviser, which are in Houston. Both the bank, which claims $8.5 billion in assets and 30,000 clients in 131 countries, and the brokerage unit, which operates about 30 offices in the United States, were named in the S.E.C. suit. Stanford Financial asserts that it advises about $50 billion in assets.

Shortly after 10 a.m. Central time, about 40 police officers and other law enforcement officials simultaneously entered Stanford Group’s two office buildings in Houston. Many of the law enforcement personnel carried large black briefcases. Stanford group’s headquarters are in two offices in Houston, one within a tower of the Houston Galleria shopping mall, and the other across the street.

A spokesman for Stanford Group declined to comment.

In its complaint, the S.E.C. said it could not account for the $8 billion in assets that were housed in the Antigua bank after issuing subpoenas for bank records and to various witnesses. Most witnesses, including Mr. Stanford, Mr. Davis, and the Antigua-based bank’s president, failed to appear to testify nor did they produce documents shedding light on the assets.

Ms. Pendergest-Holt said in testimony to the S.E.C. that she could not account for the assets, asserting that Mr. Stanford and Mr. Davis were the only ones with access to the bank’s assets.

In the complaint, the S.E.C. called “improbable, if not impossible” claims by the offshore bank that it paid “significantly” higher returns on its CDs because of the high quality of its investments.

The S.E.C. accused the bank and its affiliates of falsely stating in marketing materials that client funds were placed in liquid financial instruments, when in fact they were invested in private equity funds and real estate. On Nov. 28, Stanford International Bank quoted a rate of 5.375 percent on a $100,000 three-year CD, compared with rates of less than 3.2 percent at American banks. The bank recently has offered rates of more than 10 percent on five-year CDs, the filing stated.

In the complaint, the S.E.C. requested that the defendants’ assets be frozen and that a receiver be appointed to take control of business operations. It also requested that the assets of the bank and other offshore units be repatriated. And the agency asked that Mr. Stanford and the other named executives be required to surrender their passports.

The S.E.C. has come under fire in Congress and the media for ignoring repeated warnings over a period of years about the Bernard L. Madoff, who is accused of running a $50 billion Ponzi scheme. While investigators have been looking at Mr. Stanford and his financial empire’s activities for many months, the scrutiny into the too-good-to-be-true returns on the CDs increased substantially after the Madoff case.

Oddly enough, even the Stanford operation was touched by Mr. Madoff. Despite the fact the Antigua-bank assured investors in a report in December 2008 that it had no “direct or indirect” exposure Mr. Madoff’s funds, the bank suffered an estimated $400,000 in losses, apparently through investments in so-called “feeder funds.”

Additionally, the S.E.C. accused Stanford Capital Management, another Houston-based investment advisory unit, of inflating the performance of its $1.2 billion-asset Stanford Allocation Strategy mutual fund in promoting it to prospective investors.

The complaint also accused the offshore banking unit and the Houston-based broker dealer of violating provisions of the Investment Company Act of 1940 in failing to register as an investment company.

Clifford Krauss reported from Houston, and Phillip L. Zweig and Julie Creswell from New York.

Money Manager Is Missing in Florida

January 18, 2009

MIAMI — A Florida money manager is missing and the police have opened an investigation into the possible disappearance of “hundreds of millions” of dollars, according to the authorities.

The police are searching for Arthur Nadel, 75, a prominent Sarasota philanthropist and fund manager who was reported missing by his family Wednesday. He left a note, described as a suicide note by The Sarasota Herald- Tribune, that reported that investors could be out as much as $350 million.  The Sarasota police are investigating complaints from at least five investors in Mr. Nadel’s funds, run from a management office in Sarasota, that their money has disappeared.

“It was brought to our attention that there has been a very significant number of victims with a very significant amount of money that has disappeared,” Captain Bill Spitler of the Sarasota police said. “Allegedly it’s hundreds of millions of dollars.”

The investigation began just over a month after the authorities arrested Bernard L. Madoff, the suspected mastermind of a Ponzi scheme that may have cost investors $50 billion...full story here.

Madoff Trustee Seeks Wide Power to Subpoena
January 3, 2009

The trustee overseeing the bankruptcy of Bernard L. Madoff’s trading firm has made an urgent request to the court for unusually broad authority to subpoena witnesses and documents, citing the vast scale of what is alleged to be a $50-billion Ponzi scheme.  While not unprecedented, the request from the trustee, Irving H. Picard, is far from routine, and it illustrates how much Mr. Picard’s burdens have expanded beyond a trustee’s traditional tasks of identifying assets and selling them to satisfy claims.

Noting that “the debtor’s operations were allegedly a massive fraudulent enterprise,” Mr. Picard said he needed the authority to issue expedited subpoenas to investigate those allegations — and that his need was “most urgent.”

The request was filed Wednesday amid new allegations that Mr. Madoff had been pulling in fresh investors — and at least $10 million in cash — within a week of his arrest on Dec. 11 on federal fraud charges.  The trustee is just one of several investigators trying to determine what Mr. Madoff did with investors’ money. Federal prosecutors are conducting a criminal investigation, while the Securities and Exchange Commission continues its regulatory inquiry.

The S.E.C. is also conducting an internal examination of why it failed to respond aggressively to previous warnings about Mr. Madoff, going back several years. And the House Financial Services Committee will hold a hearing on Monday to explore the regulatory implications of the Madoff case, with a witness list that includes the S.E.C.’s inspector general.  According to his lawyers, Mr. Madoff — free on a $10 million bond but confined to his Manhattan apartment — is cooperating with federal authorities.

Few details have emerged about the case beyond those included in the earliest complaints: That Mr. Madoff’s sons questioned him on Dec. 10 about his plan to distribute several hundred million dollars in bonuses two months ahead of schedule; when confronted, he confessed that his business was a fraud whose losses could run as high as $50 billion. His sons promptly reported the confession to federal authorities, and their father was arrested the next day.

In a case where so much remains unknown, the new complaint filed this week by one of Mr. Madoff’s final investors offers a small glimpse into his dealings with his customers in the days just before he was arrested.
The accusation was made by a family corporation set up by Martin Rosenman, a resident of Great Neck, N.Y., and the president of Stuyvesant Fuel Service, a heating oil distributor in the New York area. 
According to his lawyer, Howard Kleinhendler of Wachtel & Masyr, Mr. Rosenman had been referred to Mr. Madoff by a friend who invested successfully with him over many years — “the usual story, unfortunately,” he added.

Around Dec. 3 — about the time Mr. Madoff was expressing some concern to colleagues about getting $7 billion in redemption demands, according to other court filings — Mr. Rosenman called Mr. Madoff at his office, Bernard L. Madoff Investment Securities.  Mr. Rosenman wanted to invest $10 million with Mr. Madoff, according to the complaint, filed in federal bankruptcy court on Wednesday.

“Mr. Madoff stated that the fund was closed until Jan. 1, 2009, but that Mr. Rosenman could wire money to a BMIS account where it would be held until the fund opened after the New Year,” the complaint continued. The money was wired to a Madoff bank account at JPMorgan Chase on Dec. 5.  On Dec. 9 — the day Mr. Madoff proposed the early bonus payments and two days before he was arrested — Mr. Rosenman was notified by the Madoff firm that his money had been received and invested.

No record of that transaction has been found, Mr. Kleinhendler said. “We don’t think it happened — we don’t think any securities were bought or sold,” he added.

“To the contrary, we think he was deliberately collecting money,” he continued. “He was trying to get more money in the door for this final distribution he wanted to make.”

Although Mr. Madoff reportedly told his sons he had $100 million and $200 million to distribute, it is up to Mr. Picard, the bankruptcy trustee, to determine what assets can be recovered for the benefit of customers of the firm.  Besides his investigative efforts, Mr. Picard is seeking a buyer for the separate proprietary and wholesale stock-trading operations that, before this scandal, were the foundation of Mr. Madoff’s reputation. Those operations have been suspended since the scandal broke, and Lazard Frères & Company has been hired by the trustee to help find a buyer for them.

In an exclusive interview on Friday, Mr. Picard said he was hopeful that those stock-trading businesses would be sold quickly, “perhaps by the end of next week.”

It is not clear what the businesses will fetch. Greg LaRoche of LaRoche Research in Providence, R.I., said that one rule of thumb would value them at about three times their net income, which would yield a price of about $200 million based on an audit from late 2007 — a substantial discount from the firm’s reported net worth of roughly $670 million at that time.  Other investment bankers were reluctant to put a price on the Madoff operations, citing the uncertain market environment and the cloud the firm is now under, although one said the range could be $200 million to $400 million.

Mr. Picard was named bankruptcy trustee at the request of the Securities Investor Protection Corporation, the federal agency that oversees the liquidation of failed brokerage firms. On Friday, he sent SIPC claims applications to every customer who had an open account at Madoff within 12 months of the bankruptcy filing, regardless of when the customer last made a deposit or withdrawal.  Even an investor who closed a Madoff account during the last year should be on the mailing list, he said.

People who believe they had a Madoff account but who do not get a claims package can print out the documents from the trustee’s Web site,, or from the SIPC site,

Madoff assets won't be made public
Posted: 12/31/2008 05:01:37 PM EST

A list of Bernard Madoffs assets scheduled to be filed with the Securities and Exchange Commission won't be made public, according to the regulator, which sued the money manager for allegedly directing a $50 billion fraud.

A federal judge ordered Madoff to provide the SEC an accounting of all investments, loans, lines of credit, business interests, brokerage accounts and other holdings. Madoffs lawyer, Ira Sorkin, said he would meet today's deadline for submitting the list. The court hasnt authorized its public disclosure, SEC enforcement official Andrew Calamari said. Madoff may very well have given money to other persons or other entities, said Fred Longer, a lawyer suing hedge fund operator Tremont Group Holdings Inc. over Madoff-related losses. He said the list will be useful primarily to investors suing Madoff directly. Those are the rabbit trails. They'll need to trace all of them to find the cash and it will take a lot of forensic efforts.

Madoff, 70, was charged earlier this month by federal prosecutors for directing an alleged Ponzi scheme through his New York investment firm. Sorkin has said Madoffs company is cooperating with the government. His client met with prosecutors earlier this month, according to people familiar with the case.

Shortly before he was arrested, Madoff allegedly told employees that he had $200 - $300 million left, according to an FBI complaint. Sorkin declined to comment on the amount of Madoffs remaining assets.

Arrested Dec. 11

Madoff's firm collapsed after he was arrested Dec. 11. He told his sons that he directed the Ponzi scheme, in which old investors are paid off with money from new ones, according to a lawyer for the brothers. The firm is liquidating under the Securities Investor Protection Corp., whose funds cover securities and cash claims of as much as $500,000 per customer, including as much as $100,000 in cash.

The Dec. 18 court order that Madoff disclose his assets required the list be given directly to the regulator, Calamari said. It does not authorize public release of materials related to the SECs ongoing investigation, the official said. The effort seeks to preserve and recover money for investors and hold wrongdoers accountable.

A catalog of Madoff's assets may be attractive to angry investors including hedge funds, universities and charities as they sue to recoup lost money. Madoff's investment advisory business may have had more than 4,000 customers, people familiar with investigation said earlier this month.

Inflated Losses

Losses disclosed by some clients may have been inflated by purported gains in their accounts with Madoff. Yeshiva University, which had previously valued its holdings with Madoff at $110 million, yesterday said its net investment was about $14.5 million before inflation by fictitious profits.

Longer Wednesday filed a lawsuit in Manhattan federal court against Tremont Group Holdings Inc., a hedge-fund firm owned by Massachusetts Mutual Life Insurance Co. The complaint seeks the recovery of losses suffered through the hedge fund firms investments with Madoff.

The lawyer represents Group Defined Pension Plan &amp; Trust, a Jersey City, New Jersey-based investor. Also sued was Tremonts auditor, Ernst &amp; Young LLP. Longer claims the accounting firm missed warnings about the alleged scheme. The complaint seeks class-action, or group, status.

Congressional Hearings

Congress is set to hold hearings next week on the Madoff scandal. Witnesses scheduled to appear before the House Financial Services Committee on Jan. 5 include David Kotz, the SEC's inspector general, Stephen Harbeck, president of the SIPC, and Harry Markopolos, a former investment firm employee who flagged suspicions about the alleged Ponzi scheme.

Madoff's firm was the 23rd-largest market maker on Nasdaq in October, handling an average of about 50 million shares a day, according to exchange data. It took orders from online brokers for some of the largest U.S. companies, including General Electric Co. and Citigroup Inc.  Madoff, who hasn't formally responded to the securities fraud charge, may have to appear in Manhattan federal court by Jan. 12 unless he is indicted before then.

Tuesday, the trustee now in charge of Bernard L. Madoff Investment Securities LLC obtained court approval to use $28.1 million out of its accounts as it unwinds the firm.  The estate requires the funding to get to the sale of certain assets, said Richard Bernard, an attorney representing Irving Picard, the trustee appointed by the SIPC to supervise Madoff's company.

The SIPC said that the use of some of the Madoff firms funds wont diminish customer returns, according to a statement from the agency and Picard.

Bank Deal

Picard reached a deal with Bank of New York Mellon Corp., which holds the funds, to have them released. U.S. Bankruptcy Judge Burton Lifland in Manhattan said the court papers outlining the agreement were very basic and asked the lawyer for more information on the accounts.

Bernard said there are more funds and accounts, without being specific. Bank of New York is holding some funds because it may have set-off rights on certain claims, he said, adding he was limited in what he could say in open court because of ongoing criminal investigations.  Picard is tasked with maximizing assets for the firm as investors that had about $36 billion with Madoff seek the return of their money.

Lifland last week gave him authority to share confidential information, such as proprietary trading programs, with potential buyers of the Madoff firms market-maker unit.  Picard will mail claim forms to customers and creditors of Madoff Securities by Jan. 9, the SIPC said.

Brother: Madoff Suicide Investor Lost Own Money
Filed at 1:41 p.m. ET
December 26, 2008

PARIS (AP) -- The French financier who killed himself after losing more than $1 billion of his clients' investments to Bernard Madoff's alleged Ponzi scheme also saw his own family's money disappear, his older brother told The Associated Press on Friday.

Rene-Thierry Magon de la Villehuchet and his business partner Patrick Littaye were ''totally ruined,'' Bertrand Magon de la Villehuchet said.  Bertrand said his brother had ''invested his own fortune'' with Madoff -- up to several tens of millions of dollars -- along with money from friends and family.  Rene-Thierry, 65, was found dead at his desk in New York on Tuesday, both of his wrists slashed. A box cutter and a bottle of sleeping pills lay nearby. Police say it was a suicide.  Rene-Thierry had begun investing with Madoff three or four years ago and had a total of $1.4 billion invested with him when the scandal came crashing down, according to Bertrand.

''At first he thought he'd be able to get the money back. He was very determined. Gradually he realized he wouldn't be able to,'' Bertrand said in a telephone interview from his home on Paris' chic Place des Vosges.

''My brother was a man of simple tastes,'' Bertrand said. ''He was a very modest man.''

Madoff was arrested Dec. 11 and allegedly told FBI agents he had masterminded a $50 billion fraud.

Head of Fund Invested in Madoff Said to Commit Suicide
December 23, 2008, 12:28 pm     

Rene-Thierry Magon de la Villehuchet, a founder of the hedge fund Access International Advisors, was found dead early Tuesday in his office in Manhattan, the French business daily La Tribune reported on its Web site, after losing as much as $1.4 billion that had been invested with Bernard L. Madoff, the money manager accused of running a $50 billion Ponzi scheme. Mr. de la Villehuchet, 65, committed suicide, La Tribune said, citing a someone close to Mr. de la Villehuchet.

Mr. de la Villehuchet had been trying to recover the money that Access International raised in Europe and invested through Mr. Madoff’s business, La Tribune reported.

Paramedics responded to a call at a Manhattan address matching that of Access International, people briefed on the situation told DealBook. They found a victim, whom they pronounced dead, but have not yet identified the man.

Luxalpha, a $1.4 billion Luxembourg-based fund sold across Europe, invested in Bernard L. Madoff Investment Securities. Access International last week called Mr. Madoff’s arrest “a shocking development” in a note to investors. Investors in the fund included a unit of Rothschild and several clients of the Swiss bank UBS.

UBS had been the custodian and administrator of the fund until this year when Access International took over. No one answered the phone at Access International’s New York office.

UBS has stated that Mr. Madoff was not on the bank’s wealth management recommended list as a direct investment option but it produced and sold funds containing the investment manager’s products. UBS would establish fund of funds structures at clients’ requests.

–Zachery Kouwe

Madoff Investor Seeks Relief From SEC: Report
Filed at 2:15 a.m. ET
December 23, 2008

(Reuters) - An investor who lost nearly $2 million investing with Bernard Madoff has filed a claim against the U.S. Securities and Exchange Commission (SEC) alleging the agency was negligent in failing to detect an alleged decades-long fraud, the Wall Street Journal said.

Phyllis Molchatsky, a 61-year-old retiree from Valley Cottage, New York, is seeking $1.7 million in damages from the agency, the paper said.

The claim is believed to be the first attempt by an investor to recover lost money from regulators, according to the paper.

The SEC's "statutory purpose is to protect the public interest," Howard Elisofon, the lawyer representing Molchatsky, told the paper.

"We feel they fell down on the job in this instance," Elisofon, who is also a former SEC enforcement attorney, told the paper.

The SEC could not be immediately reached for comment by Reuters.

(Reporting by Ajay Kamalakaran in Bangalore)

Fraud Inquiry Centers on Investment Firm’s Sanctum
December 15, 2008

The epicenter of what may be the largest Ponzi scheme in history was the 17th floor of the Lipstick Building, an oval red-granite building rising 34 floors above Third Avenue in Midtown Manhattan.  A busy stock-trading operation occupied the 19th floor, and the computers and paperwork of Bernard L. Madoff Investment Securities filled the 18th floor.

But the 17th floor was Bernie Madoff’s sanctum, occupied by fewer than two dozen staff members and rarely visited by other employees. It was called the “hedge fund” floor, but federal prosecutors now say the work Mr. Madoff did there was actually a fraud scheme whose losses Mr. Madoff himself estimates at $50 billion.  The tally of reported losses climbed through the weekend to nearly $20 billion, with a giant Spanish bank, Banco Santander, reporting on Sunday that clients of one of its Swiss subsidiaries have lost $3 billion. Some of the biggest losers were members of the Palm Beach Country Club, where many of Mr. Madoff’s wealthy clients were recruited.

The list of prominent fraud victims grew as well. According to a person familiar with the business of the real estate and publishing magnate Mort Zuckerman, he is also on a list of victims that already included the owners of the New York Mets, a former owner of the Philadelphia Eagles and the chairman of GMAC.  And the 17th floor is now an occupied zone, as investigators and forensic auditors try to piece together what Mr. Madoff did with the billions entrusted to him by individuals, banks and hedge funds around the world.

So far, only Mr. Madoff, the firm’s 70-year-old founder, has been arrested in the scandal. He is free on a $10 million bond and cannot travel far outside the New York area.  According to charges against Mr. Madoff, his firm paid off earlier investors with money from new investors, fitting the classic definition of a Ponzi scheme. It unraveled as markets declined and many investors who lost money elsewhere sought to withdraw money from their investments with Mr. Madoff.

But a question still dominates the investigation: how one person could have pulled off such a far-reaching, long-running fraud, carrying out all the simple practical chores the scheme required, like producing monthly statements, annual tax statements, trade confirmations and bank transfers.  Firms managing money on Mr. Madoff’s scale would typically have hundreds of people involved in these administrative tasks. Prosecutors say he claims to have acted entirely alone.

“Our task is to find the records and follow the money,” said Alexander Vasilescu, a lawyer in the New York office of the Securities and Exchange Commission. As of Sunday night, he said, investigators could not shed much light on the fraud or its scale. “We do not dispute his number — we just have not calculated how he made it,” he said.

Scrutiny is also falling on the many banks and money managers who helped steer clients to Mr. Madoff and now say they are among his victims.  Mr. Madoff was not running an actual hedge fund, but instead managing accounts for investors inside his own securities firm.

While many investors were friends or met Mr. Madoff at country clubs or on charitable boards, even more had entrusted their money to professional advisory firms that, in turn, handed it to Mr. Madoff — for a fee. Investors are now questioning whether these paid advisers were diligent enough in investigating Mr. Madoff to ensure that their money was safe. Where those advisers work for big institutions like Banco Santander, investors will most likely look to them, rather than to the remnants of Mr. Madoff’s firm, for restitution.

Santander may face $3.1 billion in losses through its Optimal Investment Services, a Geneva-based fund of hedge funds that is owned by the bank. At the end of 2007, Optimal had 6 billion euros, or $8 billion, under management, according to the bank’s annual report — which would mean that its Madoff investments were a substantial part of Optimal’s portfolio.  A spokesman for Santander declined to comment on the case.

Other Swiss institutions, including Banque Bénédict Hentsch and Neue Privat Bank, acknowledged being at risk, with Hentsch confirming about $48 million in exposure.  BNP Paribas said it had not invested directly in the Madoff funds but had 350 million euros, or about $500 million, at risk through trades and loans to hedge funds. And the private Swiss bank Reichmuth said it had 385 million Swiss francs, or $327 million, in potential losses. HSBC, one of the world’s largest banks, also said it had made loans to institutions that invested in Madoff but did not disclose the size of its potential losses.

Calls to Mr. Zuckerman and his representatives were not returned on Sunday night.

Losses of this scale simply do not seem to fit into the intimate business that Mr. Madoff operated in New York.By the elevated standards of Wall Street, the Madoff firm did not pay exceptionally well, but it was loyal to employees even in bad times. Mr. Madoff’s family filled the senior positions, but his was not the only family at the firm — generations of employees had worked for Madoff and invested their savings there.  Even before Madoff collapsed, some employees were mystified by the 17th floor. In recent regulatory filings, Mr. Madoff claimed to manage $17 billion for clients — a number that would normally occupy far more than the 20 or so people who worked on 17.

One Madoff employee said he and other workers assumed that Mr. Madoff must have a separate office elsewhere to oversee his client accounts.  Nevertheless, Mr. Madoff attracted and held the trust of companies that prided themselves on their diligent investigation of investment managers.

One of them was Walter M. Noel Jr., who struck up a business relationship with Mr. Madoff 20 years ago that helped earn his investment firm, the Fairfield Greenwich Group, millions of dollars in fees. Indeed, over time, one of Fairfield’s strongest selling points for its largest fund was its access to Mr. Madoff.  But now, Mr. Noel and Fairfield are the biggest known losers in the scandal, facing potential losses of $7.5 billion, more than half the firm’s assets.

Jeffrey Tucker, a Fairfield co-founder and former federal regulator, said in a statement posted on the firm’s Web site: “We have worked with Madoff for nearly 20 years, investing alongside our clients. We had no indication that we and many other firms and private investors were the victims of such a highly sophisticated, massive fraudulent scheme.”

The huge loss comes at a time when the hedge fund industry has already been wounded by the volatile markets. Several weeks ago, Fairfield had halted investor redemptions at two of its other funds, citing the tough market conditions as dozens of hedge funds have done. The firm reported a drop of $2 billion in assets between September and November.  Fairfield was founded in 1983 by Mr. Noel, the former head of international private banking at Chemical Bank, and Mr. Tucker, a former Securities and Exchange Commission official. It grew sharply over the years, attracting investors in Europe, Latin America and Asia.

Mr. Noel first met Mr. Madoff in the 1980s, and Fairfield’s fortunes grew along with the returns Mr. Madoff reported. The two men were very different: Mr. Madoff hailed from eastern Queens and was tied closely to the Jewish community, while Mr. Noel, a native of Tennessee, moved in the Greenwich social scene with his wife, Monica.

“He was a person of superb ethics, and this has to cut him to the quick,” said George L. Ball, a former executive at E. F. Hutton and Prudential-Bache Securities who knows Mr. Noel.

Fairfield boasted about its investigative skills. On its Web site, the firm claimed to investigate hedge fund managers for 6 to 12 months before investing. As part of the process, a team of examiners conducted personal background checks, audited brokerage records and trading reports and interviewed hedge fund executives and compliance officials.  In 2001, Mr. Madoff called Fairfield and invited the firm to inspect his books after two news reports questioned the validity of his returns, according to a person close to Fairfield. Outside auditors hired to inspect Mr. Madoff’s operations concluded that “everything checked out,” this person said.

The Fairfield Greenwich Group “performed comprehensive and conscientious due diligence and risk monitoring,” Marc Kasowitz, a lawyer for Fairfield, said in a statement. “FGG, like so many other Madoff clients, was a victim of a highly sophisticated massive fraud that escaped the detection of top institutional and private investors, industry organizations, auditors, examiners and regulatory authorities.”

Now, Fairfield is seeking to recover what it can from Mr. Madoff.

“It is our intention to aggressively pursue the recovery of all assets related to Bernard L. Madoff Investment Securities,” Mr. Tucker said in a statement. “We are also committed to the operation of our continuing funds. We hope to have a better idea of the entire situation as the facts develop.”

Working alongside the federal investigators on Madoff’s 17th floor, staff workers for Lee S. Richards 3d, the court-appointed receiver for the firm, are trying to determine what parts of the firm can keep operating to preserve assets for investors.

“We don’t have anything to report to investors at this time,” he said. “We are doing everything we can to protect the assets of the Madoff entities that are subject to the receivership, and to learn what we can about the operations of those entities.”

Eric Dash, Jennifer 8. Lee, Zachery Kouwe, Michael J. de la Merced and Nelson D. Schwartz contributed reporting.

Alleged Madoff fraud has worldwide exposure 
By JOE BEL BRUNO and JANE WARDELL, AP Business Writers 
Posted on Dec 15, 10:28 AM EST

NEW YORK (AP) -- The list of investors who say they were duped in one of Wall Street's biggest Ponzi schemes is growing, snaring some of the world's biggest banking institutions and hedge funds, the super rich and the famous, pensioners and charities.

The alleged victims who sunk cash into veteran Wall Street money manager Bernard Madoff's investment pool include real estate magnate Mortimer Zuckerman, the foundation of Nobel laureate Elie Wiesel, and a charity of movie director Steven Spielberg, according to the Wall Street Journal.

Among the world's biggest banking institutions, Britain's HSBC Holdings PLC, Royal Bank of Scotland Group PLC and Man Group PLC, Spain's Grupo Santander SA, France's BNP Paribas and Japan's Nomura Holdings all reported that they had fallen victim to Madoff's alleged $50 billion Ponzi scheme.

The 70-year-old Madoff (MAY-doff), well respected in the investment community after serving as chairman of the Nasdaq Stock Market, was arrested Thursday in what prosecutors say was a $50 billion scheme to defraud investors. Some investors claim they've been wiped out, while others are still likely to come forward.

"There were a lot of very sophisticated people who were duped, and that happens a great deal when you've had somebody decide to be unscrupulous," said Harvey Pitt, a former chairman of the Securities and Exchange Commission, a regulator in charge of monitoring investment funds like the one Madoff operated.

The extent of the potential damage prompted a leading fund manager in London to lash out at U.S. regulators for failing to detect the fraud earlier.

"I think now it is very difficult for people to invest in things that are meant to be regulated in America, because they haven fallen down in the job," Nicola Horlick, the manager of Bramdean Alternatives, which has 9 percent of its funds invested in Madoff's scheme, told the British Broadcasting Corp.

"All through the credit crunch this has been apparent," Horlick added. "This is the biggest financial scandal, probably, in the history of the markets."

Among U.S. investors, the Boston-based Robert I. Lappin Charitable Foundation, a charity that financed trips for Jewish youth to Israel, sacked its staff after revealing that the money for its operations was invested with Madoff.

New Jersey Sen. Frank Lautenberg, one of the wealthiest members of the Senate, entrusted his family's charitable foundation to Madoff. Lautenberg's attorney, Michael Griffinger, said they weren't yet sure the extent of the foundation's losses, but that the bulk of its investments had been handled by Madoff.

Lautenberg's foundation handed out more than $765,000 to at least 100 recipients in 2006, according to the most recent listing on Guidestar, which tracks charitable organization filings.

The foundation helps support a variety of religious, educational, civic and arts organizations in New Jersey and elsewhere, and its contributions range from a gift of than $300,000 to the United Jewish Communities of MetroWest New Jersey to a $2,000 donation to a children's program at the Hackensack Medical Center.

Reports from Florida to Minnesota included profiles of ordinary investors who gave Madoff their money. Some had been friends with him for decades, others were able to invest because they were a friend of a friend. They told stories of losing everything from $40,000 to an entire nest egg worth well over $1 million.

They join a list of more powerful investors that have come forward, all worried about the extent of their losses. The roster of names include former Philadelphia Eagles owner Norman Braman, New York Mets owner Fred Wilpon and J. Ezra Merkin, the chairman of GMAC Financial Services, among others.

The Wall Street Journal, citing a person familiar with the matter, said Mortimer Zuckerman, the chairman of real estate firm Boston Properties and owner of the New York Daily News and U.S. News & World Report, had significant exposure through a fund that invested substantially all of its assets with Mr. Madoff.

The Journal also said the Steven Spielberg charity, the Wunderkinder Foundation, in the past appears to have invested a significant portion of its assets with Mr. Madoff. It said the Elie Wiesel Foundation for Humanity, founded by the famed Holocaust survivor and writer, was hard hit by losses, citing two people familiar with the organization's investments.

Messages were left with the Zuckerman fund and Wunderkinder foundation. The Wiesel foundation said it was looking into the matter.

The Journal also reported potential investors and firms exposed to the alleged fraud included: Carl Shapiro, founder and former chairman of women's apparel company Kay Windsor Inc.; Bed Bath & Beyond Inc. co-founder Leonard Feinstein; Yeshiva University; EIM Group; UBS AG; Fairfield Greenwich Advisors; Tremont Capital Management; Maxam Capital Management and Ascot Partners.

Among those overseas confirming exposure on Monday, Banco Santander, the largest bank in the euro zone by market capitalization, said its clients have 2.33 billion euros ($3.07 billion) in exposure with Madoff, mostly through a fund called Optimal Strategic US Equity.

HSBC, Britain's largest bank, said a "small number" of its insitutional clients had exposure totaling some $1 billion in Madoff funds.

It added that it has custody clients who have invested with Madoff, but it did not believe those "custodial arrangements should be a source of exposure to the group."

Royal Bank of Scotland - Britain's second-largest bank, which is now 58 percent owned by the British government - said it could lose around 400 million euros pounds through exposure in trading and collateralized lending to funds of hedge funds invested with Bernard L Madoff Investment Securities LLC.

Man Group, the world's largest publicly traded fund manager that reported exposure of around $360 million on Monday, said "it appears that a systematic and comprehensive fraud may have been committed, evading a range of structural controls."

Japan's Nomura Holdings said it has 27.5 billion yen ($306 million) in exposure, but added that any losses were likely to be limited compared to its capital base.

French banks foresee nearly 1 billion euros in potential losses as indirect victims of the alleged fraud.

Natixis, France's fourth largest bank, set its maximum indirect exposure at about 450 million euros. A statement by the investment bank said it made no direct investments in hedge funds managed by Madoff. However, it said that some of its clients' money was invested in funds managed by "first class custodians," which in turn entrusted those securities to Madoff's investment securities company.

Both Societe Generale and Credit Agricole said they had "negligible" exposure of below 10 million euros each. However, the euro zone's largest bank, BNP Paribas, has estimated its risk exposure to hedge funds managed by Madoff at up to 350 million euros.

In a statement Sunday, BNP Paribas said it has no investment of its own in Madoff's hedge funds, but "does have risk exposure to these funds through its trading business and collateralized lending to funds of hedge funds."

Swiss bank Union Bancaire Privee indicated it had hundreds of millions of dollars in client assets invested under the management of Madoff. The Geneva bank, one of Switzerland's largest, did not disclose a total amount invested, but did say the exposure of its clients "represents less than 1 percent of the total assets under management of the bank."

UBP's announcement Monday followed weekend disclosures by Swiss banks Reichmuth & Co of Lucerne, Benedict Hentsch of Geneva and Neue Privat Bank of Zurich that they had millions of dollars worth of client assets at risk in the case.

In Germany, Deutsche Bank and Commerzbank both declined to comment on the matter.

On Friday, representatives from major U.S. banks - Bank of America Corp., Citigroup Inc., PNC Financial Services Group Inc. and Merrill Lynch & Co. - declined to comment on if they had exposure to Madoff's company. Both BlackRock Inc. and Goldman Sachs Group Inc. said they had no exposure.

Morgan Stanley, Wells Fargo & Co., Comerica Inc. and U.S. Bancorp did not return calls seeking comment.

Swiss Bank Sees $327M at Risk in Madoff Affair
Filed at 11:32 a.m. ET
December 14, 2008

GENEVA (AP) -- The private Swiss bank Reichmuth & Co says it has 385 million Swiss francs ($327 million) at risk in the case of U.S. financier Bernard L. Madoff, who has been accused of securities fraud.

A letter to investors posted on the Lucerne bank's Web site Sunday says the exposure is through the Reichmuth Matterhorn, the bank's ''fund of hedge funds,'' and that amount represents about 3.5 percent of the 11 billion francs ($9.4 billion) under the bank's management.

''We sincerely regret that Reichmuth Matterhorn is affected ... ,'' the letter said.

It is the second private Swiss bank to acknowledge having investments in funds managed by Madoff. The Geneva-based Banque Benedict Hentsch Fairfield Partners SA says its exposure is 56 million Swiss francs ($47.5 million) of client assets.

Swiss news media speculated Sunday that the total loss to banks in Switzerland could run into the billions of francs (dollars), but Swiss authorities said they were unable to say how much was at stake.

Madoff, a former chairman of Nasdaq stock market, was arrested Thursday in New York hours after the collapse of Bernard L. Madoff Investment Securities LLC. He has been accused by U.S. authorities of running a phony investment business that lost at least $50 billion.

Unexpected Drop in China’s Imports and Exports
December 11, 2008

BEIJING — China’s exports fell for the first time in seven years, the government reported Wednesday, sliding 2.2 percent in November and providing stark evidence that the global financial crisis has arrived here in earnest.

In October, by contrast, exports had surged 19.2 percent.

Imports also plunged sharply last month, falling 17.9 percent and widening the trade surplus to $40 billion, from $35.2 billion in October.

Taken together, the trade figures will be bracing to those who had viewed China as a potential savior for the slumping economies of the Europe, Japan and the United States.

“We were expecting a slowdown but the magnitude is a bit shocking,” Wang Tao, an analyst at UBS Securities, said.

The figures, together with further signs of a sagging economy in Japan, paint a picture of economic gloom spreading across Asia — even if much of the region will suffer from a less severe downturn than the United States and Europe.

The worrisome developments will put added pressure on the Chinese government, which only last month announced a $586 billion stimulus package aimed at cushioning the effects of the global slowdown. In recent weeks, the government has reduced interest rates and taxes on stock trades and announced other measures aimed at lifting domestic consumption.

In a report broadcast on China National Radio after the trade figures were released, the government vowed to expand spending and cut taxes next year in an effort to spur job creation and bolster agriculture, social security, education and small and medium-size enterprises.

Beijing will also seek to ensure “healthy and stable” growth of the nation’s property markets, which has slowed sharply in recent months.

In another batch of sobering news, the government said that direct foreign investment fell 36.5 percent from a year earlier and that the producer price index, a measure of inflation at the factory level, had fallen to its lowest rate in two years. That figure, 2 percent in November, was 6.6 percent a month earlier. In August, when that number hit 10.1 percent, the government was focused on stemming the threat of inflation.

Exports are a mainstay of China’s economy; by one measure they make up 40 percent of gross domestic product. While some experts dispute that figure, analysts say the slumping demand for Chinese goods will probably pull down the nation’s growth rate, which was 9 percent in the third quarter, close to or even below the 7 percent figure that many Chinese economists contend is the minimum for maintaining social stability.

