Archive for April, 2009
Unemployment rates rose in all of the nation’s largest metropolitan areas for the third straight month in March, with Indiana’s Elkhart-Goshen once again logging the biggest gain.
The United States Labor Dept. reported Wednesday all 372 metropolitan areas tracked saw jobless rates move higher last month from a year earlier. Elkhart-Goshen’s rate soared to 18.8 percent, a 13 percentage-point increase. That was the fourth-highest jobless rate in the country.
The Indiana region has been hammered by layoffs in the recreational vehicle industry. RV makers Monaco Coach Corp. Keystone RV Co. and Pilgrim International have sliced hundreds of jobs.
The jobless rate jumped to 17 percent in Bend, Ore., a 9.2 percentage-point rise and the second-biggest monthly gainer. Bend for years has been the center of the central Oregon real estate and construction boom, largely fueled by retirees from California. Many of them bought vacation or retirement homes in high-end rural developments called destination resorts, which the state began allowing in 1984 as an exception to land use laws that otherwise aim to preserve rural land from development.
The credit crunch and falling home prices have made it harder for retirees to cash out of their existing homes. Part of the area also features easy access to skiing, mountain biking, hunting, fishing and golf. But as unemployment rises, state analysts have cited weakness in the service and entertainment sectors.
Roger Lee, executive director of the nonprofit Economic Development for Central Oregon, said losses in construction jobs have battered the area, with the impact rippling through retail and service sectors. The region’s unemployment rate also has been affected by a growth in the labor force. State officials believe that is due to spouses going back into the job market to keep households afloat and retirees returning to work to supplement damaged retirement savings accounts.
Rounding out the top three was North Carolina’s Hickory-Lenoir-Morganton, which saw its unemployment rate rise to 15.4 percent last month, an increase of 9.1 percentage points. That region has been especially hard hit by heavy layoffs in manufacturing amid a recession that is nearing a record as the longest in the post World War II period.
El Centro, Calif., continued to claim the highest unemployment rate _ 25.1 percent. The jobless rate there is notoriously high because there are so many unemployed seasonal agriculture workers.
April 30th, 2009
It was surely a surprise when the WSJ hired Thomas Frank to write an opinion column. Anyone who has read either of his bestsellers, What’s The Matter With Kansas? or The Wrecking Crew understands that his view of American politics just doesn’t fit in with the other editorial page writers there. I, for one, am very happy he is writing there and his column today should be required reading for every citizen who cares about the future of this country.
Why Congress Won’t Investigate Wall Street
Republicans and Democrats would find themselves in the hot seat.
The famous Pecora Commission of 1933 and 1934 was one of the most successful congressional investigations of all time, an instance when oversight worked exactly as it should. The subject was the massively corrupt investment practices of the 1920s. In the course of its investigation, the Senate Banking Committee, which brought on as its counsel a former New York assistant district attorney named Ferdinand Pecora, heard testimony from the lords of finance that cemented public suspicion of Wall Street. Along the way, the investigations formed the rationale for the Glass-Steagall Act, the Securities Exchange Act, and other financial regulations of the Roosevelt era.
A new round of regulation is clearly in order these days, and a Pecora-style investigation seems like a good way to jolt the Obama administration into action. After all, the financial revelations of today bear a striking resemblance to those of 1933. In his own account of his investigation, Pecora described bond issues that were almost certainly worthless, but which 1920s bankers sold to uncomprehending investors anyway. He told of the bonuses which the bankers thereby won for themselves. He also told of the lucrative gifts banks gave to lawmakers from both political parties. And then he told of the banking industry’s indignation at being made to account for itself. It regarded the outraged public, in Pecora’s shorthand, as a “howling mob.”
The idea of a new Pecora investigation is catching on, particularly, but not exclusively, on the left.
It’s probably not going to happen, though, in the comprehensive way that it should. The reason is that understanding our problems, this time around, would require our political leaders to examine themselves.
The crisis today is not solely one of bank misbehavior. This is also about the failure of the regulators — the Wall Street policemen who dozed peacefully as the crime of the century went off beneath the window.
We have all heard the official explanation for this failure, that “the structure of our regulatory system is unnecessarily complex and fragmented,” in the soothing words of Treasury Secretary Tim Geithner. But no proper Pecora would be satisfied with such piffle. The system was not only complex, it was compromised and corrupted and thoroughly rotten even in the spots where its mandate was simple.
After all, we have for decades been on a national crusade to slash red tape and stifle regulators. Over the years, federal agencies have been defunded, their workers have grown dispirited, their managers, drawn in many cases from antiregulatory organizations, have seemed to care far more about industry than the public.
Consider in this connection the 2003 photograph, rapidly becoming an icon of the Bush years, in which James Gilleran, then the director of the Office of Thrift Supervision (it regulates savings and loan associations) can be seen in the company of several jolly bank industry lobbyists, holding a chainsaw to a pile of rule books. The picture not only tells us more about our current fix than would a thousand pages about overlapping jurisdictions; it also reminds us why we may never solve the problem of regulatory failure. To do so, we would have to examine the apparent subversion of the regulatory system by the last administration. And that topic is supposedly off limits, since going there would open the door to endless partisan feuding.
But it’s not only Republicans who would feel the sting of embarrassment. Launching Pecora II would automatically raise this question: Whatever happened to the reforms put in place after the first go-round?
Now a different picture comes to mind. It’s Bill Clinton in November of 1999, surrounded by legislators of both parties, giving a shout-out to his brilliant Treasury Secretary Larry Summers, and signing the measure that overturned Glass-Steagall’s separation of investment from commercial banking. Mr. Clinton is confident about what he is doing. He knows the lessons of history, he talks glibly about “the new information-age global economy” that was the idol of deep thinkers everywhere in those days. “[T]he Glass-Steagall law is no longer appropriate to the economy in which we live,” he says. “It worked pretty well for the industrial economy, which was highly organized, much more centralized, and much more nationalized than the one in which we operate today. But the world is very different.”
It turns out the world hadn’t changed much after all. But the Democratic Party sure had. And while today’s chastened Democrats might be ready to reregulate the banks, they are no more willing to scrutinize the bad ideas of the Clinton years than Republicans are the bad ideas of the Bush years.
“We may now need to be reminded what Wall Street was like before Uncle Sam stationed a policeman at its corner,” Pecora wrote in 1939, “lest, in time to come, some attempt be made to abolish that post.”
Well, the time did come. The attempt was made. And we could use that reminder today.
The odds are against us but if Congress won’t do the right thing here, it is incumbent on all of us in the blogoshpere to keep raising awareness of every policy inconsistency and hypocrisy we see. Sooner or later, public opinion will catch up to the truth.
April 30th, 2009
http://www.businessinsider.com/will-government-guaranteed-bank-debt-hurt-public-borrowing-2009-4
It’s no secret the the federal government’s need to borrow has sky-rocketed. Thanks to the various bailouts and stimulus measures, expenditures by the feds have increased by one third and are likely to grow even higher. Meanwhile, the economic slowdown has decreased the amount the government collects in taxes. The only way to bridge the gap is more borrowing.
While many are confident that the global appetite for the soveriegn debt of the United States will remain robust, some of the government’s own programs may start to diminish that appetite. The government’s guarantees of various kinds of debt issued by financial institutions essentially makes some bonds issued by banks as “risk free” as Treasuries. But these bonds pay higher yields than government debt, which should make them more attractive for risk-adverse investors looking to maximize their returns on investment.
A financial sector panel took up this risk yesterday in Washington DC’s Hays Adams hotel. The occassion was a meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Finacial Markets Association, the leading securities industry trade association.
The member presented a slide indicating that debt issuance by sovereign issuers continues to rise. This was followed by a series of sides depicting flows into various asset classes. The member pointed out that Treasury issuance has benefited from a flight to quality and general risk aversion. Aggregate foreign inflows into US assets have shifted dramatically in favor of Treasuries.