In recent months, evaporating export demand has forced thousands of factories to close in Southern China’s Pearl River Delta. Tens of thousands of jobs have disappeared, fueling protests by unemployed workers demanding back pay.

Late last month, President Hu Jintao warned that the global financial crisis was threatening to undermine three decades of head-spinning expansion.

Qu Hongbin, the chief China economist at HSBC, said he expected things to get worse as the global recession further sapped the demand for Chinese goods. He suggested that exports could fall as much as 19 percent in the first quarter of 2009.

“Combined with cooling property markets, this points to the rising risk of a hard landing,” he said in a statement. “It’s official: as the world’s workshop, China will suffer as the global downturn deepens.”

Since it joined the World Trade Organization in 2001, China’s exports have quadrupled, helping transform it into the world’s fourth-largest economy.

In a survey of more than a dozen analysts last month, no one predicted that imports would decline.

The drop in exports stretched across all major trade commodities, including electronics and machinery, with steel leading the downward spiral.

Exports to all of China’s trading partners suffered, with those to the United States down 6.1 percent. Just last month, they were up 12.4 percent.

Ecuador Audit Recommends Default on 40 Pct Debt
Filed at 5:13 p.m. ET
November 20, 2008

QUITO, Ecuador (AP) -- A presidential commission recommended Thursday that Ecuador default on almost 40 percent of its foriegn debt after finding ''illegalities and illegitimacies'' in the contracts.

President Rafael Correa said he would seek to halt payment on those debts and hold foreign investment banks and ex-government officials responsible, but fell short of declaring a default.

An audit made public Thursday advises Correa's government to default on $3.9 billion in three types of bonds issued as part of a debt restructuring in 2000. It says the negotiations lacked transparency and caused ''incalculable'' damage to Ecuador's economy.  The report also accuses former Ecuadorean officials and investment banks including U.S.-based J.P. Morgan and Salomon Smith Barney, now part of Citigroup Inc., of profiting from the restructuring.

Correa said former government officials had committed ''treason,'' and that bankers ''compulsively induced, threatened, bribed and pressured with all their might to push their loans and make their juicy commissions.'' He says the ex-officials and banks involved -- not Ecuador's government -- should therefore be the ones to reimburse bondholders.

''We don't comment on ongoing investigations, but I can assure you that Citi has profound respect for the legal and regulatory environments in the countries where we operate,'' said Claudia Lima, Latin America spokeswoman for Citigroup, Inc.

A spokeswoman for J.P. Morgan declined to comment.

Correa won by a landslide in 2006 after vowing to default on Ecuador's foreign debt and use the money to fund anti-poverty programs instead. He has not acted on the threat, but recently warned that falling oil prices may force his hand. Oil is Ecuador's top source of foreign income, and prices have dipped 64 percent since July.  Ecuador delayed $30.6 million in interest payments last week, saying it would use a 30-day grace period to assess the results of the yearlong, 30,000-page audit.

The suspension sent Ecuadorean bonds plummeting, prompted Standard & Poor's to slash its long-term rating on the country's debt. Investment in the nation's oil and mining sectors will likely freeze up as well.

A default also could hit Correa's close ally. Venezuela holds as much as $230 million in Ecuadorean debt in a national development fund. That investment represents less than 1 percent of Venezuela's $39 billion in foreign currency reserves, but its exposure could be greater, since Venezuela also holds an unknown amount of credit default swaps, or insurance contracts that guarantee against losses on Ecuadorean bonds, analysts said.

Should Ecuador default, Venezuela could owe additional millions to losing bondhonders.

The three bonds in question -- due in 2012, 2015 and 2030 -- were issued at a time when Ecuador's economy was collapsing and hyperinflation pushed the country to abandon its local currency for the U.S. dollar.

Finance Minister Maria Elsa Viteri insisted that Ecuador currently has the resources to service its debt, including $6.5 billion in foreign currency reserves. Ecuador's total foreign debt hit $10.03 billion in August, down 29 percent since 2006 but still 21 percent of the country's gross domestic product.

The Great Iceland Meltdown
Published: October 18, 2008

Who knew? Who knew that Iceland was just a hedge fund with glaciers? Who knew?

If you’re looking for a single example of how the globalization of finance helped get us into this mess and how it will help get us out, you need look no further than British newspapers last week and their front-page articles about the number of British citizens, municipalities and universities — including Cambridge — that are in a tizzy today because they had savings parked in Icelandic banks, through online banking services like

As Dave Barry would say, I’m not makin’ this up.

When I went to the Icesave Web site to see what it was all about, the headline read: “Simple, transparent and consistently high-rate online savings accounts from Icesave.” But then, underneath in blue letters, I found the following note appended: “We are not currently processing any deposits or any withdrawal requests through our Icesave Internet accounts. We apologize for any inconvenience this may cause our customers.”

Any “inconvenience?” When you can’t withdraw savings from an online bank in Iceland, that is more than an inconvenience! That’s a reason for total panic.

So what’s the story? Around 2002, Iceland began to free its banks from state ownership. According to The Wall Street Journal, the three banks that make up almost the entire banking system in Iceland “grew quickly on easy credit” and “their combined assets rose tenfold in five years.” The Icelandic banks, while not invested in U.S. subprime mortgages, had gone on their own borrowing and lending binges, wooing savers from across Europe with 5.45 percent interest savings accounts.

In a flat world, money can easily seek out the highest returns, and when word got around about Iceland, deposits poured in from Britain — some $1.8 billion. Unfortunately, though, when global credit markets closed up, and the krona fell, “the Icelandic banks were unable to finance their debts, many of which were denominated in foreign currencies,” The Times reported. When depositors rushed to get their money out, the Icelandic banking system had too little reserves to cover withdrawals, so all three banks melted down and were nationalized.

It turns out that more than 120 British municipal governments, as well as universities, hospitals and charities had deposits stranded in blocked Icelandic bank accounts. Cambridge alone had about $20 million, while 15 British police forces — from towns like Kent, Surrey, Sussex and Lancashire — had roughly $170 million frozen in Iceland, The Telegraph reported. Even the bobbies were banking in Iceland!

So think about it: Some mortgage broker in Los Angeles gives subprime “liar loans” to people who have no credit ratings so they can buy homes in Southern California. Those flimsy mortgages get globalized through the global banking system and, when they go sour, they eventually prompt banks to stop lending, fearful that every other bank’s assets are toxic, too. The credit crunch hits Iceland, which went on its own binge. Meanwhile, the police department of Northumbria, England, had invested some of its extra cash in Iceland, and, now that those accounts are frozen, it may have to reduce street patrols this weekend.

And therein lies the central truth of globalization today: We’re all connected and nobody is in charge.

Globalization giveth — it was this democratization of finance that helped to power the global growth that lifted so many in India, China and Brazil out of poverty in recent decades. Globalization now taketh away — it was this democratization of finance that enabled the U.S. to infect the rest of the world with its toxic mortgages. And now, we have to hope, that globalization will saveth.

The real and sustained bailout from the crisis will happen when the strong companies buy the weak ones — on a global basis. It’s starting. Last week, Credit Suisse declined a Swiss government bailout and instead raised fresh capital from Qatar, the Olayan family of Saudi Arabia and Israel’s Koor Industries. Japan’s Mitsubishi bank bought a stake in Morgan Stanley, possibly rescuing it from bankruptcy and preventing an even steeper decline in the Dow. And Spain’s Banco Santander, which was spared from the worst of this credit crisis by Spain’s conservative banking regulations, is purchasing America’s Sovereign Bankcorp.

I suspect we will soon see the same happening in industry. And, once the smoke clears, I suspect we will find ourselves living in a world of globalization on steroids — a world in which key global economies are more intimately tied together than ever before.

It will be a world in which America will not be able to scratch its ear, let alone roll over in bed, without thinking about the impact on other countries and economies. And it will be a world in which multilateral diplomacy and regulation will no longer be a choice. It will be a reality and a necessity. We are all partners now.

AIG Executives' Posh Retreat Angers Lawmakers 
By Andrew Taylor , Associated Press    
Published on 10/8/2008 

Washington - Less than a week after the federal government had to bail out American International Group Inc., the company sent executives on a $440,000 retreat to a posh California resort, lawmakers investigating the company's meltdown said Tuesday.

The tab included $23,380 worth of spa treatments for AIG employees at the coastal St. Regis resort south of Los Angeles even as the company tapped into an

$85 billion loan from the government it needed to stave off bankruptcy.

The retreat didn't include anyone from the financial products division that nearly drove AIG under, but lawmakers were still enraged over thousands of dollars spent on catered banquets, golf outings and visits to the resort's spa and salon for executives of AIG's main U.S. life insurance subsidiary.

”Average Americans are suffering economically. They're losing their jobs, their homes and their health insurance,” House Oversight Committee Chairman Henry Waxman, D-Calif., scolded. “Yet less than one week after the taxpayers rescued AIG, company executives could be found wining and dining at one of the most exclusive resorts in the nation.”

The hearing also revealed that AIG executives hid the full range of its risky financial products from auditors as losses mounted, according to documents released Tuesday by a congressional panel examining the chain of events that forced the government to bail out the conglomerate.

The panel sharply criticized AIG's former top executives, who cast blame on each other for the company's financial woes.

”You have cost my constituents and the taxpayers of this country $85 billion and run into the ground one of the most respected insurance companies in the history of our country,” said Rep. Carolyn Maloney, D-N.Y. “You were just gambling billions, possibly trillions of dollars...”


Read about Fairfield's problem with their O.P.E.B. money...
For those who were paying attention, accounting requirements post Enron had finally gotten to the point where someone figured out that government accounting needed a spiffing-up.  So "GASB" came to be...and as a result, for example, CT decided in 2007 that larger communities had to start a plan to provide for retirement of municipal workers.  Smaller places, like Weston, had and extra year to gear about what we've done here.

The Ratings Game: Fannie, Freddie common shares worthless, KBW says

By John Spence, MarketWatch
Oct. 19, 2009, 2:27 p.m. EDT

BOSTON (MarketWatch) -- Analysts at Keefe, Bruyette & Woods on Monday said the common shares of Fannie Mae and Freddie Mac are likely worthless even if the troubled mortgage-finance giants end up being recapitalized by the banking industry.

KBW analysts led by Bose George downgraded shares of Fannie Mae and Freddie Mac to underperform from market perform and cut their price target on both stocks to zero from $1.

"In order for the government-sponsored entities to survive going forward, we believe they need to be recapitalized through investments from the banks that benefit from their role in the secondary market," KBW wrote in a research note.

"In this scenario, both the common and preferred equity of the GSEs should be worthless," they said, adding that since being put into receivership last summer, the U.S. has put $98 billion of capital into Fannie and Freddie.

Shares of Fannie and Freddie were down more than 15% in afternoon trading, while the preferred shares were also taking a hit. Representatives for both firms didn't immediately return calls for comment on Monday morning.

"Fannie Mae and Freddie Mac have been at the heart of the U.S. housing boom, bust and recovery," KBW said. "As the mortgage market moves away from crisis mode, the future of the GSEs has to be addressed."

The pair plays a key role in the nation's housing market because they buy mortgages from lenders and bundle them up into securities, and guarantee payment. They also provide liquidity to the secondary mortgage market.

"There have been many recommendations made about potential structures for the GSEs," KBW said.

"The most noteworthy is the Government Accountability Office report which presents options for the companies ranging from becoming full government entities to returning to being stock-holder corporations," the analysts noted. "What all the recommendations to date have not done -- including the ones in the GAO reports -- in our view is address the most crucial issue regarding the agencies: how to recapitalize them."

Fannie and Freddie accounted for 68% of all mortgage originations in 2009 as they stepped in to provide credit during the lending crunch, according to KBW.

"In our view, the only viable option to limit taxpayer expense and recapitalize Fannie Mae and Freddie Mac is to set up a Bad Fannie and Bad Freddie with the existing portfolios, and a new Fannie Mae and Freddie Mac as cooperatives of bank mortgage lenders, along the lines of the other GSEs -- the Federal Home Loan Banks," the analysts wrote.

Fannie and Freddie shares jumped along with the financial sector during the summer rally, but have been volatile recently amid questions about their future structure.

"There is general consensus that the primary role of the agencies in the future is in the loan-guarantee business and not in the investment business," KBW said. "By creating 'bad banks' of the existing portfolios and putting the existing portfolios into receivership, the government can limit its losses and define its role in supporting the mortgage industry through the crisis and create an exit strategy."

Fannie and Freddie are being hit by ongoing mortgage losses and higher borrowing costs during the housing downturn. Fannie reported a second-quarter loss of nearly $15 billion, after it lost more than $20 billion in the first quarter.

KBW said the GSE ownership structure should be shifted over time to a cooperative of banks similar to the Federal Home Loan Bank system.

"Under such an approach, the banks that originate an agency conforming loan would be required to retain 5% of the loan balance as an equity investment in either Fannie Mae or Freddie Mac," KBW said. "Thus the new agencies would be recapitalized at a solid 5% level of the new expanded balance sheets."

This level of capital "would allow the government to phase out an explicit guarantee of the new agencies' debt over time," George wrote. "We would expect the government to initially guarantee the debt of the new agencies for a period, possibly up to five years, in order to establish the credibility of the new agencies."

In September 2008, Fannie and Freddie were placed into the conservatorship of the Federal Housing Finance Agency. With the financial system seemingly past the worst of the crisis, speculation on what the government should do with the GSEs has been ramping up.

A decline in the preferred stock of Fannie and Freddie would be a blow to banks that hold the shares, and could further stress the banking system.

Fairfield named in Metro Center foreclosure; Bank pushes foreclosure effort on site's developer
By Genevieve Reilly, staff writer
Updated: 03/13/2009 10:36:49 PM EDT

FAIRFIELD -- The town has been dragged into TD Bank's efforts to foreclose on the Fairfield Metro Center property owned by Blackrock Realty, which has seen its financing collapse for a large commercial complex that was to include the town's third railroad station.

Town Attorney Richard Saxl, however, said Friday the bank's move doesn't worry him.

Blackrock Realty's managing director, Kurt Wittek, said it was a business decision to stop his development firm's payments on the $20 million owed to the bank. He said he remains confident that the foreclosure dispute will be resolved.

The property at 21 Black Rock Turnpike has been approved for a multi-use retail and commercial development, in addition to the rail depot.

"The important thing is the town owns the 8.83 acres which is for the train parking," Saxl said. He contended the bank's motion does not justify naming the town as a defendant since the foreclosure is directed against property controlled only by Blackrock Realty.

According to the suit filed in Bridgeport Superior Court, Blackrock Realty first received a $10 million loan from TD Bank in July 2003. That note was amended in January 2006 to $20 million and is secured by the property at 21 Black Rock Turnpike.

While the state Department of Transportation is building a bridge into the property and the platforms for the railroad station, Wittek has informed the town he does not have the financing to construct drainage, an interior road and wetlands as required by the three-party agreement with the town and state.

First Selectman Kenneth Flatto has included a request for $28 million in funding from the economic stimulus package to pay for Blackrock's portion of the public project, as well as the town's costs to build the 1,500-space commuter lot.

According to Flatto, the Metro Center project is one of five in the state recommended by the state Department of Transportation to Gov. M. Jodi Rell for funding from a pool of stimulus money targeted for mass transit projects.

The biggest taxpayer in the Town of Fairfield
G.E.’s Debt Rating Is Cut by S.&P.
March 12, 2009, 9:40 am
Updated | 10:55 a.m.

General Electric lost its coveted triple-A credit rating from Standard and Poor’s on Thursday, as the credit-rating agency downgraded G.E’s long-term debt one notch, to AA+.

In deciding to strip G.E. of its highest rating — which G.E. has held for more than 50 years — S&P analysts cited the stress that the global economic downturn was putting on the company’s financial arm, GE Capital.

S&P said the outlook for G.E. was stable, meaning that further downgrades to its debt rating are unlikely in the next six months to two years.

The market seems to have been expecting an even bigger cut: G.E.’s stock was up nearly 9 percent Thursday morning.

In a news release after the rating cut was announced, G.E. said it does not anticipate any significant operational or funding impacts from the downgrade. It also said that GE Capital “is one of the only financial services companies in the world with a rating as high as AA+.”

“While no one likes a downgrade, this review and rating reaffirm the relative strength of the company,” Jeff Immelt, G.E.’s chairman and chief executive, said in the release.

G.E.’s stock has fallen nearly 75 percent in the last year. The slide accelerated in recent weeks as investors questioned the financial strength of GE Capital.

GE Capital, which once accounted for about half of the company’s profits, has been hit hard by the credit crisis. Its portfolio includes aircraft leasing, commercial real estate lending, credit cards and home mortgages.
In a statement Thursday, Robert Schulz, a credit analyst at S&P, said that GE Capital faces “increasing earnings pressure, due to the recent sharp deterioration in general economic conditions around the globe.” The downturn will lead to rising credit losses across GE Capital’s finance portfolio, he said.

Late last month, amid growing concern that its debt rating might be lowered, G.E. cut its stock dividend for the first time since the Depression. The company said the decision to drop the quarterly payout to 10 cents a share from 31 cents would save it nearly $9 billion a year.

Since then, speculation has swirled that G.E. might need to raise additional capital to shore up its GE Capital unit. The company has called such rumors “inaccurate” and said that GE Capital’s balance sheet is strong relative to other financial institutions.

– Cyrus Sanati

Greenwich gets money on the cheap;  Town borrows funds at nearly zero percent
Greenwich TIME
By Neil Vigdor, Staff Writer
Posted: 01/15/2009 08:24:12 PM EST

It could be a deal for the record books.

The town issued $72 million in short-term bonds Thursday to pay for construction projects and infrastructure repairs, borrowing the money from Morgan Stanley at the microscopic interest rate of .38 percent per year. 
While officials expected to receive favorable terms on the money they borrowed because federal interest rates have been slashed to near zero, they were bowled over by Morgan Stanley's bid for the town's business.

"Not only have I never seen it, (our) financial adviser over the last 20 years has never seen one this low," said Peter Mynarski Jr., the town's comptroller.

Stephen Walko, chairman of the Board of Estimate and Taxation, said the town had forecast an interest rate around 1 percent.  Walko said: ".38, you can't get much lower. Individuals in this arena have suggested it could be a record."

The town received 13 offers from 10 different bidders to issue the bonds by an 11 a.m. deadline Thursday, with Morgan Stanley coming in with the lowest interest rate, according to Mynarski.  The one-year borrowing instrument is commonly referred to as a general obligation bond anticipation note.  Around $45 million of the $72 million is money the town previously borrowed to pay for capital projects and is refinancing. The remaining $27 million is new money needed for projects.

Among the projects being paid for through the short-term bonds is the Glenville School renovation ($18 million), sewer improvements ($6 million) and preliminary engineering and architectural work on the renovation of the town-owned Nathaniel Witherell nursing home ($5 million).

The town's ability to borrow money at bargain-basement interest rates, a result of its AAA credit rating, is already prompting some elected officials to call for an expanded program of capital improvements.

"This suggests that there may be an opportunity for the town to take advantage of our good credit rating and the market to accelerate capital projects that we know we will undertake in the next few years," said Edward Krumeich Jr., a Democrat on the BET.

Long-term borrowing for projects has historically been taboo in Greenwich because of the tax burden interest payments add to the town's liabilities.  However, at a public hearing Wednesday night on the town's capital program, one that has been watered down because of a projected $31 million budget deficit, some elected officials called for the plan's architects to rethink their pay-as-you-go principles.

The town has earmarked $20.5 million overall for capital projects in the next fiscal year. That's $18.3 million less than the $38.8 million in capital spending in the current budget and some $67.5 million less than $88 million that had been projected for the 2009-10 fiscal year.

"As we've discovered to our regret, capital projects that are delayed or deferred have always wound up to be more expensive," Krumeich said. "Right now, given the unusual economic times, as a town we are well positioned to take advantage of the current financial and construction markets."

The capital spending plan calls for $14 million of the $20 million to be financed through the issuance of five-year notes, which officials say is in keeping with the town's pay-as-you-go principles.  Despite rock-bottom interest rates, Walko said the town should stick to paying for projects over the short-term and not incurring debt.

"I think we've been able to earn the AAA rating based on our pay-as-you-go system," Walko said. "I still do not believe there is a sentiment on the part of the members of the BET to change directions in this economic climate."

Outlook shaky at chamber luncheon
By Michael C. Juliano,
Staff Writer
Posted: 01/15/2009 07:30:56 PM EST

People often ask him when this recession will be over, said Nicholas Perna, an economic adviser for Webster Bank.

"It all depends on what you mean by when and over," he said Thursday at the Greater Norwalk Chamber of Commerce's 2009 Economic Outlook luncheon at the Continental Manor in Norwalk.

The event, which was sponsored by Webster Bank, was attended by about 175 business owners, bankers and other professionals.  The nation's gross domestic product, or total value of goods and services produced in the United States, is expected to increase "with a little luck" by the middle of this year or in the third quarter, but job numbers may not rise until the third quarter or next year, Perna said.

"The labor market won't improve until the economy turns around," he said.

Housing prices won't likely stabilize until next year, but the declines might get smaller, Perna said.

"Then people will put their toes in the water," he said, adding that the stock market will be a strong indicator of the economy's direction. "It's a pretty good indicator of when the recession is going to stop."

Perna also is the chief economist and managing director of Perna Associates, a consulting firm that specializes in economic analysis, forecasting and strategy. Before founding this company, he was chief economist for Fleet Financial Group, a position he previously held at Shawmut Bank and Connecticut National Bank. Perna also has served as an economist for General Electric, the Federal Reserve Bank of New York and the President's Council of Economic Advisers.

The country may not be at a great risk for a depression, but deflation threatens to further hurt the weakened economy by encouraging people to save their money and wait for lower prices on what they want to buy, Perna said.

"If you get a sustained decline, people will wait," he said. "It's also a problem for businesses because the value of collateral falls."

Connecticut is expected to lose 60,000 to 80,000 jobs in this recession, but as many as 140,000 were lost in the recession of the early 1990s, Perna said.

"We've got to go through a lot, but we've been through a lot worse before," he said.

After Perna's remarks, Peter Gioia, vice president and economist for the Hartford-based Connecticut Business &amp; Industry Association, presented the CBIA's 2009 Fairfield County Business Survey, which forecasts that sales revenues for half of Fairfield County's businesses will "worsen somewhat" in 2009.

But businesses still should look to hire workers now, as the market for employees has not been better in a decade, said Gioia.

"If you're doing a hiring freeze right now, you've got your head in the sand," he said.

On the negative side, lawmakers in Hartford most likely will increase state taxes because of the fallout in the financial services industry in Fairfield County, which pays most of Connecticut's business taxes, he said. 
Audience member Eugene Schreiner, vice president of the commercial division for Stamford-based First County Bank, said it's impossible to know where the economy is headed.

"You can't predict the future, but I see a lot of good things happening, even though things are so pessimistic in the media," he said.

Everyone needs to remain optimistic and spend wisely during the economic downturn, said Fred Petrossi, manager of a TD Bank branch in Norwalk.

"It's going to take time, like they (Perna and Gioia) said," he said. "It's not like we can flip a switch and say it's over. We are all in this together."

Town budget gap widens
Greenwich TIME
By Neil Vigdor, Staff Writer
Posted: 12/14/2008 02:34:07 AM EST


A projected $10.5 million gap in the town budget is widening to proportions that officials have never seen before in what has arguably been Connecticut's most prosperous town.

"We went through how big the problem could be. It's $31 million over the next 18 months," said Roland Gieger, the town's budget director.

Budget officials are predicting an $8.5 million shortfall in revenues from conveyance tax receipts, the sale of building permits and bank interest in the current fiscal year, which has six months to go, and a $6 million shortfall in 2008-09.  That comes on top of the anticipated $10.5 million gap, which has been bandied about since early this fall and has been attributed to rising personnel costs and shrinking revenues.

The architects of the town's projected $364 million budget will also have to make up another $6 million, which they had hoped to have left over in the General Fund balance at the end of the current fiscal year to help pare down the tax rate and pay for unanticipated expenses.  Property owners could face a spike in property taxes in excess of the customary 2 to 4 percent annual increase sought by the town if the gap isn't closed, town officials said.

"It's a significant fiscal challenge and one that requires making difficult decisions, which I'm certainly ready to do. It's a matter of prioritization," First Selectman Peter Tesei said.

In a Nov. 26 memo to municipal department heads and the town's appointing authorities, Tesei called for an across-the-board 10 percent minimum reduction in non-salary town expenditures, a clamp-down on employee travel and a hiring freeze for all positions but a few positions in police, fire and other essential areas. Tesei also wants to limit overtime, saying it should be reserved for when public safety warrants it or a potential liability emerges. All overtime requests are to be vetted by Tesei's office.

"We're looking at everything," Tesei said.

Some Representative Town Meeting members want the town to go a step further and put the brakes on an estimated $49.2 million in capital projects for which the money has been appropriated but not yet spent.  Among the options being considered by the town's budget architects is to pare down capital expenditures in the 2009-10 budget, taxing for only $30 million worth of projects instead of the planned $37 million, Gieger said.

The town, he said, is also considering forgoing a discretionary contribution to the town's post-employment benefits fund, which Gieger said pays the health care of municipal retirees and was set to receive $2 million in taxpayer money in 2009-10.

In addition to those measures, Gieger said the town is striving to save $7.9 million in the current fiscal year's budget through various efficiencies and reduce its operating expenses by $14.1 million when the new budget takes effect on July 1, 2009.

Officials based their projections on actual expenditures from the previous fiscal year rather than what was budgeted, which Gieger said turned out to be more than was needed to deliver services.  Michael Mason, chairman of the Board of Estimate and Taxation's Budget Committee, said Greenwich is not immune from the current economic recession gripping the nation.

"Everybody's being very cautious. We all know these are difficult economic times," Mason said.

Mason expressed optimism that budget architects would be able to close the gap.

"I think we have a plan," he said. "I think we're on our way. We're watching revenues. We're running models. The real key to success is how much can we save and not spend within the current fiscal year."

One of the areas that Mason said budget officials are watching closely this winter is the amount of snowfall, which in recent years has depleted the town's snow removal budget and required additional appropriations from the General Fund balance.

"Obviously, we're sitting here hoping we don't have a lot of snow this winter," Mason said. "I don't want to rely on the Farmer's Almanac. I would rather just cross my fingers."

Greenwich investment firm moves to liquidate media company

Greenwich TIME
Associated Press

Posted: 12/11/2008 12:13:19 PM EST

LITTLE ROCK, Ark. (AP) - A creditor owed $41.5 million by Equity Media Holdings Corp. says in bankruptcy court papers that it wants the Little Rock-based company liquidated.

Equity Media has filed for Chapter 11 restructuring in U.S. Bankruptcy Court. Silver Point Finance argues in a Wednesday filing that Equity Media can't administer its finances with its present management. Silver Point says that if there is a reorganization, a trustee should be appointed by the court.

Silver Point, a private investment firm based in Greenwich, Conn., said in the filing that Equity Media and its subsidiaries would not be able to meet its payroll. The company said in November it had 200 employees nationwide, with about half in Little Rock. According to its Web site, Equity Media owns 121 television stations, licenses and permits.

Last month, Silver Point called its loan to Equity Media, saying the company had defaulted. In Pulaski County Circuit Court, Silver Point filed to foreclose and asked for a receiver to protect Equity Media's assets.

On Monday, Equity Media made its bankruptcy court filing moments before the receivership hearing was to begin, Silver Point said in court documents.

Equity Media shares were trading at 4 cents per share Thursday. Over the past 52 weeks, the stock has gone as high as $3.45 per share and as low as 2 cents per share.
Information from: Arkansas Democrat-Gazette,

Tesei calls for spending cuts
Greenwich TIME
By Neil Vigdor,
Staff Writer
Posted: 12/09/2008 02:31:22 AM EST

Greenwich is going on a diet and it has nothing to do with New Year's resolutions.

Bracing for a second consecutive quarter of shrinking revenues from tax receipts, building permit fees and bank interest, the town is looking at a broad regimen of belt-tightening measures prescribed by First Selectman Peter Tesei.  In a Nov. 26 memo to all municipal department heads and appointing authorities, Tesei called for a 10-percent minimum reduction in nonsalary expenditures across-the-board by the town.

Tesei also wants to limit overtime, saying it should be reserved for when public safety warrants it or a potential liability emerges. All overtime requests are to be vetted by Tesei's office.

"We want to keep a lid on that," Tesei said. "It's another layer of approval aside from your typical, 'It's budgeted for, therefore we'll use it.' "

The town budgeted $4.5 million this fiscal year for overtime, an increase of 0.7 percent from the fiscal year that ended June 30.  Tesei said some overtime is unavoidable, including the recent decision to give public works employees additional hours to help with leaf collection.

"We want to get the leaves collected because of the potential hazard those pose once snow and ice materialize," Tesei said.

Members of the Board of Estimate and Taxation and the Representative Town Meeting, to whom copies of the Nov. 26 memo were sent, commended Tesei for his efforts to rein in spending during difficult economic times.

"Peter has attacked the budget wherever he can," said Joan Caldwell, moderator pro tempore of the RTM. "If our revenues are going to be off and if we don't know that the economic situation is going to level off at least, never mind improve, we as legislators need to be very prudent and conservative in the way we spend the taxpayers' money."

Michael Mason, chairman of the BET Budget Committee, said he wouldn't be surprised if Tesei looked to cut back hours of nonessential municipal programs and on the town's utility usage.  Despite the mantle of being one of Connecticut's most prosperous towns and one of the wealthiest in the nation, Mason said Greenwich has also been hit by the weak economy.

"We're not different than any other community," Mason said.

According to preliminary budget documents prepared for the BET, the town needs to shed about $10.5 million in spending from the projected $364 million budget to avoid an estimated 7.4 percent spike in property taxes for the 2009-10 fiscal year.  Cutting $10.5 million from next year's overall budget would put the town on pace to match the previous nine years, when taxes increased at a rate of 2 to 4 percent annually as prescribed by the bipartisan finance board.

"Obviously, the first order of priority is to be reduction of expenses, and I want that to be crystal clear," Tesei said.

To help the town close the budget gap, the BET has called for the elimination through attrition of 15 positions from the town's work force of 1,024 non-school employees.  Tesei said he already is planning not to fill five of the 47 positions that are currently vacant, including a gardener and a horticulturist in the Parks department, a painter foreman in Public Works, an accounting clerk position in Finance and the town's consumer affairs coordinator.

In remarks last month to the Northeast Greenwich Association, Tesei said his administration may consider laying off workers in light of the projected $10.5 million budgetary gap facing the town.  In previous years, that gap was about $5 million, according to town officials, who are predicting a $7 million shortfall in revenues from tax receipts, building permit issuance and bank interest.

Norwalk company to head out West, cost 100 local jobs
By CHRIS BOSAK, Hour Staff Writer
Posted on 12/08/2008

The merger is official and now Norwalk is feeling the pinch with about 100 jobs lost and 51,000 square feet of commercial real estate back on the market.

On Nov. 21, the $6.7 billion acquisition of Norwalk-based Applied Biosystems Group by Invitrogen Corp. became official, a few weeks after gaining approval by the European Commission. The new company is known as Life Technologies and will have its headquarters in Carlsbad, Calif.

Because the newly formed company is eliminating "redundant positions," the Norwalk office will be vacated by July 2009 and about 100 employees will be without jobs. While news of the merger had been expected for months, the city did not know the company would be leaving Norwalk until it received a letter from Life Technologies Corporation.

"I'd have to admit I'm disappointed," Tad Diesel, Norwalk's director of marketing and business development, said. "We've been trying to talk to the company about setting up a meeting, but they never get back to us. The deed having been done, our intent lies in doing what we can to help the employees. This was a very good company with highly skilled workers."

Applied Biosystems, a health care and life science technology company, is a division of Applera (formerly Perkin-Elmer). Invitrogen acquired Applied Biosystems to form a global biotechnology company.

In a statement released by Life Technologies on Monday, Applied Biosystems employees will be provided with severance packages and job placement services.

"The company appreciates the contributions of all employees at the Norwalk site for their years of service," the statement reads. "We are committed to treating affected employees fairly and with dignity, and providing them with severance packages and job placement services.

"As part of the integration plans associated with the merger of Invitrogen and Applied Biosystems, the companies are committed to achieving $80 million in synergies in the first year after close of the transaction," the statement adds. "The companies stated that part of those synergies would be achieved through corporate overhead reductions, which unfortunately does include the elimination of redundant positions between the two companies.

"The companies also stated that they plan for the corporate headquarters to be in Carlsbad and the decision has been made to consolidate the majority of corporate functions. Therefore, the Norwalk site that housed the Applied Biosystems corporate offices is expected to close in July 2009. Invitrogen expects that corporate functions at that site will be transitioned to other locations between now and December 2009. This closure is expected to result in the elimination of redundant positions."

Applied Biosystems had been in Norwalk since 2001. The company occupied 51,239 square feet, including the entire fourth floor, of 301 Merritt 7.

Joann McGrath, leasing agent for Albert D. Phelps Co., which manages Merritt 7, said it is unfortunate that Applied Biosystems is leaving Norwalk, but said the departure opens a rare block of large space in Norwalk. The company is under lease until May 2011, however McGrath said Albert D. Phelps will look for a buyout replacement tenant.

"There was nothing we could have done to keep them," McGrath said. "This now becomes an opportunity. (Building) 301 is the hub of amenities at Merritt 7 and we just renovated the facade, so for a new company, this would be like moving into a new building. We haven't had a large space like this available in a long time."

Diesel said the city will work hard to help the displaced employees and also assist Albert D. Phelps in finding a new tenant.

How about the Stamford building?
U.K. Takes Majority Stake in RBS
November 29, 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 signed up to buy 0.24 percent of the shares, which were offered as part of a plan to bolster the bank’s capital, and the government, which had underwritten the sale, picked up the rest, leaving it with a 57.9 percent stake in RBS.

The government also agreed to buy a separate block of preferred shares bringing its investment in RBS to about $31 billion. The investment leaves taxpayers already with a paper loss of more than $3 billion, based on Thursday’s closing price.

RBS was one of three British financial firms that sought government help to fulfill stricter capital requirements intended to help banks survive the credit crisis. Two others — Lloyds TSB and the mortgage lender HBOS, which have recently agreed to merge — also relied on the government to take up any shares they cannot sell.

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.

“We have no idea whether this will work or whether it’s just flipping matches at a damp bonfire,” said Justin Urquhart Stewart, a fund manager at Seven Investment Management in London. The lack of interest in the share sale “just underlines the loss of faith by everybody in the banking sector.”

Investors balked at buying RBS stock after it dropped below the offer price of 65.5 pence a share earlier this month. Before that, some investors considered buying the shares to avoid the government taking a stake, which would mean stricter limits on dividend and bonus payments. But they failed to do so when it became cheaper to buy the shares on the open market than through the share issue. The shares fell 5.8 percent, to 52 pence in London on Friday.

“We are grateful to the government for its underwriting and broader financial support to liquidity and funding markets,” the RBS chief executive, Stephen Hester, who took over earlier this month, said in a statement. “We regret that existing shareholders did not take up their pre-emptive rights but understand that market sentiment toward the banking sector made this uneconomic in the short term.”

The government’s majority stake means that RBS’s management will remain in place and will run the bank on a daily basis, but the government will ensure that it adheres to the conditions of the bailout plan, which includes offering more favorable loans to some businesses.

The government stake is held by a special holding vehicle led by Philip R. Hampton, a former finance director of Lloyds, who will ensure that RBS is run in a way that maximizes value for taxpayers. The government plans to hold the stake until the shares recover and can be sold at a profit.

Moccia cuts spending by nearly $1.79 million, wants BOE to slice budget
By HAROLD F. COBIN, Hour Correspondent
Nov. 7, 2008

Citing a sharp falloff in anticipated income for the current fiscal year, Mayor Richard A. Moccia announced Thursday the city is immediately cutting spending by nearly $1.79 million, while seeking to increase nontax revenues by a minimum of $70,000.

During a news conference in City Hall, Moccia said the city is facing a projected shortfall in income approaching $2 million in its 2008-09 budget, and the combined spending cuts and revenue increases will carve that back by about $1.86 million.

Moccia said he is looking for the Board of Education to slice its budget by around $140,000 to close the remaining gap.

The budget cuts will not result in layoffs of city employees or elimination of basic services, but will require redeploying officers in the police department, eliminating overtime for training in the fire department, closing libraries on Sundays, and closing the Public Works Department's yard debris disposal site on Saturdays.

"Just about every department in this city has been affected as far as the reductions," Moccia said.

The city's existing hiring freeze will remain in effect, and departments will be reducing purchases of supplies and equipment, as well as cutting back on part-time positions and the use of consulting and information technology services.

Moccia said the city never came close to ordering layoffs to meet required spending cuts.

Moccia pointed to shortfalls in the real estate conveyance tax of $1.575 million and Town Clerk land recording fees of $280,000, along with reduced income from investments as the primary reasons for the city's drop in income. At the same time, he said costs for solid waste disposal and the Registrar of Voters office are running higher than budgeted.

The city's finance director, Thomas S. Hamilton, who joined Moccia at the news conference, said the amount collected in real estate conveyance taxes in the first quarter of this year is down 47 percent compared to the previous year.

Moccia said the city will be stepping up its efforts to collect delinquent taxes and increase miscellaneous revenues.

The current budget was adopted last spring and, at the time, Moccia said, it was conservative in proposed spending and projected income.

The city planned to spend $273.7 million in its operating budget this year.

In talking with his department heads and the leaders of the city's unions, Moccia said he explained the current situation is not the result of overspending, but reduced revenues.

Considering the outlook for the economy, Moccia said there is no reason to think the collection of conveyance taxes or recording fees will improve anytime soon. At the same time, he said, with the state of the economy and an upcoming revaluation of properties, "There is no way that I can go to the taxpayers and hit them at this time with a large tax increase."

Moccia warned the city's economy could be dealt another blow if the state implements mid-year reductions in aid to municipalities.

Hamilton said the city's income and expenditures are reviewed at least monthly, so the estimated $2 million revenue shortfall could rise or fall. Depending on the fate of the economy, Hamilton said it was conceivable the drop in anticipated income for the current budget could reach $2.5 to $3 million before it expires next June 30.

In arriving at the cuts, Hamilton said department heads were asked to come up with 3 percent in savings. He said the final cuts were not evenly divided across departments, with some finding more expenditures that could be eliminated than others.

Hamilton said the money from the cuts will go into the city's contingency fund, which currently contains about $1 million.

The city does not control the Board of Education's budget, which amounts to more than half of Norwalk's operating expenditures each year, and cannot direct that it be cut.

The Board of Estimate and Taxation met with the Board of Education's budget staff on Monday to request "commensurate" cuts be made in school spending, Hamilton said.

Moccia said he is optimistic about the school system's response because Superintendent of Schools Sal Corda and his staff "can look out this window and see what's happening in the world today."

Meanwhile, Hamilton is already working on the city's 2009-10 budget, and he said it's already known it's going to be a difficult year. He said the city had planned on not taking any money from its fund balance in the next budget, but, "We are now rethinking that."

Page last updated at 08:12 GMT, Wednesday, 22 October 2008 09:12 UK

Financial crisis: World round-up
Bruce Richall is an IT consultant based in the affluent Connecticut suburb of Westport. He describes how the loss of his job at a multinational bank triggered a rapid spiral into poverty. Having depleted his savings and unable to afford rent, he now sleeps in the back of his car.

In the back of my mind, I hoped it wouldn't happen to me.

I saw bank workers being escorted off the property, clutching their boxes. It was very chilling to witness departing co-workers.

The bank where I worked had already undergone a series of lay-offs in the previous months.

Row of cars in carpark

I really liked my job and wanted to keep it. I joined in February, and having worked for many years as an IT contractor - with its inherent instability - this position offered the potential of a full-time position. It could become a "secure" job.

But when security guards made simple, routine rounds though the cubes and offices, people would look up from their desks.

There would be a sigh of relief as the guards kept going.

I never thought it would ever come down to this, but here I am - homeless
But it didn't happen this time. On a Friday, my manager came to my desk. Usually he came by to ask me if I could put in some overtime. But, just by the look on his face, I could tell. This wasn't an overtime request. This is it, I said to myself.

Sure enough, I was told that my last day would be the end of the month.

Though I didn't show it outwardly, I was devastated.

The former home of Martha Stewart, in Westport, Connecticut
Westport is home to many of the US' most well-heeled citizens
I would have another month before leaving so that I could start yet another job search. I immediately contacted my agency to let them know that the assignment would be ending.

My last day at the bank was bitter-sweet. There was a cake and a card. We joked but inside I was truly frightened. I asked myself what would happen to me now, in such a difficult job market? Would I become homeless?

At the end of my last day, my manager came downstairs with me. We had a cigarette and talked.

"Bruce, if I can get you back here, you know I will," he said. His words were kind and well-intentioned.

My life today has changed dramatically since my brief tenure with the bank.

Now I'm facing a very uncertain future.

I now sleep in the back of my car, while I wait for a bed to become available at the shelter. I call it The Hotel Honda

I'm no longer collecting a nice pay check, going to work every day and returning home at night. I'm no longer a part of the team I so enjoyed working with.

Months passed as my savings gradually dwindled. I was only collecting a small unemployment check from a low paying "between-jobs" job that I had prior to signing on with the bank.

I had to move from my apartment, put my belongings in storage and find a homeless shelter.

I now sleep in the back of my car, while I wait for a bed to become available at the shelter. I call it The Hotel Honda.

I keep a good suit and a dress shirt in the back of the car for interviews. I tell recruiters that I'm working.

This is not the life I imagined for myself when I graduated from university. I never thought it would ever come down to this, but here I am - homeless.

What galls me the most is that about one third of my income is taxed. I'm taxed on what I earn and taxed on what I spend
Unlike the Europeans, we in the US don't have much of a social safety net.

My meagre unemployment income is too high to let me qualify for Social Services, yet far too inadequate to pay for my home, food, car, utilities and health insurance.

I have hypertension, yet I can't afford a doctor, the emergency room or vital medication. I need a corrective eye surgery that I can't afford. Even routine check-ups are out of reach.

My meals are taken at a soup kitchen. This is poverty.

What galls me the most is that about one third of my income is taxed. I'm taxed on what I earn and taxed on what I spend.

Now that I'm in need there is nowhere to turn.

Nobody is helping me except for my contributions to my unemployment account.

Yet our leaders have found a way to bail out the very institutions that have put myself, and others, at risk.

Happy ending for Avon - several bids for the full amount, at interest rates even lower than they had expected!
Avon Jittery As It Prepares To Refinance Debt

Hartford Courant
October 12, 2008

AVON — - Passersby in this town of upmarket shops and sunny soccer fields would hardly guess it is about to be drawn into the vortex of America's financial crisis.

But that is the fiscal drama that will unfold early Tuesday morning, when Avon Town Manager Philip Schenck and his financial advisers gather around a conference table in town hall to sell $25.8 million in short-term notes. The town needs to borrow this money in order to retire existing debt, incurred while renovating Avon High School and town hall, that is about to come due.

Avon faces a "drop dead" date of Oct. 23, when $26 million worth of previous short-term notes matures.

In normal times, this routine "rolling over" of short-term debt — in anticipation of selling long-term bonds to pay off projects like the high school and town hall renovations — would have been easy for the prosperous Farmington Valley town. Avon is one of only 66 municipalities in the country that enjoy a perfect AAA credit rating, joining the likes of Malibu, Calif.; Boca Raton, Fla.; and Greenwich in premium appeal to the purchasers of tax-free municipal securities.

But the tsunami of failure that obliterated such venerable names of finance as Bear Stearns and Lehman Brothers has submerged Wall Street's municipal bond market as well. That market, according to a recent report by Bloomberg News, normally handles $6 billion in borrowing by states, towns and cities every week. But since mid-September, the municipal bond market has been struggling to process just $1 billion a week, a victim of the same credit strangulation that has stalled the mortgage and commercial paper markets.

Avon already has been forced to spend $13,000 providing updated financial information to the Standard & Poor's and Moody's ratings services to reassure a skittish bond market that the town is still creditworthy.

The best-case scenario for Tuesday morning, town officials say, is a successful sale of notes at an interest rate of up to one percentage point higher than normal. This could cost the town between $250,000 and $300,000 in additional debt payments over the next year.

The worst-case scenario, of course, is the dreaded D-word that Schenck and his colleagues refuse to utter — a credit-wrecking default on its loans. But Avon's financial adviser and liaison with Wall Street, Dennis Dix Jr., says it's "highly, highly unlikely" that Avon won't meet the deadline of Oct. 23 for paying off its notes.

Dix says that in the event of an unsuccessful public auction Tuesday, or only a partial sale of Avon's notes, he will spend the rest of the week on the phone "begging, crying, cajoling" underwriters to accept a private placement of Avon's debt.

Thus, for Dix and Schenck, Tuesday morning's auction is literally an abyss. They have no idea whether they will receive enough offers to float their town debt, or what will happen afterward. Nine days later, on the 23rd, looms the big deadline.

"This is going to be on my mind all through the long [Columbus Day] weekend, and it will be nail-biting time until our deadline of 11:30 on Tuesday morning, when hopefully we have the entire $25.8 million sold," Schenck says. "In 30 years of doing this I've seen bad bond markets before, but nothing like this."

During the millennial boom years after 1995, the Farmington Valley prospered as a desirable exurb, and towns like Avon, Canton and Simsbury built out most of their available residential land and sprouted tony new malls along Route 44. Avon's population has grown from 13,937 in 1990 to an estimated 17,333 today.

As a result, school enrollments soared — Schenck says the Avon schools have grown over the past 15 years from roughly 2,000 students to 3,600 today.

Avon has spent the past decade deferring improvements to other town facilities so it could devote most of its capital spending to education, much of it required by state mandates on such things as classroom sizes, athletic facilities and updated safety standards.

Schenck points out that academic competitiveness, alongside such advantages as hiking trails and open space, is vital if Avon wants to remain attractive to residents.

"In terms of SAT scores and our overall academic achievement, Avon is now considered in a league with such Fairfield County towns as Darien, New Canaan and Wilton," Schenck says. "You can't stop supporting that kind of excellence. It's an amenity that attracts new residents and rewards our long-term taxpayers."

But growth in Avon, as is so in many other suburban Hartford towns, ignites a cycle of spending. Good schools beget new development, which begets more taxes to support growing school enrollment, which begets crowded middle and high schools. Three years ago, Avon began spending $30.6 million for a new high school gym, cafeterias and classroom wings to accommodate this growth. (The town needs to borrow only $25.8 million because the rest of the building costs were covered by state aid.)

To pay for these capital expenses, Avon did what all towns do: roll over short-term notes for two or three years until final costs for the renovations, plus state aid, could be precisely calculated, then plan to float 20-year bonds to stretch out the debt payments. The town's pristine credit rating assured investors that buying the bonds at prevailing interest rates below 2.5 percent was a safe investment.

But those days of fiscal wine and roses, for the moment, are over. As American and foreign credit markets withered over the past six weeks, some of the most creditworthy states and cities found few bidders for their routine borrowing, to support either ongoing expenses or capital projects.

Since late September, for example, both Massachusetts and Connecticut, which both enjoy favorable AA credit ratings, were forced to either withdraw or reduce scheduled note sales for routine refinancing of debt. Dozens of states and cities across the country simply canceled elective note and bond sales — delaying construction on everything from sewers to alternative energy projects — until the bond market recovers.

Meanwhile, that bond market was being big-footed by California Gov. Arnold Schwarzenegger, whose annual fall borrowing of $7 billion in tax-anticipation notes was imperiled by the credit freeze. (Without this autumn borrowing, California would run out of money by late October and miss its payrolls and state aid to cities and towns.)

Schwarzenegger made municipal-finance history this month by suggesting that the U.S. Treasury may have to bail out the country's largest state. A move like that could swamp the market.

"We literally don't know what's going to happen day to day, and none of us have ever seen anything like this," says Jeffrey Esser, the executive director of the Government Finance Officers Association in Chicago. "Most jurisdictions across the country are just holding off and not going to the market, which in any case doesn't exist. Those who do have to borrow are paying higher interest rates."

Esser, and officials at the Connecticut Treasury, say they were encouraged at the end of last week by signs that the municipal bond market was slowly recovering. Maine, Kentucky, Ohio and the Long Island Power Authority had, by week's end, completed successful borrowings on the bond market.

Uncertainty over Tuesday's note sale is not the only impact felt by Avon. The stock market decline this year has reduced the value of its pension fund for town employees, and another reserve fund for retiree health benefits has also declined in value. The town has also decided to put off, for now, a much-needed library addition.

Normally, Dix says, a triple-A rated town like Avon would receive eight or nine competitive bids for its notes. But he worries that on Tuesday he may receive only two or three bids for just part of the $25.8 million issue. During 37 years in the municipal bond business — including the mid-1970s, when New York City's fiscal crisis sent tremors through the market — Dix has never seen conditions this bad.

"The issue right now is not price, it's access to market," he says. "No one is buying. It's a situation of giving a party and no one comes. And Avon's problems with this note sale are very reflective of what's happening in the entire United States right now."

For Schenck, who has served Avon for 30 years, this year's financial crisis is a jarring career finale. Last month, unrelated to the national credit crunch, Schenck announced plans to retire in 2010. Now he faces not only the uncertainty of Tuesday's note sale, but its aftermath: a year or more of juggling budgets to pay for higher interest rates.

Although jittery about Tuesday morning, Schenck is grateful for one chapter in his past. Schenck is a former lieutenant colonel in the Army Reserve, and over the winter of 1990-91 he was mobilized to the Persian Gulf during Desert Storm, where he spent six months as the executive officer of a unit responsible for health care of U.S. soldiers and detaining Iraqi prisoners of war.

"There's a lot of similarities in the skill sets required to manage an Army unit at war and an unprecedented financial crisis like this," Schenck says. "It will be the same stressful, demanding environment on Tuesday — Avon's financial Desert Storm."

Montville Voters OK $12M To Pay Rand-Whitney; Bond money will satisfy judgment against town 
By Megan Bard    
Published on 10/8/2008

Montville - The town will issue up to $12 million in bonds to pay Rand-Whitney Containerboard to satisfy a federal court judgment against the town.  With 13 percent of eligible people voting, taxpayers approved the request 988 to 246 at a townwide referendum Tuesday.  After waiting anxiously for the results to be announced, Mayor Joseph Jaskiewicz thanked voters for their support.

”I can't tell you how pleased I am,” Jaskiewicz said.

The mayor will talk to attorneys and financial advisers today to begin the bonding process.  Town Council member John Geary, who also serves on the Water Pollution Control Authority, said it is a “tragedy” that the taxpayers had to consider such a question, but that he was relieved it passed.

”We lost on the basis of a technicality,” Geary said of the U.S. District Court judge's 2002 decision to set aside an earlier jury decision in favor of the town. “Anyone who attended the trial realized that the jury had it right.”

In August, a federal appellate court upheld the lower court judge's ruling that the town owes the paper making company $11.68 million. Rand-Whitney claimed that the amount would pay for past and future damages done to its linerboard operations when the town failed to comply with a 60-year contract signed in 1992 to provide clean water to the company.

The contract requires the town to treat wastewater sent by the company to the town's treatment plant and then return the cleaned water to the mill. At issue was the town's inability to clean the water to the standard it promised.

Late Tuesday, Patrick Kinney, a spokesman for Rand-Whitney, said the company is pleased with the results and that it looks forward to working with the town to solve whatever outstanding issues remain.  Kinney said prior to the judgment, town and company officials were working diligently on a settlement. He said he hoped that “spirit of cooperation” continues.

”We understand that this issue has been contentious and troubling for the community, but it's one where we signed a contract and we want to run our business and continue to do business in Montville. With the judgment behind us we really do look forward to working with the leadership of the town,” Kinney said.

Several people who cast a ballot Tuesday said they voted yes not because they support the judgment, but because they feared what would happen if the referendum question was rejected.

If the bond request had been rejected, Rand-Whitney still would have been paid; the money would have come from a separate bond the town acquired through an insurance company prior to it appealing the U.S. District court ruling. The insurance company would have paid Rand-Whitney and then could have sought restitution from the town within 90 days.

The WPCA is researching a way to improve the quality of the water returned to Rand-Whitney.




State's cash flow problem sparks partisan feud
Keith M. Phaneuf
January 6, 2012

A new report showing state government's operating cash pool is running low sparked a partisan dispute Friday between minority Republicans in the House of Representatives and Gov. Dannel P. Malloy's administration.

And while House Minority Leader Lawrence F. Cafero, R-Norwalk, tried to link the cash flow problem to an unstable state budget, Office of Policy and Management Secretary Benjamin Barnes countered that it stems from decades of fiscal gimmicks that preceded the current administration.

House Republicans cited state Treasurer Denise L. Nappier's monthly cash flow report, which showed she temporarily shifted funds in December from capital programs to cover operating expenses. This is a legal procedure employed on past occasions at year's end or on other occasions when bills exceed tax and other operating fund receipts.

"The state's cash at hand is at near record-low levels, further evidence that Connecticut's fiscal health is in question, contrary to the Malloy administration's assertions," Cafero said.

Barnes' office and state Comptroller Kevin P. Lembo have reported in recent weeks that this fiscal year's $20.14 billion state budget is roughly $80 million in the black, a surplus of less than one-half of 1 percent. And that's despite about $1.5 billion in new state taxes.

In addition, both offices also concede that with key income tax filing data delayed last fall after two severe storms, the state won't get a clearer picture of how its chief revenue source is faring until January.

According to Nappier's report, the state had just under $196 million in its operating cash fund entering December. But Connecticut also had roughly $1.3 billion in accounts for capital projects being financed through bonding. And because the state operates from a common cash pool that mingles tax revenues, federal grants and receipts from fees and licenses with borrowed funds, the treasurer's office is allowed to transfer funds between operating and capital programs.

Weekly disbursements from the entire common pool average approximately $540 million, according to the treasurer's office.

During the past few years, several House Republicans have objected to this system, arguing it allows administrations to hide problems with the operating budget.

Malloy and his fellow Democrats in the legislative majority "rammed through the largest tax increase in history and we are borrowing millions for state employees' salaries and to keep the lights on," Cafero added. "Why can't Connecticut keep up with its bills?"

Barnes countered that Cafero's statement was false and Malloy's budget chief particularly bristled at the GOP leader's use of the term "borrowing," since Nappier's transfers didn't cost the state any money.

"The assertion that the state is using "borrowing to cover operating gaps" is false and reflects ignorance of how the state's budget and cash management work," Barnes said.

Nappier said Friday that the House GOP release is "unfortunate evidence that they value political gamesmanship over the facts."

Though Nappier conceded that transferring funds from capital programs -- and restoring them shortly thereafter -- is done "fairly infrequently," it is "part of our arsenal of cash-management tools." The treasurer has said these transfers enable the state to avoid incurring the high interest charges it would face if it approached Wall Street or a bank for financing explicitly to cover operating expenses.

The real culprit, Barnes added, is the modified cash basis accounting system that has allowed past administrations and legislatures to balance a series of budgets with hundreds of millions of dollars in phantom savings and creative accounting.

Malloy is pushing to convert state finances to generally accepted accounting principles, a series of common financial guidelines that emphasizes transparency. Under GAAP, expenses must be promptly assigned to the year in which they were incurred. Similarly, revenues are counted in most situations in the year in which they were received.

The legislature's nonpartisan Office of Fiscal Analysis estimates state government would need another $1.7 billion on hand to be in compliance with GAAP rules.

State government did borrow to help pay its bills in 2010 under a plan crafted by Nappier and approved by then-Gov. M. Jodi Rell. The state obtained $580 million in bond anticipation notes -- effectively a short-term loan -- that were paid off one year later with an interest charge of about $10 million.

Wall Street taking a closer look at Connecticut's ailing pension fund
Keith M. Phaneuf, CT MIRROR
February 1, 2011

One of the leading Wall Street credit rating agencies recently increased its focus the fiscal health of state pension systems when rating overall creditworthiness--at the worst possible time for Connecticut.

Moody's Investors Service stopped short of saying when--or if--this might lead to a drop in credit ratings for particular states. But it defended the focus as a step toward a more thorough and accurate assessment of states' fiscal conditions.

"Pensions have always had an important place in our analysis of states, but we looked separately at tax-supported bonds and pension funds in our published financial ratios," said Moody's analyst Ted Hampton. "Presenting combined debt and pension figures offers a more integrated -- and timely -- view of states' total obligations."

Moody's found Connecticut is one of four states, along with Hawaii, Massachusetts and Illinois, with the highest debt- and pension-funding needs.

Connecticut, which has more than $19 billion in bonded debt and has approved nearly $2 billion in borrowing since June 2009 to help fund day-to-day government operations, already received a bond rating downgrade from Fitch Ratings Services last year.  And in November, the state received an actuarial report showing its pension fund in its worst shape since the state began saving for pension obligations in the mid-1980s.

The state's pension account held less than 45 percent of the funds needed to meet its obligation to workers in the biennial valuation released by Cavanaugh Macdonald Consulting of Kennesaw, Ga.

State government had $9.35 billion in assets in the pension fund as of June 30, compared with $21.1 billion in obligations, which together represent a funded ratio of 44.4 percent. Actuaries typically cite a ratio of 80 percent as fiscally healthy.

The ratio, which stood at 52 percent in the 2008 valuation, plunged in part due to declining investment earnings during the most recent recession, a problem all states faced.  But the system also has been weakened by deferred contributions, retirement incentive programs and other actions by legislatures and governors to balance the annual budget. And the slippage accelerated over the past two years.  Investment earnings, which fell by $1.7 billion in the 2008-09 fiscal year, were partially offset by an $825.8 million gain in 2009-10.

But a May 2009 concession deal negotiated by then-Gov. M. Jodi Rell and ratified by state employee unions and the General Assembly deferred $214 million in pension contributions over the past two fiscal years, and allowed another $100 million deferral this year.  That deal also allowed the state to offer a retirement incentive program in 2009, which increased pension benefits for about 3,800 eligible employees. State government has offered five retirement incentive programs in the past two decades.

Though popular among workers, these incentive programs have been criticized by economists, legislators and some union leaders for providing illusory savings, offering a short-term reduction in salary costs that eventually is offset by larger, long-term losses suffered by a pension savings account robbed of investment earnings.

The state's annual pension contribution, which currently stands at $844 million, is projected to grow just beyond $1 billion next year.

Further complicating matters, state employee unions agreed in 1995  with then-Gov. John G. Rowland to shift the pension contribution system from a level-funded 30 year schedule to a backloaded system that will force dramatic increases over the next few decades.  The required annual contribution is on pace to grow by 50 percent by 2017, double by 2026 and triple by 2038, based on a consultants' report issued last summer for a state panel studying retirement benefits.

Gov. Dannel P. Malloy, who inherited a projected state budget deficit of $3.67 billion for the coming fiscal year when he took office on Jan. 5, announced shortly thereafter that the pension system could not be subjected to any more fiscal gimmicks. Malloy announced his pension fund policy before the Moody's statement.

"He has been incredibly blunt and consistent: We cannot do stuff like that any more," Roy Occhiogrosso, Malloy's senior advisor, said Monday. "The governor has been quite clear about the need to get the state's fiscal house in order due to issues just like this."

Malloy chastised congressional Republicans and New Jersey Gov. Chris Christie during an editorial board interview with The Day of New London earlier this month, charging that talk of states declaring bankruptcy was fostering instability in the bond market.

State House Minority Leader Lawrence F. Cafero, R-Norwalk, said Malloy and all Connecticut officials need to be prepared for some frank discussions about the state's huge debt.

"The first step in solving a problem, personal or otherwise, is to acknowledge the problem," Cafero said Monday. "And for so long we have swept the problem under the rug. What it's all really about is telling the truth -- to ourselves and to the public."

Malloy offers olive branch to state's largest business group
Sees better relationship as boost for job growth
New London DAY
By Lee Howard
Published 01/08/2011 12:00 AM
Updated 01/08/2011 04:07 AM

Hartford - Gov. Dannel P. Malloy told the state's largest business association Friday that he wants to develop a more cordial relationship between the government and private employers so Connecticut can once again become a job-growth state.

Speaking two days after his inauguration as the state's 88th governor, Malloy addressed the Connecticut Business & Industry Association's annual economic summit at the Hartford Marriott Downtown, saying he didn't want to place any roadblocks in the way of the state's financial rebound. He promised to take a second look at regulations that impede job growth.

"We need to change the relationship between the companies that employ so many of our workers and our state government," he said. "We need to be clear. We need to be plain-spoken. We need to be supportive. You need to count on us."

Malloy said he is still putting together an economic team to develop strategies to deal with Connecticut's $3.67 billion budget deficit and the state's current loss of 90,000 jobs from an employment peak before the Great Recession. Among the team's goals, he said, would be to address areas such as transportation, infrastructure and education that could benefit from greater state investments.

"A new day has come, and we are going to take these issues on," he said. "There is no cavalry but us."

Malloy said the state's budget problems shouldn't preclude government investments that spur growth - including the long-delayed completion of Route 11, which would be the main highway between Hartford and southeastern Connecticut.

"I'd like to see Route 11 done," Malloy said during a question-and-answer session with the crowd after his speech.

Route 11 might get done, he suggested, by placing tolls to help pay the cost of construction. Another possibility, he added, would be a public-private partnership.

Any attempt to restart the Route 11 project during his term, Malloy said, would require a creative funding scheme since the state budget hole is so deep.

It's a problem for which Malloy has no easy answer since he cannot cut spending by the huge number required to offset the budget deficit "and be the state we, as Connecticut residents, aspire to be," he said. Nor would raising taxes be a wise move, he said, "ruining any hope we would have to being a job-growth state again."

Federal Reserve economists Robert K. Triest and Joseph Tracy, who spoke before Malloy, gave some hope that the state's economy will come back in 2011. They painted a picture of Connecticut and the rest of the nation avoiding a double-dip recession and starting to recoup some of the 7.4 million jobs lost throughout the United States in the past three years.

Still, the country's current employment numbers are below their level in 2000, despite a significant rise in the work-age population.

"One of the consequences of what we have come to call the Great Recession is we have lost an entire decade of job growth," Tracy said.

But positive signs abound, the economists said, including steadily lower initial unemployment claims, higher projected gross domestic product, more people taking jobs as temporary workers and a higher rate of job-quitting (indicating confidence in finding a new position).

The one cloud on the horizon, Tracy said, is housing, which started to pick up at the beginning of last year but finished 2010 on a down note. Some economists have predicted a 10 percent decrease in house prices this year, he said, which would only add to the millions of distressed properties currently on the market.

"My guess is that as house prices continue to decline, there will be very little incentive for builders to build new houses," he said.

Tracy added that Connecticut may be protected from some of the market gyrations experienced in other states thanks largely to housing prices here that didn't skyrocket during the end of the real-estate boom as they did elsewhere.

"We have had less of the upswings and the downswings - and the adverse consequences that result," he said.

Economists: State's recovery likely to slow
Keith M. Phaneuf, CT MIRROR
September 9, 2010

STAMFORD - The nation's economic comeback has hit a lull, and by next year Connecticut may follow suit, University of Connecticut economists warned Wednesday in their latest quarterly forecast.

Connecticut will have gained 20,000 jobs by year's end, according to projections by contributors to The Connecticut Economy, the university's quarterly economic review. But job growth in 2011 might top out at half that number.

"The recovery is average at best," economist and executive editor Steven P. Lanza said during Wednesday's presentation of the latest quarterly review before about 100 business leaders gathered at UConn's Stamford branch campus. "The big fear now is we're in for the big chill."

While the national economy slowed during the second quarter of 2010, non-farm jobs grew in this state by about 8,000, despite a big drop in Census government jobs, the review states. Professional and business services saw their first increase since before the recession began in March 2008 and manufacturing grew for the first time since mid-2006.

But despite these positive marks, other signs hinted that growth in Connecticut may be ready to slow down.

Though the state's two largest labor markets, Hartford and Bridgeport-Stamford, both added jobs in the second quarter, the New Haven and New London markets lost ground.

"The recession's severity and flagging support from federal stimulus funds are forcing budget cuts in schools and hospitals statewide," the review noted, adding that the education and health care sectors lost a combined 1,100 jobs last quarter, their largest drop since the end of 2000.

Retailers, hotels, restaurants and bars all increased their payrolls during the second quarter of 2010 as consumer spending rose and average weekly earnings were up 3.5 percent compared with the second quarter of 2009. But most of that growth was tied to expanded worker hours rather than to pay increases, the review states.

UConn economists continue to predict job growth in three of the four labor markets by year's end, with New London being the exception. But as the federal stimulus winds down and businesses refocus on building inventories back up, job growth could slow quickly.

"Normally, the recovery's reins would pass to businesses and consumers," the review states, "but thus far they have proven either reluctant or unable to seize them."

According to Connecticut Labor Department statistics, the state lost just over 103,000 non-farm jobs between March 2008 and December 2009.

The review projects Connecticut's gross domestic product, the chief measure of its overall economic output, will grow about 1 percent this year, better than the 3.4 percent loss recorded in 2009 but too meager to set the stage for major job growth in 2011, Lanza said.

Gold Coast Slips But Maintains Huge National Wealth Lead
Average Income Per Person In Southwestern Connecticut Fell By One Of The Biggest Margins In The Nation In 2009.

10:02 PM EDT, August 9, 2010

The country club set on the state's Gold Coast doesn't like to talk about it, but there was no avoiding reality when the numbers came in on Monday: Average income per person in southwestern Connecticut fell by one of the biggest margins in the nation in 2009.

But they can breathe a sigh of relief. The metropolitan area that stretches from tony Greenwich to Bridgeport and its suburbs remains far and away the wealthiest among 366 U.S. areas — as it has for years. And there appears to be no challenge in sight.

Per capita income in the Bridgeport-Stamford-Norwalk metro area was $73,720 in 2009, down 6.8 percent from $79,108 the previous year, according to estimates released Monday by the U.S. Commerce Department. That's almost 20 percent higher than the next wealthiest metro area of San Francisco and the East Bay, which came in at $59,696 after falling by 4.6 percent.

To be sure, there has been plenty of pain among the upper echelons in southwestern Connecticut, not to mention the poor in Bridgeport. Banking executives — many of whom work in Manhattan — lost their jobs in the financial services industry meltdown. Survivors saw their bonuses slashed or eliminated altogether.

Hedge funds heavily populate the area, and managers saw their funds suffer and in some cases, collapse. While hedge funds had a good year in 2009, managers couldn't cut themselves big paychecks when their investors had suffered deep losses the previous year.

"You don't get to book a whopping loss and then pay yourself for performance," said John Brunjes, general counsel for the Connecticut Hedge Fund Association.

It was a down year across the nation, of course, and about three-quarters of all metro areas declined, for a combined average drop of 2.8 percent, to $40,757. That's barely more than half the Gold Coast wealth.

Although southwestern Connecticut may crow about its status, the Hartford, New Haven and New London metro areas have reason to toot their horns, too.

In 2009, Hartford was ranked 12th highest in the nation in per capita income, up from 15th in 2008, while New Haven jumped to 22 from 26. New London came in at No. 23, up from 29th place in 2008.

The figures were calculated by totaling each area's income and dividing by the population. That means a relatively small number of super-rich people can skew the tally upward for a metro area — in contrast to median income, which is a broader measure of how typical families are faring.

Edward J. Deak, an economics professor at Fairfield University, expects per capita income in southwestern Connecticut to swell again in the next few years.

"Given the profitability of banks and brokerages this year, this is temporary," Deak said. "We should start to see some rebound."

The per capita tally may be a feel-good factoid for Connecticut, but Deak said it masks the fact, especially in the Bridgeport-Stamford-Norwalk area, that there are still many families that earn well below those levels and are still out of work.

"I just wish it would filter down to us little people," Deak said, parodying a remark a few weeks ago by the embattled British Petroleum chief, who was ousted. "There's a lot of little people that would like to see better times."

Bridgeport-Stamford-Norwalk registered the fourth largest loss of per capita income among all metro areas in 2009, with Midland, Texas, sustaining the biggest decline at 8.4 percent, to $49,441.

Even hard-hit Las Vegas fared better than Bridgeport-Stamford-Norwalk, sliding 6.2 percent, to $37,457.

Boston held on better than Greater New York. Beantown fell 2.7 percent, to $53,713, coming in at No. 6, while the Big Apple and its suburbs yielded 4.6 percent, to $52,375, No. 9 on the list.

Among the 366 metro areas, 84 saw gains in per capita income, but they were limited to smaller cities. The strongest gain was registered in Jacksonville, N.C., which rose nearly 12 percent, to $44,664.

The three lowest metro areas in per-capita income were in Texas, with McAllen-Edinberg-Mission the lowest of all, at $19,720.

Greater Hartford dipped 2.1 percent, to $49,667. New Haven fared better, dropping 1.7 percent, to $46,125.

Hartford and New Haven likely gained a bit of an advantage in 2009 because of growth in health care and educational services, said economist Alissa DeJonge, director of research the Connecticut Economic Resource Center in Rocky Hill.

"Those industries held on, despite the recession," she said.

The Interest-Rate 'Trap' That Could Slow Recovery
Hartford Courant
Dan Haar
April 30, 2010

Way back at the end of 2007, when the U.S. economy started shedding jobs, Connecticut employers continued to add positions for a few months. For much of 2008, we had an easier time than the nation.

Eventually, we ended up with a recession about as bad as that of the rest of the nation, perhaps a bit milder. But now we might have to pay for that hiatus, and not only because Connecticut traditionally comes out of recessions more slowly than other states.

Call it the interest-rate trap. It's bad for Connecticut, and it works like this:

Sometime later this year or early in 2011, the economy will heat up enough that the Federal Reserve will worry about inflation. The Fed will raise its key interest rate, the overnight rate, from its current target of 0 percent to 0.25 percent.

If history is any guide, the Fed will then tighten the screws rapidly for a year or more — hoping that all the excess money it poured into the economy doesn't explode as inflation.

Some bankers and politicians will grouse, but the higher rates will not prevent employers in most places from creating jobs and consumers from spending money more freely.

Connecticut, unfortunately, might not be one of those places. Forecasters expect slow job growth here, as usual following a national recession. So, the state could suffer from the tightening money flow, even as it struggles to generate the sort of excitement that will have led to the tightening in the first place.

"If you slow down a weaker recovery you're going to get very poor decline in the unemployment rate," said economist Ron Van Winkle, West Hartford's town manager.

It's a dangerous time because, as Van Winkle points out, "the state legislature is postponing the decision to drop the shoe," meaning lawmakers are sweeping an $8 billion budget hole under the rug by borrowing money to fill it. If the cleanup happens at a time when interest rates are rising, that could add to the pain.

The interest-rate trap isn't just a fantasy fear — it actually happened after each of the past two recessions. Between February 1994 and May 1995, the Fed raised the key lending rate by 2.75 points, to 6 percent. Despite the rising borrowing rates, U.S. unemployment fell by a full 1.2 points, and the nation's payrolls swelled by a fat 3.8 percent.

Connecticut, by contrast, saw its unemployment rate fall by just one tick. Job creation was decent, not great, at 2.1 percent, but home prices in most towns continued to fall.

We had a similar pattern as the Fed raised rates between June 2004 and November 2005. That time, our job creation was even weaker, although home prices did increase nicely.

This time around, the picture is ominous for the state because the jobless rate here is uncomfortably high, at 9.2 percent and rising in March — just under the 9.7 percent national rate, which has been falling. It's true that the first three months of 2010 have brought job growth, a hopeful sign, along with optimism by many executives.