So far the Treasury has benfitted from what is called a “flight to quality,” with investors seeking the safety of government securities in rocky markets where corporate debt and municipal debt is at risk of defaulting, the committee members were told in a presenation by one of its members. Because of this, the government has been able to borrow cheaply and the Treasury’s share of the overall debt market has been growing.
But the government’s guarantees may be creating competition for safe debt, which could mean the government’s borrowing costs would increase. Although the guaranteed bank debt is viewed as less liquid and less standardized than Treasuries, the ever-increasing size of the guaranteed debt offerings may at some point bite into the Treasuy’s market share.
The committee noted that issuance of quasi-governmental debt is projected to increase dramatically.
“One member stated that many of these assets were directly competing with Treasuries and cited an expected $50 billion of issuance of Build America bonds as an example. Another member noted that FDIC-backed debt offered a significant pick-up in yield over comparable Treasury debt and that substitution by traditional Treasury investors was occurring,” the offical minutes of the meeting explain.
The bottom line is thatpolicy makers should not assume that there is no cost to offering guarantees of private debt. Even if banks don’t default and so those guarantees never have to be paid out, at some point the growth of the quasi-government debt market will make it more difficult and more expensive for the government to borrow.
April 30th, 2009
http://blogs.telegraph.co.uk/ambrose_evans-pritchard/blog/2009/04/28/swine_flu_deflation
The markets have been remarkably relaxed about the rise in the World health Organization pandemic alert Phase 4 (sustained human to human transmission) – and tonight perhaps to Phase 5.
They seem not to care that confirmed cases of H1N1 avian-swine flu have spread to Israel, Spain, France, New Zealand, and Korea.
This surprises me. The WHO alert is the best objective indicator we have of rising risk, and the potential implications of Phase 4 or Phase 5 are .. well .. awful.
We can all argue about the likely damage from a “severe pandemic” along the lines of 1918 ‘Spanish Flu’ or the Neapolitan pandemic of 1775.
The World Bank has floated a figure of $3 trillion, or 4.8pc of global GDP. The US Congressional Budget Office has come up with something similar. These are arbitrary telephone book numbers.
But even if losses are less, we are still talking about a further deflationary shock to a world economy already tipping into debt deflation (though it might not be a uniform deflation, if shortages push up local food and fuel prices). It would certainly finish off half the global banking system.
It is too frightful to think about. That perhaps is why investors are doing exactly that: refusing to think about.
Over the last couple of days I have been deluged by notes from City analysts and economists suggesting that H1N1 avian-swine flu poses no great threat to the global economy because the authorities showed during the 2003 SARS epidemic in Asia that outbreaks can be contained.
This is a misreading of the threat we face.
SARS is a coronavirus. It is extremely hard to catch. Just 8,000 people were infected worldwide during the entire epidemic (10pc died).
Today’s H1N1 outbreak is an influenza virus, which is far more contagious.
Dr. Keiji Fukuda, the WHO’s assistant director-general, said it is already too late to stop the spread of the disease. “At this time, containment is not a feasible option.
It is entirely possible that we may see a very mild pandemic. I think we have to be mindful and respectful of the fact that influenza moves in ways we cannot predict.
The worst pandemic of the 20th century occurred in 1918, and it also started out as a relatively mild pandemic that wasn’t very much noticed in most places. Then in time it became a very severe pandemic, one of the most severe infectious disease episodes ever recorded.
Perhaps because so few market players studied science, or have a current link to science, they seem not to realize that the world’s virologists and flu experts are in a state of nail-biting, ashen-faced, fear.
Rob Carnell, chief economist at ING, is one of the exceptions. “We believe fear of infection will lead to drastically altered behaviour. It may be that swine flu does not tip the human fear scale sufficiently, but if it did, with the economy already in tatters, the results could be catastrophic,” he said in a note today.
We may be lucky. The virus may indeed prove mild – like the Hong Kong flu in 1968 – or burn out altogether as it mutates.