But most economists, including Van Winkle, continue to predict a weak 2010 for Connecticut jobs. That makes it all the harder for the governor and lawmakers to do something real to solve the budget crisis, and it sets up another interest-rate trap for Connecticut.

Connecticut Unemployment At Its Highest Of Recession
By MARA LEE, The Hartford Courant
2:52 PM EST, March 9, 2010

Unemployment in Connecticut ticked up slightly to 9 percent in January, the highest yet in this recession. Unemployment hasn't been this high in the state since 1976.

The national unemployment rate is 9.7 percent.

But the signs aren't all gloomy. Six of 10 economic sectors added jobs in January – leisure and hospitality added 3,800 jobs, education and health services added 3,200, retailers added 400 jobs and the federal government added 400 jobs in Connecticut. Even smaller gains were seen in information and in a catch-all category that includes nonprofits and repair shops.

Only leisure and hospitality and education and health care are up for the last 12 months.

Copyright © 2010, The Hartford Courant

What is the outlook here in November 2009?

From an important discussion that took place in Hartford, with best economists reading CT tealeaves:  our take from the power point

Conn. Jobless Rate Reaches 8.9 Percent in December

January 21, 2010
Filed at 4:44 p.m. ET

WETHERSFIELD, Conn. (AP) -- Connecticut officials say the state lost 4,800 jobs in December, pushing the unemployment rate to 8.9 percent.

The state Department of Labor says Connecticut has lost 94,500 jobs since March 2008, although recent declines have been much slower than the pace earlier in 2009.

The December figure was an increase from 8.2 percent in November. One year earlier, it was 6.6 percent.

The biggest declines were reported in retail, leisure and hospitality jobs. The only sector to add jobs was educational and health services, which had 1,300 new positions.

The national unemployment rate in December was 10 percent.

Bankruptcy filings way up in New London County
By Lee Howard
Published on 10/19/2009

Bankruptcy filings in New London County more than doubled in the third quarter of the year compared to the same period last year, according to statistics released today by a real estate tracking firm.

The Warren Group, publisher of The Commercial Record, said the county recorded 205 bankruptcy filings between July and September, a big jump from the 91 recorded last year during the same months.

Local Chapter 7 and Chapter 13 personal bankruptcy filings were up even more dramatically than for the state as a whole. The state filings rose from 1,773 last year in the third quarter to 2,569 this year — an increase of about 45 percent.

“The dramatic increase in bankruptcy filings shows what effect job losses and salary cuts have had on Connecticut residents,” said Timothy M. Warren, chief executive of The Warren Group, in a written commentary.

State banking regulators take aim at major mortgage lender
By Lee Howard
Published on 8/12/2009

The state Department of Banking ordered Wednesday that a major nationwide lender stop writing new mortgages in Connecticut and threatened to pull the firm's licenses.

Taylor, Bean and Whitaker Mortgage Corp. of Ocala, Fla., the 12th-largest U.S. home-loan company, has been unable to fund at least 15 mortgages closed last week, state banking regulators said. Another 110 loans that TBW closed in the state since April were funded late, regulators added.

Connecticut Banking Commissioner Howard F. Pitkin issued a temporary cease and desist order against TBW, and gave notice of his intent to revoke its mortgage lender licenses. In addition, Pitkin said he would be seeking a civil penalty of up to $600,000 from TBW.

Seven of TBW's branches are registered in Connecticut, but it has no offices in the state.

The recession is my fault 
By Elissa Bass 
Published on 6/26/2009
Dear America: I'm sorry.

Dear Target, Talbot's, Payless, Land's End, LL Bean, Ocean State Job Lot, Marshall's, TJ Maxx, and the outlets in Clinton and Westbrook: I apologize.

See, the lack of an economic rebound - despite the gazillions of dollars the government has poured into programs designed to turn things around - is my fault.

I've stopped conspicuously consuming.

I've stopped impulse buying.

I've stopped “swinging by” the store and “picking up a few things.”

I've stopped getting what we “want,” and am now only getting what we “need.”

Sigh. I know. I can't help it. I just can't seem to throw away money anymore.

Me! The Queen of Credit Cards! Back in the day I had a wallet stuffed full of 'em. Disposable income? I could not dispose of it fast enough.

But those days are gone. I simply can't bring myself to do anything with my spare change other than bury it in mayonnaise jars in the back yard. My psychologically induced spending reduction even has a name: “paradox of thrift.”

In a recent Reuters article about the sloooooow economic bounce-back, the reporter wrote, “The so-called 'paradox of thrift' has been at work in recent months as shaken Americans slash spending, and try to rebuild their personal safety nets, at a time their shopping dollars have been desperately needed.” (Sorry!)

”The U.S. savings rate hit 5.7 percent in April, a 14-year high. During the boom years the savings rate turned negative as consumers felt confident about spending, buoyed by rising household wealth, especially home prices.” (Mea culpa.)

In an Associated Press story about health care costs, the reporter gave me a clue as to why I feel this way:

”From 1999 through 2008, worker earnings rose 34 percent and overall inflation was 29 percent. So worker income has barely kept pace with inflation, more of the paycheck is going to health costs, and there's less left over for things like vacations, dining out, home improvements or a new car - especially for low-wage workers and retirees. That represents a huge drag on the economic growth, considering that consumer spending powers about 70 percent of the economy.”

Having the paradox explained doesn't change things, though. So, I'm sorry. But I'm not going back to the old ways.

Pension funds called next big crisis

By Bill Cummings, Staff writer
Updated: 03/28/2009 10:59:09 PM EDT

The national economic collapse is battering municipal and state pension plans, and that means taxpayers will likely dig deeper into their pockets to pay retirees.

"It's a ticking time bomb," said Trumbull Finance Director Lynn Heim. "Unless the market takes off, we will just be holding our head above water."

Before the recession took hold, and before the stock market took a nose dive, towns and cities across the region were already allocating more money each year to pay retirees, who can earn as much as 70 percent of their pay.  But experts say the 2008 stock market crash is a potent warning that the defined benefit retirement plans towns and cities have relied on for decades could become budget-busting expenses.  As the stock market tanked, pension funds across the region, state and nation suffered huge losses.

Fairfield's pension fund, for instance, lost nearly $100 million, or 28 percent of its value. Bridgeport lost $70 million in one fund, or about 30 percent of value. Milford's pension fund dropped $158 million, while the state's pension funds dropped about 25 percent on average.  Faced with a market that as of Friday was down 35 percent over the last year, it's unlikely those losses will be recovered any time soon.

Stratford is projecting its yearly pension costs could top $35 million by 2029. Bridgeport's contribution has doubled since 2005, and even wealthy towns like Easton are putting in twice as much next year.  This is not how pensions were intended to work. The defined benefit plan was designed to be self-funded by setting aside a large pool of money and investing it in stocks and bonds. In a perfect world, revenue from those investments would both grow the fund and cover yearly retirement costs.

For some communities, that's more or less happened. But in others -- Stratford officials recently warned that its pension costs could soon bankrupt the town and dampen economic development -- the struggle to pay retirees and keep taxes in check is well under way.  All of which raise questions about the future of public sector pensions. Some wonder, for instance, if public employees will be forced to join the legions of private sector workers who now pump money into 410(k) plans with no guarantee the fund will grow and no promised level of benefits if it doesn't.

Losses everywhere

No one anticipated the massive losses in the last months of 2008, and that has left fund managers and town and city officials swimming in uncharted water.

"There is going to be a big hit unless they can make the investment return. It's a matter of how long that takes. This market, which no one has seen, will create bigger issues," said Bruce Barth, a Hartford benefits lawyer and founding member of the Connecticut Public Pension Forum.

The losses are spread across nearly every town in the region. Aside from Bridgeport, Milford and Fairfield, Trumbull's combined $54 million pension fund dropped $11 million in 2008, and Derby's now $7 million fund lost $1.2 million. Fairfield's $332 million combined fund is down nearly $100 million, including $42 million that vaporized in Bernard Madoff's now infamous Ponzi scheme.  The state's pension plans also lost big money, and a similar trend played out across the country.

Connecticut's $1.3 billion Municipal Employees Retirement Fund, which also covers many town and city workers, ended 2008 down 22.4 percent.  The state Teachers Retirement Fund, which covers all teachers in the state, closed the year down 25 percent. The State Employees Retirement Fund is down 26 percent.

"What we are facing are serious concerns about systemic risk," said state Treasurer Denise Nappier. "Taxpayers should not have to pay for the greed of Wall Street."

In Michigan, the Detroit General Retirement system lost 31 percent of its value, while Macomb County, Ga., and the Virginia Retirement System dropped 30 percent. Tennessee's pension system lost $5 billion from its $31 billion fund in the last six months of 2008.  Corporate pensions are also increasingly at risk. The National Pension Guaranty Corp., which ensures pensions for 44 million private workers and retirees, is facing an $11 billion deficit, and experts expect that deficit to grow.

"It's the same in the private sector. Many companies are pumping lots of unbudgeted money into these plans. It's a major fiscal concern and a drag on recovery," said Peter Sawyer, an analyst with the Connecticut Business and Industry Association.

Unfunded liability

Kevin Maloney, a spokesman for the Connecticut Conference of Municipalities, said finance directors across Connecticut agree that unfunded pension liabilities are on the rise, and that means taxpayer contributions will rise as well.  Unfunded liability is the difference between the value of a pension fund and how much is needed to cover a town's or city's obligation to its retirees, both those already retired and those who eventually will.

"Many plans are underfunded, especially in towns that struggle to pass a budget," Maloney said. "In the end, this is another example of a significant stress on municipal budgets and only reinforces that the state and federal governments must do all they can to sustain an adequate amount of federal aid."

Trumbull's town plan stands out because it's only 28 percent funded, after suffering a $5.6 million loss last year.  The town's $43.3 million combined town and police pension fund was well funded in the 1990s when the "market was flush," said Heim, Trumbull's finance director. But as the market cooled in the preceding years, town leaders did not contribute adequate amounts to rebuild the fund and pay retirees.  Heim said stabilizing the fund would require officials to raise the tax rate by one mill, a step no one is willing to take.

"We have been negotiating with unions and are getting more contributions," Heim said. "But by not putting money into the fund and increasing contributions, we have created a sinkhole."

During the 2008-09 fiscal year, Trumbull contributed $1.8 million to the town plan and expects to contribute $2 million next year. The police fund required a $1.2 million contribution in the 2009 fiscal year and that's expected to rise to $1.3 million in 2010.  Bridgeport during the 2006-07 fiscal year contributed $4.4 million to its police and fire pension funds. This year the city contributed $6.7 million, and officials expect more will be required next year.

The city's contribution to the state retirement fund rose from $1.7 million in 2004-05 to $2.5 million in 2008-09. To put those numbers in perspective, every mill in Bridgeport's tax rate represents more than $5 million.

In Easton, the town's $11 million fund, as of July 2008, was 100 percent funded. Today, thanks to last year's losses, it's 83 percent funded. The town's contribution of $254,000 this year is expected to double to $554,000 next year.

Fairfield's pension plan in mid-2008 was 120 percent funded, which meant the town was not directly contributing anything. After losing $96 million in the last half of 2008, Fairfield is projecting a $1.6 million town contribution next year.

Stratford's pension fund was only 59 percent funded in mid-2008 and officials have pledged to pump $7.2 million a year into the fund. They expect the annual contribution will rise to $35 million in 2029.  While recent losses are fueling future increases in town contributions, other factors are at work as well. Some communities, such as Bridgeport, link pensions to yearly union raises, which causes its obligation to rise each time a union gets a new raise.

Other towns, such as Stratford, include overtime when calculating pension salaries. Overtime allowed one Stratford worker to obtain a $107,000 yearly pension on a base salary of $82,000 a year.

Towns seek concessions

Many towns also increased retirement benefits in exchange for smaller pay raises now and offered employee buyout packages. In Bridgeport, city officials recently amended a contract with firefighters so employees can bank unused holiday, vacation and personal days for a year in exchange for a promise that none of the union members will be laid off.  When the firefighters retire, they can collect the value of the banked days at a pay rate that will most likely be higher than what they earn today. While such moves can save money now -- fewer firefighters on vacation means less overtime to cover for them -- experts say the long-term price usually far exceeds the short-term benefit.

Michael Feeney, Bridgeport's finance director, and Heim, Trumbull's finance director, each views his town's pension plans as a "ticking time bomb." In separate interviews, each warned the cost to taxpayers is going to steadily rise.

"The defined benefit plans are so rich. We have people leaving a job making 60 to 70 percent of what they were making. And throughout the state we have so many double dippers," Heim said, referring to workers, usually police or firemen, who draw pensions from several towns.

"We need to eventually explore an alternate pension plan, maybe a hybrid of defined plans and a 401(k)," Feeney said. "The future obligations we face are very high and years like 2008 are very challenging. When the market shifts, it affects everyone."

Some towns, such as Monroe, are offering a 457 plan to certain workers. It is similar to a 401(k) plan in which workers contribute weekly to create a pool of money to invest in the stock market. The employer offers a match, usually a small percentage of what the worker puts in.  Monroe First Selectman Tom Buzi, and 14 other elected or appointed officials in Monroe, are enrolled in the 457 plan. That's mostly because participants become vested within six months as opposed to five years for most municipal plans.

As an elected official, Buzi must win his job every two years.  The town annually contributes 7 percent of Buzi's salary to the 457, and he can contribute up to a federal maximum. A employee contribution is required to receive the town match.  Much of corporate America has already turned to 401(k) plans, which are viewed as far cheaper for employers than defined benefit plans. That's mostly because a 401(k) does not offer a set retirement salary; retirement pay is based on how much is contributed and how well the investments performed.

"For the unions, that's not a good solution to them. No one wants to go to that route," Heim said, referring to union reaction to converting municipal workers to 401(k)s.

Keith McLiverty, Derby's treasurer, said municipal pension plans grew out of a belief that town and city workers earned less than their counterparts in the private sector. One advantage, he explained, was good benefits, including a guaranteed pension ranging between 50 and 70 percent of an employee's final salary.  McLiverty said Derby for years believed its pension plan was the best deal for employees and taxpayers. He admitted no one investigated whether an employee contribution plan would save money.

"If it was a straight match, you could win. I have not looked at that, but I'd like to run some numbers. That's a good point," McLiverty said. "Public sector employees tended to make less, so the pension was a good benefit for them. Do they still make less? We would have to look at that, too."

Towns and cities can enter the state retirement plan, as Shelton did years ago, but a town must pay off its existing pension liability. For communities like Trumbull and Stratford, that's not likely anytime soon.

Many concerns

Barth, the Hartford benefits lawyer, said pension plan funding across the state varies, with some plans overfunded and some severely underfunded. Any fund that is less than 60 percent funded is considered in trouble.  Waterbury's pension plan is only 3 percent funded, the result of years of raiding it to balance the budget, Barth said. The city ended up under the control of a state financial review board.

By contrast, Bristol's pension fund is 200 percent funded, which has prompted officials to consider removing a portion of the money and investing it to offset health insurance costs.  Christine Shaw, spokeswoman for the state treasurer, said the impact of recent losses won't be fully felt for several years, when new actuarial reports are completed. Those reports predict how much in contributions will be needed in the future.

"What is challenging is there may be scenarios where the plan sponsor has to pay more than expected," Shaw conceded.

The National Association of State Retirement Administrators believes the market will eventually reverse current short-term losses.

"Public pension funds are intentionally designed to withstand market fluctuations, even ups and downs as dramatic as those in recent days and in years past," said Terry Slattery, NASRA president. "Retirement benefits for the nation's public workforce are safe and secure because they are highly diversified and invested with a long-term focus."

Milford Mayor James L. Richetelli Jr. also said the impact of the recession hasn't been felt yet.

"The way actuaries calculate the [required] contributions is to look at an average of three or four years. That has a smoothing effect, but it also means that the effect of what's happening now won't show up for a couple of years."

State braces for cash flow woe; Rell prepares in case revenues come up short
Posted: 03/02/2009 03:53:02 PM EST

HARTFORD -- State Treasurer Denise Nappier warned Monday that Connecticut could run into a cash crunch as early as May because of the economic downturn.

Gov. M. Jodi Rell on Monday said she is planning a variety of options.

Rell's office said the extent of the cash-flow problem will depend on income-tax receipts expected around mid-April, but she is preparing to possibly bond some of the nearly $1 billion scheduled for release to city and town school systems May 1.

"Our state keeps its money in a common cash pool, in part so that we can earn as much interest as possible, the same way a family might keep most of its money in a savings account," Rell said in a statement.

She said the downside of that tactic is that when the economy slows, there is not a large amount of cash on hand, so the state may resort to borrowing or issuing bonds.

"In addition to regular bills, in the coming months the state must make the next round of Education Cost Sharing payments (the main grant for state education aid) to cities and towns, and we want to be sure there is enough cash on hand to make those grants without over-stretching our resources," Rell said.

The ECS payments of May 1 will total more than $945 million to cities and towns.

"It is not clear yet whether we will need to do anything," Rell said. "It would not be the first time the state has taken such action and it is only prudent to plan for all eventualities." She said the state could issue bond anticipation notes for the ECS funding or draw on a line of credit arranged with banks.

"If we must act, we will be looking for the best option, one that will give us the liquidity we need without incurring excessive interest charges or other expenses," Rell said. "I will consult with my budget office, the treasurer and others as we determine the next steps."

Rell said the flow of federal stimulus money into the state could also help the cash-flow problem.

Nappier's warning was in a draft letter to the governor dated Monday. Also Monday, State Comptroller Nancy Wyman said revenue continues to fall because of the nationwide economic downturn.

The income tax was projected to bring in $7.6 billion this year, but Wyman said it will fall at least $900 million short. The state also will pay out about $140 million more in tax refunds than was anticipated, while sales tax revenues are expected to decrease by about $352 million from estimates. The corporation tax is down by about $183 million, Wyman said.

State: Building permits drop 80%
The Associated Press
Posted: 02/27/2009 08:46:50 AM EST

HARTFORD - Connecticut's economic development agency says the number of permits issued for new housing dropped 80 percent in January, compared to a year ago.
The state Department of Economic and Community Development says the 128 towns and cities that report monthly data approved 92 units last month. That's down from the 454 units approved in January 2008.

The next lowest monthly total since January 2004 was the 153 units approved in December, making the total for the past two months combined just 245.  The state agency says the most dramatic drop from last year was seen in Stamford.  Last year, with a major condo project under way, the city approved 176 units. In January this year, Stamford approved zero permits.

Indicator of where other communities are headed?
East Hartford's Grand List Shrinks 1.4 Percent
The Hartford Courant
February 9, 2009

The new grand list shrank by 1.37 percent, or $43 million, from the previous year, Finance Director Michael Walsh said.

The Oct. 1, 2008, list of all taxable property is now about $3.1 billion.

Several factors caused the reduction, including fewer new-car purchases, increases in commercial tax exemptions and a decrease in the assessments of such businesses as the Sheraton Hotel.  New businesses, such as the Aldi grocery store on Silver Lane, Phillips Farm and Meadow Hill Farms, added revenue, but those tax dollars weren't enough to counteract the overall decline.

Real estate assessments fell 0.34 percent, to $2.6 billion.
Personal property assessments dropped 8.91 percent, to $244 million.

Motor vehicle assessments fell 4.16 percent, to $237 million.
Grand List Total - $3.1 billion
Decrease From 2007: 1.37 percent
Top 10 Taxpayers (assessed property values):

1. United Technologies Corp., $348,262,010
2. Cabela's Inc., $30,183,540
3. Coca-Cola Bottling Co., $26,433,620
4. Freemont Riverview LLC, $24,293,090
5. Ansonia Acquisitions LLC, $23,716,230
6. Connecticut Natural Gas Corp., $22,011,140
7. Connecticut Light & Power, $21,846,630
8. Computer Sciences Corp., $20,720,500
9. Merchant 99111 Founders LLC, $16,637,090
10. East Hartford Founders LLC, $15,207,610

What Changed?

The town's top 10 taxpayers remained the same. United Technologies bought new manufacturing equipment that is tax-exempt. Bank of America, which moved into an enterprise zone at 20 Hartland St., received a 40 percent, five-year tax exemption. The exemption applies only to increases in Bank of America's real estate and personal property taxes that result from its $17 million investment in the property, said Jeanne Webb, the town's development director. Cabela's, which opened at Rentschler Field in October of 2007, received a full assessment last year.


State Economy Impacted By Financial Sector
The Hartford Courant
1:30 PM EST, December 10, 2008

Connecticut's higher-than-average concentration of financial services is a blessing in good economic times. But in bad times like now, it's a curse, according to a University of Connecticut economist.

Nationwide, the financial sector accounts for about 4.7 percent of all jobs. In Connecticut, the figure is closer to 8 percent, according to a 2007 study by the U.S. Bureau of Economic Analysis.

In a thriving economy, for every one job created by Connecticut's financial sector, on average, another two jobs are created in related sectors, Steven P. Lanza, executive editor of The Connecticut Economy told government officials at a presentation Wednesday at the Capitol.

"This is all great news if the economy is expanding," Lanza said. "It's troubling news if the economy is contracting."

In a recession, the ripple effect can work in reverse, he explained.

Lanza and other University of Connecticut economists predict that the state's financial sector will lose 30,000 jobs over the next year. With the ripple effect, those direct job losses in the financial industry are expected to result in the loss of another 55,000 to 60,000 jobs. "Total job cuts could approach 90,000," Lanza said.

And that spells trouble for the state's coffers, Lanza added.

Workers earnings could decline by $4 billion statewide, decreasing the state's tax revenue by nearly $375 million this fiscal year. The shortfall could double or even triple, depending on the job losses on Wall Street, Lanza said.

About 25,000 Connecticut workers commute daily to New York City -- about 11,000 of whom work in the financial industry and whose jobs "are on the chopping block," Lanza said. As their pink slips begin to pile up, the state's budget deficit could exceed $1 billion.

The average recession lasts about year. But at this point, there's no sign the economy is improving, Lanza said. "We're a year in. Losses are accelerating and a bottom isn't in sight."

Government needs to respond accordingly. "Increasing taxes would only make matters worse," Lanza told officials. "It puts the brakes on the economy."

And while budget cuts are inevitable, Lanza urged officials to continue funding the state's educational institutions at their current levels.

"You can just make across the board cuts. During recessions, there's a spike in enrollment in colleges and universities. These are people who've lost jobs and they're coming back to school and getting a new set of skills. They're connected to the community. They're going to stay here. They're making an investment in themselves and the state, he said."

Copyright © 2008, The Hartford Courant

Connecticut's economic forecast grim and grimmer
By Lee Howard
Published on 12/10/2008
Connecticut is in the midst of a long recession that will send jobless rates over 7 percent and may not end until 2010 or later, according to an economic report released today.

“The outlook for Connecticut is flat-to-very low growth in 2008, but steep contractions in employment in 2009,” said economist Daniel Kennedy in his quarterly economic forecast published in The Connecticut Economy.

“Connecticut is on track to lose at least 20,000 jobs over the next year,” added Steven P. Lanza, executive editor of the University of Connecticut's economic review, which is published every three months. “As job growth grinds to a halt and then shifts into reverse, area unemployment rates will top 7 percent, and the slide in home prices and building permits will drag on.”

The most recent numbers for the Norwich-New London area show unemployment at 6.1 percent as of October.

Lanza said personal income in Connecticut increased during the third quarter, but not enough to keep up with inflation. “Add tight credit conditions into the mix, and it is little wonder that few of the state's retailers are posting 'help wanted' signs,” Lanza wrote in his report.

Indeed, initial unemployment claims in the past quarter were up more than 36 percent in the state, with a similar increase in the unemployed.

Lanza said last quarter showed some sources of strength economically, including in the fields of leisure activities, transportation and utilities as well as education and medical services, each of which added 1,000 jobs in the period. Still, he predicted that the gains weren't likely to last.

“There is little real hope that Connecticut can dodge a serious recession,” Lanza said. “If we're lucky, it won't be as severe as in the national economy.”

Lanza noted that state exports have risen at double-digit rates in recent years, climbing more than 17 percent just in the past year. But he added that the dollar's recent rise in value compared to foreign currencies, combined with the worldwide recession, likely would cut growth in the near term.

“The current forecast anticipates declines in employment, Gross Domestic Product and housing permits at least through 2009,” Kennedy's quarterly analysis stated. “Indeed, the recovery may not come until after 2010.”

Rell plans talks with unions about deficit
New Haven Register
Associated Press
Tuesday, December 9, 2008 5:36 AM EST

CROMWELL — Gov. M. Jodi Rell said Monday that she is sending a lawyer to talk with state employee unions this week about potential cost savings to help reduce Connecticut’s mounting budget deficit.

Rell declined to say whether state worker layoffs or contract concessions would be part of the discussion. Her comments came after she gave a speech to the Middlesex County Chamber of Commerce in Cromwell.

The governor told the business group that government today is bigger than taxpayers’ ability to pay for it. She said more spending cuts are needed, and state officials must rethink how government works in an economic crisis.

Rell did not offer specifics on any new spending cuts she planned to propose, but said she opposes tax increases. She said she is focusing on the core missions of government, including public safety, education and taking care of those in need.

“But we’ve expanded in some of those areas above what is the basic core function,” the governor said. “The bottom line is ... now we simply have to get back to the basics and we have to get back to what we can afford to pay for.”

The $18 billion state budget for this fiscal year, which began July 1, is estimated to be nearly $340 million in deficit, and officials are projecting about $6 billion in deficits for the next two fiscal years combined.

A major source of the deficit has been declining state income tax revenues, especially from Connecticut residents laid off from jobs in the financial services industry.

The legislature approved a $300 million deficit-reduction plan for the current fiscal year two weeks ago that included nearly $72 million in spending cuts and delays. Rell will soon be submitting another plan to shore up the budget to lawmakers, who return to session next month.

State worker unions say there are many cost cutting ideas that should be considered before any talks about contract concessions or layoffs. The unions are also hopeful the state will get help from President-elect Barack Obama’s economic recovery plan.

Rell was among dozens of governors who met with Obama last week to discuss their economic problems.

The governors have asked for at least $40 billion to help pay for health care for the poor and disabled and perhaps $136 billion more in infrastructure projects like road and bridge repairs in the legislation, which Democrats on Capitol Hill hope to have ready for Obama’s signature as soon as he takes office Jan. 20.

One plan Connecticut state employee unions favor is creating a health care pool of all state and municipal employees, which the unions say could save tens of millions of dollars.

Another idea is reducing extra costs associated with contracting out state services, the unions say.

Matt O’Connor, a spokesman for Local 2001 of the Connecticut State Employees Association/Service Employees International Union, said state leaders should avoid budget cuts and layoffs that reduce services to Connecticut’s struggling families.

“For our members, that is not the best approach to getting though a crisis,” said O’Connor, whose union represents more than 22,000 public employees and retirees. “This is a time that folks need public services the most.”

An opportunity for a small state like CT, with a full range of State Colleges, Community and Tech Colleges and University of CT - all within commuting distance.  Will students who now go out of state, paying full room and board elsewhere...perhaps return in some percentage to go to college here?  And then stay?
College May Become Unaffordable for Most in U.S.
December 3, 2008

The rising cost of college — even before the recession — threatens to put higher education out of reach for most Americans, according to the annual report from the National Center for Public Policy and Higher Education.

Over all, the report found, published college tuition and fees increased 439 percent from 1982 to 2007, adjusted for inflation, while median family income rose 147 percent. Student borrowing has more than doubled in the last decade, and students from lower-income families, on average, get smaller grants from the colleges they attend than students from more affluent families.

“If we go on this way for another 25 years, we won’t have an affordable system of higher education,” said Patrick M. Callan, president of the center, a nonpartisan organization that promotes access to higher education.

“When we come out of the recession,” Mr. Callan added, “we’re really going to be in jeopardy, because the educational gap between our work force and the rest of the world will make it very hard to be competitive. Already, we’re one of the few countries where 25- to 34-year-olds are less educated than older workers.”

Although college enrollment has continued to rise in recent years, Mr. Callan said, it is not clear how long that can continue.

“The middle class has been financing it through debt,” he said. “The scenario has been that families that have a history of sending kids to college will do whatever if takes, even if that means a huge amount of debt.”

But low-income students, he said, will be less able to afford college. Already, he said, the strains are clear.

The report, “Measuring Up 2008,” is one of the few to compare net college costs — that is, a year’s tuition, fees, room and board, minus financial aid — against median family income. Those findings are stark. Last year, the net cost at a four-year public university amounted to 28 percent of the median family income, while a four-year private university cost 76 percent of the median family income.

The share of income required to pay for college, even with financial aid, has been growing especially fast for lower-income families, the report found.

Among the poorest families — those with incomes in the lowest 20 percent — the net cost of a year at a public university was 55 percent of median income, up from 39 percent in 1999-2000. At community colleges, long seen as a safety net, that cost was 49 percent of the poorest families’ median income last year, up from 40 percent in 1999-2000.

The likelihood of large tuition increases next year is especially worrying, Mr. Callan said. “Most governors’ budgets don’t come out until January, but what we’re seeing so far is Florida talking about a 15 percent increase, Washington State talking about a 20 percent increase, and California with a mixture of budget cuts and enrollment cuts,” he said.

In a separate report released this week by the National Association of State Universities and Land-Grant Colleges, the public universities acknowledged the looming crisis, but painted a different picture.

That report emphasized that families have many higher-education choices, from community colleges, where tuition and fees averaged about $3,200, to private research universities, where they cost more than $33,000.

“We think public higher education is affordable right now, but we’re concerned that it won’t be, if the changes we’re seeing continue, and family income doesn’t go up,” said David Shulenburger, the group’s vice president for academic affairs and co-author of the report. “The public conversation is very often in terms of a $35,000 price tag, but what you get at major public research university is, for the most part, still affordable at 6,000 bucks a year.”

While tuition has risen at public universities, his report said, that has largely been to make up for declining state appropriations. The report offered its own cost projections, not including room and board.

“Projecting out to 2036, tuition would go from 11 percent of the family budget to 24 percent of the family budget, and that’s pretty huge,” Mr. Shulenburger said. “We only looked at tuition and fees because those are the only things we can control.”

Looking at total costs, as families must, he said, his group shared Mr. Callan’s concerns.

Mr. Shulenburger’s report suggested that public universities explore a variety of approaches to lower costs — distance learning, better use of senior year in high school, perhaps even shortening college from four years.

“There’s an awful lot of experimentation going on right now, and that needs to go on,” he said. “If you teach a course by distance with 1,000 students, does that affect learning? Till we know the answer, it’s difficult to control costs in ways that don’t affect quality.”

Mr. Callan, for his part, urged a reversal in states’ approach to higher-education financing.

“When the economy is good, and state universities are somewhat better funded, we raise tuition as little as possible,” he said. “When the economy is bad, we raise tuition and sock it to families, when people can least afford it. That’s exactly the opposite of what we need.”

As economy flails, more jobs move offshore
Staff Reports
Posted: 11/23/2008 02:44:17 AM EST

Companies across the nation are scrambling to find ways to reduce costs as the economy continues in its free-fall, and some see job outsourcing as one way to balance their bottom lines.

The number of "higher-end" outsourcing jobs in India, such as clerical services for lawyers, continue to increase, said attorney Raj Mahale, a partner in the Stamford office of the Hartford-based law firm of Murtha Cullina LLP.

"The newest trend is legal process outsourcing," said Mahale, who specializes in business immigration law.

India continues to thrive as a center for information technology outsourcing, he said.

"That's what put India on the map," Mahale said.

Opportunities in India for outsourcing "lower-end jobs," such as customer representative posts at call centers for credit card companies, are declining, however, he said.

"What we're seeing with increased competition and a lot of attrition is people are jumping ship," Mahale said.

Shawna McAlearney, a senior editor for, a Framingham, Mass.-based online publication for chief information officers and information technology professionals, said she expects outsourcing to increase, despite president-elect Barack Obama's proposal to give tax cuts to companies that bring jobs back to the United States.

"If you needed to save money in your budget, where would you go?" she said. "The cost savings could be three or four times."

James Rick Stinson, president of Global Sky, a Las Vegas, Nev.-based outsourcing sources provider, said his business has grown during the down economy.
"How long could this go on? I don't know," he said. "A variety of factors could contribute to this growth including the fact that we are doing additional marketing, so we cannot attribute company growth to the economy alone."

Global Sky Inc. cited a March 2007 study by worldwide professional services firm KPMG stating that 42 percent of 650 surveyed companies claim that outsourcing has benefited their companies financially.

KPMG's study also stated that 89 percent of companies that outsource their services continue to do so, and 47 percent feel it created new opportunities that would have been impossible otherwise.

Bob Dell Isola, a partner with KPMG's Sourcing Advisory Services, said companies have taken a heightened interest in outsourcing and offshoring as they try to lower costs.

"But it is still too early to identify definitive trends," he said. "Companies are reconsidering their outsourcing strategies in order to better manage costs and, in some cases, streamline their business operations. Clearly, outsourcing can help here."

A company can save 50 percent or more over domestic costs once payroll, taxes, office overhead and other expenses are factored in, Stinson said.

"That translates into a savings of on average about $500,000 for 25 employees," he said.

The average call center worker in the Philippines earns about $300 to 400 per month, while the average call center worker in the States might earn $2,000, Stinson said.

There is no exact count on the number of American jobs that are moved overseas, but hundreds of thousands of people are employed in outsourcing jobs in the Philippines and India, he said.

Outsourcing should not be seen as "lost jobs" in the United States because it creates jobs in other parts of the world, Stinson said.

"If people were to see the impact these new jobs are having on human beings with families, they would stop wrapping themselves in the flags of their native country and start looking for ways to spread the abundance globally," he said.

Outsourcing has been a strategy used for years in a variety of industries, said Lisa Mercurio, director of the Fairfield County Information Exchange, a unit of the Business Council of Fairfield County.

"It has been a way for business to remain competitive so that their clients can best be served," she said. "That being said, most companies that haven't already pursued this strategy may be very cautious about trying anything that unfamiliar to them - and their business - at this time of economic uncertainty."

David Lewis, the president and founder of Stamford-based human resources firm Operations Inc., said more firms are outsourcing their human resources functions to his company as they reduce their staffs.

"Human resources tends to get cut regularly during a down economy," he said, adding that he receives about 40 resumes a month from human resources professionals. "The number of positions posted for human resources across six different job sites has gone down 85 percent."

Not all companies that provide outsourcing services are based overseas, as seen with the success that Stamford-based Pitney Bowes has experienced in its mail management services.

A $6.3 billion manufacturer of postage meters and other mail products, Pitney Bowes has benefited from companies outsourcing its mail management and document processing services.

"In tough economic times, customers are looking to better manage their costs, so we've seen a great uptick in that," said Keith Wyche, president of the East Region for Pitney Bowes' Management Services.

Pitney Bowes, which has 36,000 employees worldwide, has itself outsourced some information technology and business support functions, according to Colette Cote, a spokeswoman for Pitney Bowes.

Seeing the financial benefits of being an outsourcing provider, Emcor Inc., Norwalk-based global provider of mechanical and electrical construction services, energy infrastructure and facilities services, started providing maintenance services several years ago.

The division has become a major contributor to the operating budget of Emcor, which recorded net income of $48.6 million for the third quarter, a 26.9 percent increase over the same period last year.

In a slow economy, outsourcing services provide the company with a good source of income, said Kevin Matz, executive vice president of Emcor, adding that more companies are using its maintenance services to save money.

"In challenging times," Matz said, "it's more important because you ratchet up everything."

Connecticut Holds Its Breath, Awaits Impact 

By Ted Mann    
Published on 9/16/2008 
Connecticut public officials trained wary eyes Monday on the developments on Wall Street, where the collapse of major financial sector companies could have seismic effects on the state budget.

The state's ability to pay for prized projects and programs is closely linked to its tax receipts on income and capital gains from the wealthiest of its taxpayers, particularly those who live in Fairfield County and work - either in Connecticut or across the state line - in the very industry that has taken a colossal hit in the past several days.

A decline in private fortunes for financial sector workers, lawmakers and Gov. M. Jodi Rell acknowledged Monday, could quickly become a public sector problem as the state prepares to craft a new biennial budget in January - a process in which many were already expecting to face deficits.

”As (former Federal Reserve Chairman Alan) Greenspan was speaking about yesterday, and what we see on news reports, these incidents are not only frankly cataclysmic in their own right,” said Rep. Kevin M. DelGobbo, R-Naugatuck, a longtime member of the legislature's Finance, Revenue and Bonding Committee who now sits on Appropriations, the budget-writing committee. “You've got thousands of Connecticut residents who probably are impacted by the announcements over the weekend. That's a human issue and it's also an economic issue.”

”There's a substantial part of our economy - whether hedge funds or equity market traders - whose income depends upon market conditions. We cannot underestimate the impact of that, because we're not talking about small dollars. We're talking about a very significant part of the revenue stream of the state of Connecticut generated by a very small group of people.”

But others, including Rep. Denise Merrill, D-Mansfield, the Appropriations Committee co-chairwoman and incoming House majority leader, believe it may be too soon to tell if the Wall Street developments will prove devastating to the Connecticut budget.

”I just think we have to keep an eye on it,” Merrill said, but she urged that the state not overreact to anticipated shortfalls by launching a new round of program cuts, as Rell has suggested.

Deficit projections, including those anticipated in 2010, “play into her fears,” Merrill said of Rell, but she noted that even in recent months the administration has predicted the budget would fall into the red only to wind up with surpluses on hand.

”I don't think any of us can see the future yet,” Merrill said. “And we're funding lots of programs that are even more needed when the economy goes bad. That's the nature of state government. We're the safety net for a lot of people. And maybe we'll need to be even more of a safety net in the days ahead.”

Meanwhile, Treasurer Denise L. Nappier, a Democrat, announced Monday that Connecticut's $25 billion pension fund “remains intact,” despite suffering a reduction in value because of its holdings, including in Lehman Brothers.

”As long-term investors with a well-diversified portfolio, we are well-positioned to weather this latest turbulence,” Nappier said in a written statement. “Like the rest of the country, we are experiencing some fall-off; however, we are faring better than many, and I remain confident we will come out ahead over the long term.”

Connecticut's $38 million stake in Merrill Lynch has been strengthened by its takeover by Bank of America, Nappier said.

In far more serious peril is Connecticut's stake in Lehman Brothers: an equity stake estimated at $19 million and $33.3 million in debt.

”The outlook for these holdings has certainly been compromised due to the bankruptcy filing; however, the ultimate value remains to be determined,” Nappier said in her statement, but added that the amounts “represent just 2/10ths of one percent of (the pension fund's) total assets.”

In a statement e-mailed Monday afternoon, after Rell had held a conference call with state commissioners, the governor's press office said Connecticut banks remained stable but acknowledged the potentially major challenges now facing the state economy.

”The enormity of this situation, in light of the tens of thousands of jobs impacted and the historic Blue Chip companies involved, is unprecedented,” the statement said. “The ramifications of these events are breathtaking in scope.

”The Governor believes that it is critical that Congress and the President must take action quickly to redesign the federal regulatory structure for the financial industry.”

In 1996, voters approved a sales tax increase to build Paul Brown Stadium as part of a redevelopment project and to keep the Bengals in Cincinnati.

Beware Of The Muni Bond Bubble: States And Cities Can Fail As Well
Posted 04/29/2010 06:15 PM ET

Greece and Spain both suffered S&P downgrades this week — Greece to junk — as bondholders realized the obvious. The nations cannot raise taxes and cut spending fast enough to pay their debt without killing off economic recovery.

But nothing has shaken another massive debt market: American municipal bonds.

You might think that investors would pause before pouring money into obligations of muni debt, particularly obligations of California, New York or Illinois. Like mid-2000s homeowners, state and local governments spent boom years using illusory gains to justify ever-higher spending and borrowing.

By 2008, state and local debt rose to $2.2 trillion — 49% higher, after inflation, than in 2000. The biggest partners in profligacy also promised more benefits to public workers in the future.

As the recession's severity became apparent, officials kept borrowing: States have already borrowed another $15 billion for operating costs over the past two years.

Yet gatekeepers consider municipal bonds low-risk. "We do not expect that states will default on general-obligation debt, even under the most stressed economic conditions," analysts at Moody's wrote in a February 2010 report.

Higher Taxes

As for cities and towns, "we expect very few defaults in this sector given the tools that local governments have at their disposal." Standard and Poor's agrees.

The investment advisers and managers who allocate credit assume that states and cities will do anything to avoid default. The assumed incentive, of course, is their desire to borrow more.  The analysts also think that lending to state and local governments isn't risky because they — unlike private firms — have a captive source of funds. State and local governments can always tax their residents and businesses more.

There's further reassurance in the law. State governments can't declare bankruptcy to escape debt. Cities, towns and counties can file for bankruptcy only if their state allows it, and more than half don't.

The analysts take comfort in financial engineering too. The underwriters who help governments raise money have found creative ways to dodge obstacles that theoretically constrain borrowing. States issue debt through structures that depend on taxes for repayment, even as repayment isn't an official state obligation because such a promise would require voter approval.

Another theory is that the federal government regards the biggest debtors "too big to fail."

Finally, observers point to the past. Between 1970 and 2000, no investor took a loss on a state's or a city's general-obligation debt. Even Orange County, Calif., which declared insolvency in 1994 in a one-off meltdown, repaid its lenders with interest.

Blown Up

We've heard it before. Before 2006, conventional wisdom held that if you wanted a risk-free investment, you couldn't do better than buy mortgage-backed securities. Homeowners were willing and able to repay what they owed. Struggling homeowners couldn't turn to bankruptcy. Financial engineering provided another layer of security: Underwriters and raters had designed airtight structures. History proved all this.

Yet investors pumped so much money into that supposedly airtight market that they blew it apart.

To get a glimpse of the possible future of Muniworld, look to Vallejo, Calif., about 30 miles north of San Francisco. Like many municipalities, this city of 120,000 residents found itself hard hit by the housing bust, with property-tax revenues falling by more than a quarter.  So Vallejo did something unprecedented. Seeing that the real problem was that "collective bargaining agreements control the city's labor costs," as Vallejo told the court, it petitioned a bankruptcy judge in 2008 to throw out those agreements.

Vallejo violated the first principle of municipal-finance conventional wisdom: that cities and towns will do anything to avoid default. Vallejo was insolvent, true, but its managers could have done what many of their counterparts around the nation have done: try, through structured finance, to borrow more somehow and hope for the best.

But the benefits of paring down contractual obligations outweighed the costs. If the court approves Vallejo's bankruptcy-exit plan this summer, for example, the city will emerge from bankruptcy with $34 million in health-care obligations to retirees, down from $135 million.

Throughout its bankruptcy, Vallejo has not paid the full amount it owes on its municipal bonds. (The city has one municipal bondholder, the Union Bank of California.) What's more, it has proposed, in its exit plan, to defer payments on its bonds, investing in infrastructure before paying lenders in full.

Vallejo's bondholders may get off relatively easily, though, because Vallejo stopped piling up obligations, rather than trying one mad dash to borrow more. Vallejo didn't follow, say, Illinois' example: borrowing in the bond markets to fund future obligations to retirees. Vallejo knew that it had to cut future obligations — and even so, it couldn't do it without affecting bondholders.  It's easy to imagine some future mayor convincing a bankruptcy judge that it's only fair for bondholders, along with union members, to take big cuts in a restructuring.

Indeed, heavily indebted governments' willingness to repay crippling debt will depend on what's politically expedient. Today, politicians see the advantages of borrowing more. Ten years from now, it may be more practical for a governor to tell the public: We've borrowed too much. We did so because clever Wall Street investors convinced our predecessors that it was a good idea, and we shouldn't have to pay it back.

Investors continue to assume that financial calculations would trump political calculations — that is, that no state or city would default because it would cut off access to credit. But a state or city that did cut down its obligations might have an easier time getting financing, since new bondholders would know that its finances were sustainable.

Lenders Forsaken

As municipal debt grows, the risk mounts that someday it will be politically, economically and financially worthwhile for borrowers to escape it. When that happens, the protections that lenders supposedly enjoy will be meaningless. Lenders shouldn't take solace in states' inability to access bankruptcy codes: A state could certainly stop making payments on its debt without going into bankruptcy.

But there's always Uncle Sam, right? In relying on future bailouts, investors are taking a gamble. When the White House rescued Chrysler and General Motors, it forced bondholders to take bigger losses than union members did. And as Europe's woes may be showing now, sometimes governments are just too big to bail out.

• Gelinas, a Manhattan Institute senior fellow, is author of "After The Fall: Saving Capitalism from Wall Street and Washington" (Encounter Books). This article is adapted from the spring issue of the institute's City Journal.

© 2010 Investor's Business Daily, Inc. All rights reserved.

Hamilton County - where Cincinnati is located:
Stadium Boom Deepens Municipal Woes
December 25, 2009

CINCINNATI — Years after a wave of construction brought publicly financed stadiums costing billions of dollars to cities across the country, taxpayers are once again being asked to reach into their pockets.

From New Jersey to Ohio to Arizona, the stadiums were sold as a key to redevelopment and as the only way to retain sports franchises. But the deals that were used to persuade taxpayers to finance their construction have in many cases backfired, the result of overly optimistic revenue assumptions and the recession.

Nowhere is the problem more acute than in Cincinnati. In 1996, voters in Hamilton County approved an increase of half of one percent in the sales tax that promised to build and maintain stadiums for the Bengals and the Reds, pay Cincinnati’s public schools and give homeowners an annual property tax rebate. The stadiums were supposed to spur development of the city’s dilapidated riverfront.

But sales tax receipts have fallen so fast in the last year that the county is now scrambling to bridge a $14 million deficit in its sales tax fund. The public schools, which deferred taking their share for years, want their money.

The teams have not volunteered to rewrite their leases. So in the coming weeks, the county plans to cut basic services, lower its legal bills and drain a bond reserve fund with no plan for paying it back.

Not the former NYGiant, not the wrestler...

“Anyone looking at this objectively knows it’s a train wreck,” said Dusty Rhodes, the county auditor. “I told them they were making a big mistake, but they didn’t want to hear me.”

Cincinnati is hardly alone. In Indianapolis, the Capital Improvement Board spent 2009 trying to find $32 million to run the Lucas Oil Stadium and convention center. In Milwaukee, a drop in sales tax receipts may delay by several years the date for paying off the bonds issued to build Miller Park, the home of the Brewers.

Columbus, Ohio, is considering using public money to keep the Blue Jackets in town. Glendale, Ariz., has fought to hold the Phoenix Coyotes to their long-term lease. In New Jersey, a ticket surcharge may be added to help resolve a tenant-landlord dispute between the Devils and Newark.

Mark Rosentraub, the author of the book “Major League Losers,” said that many of the stadium deals included “revenue bombs,” with financial traps like balloon payments on debt in later years and sweeteners like the Hamilton County property tax rebate to win public support.

In many cases, the architects of the deals are long gone by the time the bill comes due.

“This is one of the effects of the economic tsunami sweeping through,” Rosentraub said of the deficits.

The 1996 proposal to build stadiums for the Bengals and the Reds had plenty of proponents. The economy was growing, Riverfront Stadium was outdated and the Bengals were hinting that they would move, as the Browns had done.

The plan went awry almost from the start. The football stadium exceeded its budget by $50 million, forcing the county to issue more bonds. Forecasts for growth in the sales tax turned out to be too rosy. The teams received sweetheart leases. In 2000, voters threw out the county commissioners who cut the deal.

That year the sales tax grew 1.8 percent, the first of many years below the 3 percent forecast. Both stadiums were originally expected to cost $500 million combined. Yet Paul Brown Stadium alone cost $455 million and the Great American Ballpark, the Reds’ home a few hundred yards down the Ohio River, cost $337 million by the time it opened in 2003.

The generous deal for the Bengals has been a sore spot. The team had to pay rent only through 2009 on its 26-year lease, and has to cover the cost of running the stadium only for game days. Starting in 2017, the county will reimburse the team for these costs, too. The county will pay $8.5 million this year to keep the stadium going.

The Bengals keep revenue from naming rights, advertising, tickets, suites and most parking. If the county wants to recoup money by taxing tickets, concessions or parking, it needs the team’s approval.

Compared with the lucrative deals for teams in Baltimore, St. Louis and elsewhere, the Bengals won a particularly lopsided lease.

Bob Bedinghaus, the commissioner who spearheaded the stadium project, said as much in 2000.

“They’re an organization that’s run by lawyers, and they look for every penny around every corner,” he told The Cincinnati Enquirer. “It’s going to be a difficult relationship going forward for the next 30 years.”

Bedinghaus lost his re-election bid soon after. He now works as the Bengals’ director of stadium development. Through a team spokesman, Bedinghaus declined to be interviewed. The Bengals also declined to comment. Several telephone and e-mail attempts to reach the Reds’ management were unsuccessful.

Hamilton County started using some of the proceeds from the sales tax fund to jump-start construction of a redevelopment district with the stadiums as bookends. After years of delays, cranes dot the riverfront that will eventually include a hotel, shops and hundreds of homes.

Critics like Rhodes contend that the tax was never meant to pay for the real estate project. But Cincinnati business leaders, eager to reverse the flow of money to the suburbs, say the stadiums were just the beginning of a transformation of the riverfront.

“We need to build this neighborhood so that it becomes the center of someplace you want to go,” said Thomas L. Gabelman, the outside counsel for the county on the riverfront development.

Gabelman said that most of the money for the $1.2 billion project comes from federal and state grants and private financing. No more than $3 million annually comes from the sales tax fund, which brings in about $60 million a year.

Problems persist. In 2004, Todd Portune, the commissioner who unseated Bedinghaus, sued unsuccessfully to change the Bengals’ lease. In 2006, the Cincinnati public schools agreed to defer their payments from the sales tax fund for three years to help cover shortfalls.

Still, the gap between expected and actual sales taxes continues to grow, something the county administration had been warning for years. In August, the administrator predicted not only a $14 million shortfall next year, but also a $94 million gap in 2014, a year after interest payments on the stadium bonds rise 44 percent. By then, the Reds will no longer be paying rent.

Last month, two of the three commissioners voted against cutting the property tax rebate, fearing a voter backlash. Raising the sales tax again was not proposed for the same reason.

“It can’t be 100 percent on the backs of taxpayers,” said Greg Hartmann, the lone Republican commissioner. “We gave away too much to keep the Bengals in Cincinnati. There has to be some middle ground.”

Hartmann and Portune want to introduce a tobacco tax, but lawmakers in Columbus, the state capital, may be unwilling to approve it.

So they have ordered more cuts in basic county administrative services, something that creates a slippery slope, said David Pepper, the commissioner who voted against the proposal.

“It’s like the movie where the blob keeps growing and eating away at other elements of county government,” Pepper said. “We’re beginning to cross a line in the sand by taking money from the general fund to pay for the stadiums. Once you put that money in jeopardy, you put the whole county at risk.”

EBAY TO THE RESCUE?  Nope.  In election 2010, Californians prefer Governor Moonbeam II to Governor EBAY.

The Governator will sign items for auction, increasing their value...
did he tell some of his opponents "hasta la vista baby?"  Apparently he has done some of that...

Killing the Golden State's golden goose

National Review
Last Updated: 7:28 AM, May 23, 2011
Posted: 11:08 PM, May 22, 2011

SACRAMENTO In 1967, five years after California be came the most populous state, novelist Wallace Stegner said California -- en ergetic, innovative, hedonistic -- was America, "only more so." Today, this state's budget crisis is like the nation's, only more so. Bob Dutton is an island of calm in the eye of the storm -- which should agitate Gov. Jerry Brown.

Dutton came to California from Nebraska at age 19 in 1969 and now is leader of Republicans in the state Senate. He says his caucus is "almost like a Chamber of Commerce board of directors." Its members are mostly from small businesses, as he is. Because they are term limited, they can't make a career here, so they might as well follow their small (well, smaller) government inclinations.

They have it in their power to compel Brown to confront the public-employee unions that have gained so much power over the state's budget. All they need to do, Dutton notes, "is just say 'no' to more taxes." This is so because Brown needs two Republicans in each house of the Legislature to raise taxes (actually, to reinstate for five years some taxes and fees that will have lapsed by July 1) or to authorize a November referendum that could reinstate them.

Brown's plan for balancing the budget is to close about half of the deficit with already approved reductions and fund shifts and the rest by tax hikes. Republican resistance to the taxes is explained by facts provided by Troy Senik, writing in the Manhattan Institute's City Journal:

"Californians already labor under sales-tax rates usually reserved for states without income taxes (at 8.25 percent, the nation's highest) and sharply progressive income-tax rates usually reserved for states without sales taxes (the state's top rate is 10.55 percent, and it doesn't allow you to deduct your federal taxes, as some states with income taxes do)."

Those taxes are surely related to these demographic facts: Between 2000 and 2010, Los Angeles gained fewer people than in any decade since the 1890s, and Los Angeles and the San Francisco Bay Area have the slowest growth rates since the end of Spanish rule. For the first time since 1920, the Census didn't award California even one more congressional seat.

California's constitution makes a balanced budget mandatory. Sort of. For more than a decade it has been "balanced" only by creative accounting -- a fact that should give pause to conservatives, in Washington and elsewhere, who are eager to constitutionalize fiscal policy by putting a balanced-budget requirement in the US Constitution. California's is one of the world's longest constitutions -- if a document that has been amended more than 500 times by direct democracy can be said to truly constitute a political system. It controls much of state spending. For example, about 40 percent of the budget is dedicated to education. The Legislature has limited or no control over as much as 85 percent of revenues.

Brown knew all this last year when he campaigned for governor on a principle he articulated when running for president in 1976: "A little vagueness goes a long way in this business." Brown is, however, a veteran practitioner of the rhetoric of reform. A transcript from "Meet the Press," Oct. 5, 1975:

"Mr. Will: Governor, you expressed an interesting concept of representation when you said that you wanted to be governor of the 54 percent of the people who didn't vote last year. How do you fashion a program for people who express no mandate?

"Gov. Brown: To stand up to the special pleaders who are encamped, I should say encircling the state capitol, and to see through their particular factional claims to the broad public interest."

The most muscular pleaders are the public-employee unions. In 1978, Brown conferred on government employees the right to unionize and bargain collectively. In 2010, their unions fueled the campaign that restored him to the governor's office. Thus does the liberal merry-go-round spin.

Bill Whalen, of the Hoover Institution, notes that California's four most influential Democrats are Brown, US Sens. Dianne Feinstein and Barbara Boxer and Rep. Nancy Pelosi, who are 73, 77, 70 and 71, respectively: "No other state's political ruling class is as gray, a terrific irony for youth-worshipping California."

Dutton and other relatively anonymous Republican legislators can, by being constructively obdurate ("no"), shake the foundations of reactionary liberalism -- the regulatory state that seemed so right in the septuagenarians' formative years, a half-century ago.

“Oh what a tangled web we weave, When first we practice to deceive” Thanks, Google (Sir Walter Scott)
U.S. Inquiry Said to Focus on California Pension Fund
January 7, 2011

Federal regulators are investigating whether California violated securities laws and failed to provide adequate disclosure about its giant public pension fund, according to a person with knowledge of the investigation.

The Securities and Exchange Commission normally polices companies, but last year it brought its first enforcement action ever against a state, accusing New Jersey of securities fraud for misleading bond investors about the condition of its pension fund. The commission signaled, in its settlement with New Jersey, that it was going to look more broadly at the pension disclosures of states and cities.

The fund, the California Public Employees’ Retirement System, known as Calpers, lost about a quarter of its total investment portfolio during the financial crisis, leaving the state responsible for replacing billions of dollars each year and contributing to its huge deficit. The question is whether California adequately disclosed in the preceding years how risky the pension investments were and how much money it might need to cover any shortfall.

But it is unclear whether investigators are focusing on those risks or on possible conflicts of interest in steering investments to related parties, the subject of a separate investigation by the attorney general of California.  S.E.C. officials declined to confirm an investigation, citing agency rules. But the person with knowledge of the investigation said it was among the agency’s top priorities. A spokeswoman for Calpers, which is America’s largest pension fund with assets of about $220 billion, said it had not been contacted by the S.E.C. about its accounting or about financial disclosures.

“The SEC has an ongoing look at pension funds in California” because of revelations about the use of placement agents who recommended investment managers, said Patricia Macht, a spokeswoman for Calpers.

Along with concerns about the use of placement agents, regulators have grown increasingly concerned about whether states may have hidden financial weaknesses, particularly in their pension portfolios, and whether investors who buy municipal bonds can fully appreciate the risks.  A spokesman for the California state treasurer’s office, which is responsible for disclosures to bondholders, said “we provided all material information about pension fund issues at all times.”

California has not defaulted on any debts and says its bonds are safe. But the state has been grappling with big, structural budget deficits every year, and cannot easily increase revenue because of voter-approved tax caps. The state’s credit has been downgraded as these financial problems have intensified, and the downgrades have in turn lowered its bonds’ value. Had investors been able to clearly see the pension risks, they might have steered clear of California’s debt or demanded a higher yield.

If federal investigators are able to make a case that California misled investors about the risk in its pension fund, it would send a powerful signal to other public funds, which almost without exception base their financial reporting on average annual investment returns of about 8 percent a year, something hard to defend in today’s markets, no matter what the investment mix.

The S.E.C.’s goal is to force public pension funds to be more open, not just about their investments but about how their risk may affect the finances of the state. It is unlikely that the S.E.C. would impose any penalty because that would force taxpayers to pay for wrongs they knew nothing about. In the New Jersey case, the S.E.C. imposed no penalty but publicized the case in hopes it would be a deterrent.

Any accusation of securities fraud could take years because public finance is a new area for the S.E.C. and any case would rely on novel legal theories. It would be a blow to Calpers, which has used its institutional clout for years to promote good corporate governance and truth in accounting. Calpers has recently pushed for boardroom reforms at JPMorgan Chase, Goldman Sachs, Apple, and BP, among others. And it has sued Moody’s, Fitch and Standard & Poor’s, accusing them of giving “untrue, inaccurate and unjustifiably high” ratings to structured investment vehicles that failed in the mortgage collapse.

Its activism has served as a role model for smaller public pension funds that have also had losses, but might not have been able to challenge corporate governance practices on their own. But now the tables have turned, because S.E.C. investigators hope to use Calpers as an example in a case about of how misleading pension disclosures can amount to securities fraud, according to the person with knowledge of the investigation. Like most public plans, Calpers has maintained that its accounting methods are appropriate and that it is in full compliance.

Calpers has lately been under fire for a big benefit increase in 1999. At that time the fund ran various assumptions on how its investments might do. It discussed them in a public meeting but the state did not put them into its bond prospectus, which was the responsibility of the state treasurer, then Phil Angelides, who also sat on the board of Calpers.

In the years after that, Calpers stepped up its investments in real estate, riding the market up and then crashing when the housing bubble burst. The worst case, created by Calpers’ staff, turned out to be oddly prescient. It said the state might have to come up with $3.95 billion a year in fresh money for the pension fund by the end of 2010. In fact, the state has to contribute $3.88 billion.

Mr. Angelides, now chairman of the Financial Crisis Inquiry Commission, was not available to comment Thursday because the commission was finishing its report.

David Crane, an aide to then Gov. Arnold Schwarzenegger, said last year in legislative testimony that he found it “nothing short of astonishing” that Calpers had “promoted the largest nonvoter-approved debt issuance in California history” without revealing the risks or conflicts of interest involved.

“Frankly, I’ve never seen anything like the Calpers sales document, which makes even Goldman Sachs’s alleged nondisclosure look like child’s play,” said Mr. Crane, who testified at a time when the S.E.C. was suing Goldman Sachs over alleged disclosure violations in connection with mortgage-backed securities.

Municipal Bond Market Shudders
November 12, 2010, Correction: November 13, 2010

Has the reckoning arrived for municipal bonds?

That is the question investors are asking after munis — those old faithfuls of investing — took their biggest hit since the financial collapse of 2008.

Concern over the increasingly strained finances of states and cities and a growing backlog of new bonds for sale overwhelmed the market last week. After performing so well for so long, munis and funds that invest in them fell hard. One big muni fund, the Pimco Municipal Income Fund II, for instance, lost 7.5 percent. The fund is still up 6.75 percent so far this year.

While the declines were relatively small given the remarkable gains in these bonds over the last two years, the slump was swift enough to leave investors wondering if this was a brief setback or the start of something worse. For months, some on Wall Street have warned that indebted states and cities might face a crisis akin to the one that brought Greece to its knees.

“I think it’s too early to say that it’s more than a correction,” said Richard A. Ciccarone, the chief research officer of McDonnell Investment Management.

“The facts just don’t support a serious conclusion that the whole market’s going downhill,” he said. “They could. We’ve got some serious liabilities out there.”

The causes of the week’s big decline are clouded by unusual factors like the looming end of the Build America Bonds program, which has prompted local governments to race new bonds to market before an attractive federal subsidy is reduced.

But the big question confronting this market is how state and local governments will manage their debts. Many are staggering under huge pension and health care obligations that seem unsustainable.

Certainties are impossible because governments do not have to disclose the pension payouts they will have to make in the coming years, as they do for bond payouts.

California, for example, will have to sell nearly $14 billion of debt into the falling market this month, because of its record delay in getting a budget signed this year. The warnings keep coming. On Friday, Fitch, the credit ratings agency, issued a report saying that ratings downgrades for municipal bonds outnumbered upgrades for the seventh consecutive quarter.

And a few prominent defaults have made the market jittery.

“This is what happens with our market now, with these fears of a systemic credit crisis,” said Matt Fabian, managing director at Municipal Market Advisors. “Any weakness is related to fears of default.”

Standard & Poor’s, meanwhile, issued a report last Monday observing that even troubled cities like Detroit were still able to bring debt to market at what the rating agency considered favorable rates. It said most government officials seemed determined to honor their general obligations.

Analysts like Mr. Ciccarone said much of the decline was concentrated among longer-maturity bonds and bonds with lower credit ratings. Their values fell more sharply as investors watched the Federal Reserve buying hundreds of billions of dollars of Treasury bonds and concluded the Fed’s move would be inflationary over the longer term. That made some investors less willing to hold long-term municipal bonds, so the prices of the bonds fell.

Until two weeks ago, the municipal bond markets had been frothy, thanks in part to the intensifying interest of wealthy individuals in tax-sheltered investments as the sunset date on the Bush administration’s tax cuts looms. People seek a tax shelter like municipal bonds because the interest is usually not taxed, and the bonds are considered very safe.

This year, however, tax-exempt municipal bonds have been harder than usual to find, because the governments that normally issue them have switched over to taxable bonds.

So investors were bidding up the prices. Mr. Fabian said that had fed into the prices of all of the municipal bonds held by mutual funds, which are assigned a value each day on the basis of a model because they may not trade.

The reason for scarcity of tax-exempt bonds has been, in part, the Build America Bonds program, created as part of the fiscal stimulus program. That federally subsidized program is scheduled to expire at the end of this year, so states and cities have been rushing to take advantage of it.

Yet the values of tax-exempt munis fell, defying those who said it was all a matter of supply and demand. The last week also brought some large tax-exempt bond issues, including one by a public authority in Massachusetts for Harvard University, which was reduced because of poor investor demand.

Mr. Fabian said the downdraft could continue next week.

“The risk is that you don’t know,” he said.

“You have an awful lot of money, including from households, that simply follows momentum.”

One way to save money?  Oops, CT already does this!
Governor looking at part-time Legislature
Carla Marinucci, Chronicle Political Writer
Thursday, August 20, 2009

Gov. Arnold Schwarzenegger, after months of budget battles with the Legislature, met Wednesday with a reform group calling for a part-time state Legislature in a sign of his interest in efforts to reshape Sacramento's political landscape.

The governor sat down for the first time with Gabriella Holt, who heads Citizens for California Reform, a nonpartisan public interest group that describes itself as "committed to advancing more limited and more transparent government."

Holt's reform organization has received the required title and summary for the "Citizen Legislature Act" and has 150 days to collect nearly 700,000 signatures for the measure - which it says could be on the ballot by November 2010.

The reform group is among a growing crowd currently at work on ideas to redraw the way government works in the state Capitol - including the Bay Area Council and Repair California, which are holding events this week to discuss a proposed state constitutional convention.

Adam Mendelsohn, a senior adviser to Schwarzenegger, said that the Republican governor has not endorsed a part-time Legislature but considers it to be one answer to the state's political gridlock, annual budget impasses and partisan dysfunction.

"The governor has been very clear that this state is in desperate need of reform," Mendelsohn said. "This is one of the many ideas he's taking a look at. He's talked about a constitutional convention, he's involved in an open primary and we're talking campaign finance reform."

California is one of six states with full-time legislatures. The proposed initiative, which would be effective in December 2012, calls for a 90-day legislative session annually - convening the first Monday of January for 30 days and again the first Monday in May for 60 days.

The measure would end the full-time legislative body that has been in place since 1966, after then-Speaker Jesse Unruh said the state's huge and complex business and policy matters required more attention.

Mark Baldassare, head of the Public Policy Institute of California, said a part-time Legislature may resonate with state voters, 80 percent of whom disapprove of how the Assembly and Senate, each controlled by Democrats, are working, recent polls show.

"The public is in a very angry mood about state government, in particular the Legislature," said Baldassare. "So anything that comes with making life harder for the Legislature comes with public support - because they're frustrated with the lack of action on things they think are important."

With little more than a year until the 2010 gubernatorial election, Schwarzenegger's interest in such reform measures reflects his concern about legacy and his own public support, he said.

"The governor came in wanting to do a variety of fiscal and legislative reforms and couldn't get the Legislature to work with him," Baldassare said. "It's unfinished work, so he will study any and all reform proposals - and embrace those that fit."

E-mail Carla Marinucci at

California Reaches Budget Deal, With Billions Cut

July 21, 2009

LOS ANGELES — California lawmakers, their state broke and its credit rating shot, finally sealed the deal with the governor Monday night on a plan to close a $26 billion budget gap.

The plan, which is certain to be viewed with trepidation among legislatures across the country also facing huge budget gaps, distributes pain through nearly every aspect of government services. While the Legislature pushed back on Gov. Arnold Schwarzenegger’s proposal to eliminate health care programs for children and the state’s generous welfare program, both took large cuts. So did public education, universities and local governments.

All told, the deal contains $15.6 billion in cuts, about $2.1 billion in borrowing, $3.9 billion in new revenues and about $2.7 billion in accounting maneuvers like shifting a payday into the next fiscal year, which Mr. Schwarzenegger had claimed he would not brook.

Under the new budget, which runs through the 2010 fiscal year, localities will basically serve as unwilling lending agents to the state. It will raid their coffers and repay them over time as the state’s fiscal situation improves.

“I would characterize this budget as shared pain and shared sacrifice,” Karen Bass, the speaker of the California Assembly, said in a telephone interview from Sacramento.

Last February, lawmakers signed off on a budget deal with $14.8 billion in spending cuts, $12.5 billion in tax increases and $5.4 billion in new borrowing, along with the creation of a $1 billion reserve fund. But that budget depended on a nod from voters on several ballot measures. All failed.

With the deficit continuing to grow, the state was forced to issue millions of dollars in i.o.u.’s to vendors and taxpayers in lieu of payment.

After weeks of often-cantankerous negotiations, state officials have come up with a compromise that few who receive government services will celebrate. While the state’s health insurance program for children, Healthy Families, remains, it was cut by $144 million, meaning thousands of children will probably be on a waiting list for the program unless a private foundation makes up the balance, as the Democratic-controlled Legislature hopes.

In-home services for the elderly and infirm were reduced by several million dollars, and Mr. Schwarzenegger, a Republican, achieved his goal of having caregivers and the recipients fingerprinted in the future with the goal of preventing fraud. While the governor wanted certain welfare benefits to be reduced from a five-year period to two years, the program was instead given an overall cut of $500 million.

Local governments will lose millions of dollars that are used to build housing, among other purposes, and the state plans to borrow roughly $2 billion in property taxes from localities, which would have to be repaid within three years. Lawmakers believe that cities and counties could in turn borrow against that borrowing; localities bankrupt or nearly so would be exempt.

One of the biggest sticking points was over the $11 billion already cut from public schools. The budget deal calls for roughly $650 million more in cuts.

Under California law, though, the state is on the hook to pay that money back, something it has not done in the past. So lawmakers have written legislation guaranteeing that the money goes back to schools. The governor had faced strong criticism from the state’s teachers’ union.

“We accomplished a lot,” Mr. Schwarzenegger said after the agreement was reached. “We made government more efficient and also we’re cutting waste, fraud and abuse.”

The governor also said, on his Twitter feed: “We’ll actually be having a CA Garage Sale at the end of Aug to auction cars and office supplies.” He will sign some of the items to increase their value.

As deficit grows, Calif. prepares to issue IOUs 
By SAMANTHA YOUNG, Associated Press Writer 
Posted on Jul 2, 7:56 AM EDT

SACRAMENTO, Calif. (AP) -- California's controller will start paying many of the state's bills with IOUs as soon as Thursday after lawmakers failed to close the state's worsening budget deficit, adding a new measure of indignity to a state sinking deeper into dysfunction.  Lawmakers' failure to act on Tuesday, the end of the fiscal year, also widened California's deficit from what already had been a whopping $24.3 billion - more than a quarter of its general fund.

The failure to balance the state's main checkbook and the looming IOUs prompted Gov. Arnold Schwarzenegger on Wednesday to declare a fiscal state of emergency.

Under the declaration, state offices will be closed three days a month to conserve cash. If the Legislature fails to solve the deficit within 45 days, it cannot adjourn or act on other bills until the crisis is resolved.  The partial government shutdown also will lead to a third furlough day for 235,000 state employees, bringing their total pay cut this year to about 14 percent.

"California needed the Legislature to act boldly and with conviction. Their response was not a solution to California's budget problem but an invitation to actually a bigger financial crisis," Schwarzenegger told reporters Wednesday.

On Tuesday, as the previous fiscal year was drawing to a close, the Senate rejected three bills designed to save $5 billion, including $3.3 billion in education funding cuts that had to be enacted. Passing those bills would have given the Legislature time to work out a broader solution to the deficit and delayed the need for IOUs.  Instead, the budget shortfall is set to grow even wider because of California's complicated school funding formula, meaning the state will not have enough money to pay all its bills.

State Controller John Chiang said his office is prepared to issue IOUs totaling $3.3 billion in July.  Senate Minority Leader Dennis Hollingsworth said neither he nor his Republican colleagues wanted to see California resort to IOUs to pay its bills, but he said Democrats had refused to make sufficient spending cuts to solve the shortfall.

"It's unfortunate that we're at this point," said Hollingsworth, a Republican.

It will be the first time since 1992 that California will have issued IOUs. The move is almost certain to further damage the state's credit rating, already the lowest of any state, saddling taxpayers with billions of dollars in higher interest payments on bonds that have yet to be sold.  Issuing IOUs - formally referred to as individual registered warrants - also will have real-world consequences for those on the receiving end. Small businesses that rely on state contracts will be most affected.

"It really doesn't affect the million-dollar companies. It's the smaller ones that will get hit," said Paul Nguyen, director of Care Now Staffing, a Southern California company that employs a dozen medical professionals.

The IOUs also will be sent to California counties, which now must find other ways to fund a wide array of social programs, ranging from alcohol abuse and mental health treatment to services for the elderly and disabled. California's universities were evaluating ways to assist students whose grants will not be funded to pay education expenses.  It was unclear whether some of California's largest banks will accept the state's IOUs as payment. They would be paid back, with interest, but the state's precarious financial condition and legislative gridlock might be making some bankers nervous.