The early cases in the US and Canada give hope. So does the apparent fall-off in the fatality rates in Mexico.
But as Dr Fukuda said, nobody can pre-judge the virulence of this pandemic. Least of all the markets.
April 30th, 2009
The auditors of nearly one-quarter of companies feel that the companies may not live out the year.
Auditors have become increasingly doubtful about their clients’ ability to continue as going concerns, according to the most recent report on the subject by Audit Analytics, which has tracked the number of such going-concern opinions this decade in a recently released report. With calendar year-end 2008 filings still coming in to the Securities and Exchange Commission, the research firm estimates there will be 3,589 going-concern opinions eventually filed for 2008 annual reports, an increase of 9% compared to last year’s total of 3,293 going-concern opinions.
Audit Analytics made this prediction based on a compilation of regulatory filings made as of late March for 2008 10-Ks. Its data suggests auditors’ going-concern doubts were more commonplace compared to the previous year. If the firm’s estimate is correct, the number of auditors’ documented worries about their clients’ viability will reach the highest level this decade.
In 2001, 19.2% of companies noted their auditors’ going-concern uncertainty. But only 15% had those qualifications in 2003, according to the Audit Analytics report. For 2007 10-Ks, that number rose to 20.9%, reflecting the highest number of going-concern doubts since 2000. Now the total could reach 23.4% percent, the firm’s researchers say.
The audit profession has been predicting a surge in the number of going-concern doubts since last fall, when auditors were on the verge of beginning their annual reviews for calendar year-end companies amid the rough economy. Last month, on the heels of General Motors revealing its auditors’ going-concern doubts, Grant Thornton CEO Ed Nussbaum told CFO.com there will be “an unprecedented number of going-concern footnote disclosures and clarification from the auditors” forthcoming.
Auditors must consider several factors during their annual client reviews that may signal that a company won’t be in existence 12 months from now. Among them: negative recurring operating losses, working capital deficiencies, loan defaults, unlikely prospects for more financing, and work stoppages. Auditors also consider such external issues as legal proceedings and the loss of a key customer or supplier.
Auditors’ going-concern evaluations don’t stop there. If they have doubts about a company’s future, they tend to confer with their client’s management and review the company’s plans for overcoming the problems noted and decide whether those plans can likely keep the company in business. If they still aren’t satisfied, then the auditors will explain why they have “substantial doubt” about the company’s ability to stay a going concern in an opinion filed with the company’s 10-K.
In late March, when Audit Analytics compiled the data, only 10,895 auditor opinions had been filed for year-end 2008 with the SEC. That means that Audit Analytics’ forecast could be off, since the data doesn’t account for about 5,000 10-Ks that were still due. Still left to be collected was data from smaller companies, late filers, and foreign filers. But it’s likely that companies that have missed the SEC’s filing deadlines are dealing with financial issues, possibly involving discussions over a going-concern qualification with their auditors, suggests Don Whalen, research director at Audit Analytics.
To be sure, what the findings mean has yet to be determined . Still unclear is whether audit firms are being more conservative in their forecasts because regulators have indicated they will keep a close watch on going-concern opinions.
Or is it a fact that a higher number of companies have a seriously uncertain financial future? “I’m not really sure what’s driving this,” Whalen says. “Obviously, there’s a lot of economic pressure right now with the credit crunch and the dearth in consumer spending. At the same time, it might be that … auditors are being a little more cautious in their assumptions.”
Accounting firms have been criticized for not reliably raising going-concern red flags for investors before their clients file for bankruptcy protection. Past academic studies have found audit firms have made going-concern qualifications for just over half of the companies that eventually go bankrupt, according to Joseph Carcello, a University of Tennessee professor.
Last fall, in a practice alert, the Public Company Accounting Oversight Board warned auditors that companies’ ability to stay viable during the economic downturn would likely slide — effectively putting audit firms on notice that this would be at least one area high on the radar of PCAOB inspectors in the coming year. Further, the board is revising its going-concern rules to align them more with those of the Financial Accounting Standards Board.