Bank of America (note: we are linking to CNBC interview with Sec'y Geithner - Bank of America is one of the banks "in trouble") announced Wednesday it would cash the IOUs for its customers through July 10, bank spokeswoman Colleen Haggerty said. Schwarzenegger and state officials asked other banks to do the same, noting that California has never defaulted.

"We will make those payments," he said. "We are responsible."

In a Crisis, Rethinking Fiscal Federalism
By Harold Pollack* AND Ed Kilgore
June 29, 2009, 7:15 am

The Los Angeles Unified School District will cancel most summer programs this year because of California’s budget woes. The state’s entire welfare-to-work system may also be on the chopping block, cuts that could deny health coverage to 900,000 children.

Although California’s budget woes and political hijinks hit the front page, that state is not alone.

The Center on Budget and Policy Priorities reports that 47 states are projecting deficits, whose total may approach $200 billion. Illinois legislators, for example, are searching for some alternative between a July 1 “doomsday budget” containing deep service cuts and a 67 percent income tax increase.

Media accounts present each state’s difficulties in light of its distinctive politics and economic circumstances: the budget-crippling ballot initiatives in California, the culture of corruption in Illinois, the liberal health policies of Massachusetts.

It’s fun to ponder the local flora and fauna, but the real problems lie underneath: the frayed partnership between states and the federal government.

States and localities are the invisible — if not always silent — partners in national domestic government. Together or separately, they administer and partially finance almost every public service. America faces critical decisions about health care, the environment, transportation, No Child Left Behind. It’s impossible to tackle any of these large national priorities without considering how reforms would be put in place in state capitols, county commissions and city halls.

The basics of American federalism are often forgotten in Washington, most recently during the stimulus debate, when Republicans and some centrist Democrats railed against “excessive” funds provided to state and local governments to avoid cutbacks and layoffs.

These basics may be forgotten again in the wake of California’s fiscal meltdown, which has generated self-righteous clucking about that state’s irresponsibility, with little reflection about the basic services for 12 percent of the American population now at risk.

There has been less reflection about how changing realities of public finance are undermining traditional roles of local, state and federal government.

Take health care, for example.

States and localities are intimately involved in delivering, financing, administering and monitoring health services, and are responsible for wide national variations in access and quality. Serious health care reform at the federal level must address two intertwined realities: First, Medicaid is killing state and local budgets. Second, legally and fiscally constrained states lack the capacity and administrative tools to spend health care monies well.

Adjusted for inflation, state and local health expenditures have more than tripled since 1980 and continue to grow. The ranks of the uninsured have swelled, and include increasing numbers of immigrants and Americans with costly needs.

Local safety-net providers traditionally bear much of the resulting burden. It is not surprising, then, that states and localities are groaning under the load, or that they are cutting services at precisely the moment of greatest need, when elementary macroeconomics suggests that service cutbacks most harm the overall economy.

Other policy domains yield similar stories.

Many states are far ahead of Washington in limiting carbon emissions. States and localities hold 91 percent of jail and prison inmates, while state and local police officers vastly outnumber their federal peers. States and localities spend the lion’s share of public funds expended for education as well.

In these areas and more, effective policy requires much more careful attention to the capacities, preferences and interests of state and local governments. They are where the rubber meets the road in setting public policies.

Although current circumstances may require increased federal support for states and localities, the times also demand serious measures to ensure that states and localities don’t abuse or waste federal funds, or simply reduce their own efforts.

Similarly, while states could use more flexible federal funding to respond to local circumstances, states’ resistance to federal mandates is sometimes disingenuous, particularly when these mandates serve crucial priorities, like homeland security, or when mandates protect readily-marginalized groups, like measures to promote fair elections and civil rights.

Americans don’t need another gauzy ideological debate over federalism and states’ rights. But we do need to pay greater attention to realities of federalism when setting national policy.

Thus, federal budget debates should expand to include the national budget, the sum total of spending, taxes and policies that implement and finance national governance. At a minimum, the Office of Management and Budget and the Congressional Budget Office should routinely scrutinize the financial impact of proposed federal policies on every level of government.

We should also scrutinize the division of roles and resources across different levels of government. The road maps of 1933 (when the first New Deal was put in place) or 1965 (when Medicare and Medicaid were signed into law) may no longer apply. Some tasks, such as long-term care, are now so costly that they require greater federal resources. Others, like regional planning, require greater state and local authority.

The likely bailout of California provides unwelcome opportunities to realign these competing roles. It provides a timely reminder: Americans live in towns, cities, counties, and states, not just the United States of America.

Harold Pollack researches public health at the University of Chicago School of Social Service Administration, where he is faculty chair of the Center for Health Administration Studies. Ed Kilgore is managing editor of The Democratic Strategist. He was previously vice president for policy at the Democratic Leadership Council and a federal-state relations liaison for three governors of Georgia, and served as communications director and legislative counsel for United States Senator Sam Nunn.
Calif. Legislature Begins Debate Over Budget Fix
Filed at 3:43 p.m. ET
June 24, 2009

SACRAMENTO, Calif. (AP) -- Lawmakers have begun a sharp debate about a Democratic plan to close California's projected $24 billion deficit but a quick resolution seems unlikely.

The plan being debated Wednesday in the Assembly and Senate appears to have insufficient support from Republicans. Gov. Arnold Schwarzenegger has criticized the plan's higher taxes on oil drilling, tobacco products and vehicle licensing.

State Controller John Chiang said he would begin issuing IOUs to thousands of state contractors as soon as next week. He said that without a balanced budget, the state would be $2.8 billion in the red at the end of July, the first month of its new fiscal year.

California to Pay Creditors With I.O.U.’s
June 25, 2009

LOS ANGELES — Signaling that California is slipping deeper into financial crisis, the state’s controller said Wednesday that his office would soon be forced to issue i.o.u.’s to scores of the state’s creditors, the first time since 1992, when 100,000 state employees were paid with them.

Before that budget crisis — which pales in comparison to the current shortfall, even with inflation adjustments — the last time California issued the documents was during the Depression, something the controller, John Chiang, alluded to in his news release announcing the impending action.

“Next Wednesday we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression,” Mr. Chiang said in a written statement. “The State’s $2.8 billion cash shortage in July grows to $6.5 billion in September, and after that we see a double-digit freefall. Unfortunately, the State’s inability to balance its checkbook will now mean short-changing taxpayers, local governments and small businesses.”

The issuing of the i.o.u.’s would reflect the state’s lack of cash flow and its legislature’s inability to agree on a way to close a roughly $24 billion budget gap, as tax revenues have continued to fall in the state. On Wednesday, as Mr. Chiang made his announcement, legislators continued to debate ways to close the gap in preparing for a vote on a budget presented by Democrats that was all but certain to fail on the floor.

Democrats want to close the gap with a mix of vast cuts to social programs and an increase to cigarette, oil drilling and car taxes; Gov. Arnold Schwarzenegger, a Republican, has vowed to veto any and all tax hikes, and his party’s lawmakers agree with him.

In February, lawmakers passed a budget for both 2009 and 2010, but the legislation, which covered 17 months’ worth of spending, was dependent on the passage of several ballot propositions that that were rejected by California voters in May. As a result, the state’s budget gap expanded.

In response, Governor Schwarzenegger has proposed $16 billion in cuts. Those cuts would largely be carried out through the state’s programs for the poor: the Healthy Family Program, the health insurance program that covers more than 900,000 children; the main welfare program, known as CalWorks, which provides temporary financial assistance to poor families; and Cal Grants, a college financial aid program. He also wants to borrow millions from local governments and release some prisoners early to save money.

Republican lawmakers are more or less on board with the governor other than the plan to borrow from localities and release prisoners or lay off any corrections officers.

“The consequences of inaction just shot up dramatically,” said H. D. Palmer, the spokesman for the state’s Department of Finance, in an e-mail message. “This underscores just how serious this situation is, and why it’s absolutely critical for the Legislature to get a budget package to the Governor in a form that he can sign — and do it in a matter of days.”

If all sides cannot come to an agreement by July 2, millions of dollars in the unusual i.o.u’s will be issued, including $159 million to the Student Aid Department and hundreds of millions to social services agencies across the state.

The controller delayed payments for 30 days in February to manage a cash crisis at that time, but i.o.u.’s represent a far larger shortfall that would likely be impossible to cover with simple delays. An attempt to borrow money to cover the shortfalls, which is usually done as the legislature bickers its ways to a budget this time of year, was impossible this June because the banks that usually make such loans are unable to do so, and the Obama administration refused a request to back loans as well.

According to the controller’s news release, the i.o.u’s will carry an interest rate set by the state’s Pooled Money Investment Board, which will hold an emergency meeting at his request on July 2 to set the rate. Any rate adoption would become effective immediately; the i.o.u’s will have a maturity date of Oct. 1, 2009.

In 1992, Gov. Pete Wilson, a Republican, issued the i.o.u.’s to state workers; the workers immediately brought a lawsuit, contending that the i.o.u.’s violated the federal Fair Labor Standards Act. A federal judge approved a $558 million settlement, and some workers received additional vacation time.

Political Memo: Deep Cuts Could Reshape California
May 31, 2009

LOS ANGELES — Gov. Arnold Schwarzenegger did not get the election results he sought. Now he seems determined to show California voters the consequences.

In a special election on May 19, voters rejected a batch of measures on increasing taxes, borrowing funds and reapportioning state money that were designed to close a multibillion-dollar budget gap. The cuts Mr. Schwarzenegger has proposed to make up the difference, if enacted by the Legislature, would turn California into a place that in some ways would be unrecognizable in modern America: poor children would have no health insurance, prisoners would be released by the thousands and state parks would be closed.

Nearly all of the billions of dollars in cuts the administration has proposed would affect programs for poor Californians, although prisons and schools would take hits, as well.

“Government doesn’t provide services to rich people,” Mike Genest, the state’s finance director, said on a conference call with reporters on Friday. “It doesn’t even really provide services to the middle class.” He added: “You have to cut where the money is.”

In less than two weeks, the administration has gone from warning residents that a vote against the budget measures would send the state — some $24 billion in the red — into utter turmoil to sanguine acceptance that “the people have spoken” and that the government must move on.

And so it is that administration officials have been sent off to talk to the Legislature and hold conference calls about the latest proposed blows to state programs, while Mr. Schwarzenegger largely tends to other aspects of governing. He was in Livermore on Friday dedicating the world’s largest laser system (for sustaining nuclear fusion), and has updated his Twitter feed. “Backstage at the Tonight Show,” one tweet said.

The measures proposed by the administration to balance the budget, including the $2.8 billion in cuts outlined on Friday, are unlike any proposed to the state’s social services in a generation.

Mr. Schwarzenegger, a Republican, is threatening to eliminate the Healthy Family Program, the state’s health insurance program that covers over 900,000 children and is financed with state and federal money, as well as the state’s main welfare program, known as Cal-Works, which provides temporary financial assistance to poor families and a caregiver for the severely disabled.

The $1 billion in cuts to programs for the poor would be met with $680 million in new cuts to education and a 5 percent salary reduction for state employees, many of whom are already enduring furloughs.

These proposals, as well as those that would make cuts to state parks, the prison system and other state agencies, are winding their way through Sacramento now, where they will be voted on by committees and eventually the full Legislature.

Some of the proposed cuts are clearly saber rattling on the governor’s part, but there is a nervous acceptance among lawmakers, advocates for the poor and outside budget experts that the state is out of money and time.

If lawmakers sign off on closing the health insurance program for children whose families make too much to qualify for Medicaid, California would be the first state in the nation to close the popular program. Begun in 1997, the program, known as S-CHIP, reimburses states at a higher rate than for Medicaid to deliver health insurance to children and teenagers. With the cuts to Medicaid, the state would probably increase its number of uninsured people by nearly 2 million, the California Budget Project says.

“As the nation is debating how to move forward to provide broader health care coverage,” said Diane Rowland, the executive vice president of the Kaiser Family Foundation, “for a state to be scaling back coverage for children would be a major challenge. This program means a lot to working families. It is well run and well liked by people on both sides of the aisle.”

Further, the governor has gone after some spending not covered by mandates enacted by voters through ballot measures, a quirk of California budgeting that has helped create the mess the state is in.

“Certainly the programs that were targeted are not protected by the California Constitution or required by federal law,” said Jean Ross, the executive director of the California Budget Project, a left-leaning policy organization that analyzes the budget.

The Democratic-controlled Legislature has been uncharacteristically silent on most of the cuts, most likely because lawmakers know that tax increases are not politically palatable, that huge cuts in some form are in the offing no matter what, and that any program they wish to spare will quite likely have advocates among their ranks.

“There is no drawing lines in the sand,” said Alicia Trost, the spokeswoman for State Senator Darrell Steinberg, a Democrat and president pro tem. “Everyone knows we’re the majority, and we all know where we stand.”

California, a Broke State, Reels as Voters Rebuff Leaders
May 21, 2009

LOS ANGELES — Direct democracy has once again upended California — enough so that the state may finally consider another way by overhauling its Constitution for the first time in 130 years.

Gov. Arnold Schwarzenegger returned home from a White House visit on Wednesday to find the state dangerously broke, his constituents defiant after a special election on Tuesday and calls for a constitutional convention — six months ago little more than a wonkish whisper — a cacophony.

As the notion of California as ungovernable grows stronger than ever, Mr. Schwarzenegger, a Republican, has expressed support for a convention to address such things as the state’s arcane budget requirements and its process for proliferate ballot initiatives, both of which necessitated Tuesday’s statewide vote on budget matters approved months ago by state lawmakers.

“There could not be more of a tipping point,” said Jim Wunderman, chief executive of the Bay Area Council, a business group that moved forward on Wednesday with plans to push for a constitutional convention. “We think the interest is going to grow by orders of magnitude now.”

More immediately, Mr. Schwarzenegger met with legislative leaders to begin the painful process of slashing state spending after voters rejected five ballot measures intended to balance the budget through a mix of tax increases, borrowing and the reallocation of state money.

The only ballot measure to succeed was one that prevented lawmakers and constitutional officers from getting raises in times of fiscal distress, a sort of chin-out electoral scowl by voters, who will now probably see their health care systems, schools and other services erode. On Friday, the state controller, John Chiang, and the treasurer, Bill Lockyer, are expected to appear before lawmakers and warn them that the state is nearly unable to pay its bills.

With the special-election results in, the California Citizens Compensation Commission moved Wednesday to impose an 18 percent pay cut for all elected officials, while the Bay Area Council began its campaign to rewrite the Constitution to address some of its more crippling rules and give more financial control to localities.

The constitutional effort was immediately embraced by the San Francisco mayor, Gavin Newsom, a Democrat who is a 2010 candidate for governor, and some political experts suggested that the movement might be perfectly timed.

“The majority of Californians say the state is headed in the wrong direction,” said Mark Baldassare, the president of the Public Policy Institute of California, a nonpartisan polling organization. In a March poll of 2,004 residents, two-thirds said the Constitution should be altered, Mr. Baldassare said.

“I think that we could be at a crossroads here, “ Mr. Baldassare said. “People in California don’t feel they have the government we need in the 21st century.”

The last time California held a constitutional convention was in 1878-79 when the state’s founding constitution was rewritten, though a state commission made revisions to the document in the 1960s and 1970s. Such a convention would have to be done, of course, through a ballot initiative.

In the meantime, the unpleasant exercise of renegotiating the state budget — the third time this fiscal year — must be done by June 30 in order to realize the full value of any cuts.

Facing a $21.3 billion budget deficit, Mr. Schwarzenegger is requesting a $6 billion loan from the federal government, and has proposed a variety of politically unpalatable cuts, including commuting prisoners’ sentences, taking away health insurance from some poor children, reducing aid to community colleges and eliminating a large chunk of financing for shelters that serve children and women who have been abused.

The Legislature, controlled by Democrats, will hold public hearings on the governor’s proposals next week and come up with its own suggestions, which would probably affect fewer vulnerable residents and avoid jeopardizing the loss of federal education and health care money that requires a state match.

While California has suffered the same fate as much of the nation — high unemployment, large numbers of foreclosures, general economic sluggishness — its budget woes are greatly exacerbated by its odd and in many ways outmoded way of doing business.

The ballot initiative process — in which legislators or independent groups ask voters to mandate how the state’s money is spent or not spent — has become at times an exercise in fiscal self defeat, with voters moving to earmark money for one special program one year, only to contemplate undoing their own will a few elections later.

The state’s legislative districts are highly gerrymandered, leaving the Legislature influenced by the political fringe of both parties and unable to agree on practical budget matters or much else. State senators represent roughly a million people each, larger than most Congressional districts, leaving them out of touch with local needs. Further, the state is one of only three requiring a two-thirds majority vote in the Legislature on taxes and budgets, which leads to partisan fighting and long delays.

All of this came into play in the special election on Tuesday.

“There was a both-sides-against-the-middle aspect,” said Bruce Cain, a political scientist at the University of California, Berkeley, “reflecting the wide differences between Democrats and Republicans on the budget; a general disgust with the Legislature and the governor; ballot fatigue; and weariness with voting for yet another budgetary patch.”

California passed a budget in February contingent on the ballot measures’ winning approval. Even before Tuesday’s vote, the state was $5.8 billion newly in the hole because revenues had continued to plummet over the spring. Institutions that rely on state money have already begun to adjust in ways large and small.

The Los Angeles Superior Court will now close once a month. Dental care at Feather River Hospital in Paradise, near Sacramento, will cease on July 1. The Santa Clarita fireworks show this Fourth of July will be 10 minutes shorter.

“The state funds 94 domestic violence emergency shelter programs,” said Nicole Shellcroft, a former director of a targeted shelter in the Antelope Valley. “With this cut, the majority of them disappear.”

When he took office six years ago, Mr. Schwarzenegger promised to bring badly needed systemic change to state government. Though he has not delivered on that promise, he has laid more groundwork for it than his predecessors. He persuaded voters to let an independent panel redraw the legislative districts, which may well erode the partisan chokehold many candidates have had on parts of the state.

Also, if his ballot proposal to conduct open primaries in the state prevails at the polls next year, political change in Sacramento could be profound.

Calif. Voters Reject Measures to Keep State Solvent
May 20, 2009

LOS ANGELES — A smattering of California voters on Tuesday soundly rejected five ballot measures designed to keep the state solvent through the rest of the year.

The results dealt a severe setback to the state’s fragile fiscal structure and to Gov. Arnold Schwarzenegger and the state legislators who cobbled together the measures as part of a last-minute budget deal passed in February.

The measures, which would have prolonged tax increases, capped state spending, earmarked money for education and involved the state in a complex borrowing scheme against its lottery, were rejected by roughly 60 percent of those who voted. The failure of the measures, combined with falling revenues since the state passed its budget, leaves California with a $21 billion new hole to fill, while foreclosure rates and unemployment remain vexing problems here.

“Tonight we have heard from the voters, and I respect the will of the people who are frustrated with the dysfunction in our budget system,” Governor. Schwarzenegger said in a prepared statement. “Now we must move forward from this point to begin to address our fiscal crisis with constructive solutions,” Mr. Schwarzenegger said.

While the governor was a strong supporter of all the measures, he was not the public face of the effort, as he was in 2005 when he took on the budget issues, and well as the state’s unions, in another failed effort at the ballot box. This time the Republican governor let teachers and firefighters do his talking for him in advertisements, and indeed was not even in the state the day of the vote.

Instead, he was a guest of President Barack Obama at the White House, where the president was announcing tough new federal standards on automobile emissions that emulate California’s environmental standards. He updated his Twitter account through out the day ("Just landed in DC. Look forward to updating you tomorrow, hopefully with pictures or video") but made nary a mention of the propositions there.

The one measure to pass, which would prevent legislators and statewide constitutional officers, including the governor, from receiving pay rises in years when the state is running a deficit, was approved by more than 75 percent of those who cast ballots, demonstrating the overwhelming disgust many Californians say in polls that they feel toward elected officials in a time of deep budget paralysis.

The central measure, Proposition 1A, would have increased the state’s rainy-day fund but also restrict spending in future years, and extend several temporary taxes. Proposition 1B, which was connected to 1A, would have required $9.3 billion to be paid to education to make up for shortfalls in spending levels set by a voter-approved proposition in 1988. Voters indicated in polls earlier this month that they had a distaste for protracted taxes, caps on spending during inflation periods and general legislative and gubernatorial will.

The other failing propositions were 1E, which would have redirected money guaranteed for mental health services to the state’s general fund; 1D, a similar measure using money earmarked for early childhood programs; and 1C, which would have modernized the state lottery and permitted the state to borrow from future profits.

But voters — roughly 10 percent of those registered, according to midday figures — seemed to have lost patience with ideas cooked up by legislators to fix the state’s perpetual budget imbalances. The governor and lawmakers will now be forced to debate yet again what methods will be used to set the balance sheet right and vote on new measures to cut spending. Those proposed measures will be draconian and politically difficult, including large education cuts and reductions in prison sentences.

“We face a staggering $21.3 billion deficit and in order to prevent a fiscal disaster, Democrats and Republicans must collaborate and work together to address this shortfall,” said Governor Schwarzenegger. “The longer we wait the worse the problem becomes and the more limited our choices will be.”

Lawmakers will regroup in Sacramento on Wednesday.

Bill Watkins, an economist with University of California in Santa Barbara, said legislators “have some interesting decisions to make now,” adding: “Education is definitely going to take a hit. The way we finance local governments is a travesty and funds will be taken away this time.”

After Wrangling, California Senate Passes Budget
Filed at 9:14 a.m. ET
February 19, 2009

SACRAMENTO (AP) -- The state Senate approved a long-awaited budget package early Thursday intended to wipe out a $42 billion deficit, possibly steering the state clear of a fiscal disaster.

Leaders were able to secure the final vote needed from a moderate Republican in late-night negotiations by agreeing to his demands for election changes, government reform and removal of a gas tax increase, giving them the two-thirds vote needed to pass the package, 27-12.

The budget awaited approval from the state Assembly, which had been expected to approve previous budget deals this week but has yet to weigh in on the late changes. The Assembly was set to take up the bill immediately.

The Senate vote was a giant step toward bringing the drawn-out budget battle to a close after leaders agreed to ask voters to revise the state's constitution to allow open primaries for legislative, congressional and gubernatorial elections in order to win Sen. Abel Maldonado's support.

Leaders also met Maldonado's demands to remove a provision to increase the gas tax, freeze legislators' salaries in deficit budget years and to eliminate new office furniture budgeted for the state controller.

California Struggles to Close a Projected $41 Billion Deficit
February 17, 2009

LOS ANGELES — The state of California — its deficits ballooning, its lawmakers intransigent and its governor apparently free of allies or influence — appears headed off the fiscal rails.

Since the fall, when lawmakers began trying to attack the gaps in the $143 billion budget that their earlier plan had not addressed, the state has fallen into deeper financial straits, with more bad news coming daily from Sacramento. The state, nearly out of cash, has laid off scores of workers and put hundreds more on unpaid furloughs. It has stopped paying counties and issuing income tax refunds and halted thousands of infrastructure projects.

After negotiating nonstop from Saturday afternoon until late Sunday night on a series of budget bills that would have closed a projected $41 billion deficit, state lawmakers failed to get enough votes to close the deal and adjourned. They returned to the capital late Monday morning only to adjourn until the afternoon, though it was far from clear whether they would be able to reach a deal.

California has also lost access to much of the credit markets, nearly unheard of among state municipal bond issuers. Recently, Standard & Poor’s downgraded the state’s bond rating to the lowest in the nation.

California’s woes will almost certainly leave a jagged fiscal scar on the nation’s most populous state, an outgrowth of the financial triptych of above-average unemployment, high foreclosure rates and plummeting tax revenues, and the state’s unusual budgeting practices.

“No other state is in the kind of crisis that California is in,” said Iris J. Lav, the deputy director of the Center on Budget and Policy Priorities, a liberal research group in Washington. The roots of California’s inability to address its budget woes are statutory and political. The state, unlike most others, requires a two-thirds majority vote in the legislature to pass budgets and tax increases. And its process for creating voter initiatives hamstrings the budget process by directing money for some programs while depriving others of cash.

In a legislature dominated by Democrats, some of whom lean far to the left, leaders have been unable to gather enough support from Republican lawmakers, who tend on average to be more conservative than the majority of California’s Republican voters and have unequivocally opposed all tax increases.  And then there is Gov. Arnold Schwarzenegger, whose budget woes far outweigh those of his predecessor, Gray Davis, whom he drummed from office in a 2003 recall that stemmed from the state’s fiscal problems at the time. The governor has failed to muster votes among lawmakers in his own party, whom he often opposes on ideological grounds, resulting in more scorn from Democrats.

Furthermore, Republican leaders in the Senate and Assembly who have agreed to get on board with a plan have been unable to persuade a few key lawmakers to join them. The package needs at least three Republican votes in each house, to join with the 51 Democrats in the Assembly and the 24 Democrats in the Senate.  For months Republicans have vowed not to raise taxes, which in California means no increase in either the sales, gas or personal income tax.

“It is a dramatic time,” said Darrell Steinberg, the State Senate’s president pro tempore. “The solvency of the state is on the line. It is really quite a system where the fat of the state rests upon the shoulders of a couple of members of a minority party. The system frankly needs to be changed.”

In the meantime, motorists are met with “closed” signs at Department of Motor Vehicles offices two days a month, environmental programs are left unattended, piles of dirt mark where highway lanes are to be built to ease the state’s infamous traffic congestion, school systems mull layoffs and counties prepare to sue the state for nonpayment of bills.

Last week, Mr. Schwarzenegger and the four legislative leaders concurred on a series of bills that included $15.1 billion in budget cuts, $14.4 billion in tax increases and $11.4 billion in borrowing, much of it subject to voter approval.  The Senate Republican leader, Dave Cogdill, said he thought he had all the votes needed to get the deal done in each house. But on Sunday, two Republican senators — Dave Cox, who was originally thought to be the last vote needed, and Abel Maldonado, whom Mr. Schwarzenegger had been able to woo into voting against his party in the past — said they would reject the plan.

Democrats, who had already given into Republicans’ long-held dreams of large tax cuts for small businesses and for some of the entertainment industry and a proposed $10,000 tax break for first-time home buyers, balked at Mr. Maldonado’s request that the legislature tuck a bill into the package that would allow voters to cross party lines in primary elections.  Mr. Maldonado, who is also seeking a constitutional amendment to prevent lawmakers from getting paid if budgets are late, defended his request that the open primary bill be included in the budget package.

“There needs to be good government reforms in this budget, and no member should be getting pet projects,” he said. “I think with an open primary, we would have good government that would do the people’s work.”

Sunday evening ended in frustration and exhaustion for lawmakers, who returned to work Monday facing the state’s uncertain future.

“My boss will continue to work toward a responsible budget solution,” said Mr. Cogdill’s spokeswoman, Sabrina Lockhart. “There are real risks and real consequences for not passing a budget.”

Furloughs in California Close Many Agencies
February 7, 2009

CULVER CITY, Calif. — The drivers pulled into the lot of the Department of Motor Vehicles office here, momentarily stymied by the empty parking spaces, then sprinted through the drizzle toward the door, only to be met with one dispiriting word: Closed.

In the starkest example of the intensifying budget crisis befalling most states, more than 200,000 California state workers were ordered to stay home Friday, the first of the semimonthly work furloughs across state agencies intended to trim $1.3 billion from California’s $143 billion budget.

Gov. Arnold Schwarzenegger ordered the unpaid days — which were upheld last month by a county judge — to be taken until June 2011. For most workers, for whom the furlough means a 9 percent cut in pay, the days off will be the first and third Fridays of each month.

About 15,600 employees who work for elected officials like the attorney general and the comptroller were exempted, though Mr. Schwarzenegger’s aides have said they are mulling a lawsuit seeking to include those workers, along with the ones from the Department of Motor Vehicles, the Energy Commission, Food and Agriculture, and various social, mental health and accrediting agencies in the program.

“It’s very frustrating not being able to work,” said Roland Becht, a field office worker for the motor vehicles agency in Chula Vista. “I am going to have to decide what bills not to pay this month, and that’s going to hurt my credit. I am 50 years old, and I am thinking of renting out a room to help pay my bills.”

California appears to be the only state that has begun a significant worker furlough program, though at least four others are considering similar measures, said Scott D. Pattison, the executive director of the National Association of State Budget Officers in Washington. “It’s not surprising,” Mr. Pattison said, “given what we have been expecting.”

California has been crushed by the combination of a collapsed housing market, expansive government spending in recent years and the loss of a lucrative automobile tax ended by the governor when he came into office in 2003. The state’s unemployment rate, 9.3 percent, is among the highest in the nation.

More than 20 states have unemployment rates above 7 percent, according to the latest figures from the federal Bureau of Labor Statistics, which contributes to lower sales, property and personal income taxes for states and may lead to other furlough orders, Mr. Pattison said.

Californians looking to renew driver’s licenses, take tests for state jobs, file claims or seek many other services found themselves out of luck Friday. By early morning, about a dozen people stood on the sidewalk outside a Los Angeles high-rise where the Department of Industrial Relations is located. Five had planned to take an exam in an effort to register as garment workers.

“Why this office?” said Lisa Bacaro, 32, who had taken the morning off to take the exam. “In hard times, why can’t they close a different office? This is where people come for help with jobs. I am trying to take this test to start work, better work. I can’t believe this.”

The California Legislature, which is controlled by Democrats, and Governor Schwarzenegger, a Republican, have repeatedly failed to come to an agreement over how to plug a $40 billion shortfall in the budget through mid-2010. Among other measures, Democrats and the governor are seeking an increase in the sales tax, which Republican lawmakers reject. California is one of the few states that require a two-thirds majority vote in the Legislature to raise taxes.

The state controller, John Chiang, a Democrat, joined labor unions in a lawsuit to prevent the governor from putting the furloughs into effect, arguing that he lacked the authority to do so. But Judge Patrick Marlette of Sacramento County Superior Court rejected that argument last month, calling California’s fiscal situation an emergency and citing the governor’s order as “reasonable and necessary under the circumstances.” Judge Marlette ruled that employees of statewide elected officials were exempt because they were not party to the lawsuit seeking to block the furloughs.

The forced work stoppages will most likely do little to ease voters’ growing dissatisfaction with the governor and the Legislature, which last summer delivered the latest budget in the state’s history, one that immediately had to be retooled in the face of falling revenues.

“I’m really upset,” said Monique Carter, who tried to renew her driver’s license Friday, the day before her birthday. “I think this guy is playing games, because he thinks Obama is going to give the state money and he’s going to get his little percentage. I voted for him, and I am mad now.”

In Budget Crises, States Reluctantly Halt Road Projects
December 23, 2008

LOS ANGELES — With cars whizzing behind him along one of Southern California’s most congested and detested freeways, Gov. Arnold Schwarzenegger warned Monday that the state was “on a track toward disaster” as it ceases highway, school and bridge construction because of budget and credit woes.

California, which has suspended nearly $4 billion in public works projects, is one of a half dozen states delaying or halting projects because of capsizing budgets, an inability to attract investors to the municipal bonds used to bankroll many projects and a reduction in gasoline tax revenues — which underlie a lot of transportation financing.

The American Association of State Highway and Transportation Officials has identified 5,000 transportation projects nationwide that lack the dollars to proceed; many of them, like the $730 million project here to add 10 miles of high-occupancy-vehicle lanes to the 405 Freeway — Mr. Schwarzenegger’s backdrop on Monday — have been stopped midstream.

“They just haven’t been able to find the resources,” Tony Dorsey, the spokesman for the association, said of the halted projects.

More than 40 states are struggling with revenue shortfalls, and lawmakers across the country are cutting, taxing and pleading their way toward solvency. Fixing bridges, expanding highways and other infrastructure projects have faced the same fate as government entitlement programs, state jobs and other items.

Jeffrey Caldwell, a spokesman for the Virginia Department of Transportation, said, “Projects not currently under construction or significantly far in the development process were either delayed or completely removed from plans for future construction.”

In addition to the weak economy and lower gasoline tax revenues, states are “concerned about the market and cost of debt,” said Scott D. Pattison, the executive director of the National Association of State Budget Officers in Washington

In fact, there has been very little interest among institutional investors in municipal bonds since the financial markets began to collapse this fall, and states have had to rely on individual investors — far less plentiful and reliable than institutional investors — to buy bonds.

Right after Washington cobbled together its plan to bail out banks, California, which uses bonds to pay for projects as well as to cover its short-term cash needs, sold $5 billion in notes, and 80 percent of the buyers, rather than the typical 30 percent, were individuals.

Last month, when the state tried to restructure existing debt with an additional $523 million offering, it had to reduce the offering by two-thirds, said Tom Dresslar, the spokesman for Bill Lockyer, the California treasurer.

“The institutional investor interest was nil,” Mr. Dresslar said.

Further, the State Legislature’s inability, with the governor, to figure out a way to deal with the state’s $15 billion budget gap has weakened the market’s confidence in California, something other states could face if the fiscal situation deteriorates.

This month, Standard & Poor’s downgraded the $5 billion in revenue bonds issued by California last month and put more than $50 billion of debt on watch for a downgrade.

“The bottom line is we are not viewed as a quality investment,” Mr. Dresslar said, adding that California is not in position to offer the sort of fat interest rates needed to get offerings off the ground.

California and other states are clearly holding out hope that President-elect Barack Obama will pump some federal money into the stalled infrastructure projects, and some may even be delaying work until they have a chance to make the case for federal spending. Mr. Obama has proposed a stimulus package intended to create or save three million jobs, largely through financing infrastructure improvements.

“It happens to be that the Obama administration wants to rebuild America,” Mr. Schwarzenegger, a Republican, said at a news conference here.

Steve Swartz, a spokesman for the Kansas Department of Transportation, said most projects in that state scheduled for December and January had been suspended because of uncertain financing.

“We’re hopeful, keeping our fingers crossed like every other state, that a stimulus package will come through,” Mr. Swartz said. “If it does, we’ll be in good shape.”

In the meantime, some states might think twice about proclaiming great calamity in the face of crumbling infrastructure, high unemployment and lack of state financing, said Matt Fabian, director of Municipal Market Advisors, an independent consulting firm.

The strategy might attract the attention of the federal government, but it does little to entice investors in municipal bonds.

“We have seen over the last three months that every bridge is about to collapse, every highway is a danger and every hospital is full of anthrax,” Mr. Fabian said. “By putting out a lot of headlines about those issues, local governments are undermining the only base we have left. There is no institutional demand for municipal bonds, so we are relying completely on individuals, and individuals get scared by those headlines.”

Calif. Gov. Calls Lawmakers Back on Budget
Filed at 4:22 p.m. ET
December 19, 2008

FRESNO, Calif. (AP) -- Gov. Arnold Schwarzenegger said Friday he'll call lawmakers back to work on the state's budget woes in two months' time after saying a day earlier he planned a veto on an $18 billion deficit-cutting package pushed by Democrats.

''As we free-fall into a fiscal Armageddon, the Legislature still can't cross the special interests and do what's right for the state of California,'' Schwarzenegger said at a news conference. ''The only thing they did really well was to increase taxes.''

Lawmakers adjourned for the holidays Thursday after state Democrats pushed through a package of spending cuts and tax increases using a creative maneuver to bypass Republican support. Schwarzenegger wants lawmakers to return to the Capitol for a third special session and work until they reach a compromise on the state's mammoth $42 billion shortfall.

The governor said he rejected the Democrats' budget proposal because it lacked his demands for an economic recovery plan. His office had requested deeper cuts in welfare and senior assistance programs than Democrats were willing to offer, as well as broad authority to relax environmental regulation on public works projects and more toll roads.

Democratic leaders and environmental advocates that include Paul Mason, deputy director of the Sierra Club in California, questioned why the governor would toss aside the only deficit-cutting legislation to reach his desk since he declared a fiscal emergency on Nov. 5.

Mason suggested the governor was betraying his public image as a crusader against global warming through his environmental requests.

''It's inconsistent with the media image he likes to present with how green he is,'' Mason said.

Democrats sent the Republican governor a package of bills Thursday that would make more than $7 billion in cuts to education, health care and prisons, and increase taxes and fees by $9.3 billion. It proposed about $1.5 billion in other budget changes.

POSITIVE DIRECTION FROM GOVERNMENT AND BUSINESS...bringing back this historical view: Global Trade, 2008 NYTIMES graphic.

Mr. Frank told Mr. Deutsch. “But as Chico said to Groucho, ‘Who are you going to believe, me or your own eyes?’ ”  Frank to not run in 2012, Dodd did not run in 2010

Treasury has profited from big bank bailouts

Washington Times
Patrice Hill
Tuesday, April 27, 2010

At a time when both parties are competing to crack down the hardest on Wall Street banks, it might come as a surprise to know that the Treasury has been making a tidy profit on most of the government's Wall Street rescue operations.

What few in Congress are disclosing is that the government's non-bank rescues have become the biggest drain on taxpayers, including the burgeoning bailouts of mortgage giants Fannie Mae and Freddie Mac, insurance giant American International Group, and Detroit's General Motors and Chrysler.

All but one of the megabanks that have raised populist ire — including Goldman Sachs, JP Morgan Chase and Bank of America — repaid the government bailout funds long ago, along with interest and dividends that made the deals profitable for the Treasury. Citigroup is the only major bank that has not repaid in full, though it has announced plans to do so.

While many smaller banks still have not repaid their government assistance, industry lobbyists say the much-maligned Troubled Asset Relief Program has proved to be mostly a big win for taxpayers and the economy.

"Two-thirds of the TARP investment from banks has already been repaid with a large profit to the taxpayer," said Steve Bartlett, president of the Financial Services Roundtable. "TARP was a positive boost to the economy and the government, and taxpayers are seeing a positive return on their investment."

The Federal Reserve reported last week that it had transferred a record $47.4 billion in profits to the Treasury in 2009 from its Wall Street rescue operations — up 50 percent from 2008.

About half of that came from interest that the central bank earned on Fannie Mae and Freddie Mac mortgage bonds it purchased in the past year to support the housing market and keep 30-year mortgage rates near record lows.

The Fed's profits were used to help reduce the government's sky-high budget deficit, but were not enough to offset the huge cost of Fannie and Freddie's taxpayer bailout — which stands at $127 billion and is expected to grow to as much as $400 billion by some estimates.

In an unexpected development, the Fed said it was also on course to earn money on the notorious portfolio of supposedly toxic bonds it acquired from Bear Stearns two years ago to sweeten a merger deal it arranged with JP Morgan Chase.

That deal marked the start of the government's massive Wall Street bailout operations, which burgeoned throughout 2008 as the threat of massive failure in the banking system forced Congress to enact the $700 billion bank bailout fund.

But the mostly untold story is that most of the money was never used, in large part because the program was so unpopular that Wall Street banks — worried about the congressional backlash and pay restrictions attached to the funds — returned their bailout cash and then declined to take part in several programs that the Treasury set up to help unfreeze credit markets.

As a result, a $1 trillion program the Treasury set up to help banks unload their toxic mortgage assets spent only $30 billion, though that was the "troubled asset relief" part of the bank bailout fund for which TARP got its name.

Another $1 trillion program that the Treasury and Fed set up jointly to help unfreeze securitized loan markets spent only $48 billion. Similarly, thanks to dramatic improvement in the credit markets in the past year, a $333 billion asset guarantee program set up by Treasury, the Fed and Federal Deposit Insurance Corp. was never tapped.

Since the credit programs were barely used and loan securities markets have been rebounding on their own, the Treasury and Fed have been quietly shutting down the programs in recent months.

Meanwhile, the Treasury is expanding other uses for the cash aimed at helping Main Street rather than Wall Street.

Those programs to help small businesses get loans and help defaulting homeowners renegotiate their mortgages have cost about $60 billion. But spending could go much higher under the Treasury's plans, which also would greatly increase the losses incurred by Fannie and Freddie, which guarantee the defaulted mortgages.

The result is that the "bank bailout" fund today is primarily benefiting small banks, AIG, which has received more than $100 billion in assistance and has failed to make its dividend payments to the Treasury, as well as GM, Chrysler, GMAC and various automotive suppliers, which are on track to receive a total of $90 billion in funding from the Treasury.

GM last week made an early repayment of $6.7 billion in loans it got from the Treasury, but it is not clear whether or when the Treasury will recoup the rest of its $50 billion investment in GM, which is held in the form of common and preferred stock. The nearly $20 billion invested in Chrysler, which has seen its sales plummet in the past year despite the bailout, may never be recouped.

About $67 billion in TARP funds have gone to 640 smaller banks, a couple of which have shut down, resulting in a $2.3 billion loss to the Treasury. About 80 of the small banks have failed to make scheduled dividend payments.

Despite the apparent success of the bailout program, the political myth that the funds were wasted on bailouts of greedy Wall Street firms refuses to die, and in fact has taken on new life this month as Congress takes up legislation to reform the financial sector.

President Obama traveled to Wall Street last week to reprimand investment houses for resisting the legislation and to whip up public sentiment once again in an effort to drive a Democratic reform bill through the Senate.

Nearly every time the Senate's 41 Republicans seek changes in the heavily regulatory bill, Democrats accuse them of siding with Wall Street. Republicans respond by insisting that the bill as written would perpetuate "Wall Street bailouts" that the public never again wants to finance.

Treasury Secretary Timothy F. Geithner has played both sides of the political fence, on the one hand calling for a massive crackdown on Wall Street while on the other hand touting the profits the Treasury is making from the bank bailouts and trumpeting the resulting dramatic reduction in deficit spending.

Thanks to the bank repayments, as well as profits from the sale of bank stock acquired through the bailouts, the program turned from a money loser into a profit center for the Treasury early this year.

Moreover, the dramatic drop in projected TARP spending is largely responsible for a nearly $200 billion drop in the government's projected budget deficit that the administration has been touting as proof of fiscal discipline.

Despite that, the president this year took bank bashing to new heights and proposed a tax on the largest financial firms to recoup the continuing cost of the programs for small banks, the auto industry and insurance companies.

Detroit rarely is the target of such punishment or invective from the White House and congressional leaders, though the Treasury could lose much of the money it invested there.

"We are confident that [GM] is on a strong path to viability," Mr. Geithner said last week.

He suggested that the Detroit bailout was worth the cost in any case because of the "countless jobs saved," though thousands of layoffs in the auto sector were a major contributor to the unemployment crisis last year.

WASHINGTON — The federal overseer of Fannie Mae and Freddie Mac on Tuesday announced policies that would maintain the mortgage giants’ role in parts of the housing market, spur more home lending and aid distressed homeowners...

Frank Defends Oversight of Fannie, Freddie
July 24, 2009, Filed at 11:12 a.m. ET

WASHINGTON (AP) -- House Financial Services Chairman Barney Frank is defending Democrats' oversight of struggling mortgage buyers Fannie Mae and Freddie Mac.

At a hearing Friday, the Massachusetts Democrat said the notion that the two institutions have been left ''unbridled'' by Democrats is a myth. Frank said Congress will eventually want to change the model of the government-sponsored enterprises. But, he added that Democrats already have imposed major reforms requested by the Bush administration.

The administration is expected to release its plan for Freddie Mac and Fannie Mae in February 2010. Republicans want to enforce new restrictions immediately, including winding them down if they aren't financially viable in two years.

Editorial: Another Rescue?
May 29, 2009

Remember the days, not so long ago, when you had never heard of subprime mortgages or credit default swaps or collateralized debt obligations? As government officials try to sort out those messes, states and localities are asking for federal aid for another financial trouble child: the VRDO, or the variable rate demand obligation.

A VRDO (rhymes with weirdo) is a type of municipal bond that combines a long maturity with a floating interest rate and other tricky features. With some $400 billion outstanding, VRDOs are a big chunk of the $2.7 trillion in municipal debt that has been issued by more than 50,000 entities, mainly state and local governments.

As the recession has deepened, impairing the credit quality of insurers and banks that back the bonds, interest-rate increases have been triggered on some VRDOs. That has led to higher debt payments at a time when municipalities can least afford it. It has also become increasingly more expensive to issue new bonds, because fewer insurers and banks are able or willing to backstop them, especially for cash-strapped issuers.

The result has been less access to capital at a higher cost, a squeeze that state and local governments say will only prolong the recession.

On Capitol Hill, Representative Barney Frank, the chairman of the House Financial Services Committee, is now drafting legislation that would provide federal backing for VRDOs and other municipal bonds. That would make it easier and less costly for state and local governments to borrow.

At first glance, support for the municipal bond market seems like one more unfortunate but unavoidable lifeline for a troubled financial system. But we are not yet persuaded that the need is as urgent as some politicians are claiming — or if such support would be wise.

States and localities are hurting, no doubt. But they have also been on the receiving end of substantial federal stimulus dollars, and will likely receive more if the downturn deepens. They also will be the direct or indirect beneficiaries of other policy actions — like federal foreclosure relief and the bank bailouts. Encouraging more borrowing, especially with potentially dicey instruments, may not be the best way to help.

There is a legitimate concern that propping up VRDOs could lead governments to over rely on them, even though the financial crisis has exposed their weaknesses. This latest round of trouble is also one more reminder of the urgent need to reform the credit rating agencies, whose faulty ratings led in part to the municipalities’ reliance on VRDOs and other borrowing.

If federal backing is deemed necessary, Congress must be frank about the costs and risks. Debt guarantees by the Treasury can carry a cost, even if there is no immediate outlay. In the year a guarantee is extended, the federal budget records an amount that the government is likely to lose in the event of default. Each year the amount is re-estimated, based on the loan’s performance. Losses add to the budget deficit and the federal debt.

That isn’t the only cost. The more the government spends, guarantees and borrows to prop up the financial system, the more nervous investors have become about the possibility of future inflation, a worry that of late has contributed to big swings in the stock market.

In these very difficult times, states and localities certainly need help from the federal government. But before any support is provided to the municipal debt market, the case for aid has to be made based on thorough analysis and full transparency.

Housing, other indicators point to a possible turnaround
By Dirk Perrefort, Staff Writer
Posted: 03/28/2009 11:56:46 PM EDT
Updated: 03/29/2009 02:11:07 AM EDT

A surprise increase in housing sales nationally and locally is one of several indicators that the economy could be nearing a turnaround, experts said.

The National Association of Realtors reported last week that single-family home sales increased in February by about 5 percent nationally and 15 percent in New England. New home sales also increased about 5 percent nationally last month.  Paul Scalzo, president of Scalzo Group Real Estate Services in Bethel, said he is seeing a similar trend locally. Closings on housing purchases increased in the Danbury area by about 12 percent in February. In Danbury, 41 home sales were reported from Feb. 23 to March 23 compared with 34 sales from Jan. 22 to Feb. 22.

A more current indicator -- deposits on real estate purchases -- have increased by about 25 percent within the last month.

"The market isn't where it used to be, but I think the confidence is starting to come back," Scalzo said. "While I can't predict the future, this could be the beginning of a rebound."

He added that much of the recent activity has been in homes priced at less than $300,000 that are purchased by first-time home buyers.  Recent government incentives, including the $8,000 tax credit included as part of the most recent stimulus package, and low interest rates could be factors in buyers entering the market. Gary Lemme, a senior vice president with Union Savings Bank, said the mortgage volume has increased in recent months. Much of that activity, he said, is because of first-time home buyers.

"The volume in mortgages has definitely increased, but it's still no where near what we saw a few years ago," he said.

Lemme said he has seen an "opening of the floodgates" in mortgage-refinancing applications as a result of low interest rates.  Saving money on a mortgage payment, he added, could help by putting more money in a homeowner's pocket to pay other expenses.  Nick Perna, an economic adviser to Webster Financial Services, said several indicators, including the increase in real estate purchases, could be pointing to an economic turnaround later this year.

"We seem to be at a point where all the indicators coming out are a little better than expected, even if they are still lousy," he said.

Those indicators, he said, include recent national retail sales numbers that showed an improvement in February over previous months.  Orders for durable goods also jumped 3.4 percent in February. Economists had forecasted a drop in the economic indicator.  An increase of more than 1,000 points in the stock market over the past two weeks, Perna said, also is important.

"In the past, the stock market has been a leading indicator of a turnaround in the economy," he said. "The good thing about the economy is that its sort of a self-fulfilling prophecy. If it goes up, people feel better."

Speaking of historical below and/or click this link!
Has the Economy Hit Bottom Yet?
March 15, 2009

The economist John Kenneth Galbraith once said, “The only function of economic forecasting is to make astrology look respectable.”

Still, we have to ask: was that the bottom we just hit?

After months of punishing economic news, the gloom seemed to lift last week if only for a moment. The stock market shot up 12 percent in four days. Two of the nation’s biggest banks said they had returned to profitability. General Motors said it wouldn’t need another $2 billion in government help this month. And retail sales were better than expected.

Then again, perhaps that’s what passes for good news these days.

The market is still down by more than 50 percent since its high 17 months ago. Yes, the banks made money, but for just two months, and never mind the billions of bad assets that remain on their books. G.M. will still, in all likelihood, need billions in taxpayer help down the road and there’s no guarantee it will survive. And those retail sales numbers? They were still bad, just not as bad as analysts were expecting.

Still, there was a sense among some economists and Wall Street analysts that if the bottom was not touched, perhaps the freefall was at least slowing. No less than Lawrence Summers, President Obama’s top economic adviser, said on Friday that while the economic crisis would not end anytime soon, there were early signs that it was easing.

Which leads to a question: When we do hit the bottom — this year or years from now — how will we know?

There’s no easy answer.

Mr. Galbraith was not the first or last economist to acknowledge fallibility at predicting turning points. (Just think back to assurances by top government officials in early 2007 that the growing problems with subprime mortgages were “contained.”)

Forecasting the end of the current recession is even more difficult because it will hinge on how quickly and efficiently governments resolve the crisis in the banking system. Many investors continue to worry that the world’s biggest financial institutions are insolvent, despite assurances from Washington that those firms have plenty of capital.

How political leaders diagnose and fix the banks will be critical. Analysts say misguided and erratic government responses exacerbated Japan’s “lost decade” in the 1990s and the Depression of the 1930s. “The things that can screw it up are bad policies,” said Thomas F. Cooley, dean of the Stern School of Business at New York University.

In the end, there’s probably no way to know for sure that we’ve hit bottom until we’re on the rebound. Still, analysts say there are some key indicators that might help in spotting a bottom and recovery at a time when it can be hard to see past the despair.


History shows that the stock market usually hits bottom before the economy does.

In October, Warren E. Buffett, one of the world’s most successful investors, said he was buying American stocks because they usually rise “well before either sentiment or the economy.” But even he acknowledged not having “the faintest idea” what would happen in the next month or year.

Since then, stocks have dropped by another 20 percent, and with the market at levels last seen in 1997, stocks are cheap by historical standards. The price-to-earnings ratio — which investors use to gauge how much they are paying for each dollar of corporate profit — is around 13, about 20 percent lower than the average of the last 130 years.

But many investors remain on the sidelines. Money market funds have swollen to $3.8 trillion, up from $2.4 trillion two years ago. And the cash banks are holding in their vaults and at the Federal Reserve has more than doubled in the last nine months.

What has made the current recession so pernicious is the eroding pressure of deflation, the general decline in prices that has hurt both businesses and consumers. They earn less and the value of their businesses and homes has fallen, yet they still owe as much as they did before, said Russell Napier, a consultant with Credit Lyonnais and author of “Anatomy of the Bear: Lessons From Wall Street’s Four Great Bottoms.”

He said he believed stocks would not rise until deflation ended and businesses could charge higher prices to pay off debts. Early indications suggest that this may be happening and that the stock market may be near the bottom, Mr. Napier said. He pointed to three indicators that often signal that economic growth and inflation are on the way — the prices of copper, corporate bonds and inflation-protected Treasury securities. Prices for all three are higher today than they were in November.

“All the indicators suggest you should be buying and not selling,” he said. Still, Mr. Napier acknowledged that stocks, while cheap, could fall further. Measured by their 10-year price-to-earnings ratio, stocks were a lot less expensive in the early 1980s, when the ratio fell to less than seven, and in the 1930s, when it was below six.

Nouriel Roubini, the economics professor from New York University who predicted much of the current crisis, has warned that corporate earnings and stock prices could continue to fall, perhaps precipitously.


To determine whether home prices are still inflated, economist use ratios that compare the cost of buying a home to renting or to median family income. If the ratios move sharply higher, as they did in recent years, it suggests home prices might be inflated. When they are falling, as they are across the country and particularly in places like San Diego, Phoenix and Tampa, owning a home becomes more affordable.

Barry Ritholtz, a professional investor who writes the popular economics blog The Big Picture, has a simpler, more subjective, approach: Assume a young couple earning two modest incomes is looking to buy a two- or three-bedroom starter home in a middle-income neighborhood in your city. Can they qualify for a mortgage and afford to buy it?

“If the answer is no, then you are not at a bottom in housing,” said Mr. Ritholtz, who estimates that the decline in national home prices is only half-complete.

Just as prices in the bubble did not go up uniformly in all parts of the country, they will not reach bottom together, said Ronald J. Peltier, chief executive of Home Services of America, a real estate brokerage firm.

In places like Riverside, Calif., and Miami, where homes are selling for half or less than what they sold for three or four years ago, real estate may be close to the bottom. One telling sign is that first-time home buyers and investors are snapping up homes, though they are mostly buying from banks selling foreclosed properties at deep discounts. Sales of existing homes in California jumped by more than 50 percent in January from a year earlier. But the median price was down more than 40 percent, to $224,000.

At the same time, prices have come down a lot less in urban areas like Manhattan and, not surprisingly, the number of homes being sold is down by as much as 50 percent from a year ago. Prices in these urban areas will have to fall much more before many young couples can afford starter homes.

Of course, those who bought at the peak of the market will suffer the greatest pain if they are forced to sell. But Mr. Peltier and other specialists say the current dismal market will only be resolved by lower prices, easier lending and an improving economy.


Americans like to buy things, and for at least the last decade, many economists assumed they would continue to spend on cars, clothes and the latest digital toy, good times or not. Consumer spending has rarely declined in the post-World-War-II era and when it has, it bounced back quickly.

The current recession is severely testing that article of faith. Personal consumption fell by about 1 percent in the second half of last year — the first sustained decline since 1980. Economists say consumption will be slow to recover because debt-saddled Americans are saving more or paying down debt. The savings rate — the amount of money consumers did not spend — jumped to about 3 percent late last year, from practically zero, still far below its postwar average of 7 percent.

A sign that consumption has hit bottom may come when the savings rate begins to flatten. Spending should then rebound as pent-up demand gives way. Car sales, for instance, have fallen to levels last seen in 1981, when the population of the United States was about three-quarters of what it is today. Many families are deferring car purchases and making do with what they have. Eventually, however, they will have to replace their aging vehicles.

In a study of economic cycles, Edward E. Leamer, an economist at the Anderson School of Management at the University of California at Los Angeles, found that auto sales and home building tended to lead recoveries.

An increase in international trade would be another early indicator that consumer spending here and abroad has hit the floor and begun to rebound.

After growing at an average of 7 percent a year for most of this decade, global trade was little changed from March to September last year, according to the Organization for Economic Co-operation and Development. Many large economies including the United States, Japan and China have reported a sharp drop in exports and imports in recent months. There was more bad news on Friday, when the Commerce Department reported that exports from and imports to the United States fell by about 12 percent in January.

“Seeing global trade pick up would be a very positive sign,” said Kenneth Rogoff, a former chief economist at the International Monetary Fund and now a professor at Harvard.

Tobias Levkovich, chief United States equity strategist at Citigroup, has another indicator for spotting when we have hit bottom: When we stop behaving like children in the backseat of the car asking their parents, “Are we there yet?”

Talking Business:  Facing Crisis, Congress Makes Sense
November 15, 2008

Congress has an endless capacity to disappoint. A scandal erupts, and it rushes to pass legislation full of unintended consequences. Then, when no one is looking, it strips away regulations the country needs. Ideology too often trumps common sense. Partisanship too often gets in the way of practical solutions. It’s an old story, I know.

And then there is a week like this one, a week that’s almost enough to restore your faith in the United States Congress.

Around 9:45 on Wednesday morning, William Frey took a seat in the hearing room of the House Financial Services Committee. Mr. Frey, 50, is a broker-dealer who trades mortgage-backed securities. A few weeks ago, he caught the attention of the committee chairman, Barney Frank, when The New York Times reported that he had sent letters to servicers of mortgages contained in mortgage-backed securities, threatening to sue if they dared to modify mortgages for struggling homeowners.

Mr. Frank was livid. For months, he has been jawboning lenders to do more to prevent foreclosures, and it has been like whistling in the wind. Yet as slow as banks have been to get with the program (which they are finally starting to do), Wall Street has been worse, doing virtually nothing about the $2 trillion worth of mortgages trapped in securitized mortgage pools, those so-called toxic assets. Indeed, Mr. Frey’s letter seemed to suggest that the big boys on Wall Street actually wanted people to lose their homes.

Within hours of reading the Times article, Mr. Frank and several other Democrats put out a news release demanding the scalp of both Mr. Frey and a second hedge fund manager mentioned in the Times article. Mr. Frank also demanded that Mr. Frey appear at a hearing to explain why he was unwilling to allow mortgage modification.

At the hearing, however, Mr. Frey was not at the witness table. He was in the audience. At the last minute, Mr. Frank had decided to withdraw his invitation. Most people would view such a reprieve as a gift from the gods, but not Mr. Frey.

When I met him not long ago, Mr. Frey explained that he wasn’t really trying to stand in the way of preventing foreclosures. In fact, he had devised a plan months ago to deal with securitized mortgages, by having Fannie Mae and Freddie Mac buy them at face value and then refinance them. This of course would cost the Treasury tens of billions of dollars, but as Mr. Frey saw it, it was the only possible solution. Anything else would have the effect, he believed, of violating the contract between the servicer and the investors, which never anticipated the housing meltdown and lacked language that would allow for mortgage modification. And interfering with contracts is bad business — that’s the road to Russia or Venezuela.

Mr. Frey also believes that he is the only person in the business willing to speak this painful truth. When he learned that the other hedge fund manager called on the carpet by Mr. Frank, Harvey Allon of Braddock Financial, was now saying he’d been misunderstood, Mr. Frey was contemptuous. He wanted to testify, he said, because somebody needed to give the committee some straight talk about securitized mortgages.

Having gotten to know him these past few weeks, I couldn’t help suspecting another motive, however: since that original Times article, he had discovered that he liked being in the newspaper. A juicy confrontation with a sharp-tongued committee chairman would surely provoke a headline or two.

At first, I couldn’t understand why Mr. Frank wouldn’t want a foil like Mr. Frey on the panel of witnesses. Instead, he had invited four milquetoasts, including representatives from Bank of America and JPMorgan Chase, whose primary goal was to present their institutions as the homeowners’ best friends. (To give them their due, both institutions have mortgage modification efforts under way that are better than anything the government has going.) A third witness was a lobbyist for the hedge fund industry who said things like, “Bold, proactive steps need to be taken.” (Zzzzzz.)

And then there was Tom Deutsch, a lobbyist for the securitization industry. His job, not surprisingly, was to play down the problem. There were eight times more securitized mortgages being modified today than there were a year ago, he said. The fear of lawsuits was wildly overblown, he insisted. “Industry participants have been and will continue to deploy aggressive and streamlined efforts to prevent as many avoidable foreclosures as possible,” he said.

Mr. Frank wasn’t buying it. Nor should he have been. Yes, some securitization contracts allow for mortgage modifications, but most do not. At IndyMac, for instance, which the Federal Deposit Insurance Corporation has taken over, the agency has sent letters to 9,000 people who hold securitized mortgages it believes it can modify. But it has also found another 20,000 it can’t touch.

“I would like to believe what you are saying,” a skeptical Mr. Frank told Mr. Deutsch. “But as Chico said to Groucho, ‘Who are you going to believe, me or your own eyes?’ ”

In response, Mr. Deutsch told the committee that his organization, the American Securitization Forum, was working on a solution to the problem by bringing “all the parties together that own mortgage-backed securities to create a streamlined process.” In other words, all the investors were going to get in a room together and figure out how to redo the contracts to make mortgage modifications possible. Or so Mr. Deutsch seemed to be promising.

That was exactly what Mr. Frank had been waiting for. He pounced. “Tell them that if they are worried we will intrude legislatively, they can make us go away. But only if their effort works, and is meaningful,” he said.

And that is when I realized Mr. Frank’s intent. Earlier in his career, perhaps, he might have enjoyed a confrontation with Mr. Frey. But now, as the most powerful Congressional Democrat grappling with the financial crisis, he had more important things on his mind. He had called this hearing to deliver a message to the securitization industry. Mr. Deutsch was his appointed messenger.

Afterward, surrounded by reporters, Mr. Frank sent the message again, even more strongly. “We cannot interfere with existing contracts,” he said. “And we are not going to spend a penny of taxpayers’ money buying up loans that should never have been made in the first place. But preventing foreclosures is at the top of the agenda. We’ll see if Deutsch can do what he says he can do. If not, we are poised to introduce legislation that they won’t like.”

If that doesn’t move the securitization industry to do something to help homeowners, nothing will.

The next day, the scene shifted to the House Committee on Oversight and Government Reform, headed by Congress’s grand inquisitor, Henry Waxman of California. As a general rule, I don’t have much patience for Mr. Waxman’s accusatory style. He calls a hearing to investigate the cause of the cataclysmic bankruptcy at Lehman, and then spends the whole time berating the former chief executive, Richard Fuld, over his compensation. Hearings to him are blood sport, not fact-finding missions.

Mr. Waxman’s hearing on Thursday was supposed to be an inquiry into the role of unregulated hedge funds in the credit crisis. To that end, Mr. Waxman had assembled five hedge fund billionaires, including Ken Griffin, head of the Citadel Investment Group; John Paulson, who made billions betting against mortgage-backed securities; and George Soros.

With the exception of Mr. Soros, who arrived with a smile on his face and copies of his latest book under his arm, the hedge fund managers approached the witness table with expressions ranging from trepidation to dread. James Simons, who runs the hedge fund firm Renaissance Technologies, seemed to visibly shrink as the cameramen crowded around him.

At first, it looked like Mr. Waxman was going to use the hearing the way he usually does: to hammer his unfortunate witnesses. Twice in his short opening statement, he pointedly mentioned that each of the five hedge fund managers had made more than $1 billion in 2007. But then Mr. Waxman asked his first question, and suddenly the tenor changed.

“Do you believe that the collapse of large hedge funds pose systemic risk?” he began. “And does this justify greater federal regulation?” That question, in turn, provoked one of the most amazing hearings I’ve ever attended, not because sparks flew but because the hedge fund managers responded with answers I never thought I would hear in my lifetime.

They all agreed with Mr. Waxman, and with the other Congressional questioners, that in certain cases hedge funds could indeed pose systemic risk. All but Mr. Griffin said they would favor at least some regulation of hedge funds. They all agreed on the need for more disclosure. They said they had no problem turning over now-hidden information about their portfolios to a federal regulator. Mr. Simons and several others (though, again, not Mr. Griffin) said that if Congress changed the tax laws in ways that caused them to have to pay more taxes, they would be O.K. with that. I almost fell out of my chair.

As the hearing approached its end, Mr. Waxman happily ticked off all the things they had agreed to. Though they may all wake up tomorrow and wonder what had come over them during their testimony, what’s done is done. They can’t take their words back.

And next year, as a new Congress and a new president begin the task of coming up with better regulations for the financial system, you can bet that the words of those hedge fund managers will be cited again and again. In fact, if you want to point to the day when hedge fund regulation became a foregone conclusion, it was this Thursday.

Later, after the hearing was over, Mr. Waxman shook hands with Mr. Simons. “Thank you,” he said. “It was a good hearing.” Then he broke into a wide grin. “Very substantive,” he added.

He sounded surprised.

Our question:  how many leaks of information on the government declaration of "fitness" will take down how many banks?  How much did this editorial do to prevent it?
So far, 3 Buffett pronouncements: first, buy American;  second, who knew?  Third, oops, fell off a cliff.  FYI:  supported President Obama during campaign.

A Roadblock to Brawny Bank Reform
January 4, 2014

Regulators made some real progress last year attacking the risks of too-big-to-fail banks. The Volcker Rule and other Dodd-Frank reforms were completed, and, perhaps even more important, three big regulators devised a proposal for tougher capital rules intended to ensure that banks would never require a government bailout when their risky bets went bad.

But action on that last crucial bit of business has ground to a halt. Officials at the Federal Deposit Insurance Corporation had hoped that the rule they proposed last July along with the Federal Reserve Board and the Comptroller of the Currency would be set in stone by the end of the year. It was not.

It is unclear why. But last month, Bloomberg News reported that unnamed Fed officials were suggesting that approval of the proposed leverage ratio be put off until overseas regulators agreed to a framework that would apply to their nations’ banks as well.

Arguing for international agreement on regulations is a time-honored stall tactic among industries interested in thwarting tough rules. But why would the Fed or any bank overseer want to wait for other regulators? Barbara Hagenbaugh, a spokeswoman for the Federal Reserve, says it supports a strong leverage ratio. But she adds that the regulator expects a global agreement soon on changes to an international leverage ratio established in 2010. “The definitional changes should not cause a decline in required capital at the largest banking firms compared with a U.S. leverage ratio proposal the agencies issued in the summer,” she said.

United States banking regulators would support incorporating these definitions into the pending proposal, she said, while retaining the higher leverage ratio than called for in the international agreement.

But Jeremiah O. Norton, a member of the F.D.I.C.’s board, says he thinks it is wrong to delay voting on the rule. “I’m concerned that the inertia of not acting will take over and win,” he said. As it was proposed last summer, the leverage ratio would require big banks to increase the capital they have on hand to absorb losses by 2018.

To compute a leverage ratio, a bank would divide its tangible common equity, a measure of a company’s readily accessible capital, by its total assets. Under the proposed rule, the nation’s largest federally insured banks would have to show leverage ratios of at least 6 percent, double the 3 percent required under international capital standards currently set by the Basel Committee on Banking Supervision.

Banks’ parent companies would be required to have leverage ratios of 5 percent. Institutions failing to maintain these levels would face limits on discretionary bonus payments to employees as well as on dividends they distribute to shareholders.

One of the ratio’s primary benefits is that it is much harder to manipulate than other methods used to calculate capital requirements, like those based on risks associated with a particular type of asset. Before the credit crisis, for example, mortgage securities were considered relatively low-risk assets and didn’t require large amounts of capital to be set aside in case of losses. We saw what happened with that.

Another plus to the proposed ratio is that it would include large bank holdings that are currently excluded from required capital calculations. These include trillions of dollars in derivatives positions held by the banks as well as assets carried by related entities that do not show up on the institution’s balance sheet. By holding capital against these positions, the risks they pose to the banks would be reduced.

Tougher leverage ratios have many fans. Among them are Sheila Bair, the former chairwoman of the F.D.I.C. and the current chairwoman of the Systemic Risk Council; Paul A. Volcker, the former Fed chairman; and John S. Reed, the former head of Citibank.

Big banks, however, don’t like them so much. Larger capital set-asides, after all, reduce their profit potential. A comment letter sent last October by three bank lobbying organizations not only urges United States regulators to wait for their international colleagues to agree on capital standards, but also advises them to conduct a study of the rule’s effect on banks’ ability to lend. In other words, the proposed leverage ratio would reduce lending — a familiar criticism of tighter regulations.

There is no doubt that a higher ratio would force the largest banks to hold more capital. As of the second half of 2013, the most recent figures available, leverage ratios at the eight largest United States banks averaged 4.3 percent; the ratio for the rest of the nation’s banks was about double that.

And yet a failure of banking behemoths would pose the greatest threat to our financial stability. Thomas M. Hoenig, vice chairman of the F.D.I.C. and a strong supporter of the proposed leverage ratio, noted in a speech last month in Dublin that the eight largest United States global banking firms hold nearly $15 trillion of assets, the equivalent of about 90 percent of our nation’s gross domestic product. As such, he said, the nation’s economy is more vulnerable than ever to these banks’ mistakes or maneuverings.

Leverage ratios at large foreign institutions are even lower. As of the second quarter of 2013, a group of the 16 largest overseas banks had an average leverage ratio of 3.86 percent. Clearly, foreign banks would have to add much more capital if they had to meet the more stringent American ratio rule.

There may be another reason that overseas institutions and their regulators don’t like the idea of United States banks being better capitalized under the new rule. Dennis M. Kelleher, president of Better Markets, a nonpartisan group that promotes sound banking practices, said that if American regulators didn’t have to worry about their own institutions failing in a crisis, they wouldn’t feel compelled to rescue overseas banks, as they did in 2008.

“Nine of the top 20 largest users of Fed emergency lending facilities in 2008 and 2009 were foreign banks, and 10 of the top 16 recipients of payouts in the A.I.G. rescue were foreign banks,” Mr. Kelleher said, referring to the American International Group. “They want the U.S. on the hook again, backstopping the global system.”

Last week, Mr. Hoenig said he still hoped the proposed leverage ratio would be adopted by the end of February.

“In 2006 and 2007 when many of these institutions had leverage ratios under 3 percent, what was the consequence?” Mr. Hoenig asked. “Enormous loss of wealth in the crisis, millions of people being put out of work because banks didn’t have the capital necessary to absorb their losses. Let’s learn from that experience. Nothing is to be gained by waiting.” 

Frank Comes Home to the Facts
National Review  Online
Larry Kudlow
August 20, 2010 5:16 P.M.

The congressman acknowledges that market processes work. Can Obama?

Can you teach an old dog new tricks? In politics, the answer is usually no. Most elected officials cling to their ideological biases, despite the real-world facts that disprove their theories time and again. Most have no common sense, and most never acknowledge that they were wrong.

But one huge exception to this rule is Democrat Barney Frank, chairman of the House Financial Services Committee.

For years, Frank was a staunch supporter of Fannie Mae and Freddie Mac, the giant government housing agencies that played such an enormous role in the financial meltdown that thrust the economy into the Great Recession. But in a recent CNBC interview, Frank told me that he was ready to say goodbye to Fannie and Freddie.

“I hope by next year we’ll have abolished Fannie and Freddie,” he said. Remarkable. And he went on to say that “it was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.” He then added, “I had been too sanguine about Fannie and Freddie.”

When I asked Frank about a long-term phase-out plan that would shrink Fannie and Freddie portfolios and mortgage-purchase limits, and merge the agencies into the Federal Housing Administration (FHA) for a separate low-income program that would get government out of middle-income housing subsidies, he replied: “Larry, that, I think, is exactly what we should be doing.”

Frank also said that any federal housing guarantees should be transparently priced and put on budget. But he added that the private sector must be encouraged to re-enter housing finance just as the government gradually withdraws from it.

Some would say Frank’s mea culpa is politically motivated in advance of an election where bailout nation and big government are public enemies number one and two. Of course, poll after poll shows that the $150 billion Fan-Fred bailout, which the Congressional Budget Office estimates could rise to $400 billion, is detested by voters and taxpayers everywhere.

In fact, these failed government agencies are in such bad shape that they can’t even pay Uncle Sam the dividends owed under the conservatorship deal reached two years ago. That’s right. In order to pay a $1.8 billion dividend on Treasury department stock, Fan and Fred had to borrow $1.5 billion from — you guessed it — the Treasury.

Then there’s this head-scratching detail: In an absolutely outrageous move last Christmas Eve, President Obama signed off on $42 million in bonuses for the top twelve Fannie and Freddie executives, including $6 million apiece for the two CEOs. (Hat tip to attorney Stephen B. Meister.)

Voters are on to all this. So politics may indeed be motivating Barney Frank’s turnaround. But I’m going to credit him with more than that.

I think Chairman Frank watched these government behemoths descend into hell and then witnessed the financial catastrophe that ensued. And I think he has come to realize that the whole system of federal affordable-housing mandates that was central to the real-estate collapse — including the mandates on Fannie and Freddie and the myriad bad decisions made by private banks and other lenders in response to the government’s overreach — simply needs to be abolished.

Noteworthy is the fact that Treasury Secretary Tim Geithner has come to a similar conclusion. Geithner told a recent Washington conference on the future of housing finance that the system needs fundamental change. He said, “We will not support a return to the system where private gains are subsidized by taxpayer losses.”

Of course, the withdrawal of housing markets from government programs, and the onset of a reinvigorated private sector for providing mortgages, must be done gradually over a period of years. But it is possible that the federal mortgage madness is coming to an end.

We will have to see if Congress really does say good-bye to Fan and Fred, as Republicans like Jeb Hensarling are advocating. Equally important, we will have to see if the federal affordable-housing mandates created by Congress and implemented by HUD and banking regulators are similarly repealed.

And then we will have to see if reformed federally guaranteed housing insurance includes larger down-payments, stricter underwriting standards, and greater reliance on private capital markets, lenders, and insurers. In other words, we need to see if housing will be restored to a market-based system and removed from the government-backed system that has proved so disastrous.

The broader lesson here is that government planning doesn’t work. And if left to their own devices, market processes will work. I don’t know if President Obama gets this. But my hat goes off to a man who does, Chairman Barney Frank.

Blackstone Raises $5 Billion for Second Rescue Lending Fund
September 3, 2013

NEW YORK — Blackstone Group LP said on Tuesday it had raised $5 billion from investors for its second rescue lending fund, underscoring how alternative asset managers are looking to displace banks in providing financing to companies in distress.

Five years after the collapse of Lehman Brothers, banks are facing increasingly stringent financial regulations that have left an opening for investment firms such as Blackstone in areas that banks are retreating from.

Bennett Goodman, who helps manage Blackstone's credit investment arm called GSO, last year called the Volcker rule, which limits banks from taking on risky bets using their balance sheets, an "Employment Act for GSO."

Blackstone said in a statement on Tuesday that the new fund, GSO Capital Solutions Fund II, was oversubscribed by investors and proved more popular than its first such fund, which raised over $3.25 billion in 2010.

Unlike banks that often rely on their balance sheets for proprietary trading and investing, Blackstone and other alternative asset managers have at their disposal long-dated capital they have raised from pension funds, insurance firms and other institutional investors.

GSO has deployed to date more than $4 billion in lending to distressed companies facing liquidity issues, with a focus on North America and Western Europe, Blackstone said.

Credit assets accounted for $62.2 billion of Blackstone's total assets under management of $229.6 billion as of the end of June. Real estate accounted for $63.9 billion, private equity for $53.3 billion and hedge fund assets for $50.1 billion.

Obama claims a major victory in sweeping financial overhaul deal
By JIM KUHNHENN Associated Press Writer
Article published Jun 26, 2010

House and Senate negotiators reached a dawn agreement Friday on legislation that redefines federal oversight of the financial industry and, following the signing of the health care act in March, adds another milestone to mark the Obama presidency.

President Barack Obama declared victory Friday after congressional negotiators reached agreement on a sweeping overhaul of rules overseeing Wall Street.

Lawmakers shook hands on the compromise legislation at 5:39 a.m. after Obama administration officials helped broker a deal that cracked the last impediment to the bill - a proposal to force banks to spin off their lucrative derivatives trading business. The legislation touches on an exhaustive range of financial transactions, from a debit card swipe at a supermarket to the most complex securities deals cut in downtown Manhattan.

Speaking to reporters as he left the White House to attend an economic summit of world leaders in Canada, the president said he was gratified by Congress' work and said the deal included 90 percent of what he had proposed. He said the bill, forged in the aftermath of the 2008 financial meltdown, represents the toughest financial overhaul since the Great Depression.

"We've all seen what happens when there is inadequate oversight and insufficient transparency on Wall Street," he said. "The reforms working their way through Congress will hold Wall Street accountable so we can help prevent another financial crisis like the one that we're still recovering from."

Asked by reporters whether he can get the financial measure through the Senate, Obama said, "You bet."

With the new health care law, passage of the legislation would give Obama a second major triumph that he and Democrats can take to voters as they head toward tough congressional elections in November. Senate Democrats are now trying to coalesce around the third big-ticket item on Obama's agenda, passage of clean energy legislation.

Obama said he will discuss the regulations with other leaders at the Toronto meeting because the recent economic crisis proves that the world's economies are linked.

Lawmakers hope the House and Senate will approve the compromise legislation by July 4. Republicans complained the bill overreached and tackled financial issues that were not responsible for the financial crisis.
The bill would set up a warning system for financial risks, created a powerful consumer financial protection bureau to police lending, forced large failing firms to liquidate and set new rules for financial instruments that have been largely unregulated.

"It took a crisis to bring us to the point where we could actually get this job done," Senate Banking Committee Chairman Christopher Dodd said.

In its breadth, the legislation would affect working class homebuyers negotiating their first mortgage as well as international finance ministers negotiating international regulatory regimes.

The bill came together in during a time of high unemployment for American workers, huge bonuses for bankers and rising antipathy toward bank bailouts.

"It is reassuring to know that when public opinion gets engaged it will win," said Rep. Barney Frank, the chairman of the House-Senate panel that merged competing bills.

House negotiators voted a party line 20-11 in favor of the final agreement; senators voted 7-5, also along party lines.

Jim Dunigan, managing executive of investments for PNC Wealth Management in Philadelphia, said investors are relieved that they now know what the bill will look like. "It clears the playing field a little bit so at least you know what you're up against and you can start to plan around that. The no man's land that they were in while they were crafting the final bill left too much uncertainty," Dunigan said.

Financial stocks rose in early trading Friday, as traders were relieved that banks would be allowed to continue most kinds of transactions.

JPMorgan Chase & Co. rose 2 percent, while Citigroup Inc. climbed 2.1 percent.

Frank and Dodd set a furious pace for lawmakers in their last day of talks. Their goal, in part, was to hand Obama a deal going into this weekend's summit. The compromise did not address any restructuring of the government-related mortgage giants Fannie Mae and Freddie Mac. Republicans tried to shift the debate to those two, to no avail.

Overhauling those agencies "should have been our top priority," said Rep. Spencer Bachus, R-Ala., the top Republican on the House Financial Services Committee. He said the bill focused on many areas unrelated to the financial crisis.

The government took over Fannie and Freddie in 2008 after they suffered heavy loan losses in the housing crash. Their collapse has cost $145 billion and the Obama administration has pledged to cover unlimited Fannie and Freddie losses through 2012, lifting an earlier cap of $400 billion.

In a blow to Obama, the consumer protection agency would not regulate auto dealers, even though they assemble loans for millions of car buyers. Payday lenders and check cashers would be regulated, but enforcement would be left to states or the Federal Trade Commission.

To pay for the costs of the bill, negotiators agreed to assess a fee on banks with assets of more than $50 billion and hedge funds of more than $10 billion in assets to raise $19 billion over 10 years.

The final agreement capped an all-night marathon session of public and private deal making. House Speaker Nancy Pelosi, D-Calif., stepped in to press agreement on one of the final obstacles.

As they worked toward the home stretch early Friday, negotiators softened a contentious Wall Street restriction that would force large bank holding companies to spin off their lucrative derivatives business.
The deal, negotiated between the White House and Sen. Blanche Lincoln, D-Ark., eliminated one of the last major sticking points.

Derivatives are complex securities often used by corporations to hedge against market fluctuations. But they also have become speculative instruments for financial institutions, the most notorious of which were credit default swaps that hedged against loan failures.

In the House, moderate Democrats and members of the New York congressional delegation fought to remove Lincoln's language.

Under the agreement banks would only spin off their riskiest derivatives trades. Banks get to keep some of their lucrative business based on trades in derivatives related to interest rates, foreign exchanges, gold and silver. They could even arrange credit default swaps, the notorious instruments blamed for the meltdown, as long as they were traded through clearing houses. Banks could trade in derivatives with their own money to hedge against market fluctuations.

Negotiators also limited the ability of banks to carry out their own high-risk trades or invest in hedge funds and private equity funds.

Bank holding companies that have commercial banking operations would not be permitted to trade in speculative investments. But negotiators agreed to let bank holding companies invest in hedge funds and private equity funds, setting an investment limit of no more than 3 percent of their capital. There are no such conditions on banks now.

3 Fla. banks, 1 each in Nev., Calif. shut down
By MARCY GORDON, AP Business Writer
Fri May 28, 9:56 pm ET

WASHINGTON – Regulators on Friday shut down three banks in Florida and one each in Nevada and California, bringing the number of U.S. bank failures this year to 78.

The Federal Deposit Insurance Corp. took over the Florida banks, all owned by holding company Bank of Florida Corp. They are Bank of Florida-Southeast, based in Fort Lauderdale, with $595.3 million in assets; Bank of Florida-Southwest, based in Naples, with $640.9 million in assets; and Bank of Florida-Tampa Bay, based in Tampa, with $245.2 million in assets.

The FDIC also seized Las Vegas-based Sun West Bank, with $360.7 million in assets, and Granite Community Bank, located in Granite Bay, Calif., with $102.9 million in assets.

EverBank, based in Jacksonville, Fla., agreed to acquire the assets and deposits of the failed Florida banks. Los Angeles-based City National Bank is assuming all the assets and deposits of Sun West Bank, and Tri Counties Bank, based in Chico, Calif., is assuming those of Granite Community Bank.

In addition, the FDIC and EverBank agreed to share losses on the three Florida banks' loans and other assets. Losses will be shared on $437.3 million of Bank of Florida-Southeast's assets, $568.1 million of Bank of Florida-Southwest's assets and $210.8 million of Bank of Florida-Tampa Bay's assets. The federal agency and City National Bank agreed to share losses on $280 million of Sun West Bank's assets. The FDIC is sharing with Tri Counties Bank losses on $89.3 million of Granite Community Bank's assets.

The failures of the three Florida banks are expected to cost the deposit insurance fund a total of about $203 million. The failures of Sun West Bank are expected to cost around $96.7 million, while losses at Granite Community Bank are expected to cost $17.3 million.

The three Florida closures brought to 13 the number of bank failures this year in Florida, a state with one of the highest concentrations of bank collapses and where the meltdown in the real estate market brought an avalanche of soured mortgage loans. Fourteen banks in the state failed last year.

California is another state with a heavy concentration of bank failures, and Granite Community Bank was the sixth bank to fall in the state this year, following the shutdown of several big California banks in the last months of 2009. Seventeen banks failed in California last year.

Georgia and Illinois also are high on the list of states with concentrated bank failures.

With 78 closures nationwide so far this year, the pace of bank failures is more than double that of 2009, which was already a brisk year for shutdowns. By this time last year, regulators had closed 36 banks. The pace has accelerated as banks' losses mount on loans made for commercial property and development.

The number of bank failures is expected to peak this year and to be slightly higher than the 140 that fell in 2009. That was the highest annual tally since 1992, at the height of the savings and loan crisis. The 2009 failures cost the insurance fund more than $30 billion. Twenty-five banks failed in 2008, the year the financial crisis struck with force, and only three succumbed in 2007.

As losses have mounted on loans made for commercial property and development, the growing bank failures have sapped billions of dollars out of the deposit insurance fund. It fell into the red last year, and its deficit stood at $20.7 billion as of March 31.

The number of banks on the FDIC's confidential "problem" list jumped to 775 in the first quarter from 702 three months earlier, even as the industry as a whole had its best quarter in two years.

A majority of institutions posted profit gains in the January-March quarter. But many small and mid-sized banks are likely to continue to suffer distress in the coming months and years, especially from soured loans for office buildings and development projects.

The FDIC expects the cost of resolving failed banks to grow to about $100 billion over the next four years.

The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund.

Depositors' money — insured up to $250,000 per account — is not at risk, with the FDIC backed by the government.

Moody's: TARP for Insurers Beneficial

Filed at 12:51 p.m. ET
June 2, 2009

CHARLOTTE, N.C. (AP) -- Although some insurance companies have shied away from accepting bailout money from the government, Moody's Investors Service says the insurers and their creditors would benefit from the funds.

Last month, the government said it would allow six major insurers to tap the Treasury Department's Troubled Asset Relief Program for additional capital. Half have already declined the aid.

TARP money has the potential to materially increase companies' capital reserves and give them more financial flexibility, Moody's said in a report issued Tuesday.

The credit rating agency says any additional capital would help the insurers prevent ratings downgrades and improve their ratings outlooks -- which are currently negative for most insurers.

U.S. Says Ailing Banks Need $75 Billion
May 8, 2009

Federal regulators told the country’s 19 largest banks that they must raise $75 billion in extra capital by November, a more upbeat verdict on the health of the financial system than the industry had feared just two months ago.

Ten of the 19 bank holding companies deemed “too big to fail” by the Obama administration will be required to raise additional capital, according to the results of the government’s stress tests, released late Thursday afternoon. But the 10 banks will have to raise much less capital than some analysts had expected as recently as a few days ago.

“With the clarity today’s announcement will bring, we hope banks are going to get back to the business of banking,” Treasury Secretary Timothy F. Geithner said during a news briefing on Thursday afternoon.

Mr. Geithner noted that banks had a long way to go to restore the nation’s confidence in the financial industry, and that they could get a start in generating good will by lending more.

Regulators and bank executives alike predicted that most of the institutions will be able to build up the necessary capital from private sources — either by selling off assets or by converting shares of nonvoting preferred stock into nonvoting shares of common stock. Some banks immediately said they would raise money by selling shares or assets.

Citigroup must raise $5.5 billion in new capital, on top of converting $45 billion in rescue funds into ordinary stock, which would give the United States ownership of 36 percent of Citi.

Bank of America must find $34 billion, but it is likely to resist filling its capital gap by converting $45 billion in preferred shares from the government’s bailout money into common stock. Instead, the bank is expected to sell off assets, including a stake in China Construction Bank.

And GMAC, the financing arm of General Motors, will need to find $11.5 billion in capital. The government last week gave GMAC more federal money after it agreed to be the lender for purchasers of Chrysler vehicles while Chrysler is in bankruptcy. GMAC earlier converted to a bank holding company, and the Treasury Department gave it $5 billion from the Troubled Asset Relief Program fund.

The stress tests are aimed at estimating how much each bank would lose if the economic downturn proved even deeper than currently expected. Under the worst-case scenario — an unemployment rate of 10.3 percent, an economic contraction of 3.3 percent this year and a 22 percent further decline in housing prices — the losses by the 19 banks could total $600 billion this year and next, or 9.1 percent of the banks’ total loans, regulators concluded. Losses to the banks’ loan portfolios alone could total $455 billion this year and next.

Mr. Geithner said the stress tests provided far more disclosure than is typical on financial companies. “That will make it possible for more capital to come into the financial system,” he said. “That will make it easier for banks to be in a position to ultimately repay the government.”

The Treasury secretary said the regulators were conservative in their estimates of the loan losses and in their expectations of future earnings. “This was a carefully designed, credible test,” he said.

Regulators did not push for the ouster of any chief executives or demand any specific board shake-ups. They also said they would not be subjecting the rest of the nation’s banks to similar stress tests or require them to have additional capital buffers.

Because most of the test results had largely leaked out earlier this week, the actual numbers did little to jolt investors one way or the other. Indeed, industry executives proclaimed that they had passed the test with flying colors and proven their many critics wrong.

“The results of the stress should put to rest the harmful speculation we have seen over the past few months,” declared Edward L. Yingling, president of the American Bankers Association, almost five hours before Treasury and Fed officials actually released the results.

Despite the reassuring picture outlined by Mr. Geithner and the Federal Reserve chairman, Ben S. Bernanke, the stress test results hardly silenced the raging debate between industry cheerleaders and skeptics about whether the exercise amounted to a whitewash of the banks’ problems and vulnerabilities. Critics have long complained that the Fed and the other federal bank regulatory agencies had designed a test that was too easy to fail.

“It’s window-dressing,” said Bert Ely, a longtime bank analyst based in Alexandria, Va. Mr. Ely was particularly skeptical about letting companies bolster their balance sheets by converting preferred shares to common.

“That won’t add one extra dollar to a bank’s capital buffer against losses,” Mr. Ely complained.

From the start, Treasury and Fed officials have steered between what Mr. Bernanke recently described as “Scylla and Charybdis” — being perceived as too easy and too coddling of banks on the one hand — or so tough and antagonistic that investors and consumers alike became even more anxious.

But the big question, which remains unanswered, is whether Mr. Geithner and Mr. Bernanke will in fact confront banks in a way that regulators have been afraid to do for years — or whether regulators will simply revert to business as usual once the crisis eases.

In a joint statement on Wednesday evening, federal regulators pointedly noted that they reserved the right to shake up the top management and boards of banks that have to rely on the government for their additional capital.

In an interview on Wednesday on “The Charlie Rose Show” on PBS , Mr. Geithner tried to emphasize the government’s willingness to oust top executives if necessary.

“This crisis was deeply damaging in part because of this great loss of confidence in the quality of leadership at America’s financial institutions across the board,” Mr. Geithner said in the interview. “These institutions, all of them, have a long way to go to rebuild that sense of confidence and trust that’s necessary for any financial system to run well.”

The International Monetary Fund has argued that financial institutions still have about $2.3 trillion worth of unrecognized losses from toxic assets tied to American mortgages and the collapse of the housing bubble.

Treasury and Fed officials said those estimates overstated the size of the hole that faced bank holding companies. Banks hold only a portion of those toxic assets, they noted, and American banks hold an even smaller portion of them. In addition, they noted, American banks have already booked hundreds of billions of dollars in losses over the past year.

But Douglas Elliott, an analyst at the Brookings Institution, said he was surprised at how little extra capital the Federal Reserve and other regulators had demanded that big banks raise. Mr. Elliott had predicted as recently as Tuesday that the banks would have to raise a total of $100 billion to $200 billion, rather than less than $80 billion.

“We have to be careful not to over-interpret the results,” Mr. Elliott wrote in a research memo on Thursday morning. The tests are supposed to estimate how solid the 19 big banks — defined as those with more than $100 billion in assets — would be if the economy endured an “adverse scenario” even worse than forecasters were already expecting.

But while the “adverse scenario” was supposed to be unlikely, it is not that much worse than what has happened so far. It assumed, for example, that unemployment would average 8.9 percent in 2009 and peak at slightly more than 10 percent next year. As it happens, unemployment hit 8.5 percent in April and could top 9 percent as early as Friday, when the Labor Department releases its employment report for May.

That said, analysts also agree that the economic outlook has brightened considerably in the last month or so. A wide array of recent indicators — from consumer spending and consumer confidence to home sales and credit conditions — now suggest that the economy is stabilizing and that a fragile recovery will indeed begin later this year.

Share prices of the major banks, which had crashed to nearly penny-stock levels earlier this year, have doubled and tripled since early March. Part of that reflects diminishing fears about even higher default rates on home mortgages, car loans and credit card debt.

But part of it may also be the result of the soothing messages from Mr. Geithner and Mr. Bernanke that the stress tests would ultimately make people feel more confident rather than less about the reliability of the big banks.


The Stress Test Results

April 26, 2009

The nation’s largest banks received the results of their government stress tests on Friday. The rest of us should get the news next week. For the Obama administration, the tests could be a major success, if they provide clear data on which to base a bank-rescue strategy. Or the tests could be one of its worst failures, especially if they are not seen as credible. That would feed already profound financial anxieties and make it even harder for President Obama to manage the economic crisis.

The tests are designed to gauge each bank’s capital, and its ability to withstand various stressful economic scenarios. Regulators have released information about how the tests were done, but it does not appear detailed enough for independent analysts to verify the results.

If they are credible, the stress tests will finally provide the information the government needs to deal forcefully with the banking mess — assuming the White House also has the will to do what is needed.

Banks that are shown to be well capitalized can basically fend for themselves. That does not mean they should be entirely freed from the government’s yoke. Bank health, where it exists, is due largely to hundreds of billions of dollars of taxpayer assistance and federal guarantees. The rules and monitoring that come with that — including curbs on executive pay and oversight from the bailout’s inspector general — should be loosened gradually as government support is withdrawn.

Banks that are ailing are a tougher problem. When the stress tests were announced in February, the plan called for giving weak banks six months to raise private capital. If they could not, the government would provide it, taking in exchange a potentially big ownership stake.

If the capital shortfalls are severe, however, it is all but certain that private capital will not be forthcoming. The government should act quickly to plug the holes. That will mean asking an angry Congress — and an angry public — for more money. The Obama administration is not eager to do that. But it will have a better chance if the results of the stress tests and their implications are fully disclosed and explained.

The administration should use the money to recapitalize the banks. And it should take temporary control if that infusion results in a majority stake.  The banks’ current executives would be fired, shareholders would be wiped out and bondholders would take a haircut. But that is the best way to ensure that the banks’ finances are quickly and efficiently restructured, and the taxpayers’ investment is protected.  The Obama administration has so far rejected that path. Instead it is proposing to provide government subsidies to private investors to get them to buy up the banks’ bad assets. At best, that would be an indirect path to recapitalization — at worst, another expensive and ultimately inadequate bailout attempt.

The administration needs to craft a rescue that is comprehensive rather than piecemeal, that favors taxpayers over investors, and that aims for a prompt, transparent solution. If the tests have been rigorous, the White House has the information it needs. Now the question is how it will use it.

Op-Ed Contributor
The Greenback Effect
August 19, 2009


IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.

The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.

To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.

They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.

The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.

To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.

Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.

The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.

Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).

Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.

Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.

Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future just as it has in the past.

But it was a wise man who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.

Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Buffett Says Economy Fell Off Cliff

Filed at 11:27 a.m. ET
March 9, 2009

NEW YORK (Reuters) - Warren Buffett said on Monday the U.S. economy had "fallen off a cliff" but would eventually recover, although a rebound could kindle inflation worse than that experienced in the late 1970s.

Speaking on CNBC television, the 78-year-old billionaire said the country is experiencing a "close to the worst-case" scenario of falling business activity and rising unemployment, causing consumer confidence and spending to tumble.  Buffett called on Democratic and Republican policymakers to set aside partisan differences and unite under the leadership of President Barack Obama to wage an "economic war" that will fix the economy and restore confidence in banking.

He urged policymakers and regulators to communicate their efforts better to the public, though he stopped short of major, specific policy recommendations.

"People are confused and scared," he said. "People can't be worried about banks, and a lot of them are."

Buffett spoke nine days after his insurance and investment company Berkshire Hathaway Inc said quarterly profit fell 96 percent, largely from losses on derivatives contracts. Berkshire's book value per share fell 9.6 percent in 2008, the worst year since Buffett took over in 1965.


Buffett said Americans, including himself, did not predict the severity of home price declines, which led to problems with securitizations and other debt whose value depended on home prices continuing to rise, or at least not plummet.

"It was like some kids saying the emperor has no clothes, and then after he says that, he says now that the emperor doesn't have any underwear either," Buffett said. "We want to err on the side next time of not allowing big institutions to get as unchecked on leverage as we have allowed them to do."

Consumers too should reduce their reliance on debt such as credit cards, he said. "I can't make money borrowing money at 18 or 20 percent," said Buffett, ranked as the second-richest American by Forbes magazine in October. "I'd go broke."

Buffett said the economy was mere hours away from collapse last September when credit markets seized up, Lehman Brothers Holdings Inc went bankrupt and insurer American International Group Inc got its first bailout.  While praising efforts by Federal Reserve Chairman Ben Bernanke and others to stimulate the economy, he said the economy "can't turn around on a dime" and that their efforts could trigger higher inflation once demand rebounds.

"We are certainly doing things that could lead to a lot of inflation," he said. "In economics there is no free lunch."

The stock of Omaha, Nebraska-based Berkshire has fallen by half since September. Growth in some units such as auto insurer Geico Corp has been offset by weakness elsewhere, including jewelry retailers that Buffett said have "gotten killed."

Buffett said Berkshire will write less catastrophe insurance this year after investing roughly one-third of its cash in high-yielding securities issued by General Electric Co, Goldman Sachs Group Inc and other companies.  In morning trading, Berkshire Class A shares were down $795, or 1.1 percent, at $72,400. Their 52-week high is $147,000, set last September 19, Reuters data show.


Buffett called on banks to "get back to banking" and said an overwhelmingly number would "earn their way out" of the recession, even if stockholders don't go along for the ride.

Saying that "a bank that's going to go broke should be allowed to go broke," Buffett nevertheless added that the "paralysis of confidence" in the sector is "silly" because of safeguards such as deposit insurance.

He said Wells Fargo &amp; Co and U.S. Bancorp, two large Berkshire holdings, should appear "better than ever" three years from now, while the ailing Citigroup Inc, which Berkshire does not own, would probably keep shrinking.

Bank of America Corp Chief Executive Kenneth Lewis, in a Wall Street Journal opinion piece on Monday, agreed that the vast majority of banks will survive. Berkshire has reported a small stake in Bank of America stock.  Buffett said he still expects Berkshire's derivatives contracts, whose value depends on where four stock indexes trade a decade and more from now, to be profitable.

Over 10 years, he said, "you will do considerably better owning a group of equities" than U.S. Treasuries.

Buffett also defended his imperfectly timed October opinion piece for The New York Times, where he said he was moving non-Berkshire holdings in his personal account to stocks.

"I stand by the article," he said. "I just wish I had written it a few months later."

Buffett cancelled municipal debt bet 5 years early: WSJ

20 August 2012

(Reuters) - Berkshire Hathaway Inc terminated a large wager on the municipal-bond market five years early, the Wall Street Journal quoted a person familiar with the transaction as saying.

In a quarterly regulatory disclosure filed this month, the Warren Buffett-owned company terminated credit-default swaps insuring $8.25 billion of municipal debt.  The paper said the early termination is deepening questions among some investors about the risks of buying debt issued by cities, states and other public entities.  The WSJ quoted the source as saying that Buffett's bet that more than a dozen U.S. states would keep paying their bills on time had been made before the financial crisis.

The insurance-like contracts, which required Berkshire to pay in the event of bond defaults, were bought by Lehman Brothers Holdings Inc in 2007, more than a year before the firm filed for bankruptcy, the WSJ quoted the source as saying.  Buffett declined to comment on the details of the termination with the Lehman Brothers estate, the paper added. It is not clear if the move would leave the company with a profit or loss on the wager.

Berkshire was not immediately available for comment outside regular office hours.

Stop Coddling the Super-Rich
August 14, 2011


OUR leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched.

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.

These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places.

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot.

To understand why, you need to examine the sources of government revenue. Last year about 80 percent of these revenues came from personal income taxes and payroll taxes. The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It’s a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot.

Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent.

The taxes I refer to here include only federal income tax, but you can be sure that any payroll tax for the 400 was inconsequential compared to income. In fact, 88 of the 400 in 2008 reported no wages at all, though every one of them reported capital gains. Some of my brethren may shun work but they all like to invest. (I can relate to that.)

I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them. Many have joined the Giving Pledge, promising to give most of their wealth to philanthropy. Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.

Twelve members of Congress will soon take on the crucial job of rearranging our country’s finances. They’ve been instructed to devise a plan that reduces the 10-year deficit by at least $1.5 trillion. It’s vital, however, that they achieve far more than that. Americans are rapidly losing faith in the ability of Congress to deal with our country’s fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness. That feeling can create its own reality.

Job one for the 12 is to pare down some future promises that even a rich America can’t fulfill. Big money must be saved here. The 12 should then turn to the issue of revenues. I would leave rates for 99.7 percent of taxpayers unchanged and continue the current 2-percentage-point reduction in the employee contribution to the payroll tax. This cut helps the poor and the middle class, who need every break they can get.

But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.

My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.

Warren E. Buffett is the chairman and chief executive of Berkshire Hathaway.

Warren Buffett demands to pay more tax
15 August 2011 Last updated at 11:25 ET

Warren Buffett has called for Congress to make him and his "mega-rich friends" pay more income tax.

In a piece in the left-leaning New York Times, the billionaire investor and philanthropist said the rich should do more to help plug the deficit.

He called for a tax rise for those earning more than $1m (£600,000), and a higher rate for those on over $10m.

In a rebuttal of arguments made by Republicans, he said tax rises would not hurt investment or jobs in the US.

He told Congress to "stop coddling the super-rich".

"Our leaders have asked for 'shared sacrifice'," he wrote. "But when they did the asking, they spared me."

Challenge to Congress

Mr Buffett explained that, like many top earners, his income came entirely from investments rather than from employment, which are subject to lower taxes in the US.

He said last year he paid an effective tax rate of 17.4%, less than the 33% to 41% paid by the employees in his office.

He dismissed arguments made by senior Republicans, including House majority leader John Boehner, that taxing higher earners more would damage investment and job creation in the US.

"I have yet to see anyone... shy away from a sensible investment because of the tax rate on the potential gains," he said.

He pointed out that the effective tax rate paid by the highest earners was much higher in the 1980s and 1990s than in the last decade, and yet job creation was much higher in the earlier decades.

His proposed tax rises would not affect 99.7% of taxpayers, he claimed, adding that a 2% payroll tax cut passed in December should stay in place to help the poor and middle classes.

However, Mr Buffett also set a challenge for the Democrats who are set to form a special Congressional committee with Republicans to agree $1.5tn in budget savings.

He said "job one for the 12 [committee members] is to pare down some future promises that even a rich American can't fulfil".

While Republicans have been implacably opposed to tax rises, Democrats have been loathe to cut healthcare and social security benefits that some economists claim will become unaffordable as Americans live longer and baby-boomers retire.

Warren Buffett: "We're still in a recession"
By Jonathan Stempel
Thu Sep 23, 2010 10:50 am ET

NEW YORK (Reuters) – Billionaire investor Warren Buffett said the U.S. economy remains in recession, disputing this week's assessment by a leading arbiter of economic activity that the downturn ended more than a year ago.

"We're still in a recession," Buffett told CNBC television in an interview broadcast on Thursday. "We're not gonna be out of it for a while, but we will get out."

On Monday, the National Bureau of Economic Research said the world's largest economy ended an 18-month recession in June 2009, but cautioned that its assessment did not mean normal activity had resumed.

Buffett said he defines a recession differently from the NBER, saying it ends when real per capita gross domestic product returns to its pre-downturn level.

President Barack Obama said on Monday that economic weakness is "still very real" for the millions of Americans who are out of work, have seen the value of their homes fall, or are mired in debt.

Buffett, 80, runs Berkshire Hathaway Inc, which has roughly 80 operating businesses. "A great majority" of these businesses are "coming back slowly," he said.

Berkshire's operations cover a broad swath of the economy, including the Burlington Northern Santa Fe railroad, Dairy Queen ice cream, Geico auto insurance, and luxury jewelers such as Borsheim's.

Shipments at Burlington Northern are "61 percent of the way back," Buffett said. "Our carpet business, our brick business, our insulation business, they're not back 61 percent, but they are moving back."

On Tuesday, the U.S. Federal Reserve, which has already driven short-term lending rates to near zero, said it is prepared to provide additional stimulus to support economic expansion and avert possible deflation.

"We've used up a lot of bullets," Buffett said. "And we talk about stimulus. But the truth is, we're running a federal deficit that's 9 percent of GDP. That is stimulative as all get out."

Buffett's $45 billion net worth makes him the second-richest American, trailing only Microsoft Corp co-founder Bill Gates, Forbes magazine said on Wednesday.

Berkshire Class A shares fell 0.6 percent to $123,077 in morning trading. They traded as high as $126,160, their highest level in nearly 23 months, on September 17.

Buffett: Economy on mend, health care big problem
By Jonathan Stempel
March 1, 2010

NEW YORK, March 1 (Reuters) – Warren Buffett said the U.S. economy has passed the worst of its troubles but faces an uneven recovery as consumers keep a tight rein on spending.

"We got past Pearl Harbor," Buffett said Monday on the CNBC business news channel. "We will win the war."

But he said business remains slow in many areas, including at his insurance and investment company Berkshire Hathaway Inc (BRKa.N) (BRKb.N), as consumers adopt a more cautious mindset about spending.

He also said consumers must fend off "out of control" health care costs, "a national emergency" that is a "tapeworm" eating at the economy. Buffett called on lawmakers in Washington to adopt reforms that would restrict costs more than any current proposal does.

Even as the economy improves, Buffett said it may not make stocks more attractive to buy. He lamented not buying more aggressively last March, when stocks were hitting decade lows.

"My enthusiasm for stocks is in direct proportion to how far they go down," he said. "Stocks are a lot less attractive now than they were a year ago."

Buffett spoke two days after Berkshire published its annual report, including Buffett's widely read shareholder letter.  Full-year profit at the Omaha, Nebraska-based company rose 61 percent. Berkshire has about 80 operating businesses that sell things from car insurance, carpeting and ice cream to industrial components, paint and underwear.

"There's a few businesses that have really had a fair amount of bounce," while others show no improvement, Buffett said. "It's getting better, but at a very, very slow pace."

He said U.S. President Barack Obama is doing a good job in restoring the country from difficult conditions. "I give Obama high marks," he said.


Berkshire's $26.5 billion takeover last month of Burlington Northern Santa Fe Corp, the second-largest U.S. railroad, cost Berkshire the last of its "triple-A" ratings from major credit agencies.

Buffett raised about half of the $15.9 billion of cash used for the takeover, Berkshire's largest, in credit markets.  He said the downgrades had virtually no impact on Berkshire, perhaps costing just a few hundredths of a percentage point in extra yield on its debt.

"I think we deserve a quadruple-A" rating, he joked. Such a rating does not exist.

Buffett offered praise for Goldman Sachs Group Inc (GS.N) and Chief Executive Lloyd Blankfein, which advised on the takeover, and in which Berkshire owns $5 billion of preferred shares and warrants to buy an equal amount of stock. The warrants are in the money because Goldman stock has risen.  Goldman still receives much criticism over the extent to which it may have contributed to the recent financial crisis, and the debt crisis now afflicting Greece.

Berkshire acquired the Goldman securities in September 2008 at the height of the financial crisis, and Buffett said he would do it again under the circumstances if he had another chance.

"It's a very, very strong, well-run business," he said. On Blankfein, he said, "You cannot find a better manager."


Buffett also said there remain three potential candidates to succeed him as chief executive, including one ready to take over immediately if needed.

He praised David Sokol, who chairs Berkshire's MidAmerican Energy unit and whom he installed to slash debt and restore profit at the troubled NetJets plane leasing unit. "What Dave has done there is miraculous," Buffett said.

Buffett also praised Ajit Jain, a 25-year Berkshire veteran who runs much of its insurance business and talks with Buffett each day. He called Jain "incredibly valuable" to Berkshire and said he is responsible for a huge part of its success.

Paper gains drive Berkshire's profit skyward
By JOSH FUNK, AP Business Writer
Feb. 27, 2010

OMAHA, Neb. – Berkshire Hathaway Inc. delivered a fourth-quarter profit more than 25 times higher than the previous year thanks largely to an unrealized $1 billion gain on derivative contracts and investments.

Warren Buffett's company said Saturday that its insurance and utility divisions also performed well and helped offset weakness in subsidiaries tied to the economy, such as NetJets, Acme Brick and other manufacturing and retail businesses.

Berkshire generated $3.056 billion in net income, or $1,969 per Class A share, during the quarter. That's up from $117 million net income, or $76 per share, a year ago.

The three analysts surveyed by Thomson Reuters had expected Berkshire to report fourth-quarter earnings per share of $1,208.33 on average.

Buy American. I Am.
Published: October 16, 2008

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.


A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short