Audit Analytics hasn’t analyzed whether certain kinds of firms were more likely to issue going-concern opinions than others. Whalen noted, however, that smaller audit firms as well as larger ones have expressed doubts about their clients’ viability. “The smaller audit firms are not shying away,” he says.
http://www.cfo.com/article.cfm/13525910?f=most_read
April 29th, 2009
We appear to be less than halfway through writedowns, and the fundraising and recapitalizations to date are falling short of the equity hits. Wolf thinks the ability to raise funds privately is nada.
Banks also have significant maturing debt in 2010 and 2011. If they can’t roll it at an attractive price, that means balance sheet shrinkage. And believe it or not, the myriad of lending support programs represents only 1/3 of the IMF’s estimate of total needs. Yes, the US has the FDIC guaranteeing bank bond issues; it will probably expand that program further. But if that continues (likely) it again continues the dangerous pretense that banks are private concerns that claim the need to give employees decent pay, when they are in fact wards of the state and should be regulated as utilities. or put into receivership and restructured.
The gloomy calculus does not include the implosion of the shadow banking system, a bigger source of credit than the banking system. Unless private securitization can be restored (ahem, no progress on the needed reforms), even more capital in the banking system is needed.
Under Chairman Bernanke, the central banking system has opened a range of extraordinary funding facilities that are providing additional credit to banks, large financial institutions, and primary brokers, as well as guaranteeing commercial paper. All of this activity is happening in secret, with the Federal Reserve disbursing money and credit to the large financial institutions that have put our credit markets and economy at risk. The Federal Reserve has resisted FOIA requests, and will not make public even the terms of payment for the contractors it is using to run these extraordinary programs.
At the very least, Congress and the public should have knowledge about which banks are receiving taxpayer money, what they are doing with the money, and the credit risk taxpayers are taking on through the Federal Reserve. The Senate language encourages such transparency, allowing for audits and public disclosure of secret loans and financial assistance from the Federal Reserve to these large institutions.
From the Financial Times:
The International Monetary Fund’s latest Global Financial Stability Report provides a cogent and sobering analysis of the state of the financial system. The staff have raised their estimates of the writedowns to close to $4,400bn. …
To put this in context, the writedowns estimated by the IMF are equal to 37 years of official development assistance at its 2008 level…
The IMF estimates the additional equity requirements of the banks as well. It starts from total reported writedowns up to the end of 2008, which come to $510bn in the US, $154bn in the eurozone and $110bn in the UK. The capital raised to the end of 2008 is, again, $391bn in the US, $243bn in the eurozone and $110bn in the UK. But the IMF estimates additional writedowns in 2009 and 2010 at $550bn in the US, $750bn in the eurozone and $200bn in the UK. Against this, it estimates net retained earnings at $300bn in the US, $600bn in the eurozone and $175bn in the UK.
The IMF points out that the ratio of total common equity to total assets – a measure investors burned by more sophisticated risk-adjusted ratios increasingly trust – was 3.7 per cent in the US at the end of 2008, but 2.5 per cent in the eurozone and 2.1 per cent in the UK. The IMF concludes that the extra equity needed to reduce leverage to 17 to 1 (or common equity to 6 per cent of total assets) would be $500bn in the US, $725bn in the eurozone and $250bn in the UK. For a 25 to 1 leverage, the required infusion would be $275bn in the US, $375bn in the eurozone and $125bn in the UK.
In current dire circumstances, the chances of raising such sums from markets are zero. Part of the reason is that they could still prove to be too little…..
Yet these are not the only sums required. Governments have so far provided up to $8,900bn in financing for banks, via lending facilities, asset purchase schemes and guarantees. But this is less than a third of their financing needs. On the assumption that deposits grow in line with nominal GDP, the IMF estimates that the “refinancing gap” of the banks – the rollover of short-term wholesale funding, plus maturing long-term debt – will rise from $20,700bn in late 2008 to $25,600bn in late 2011, or a little over 60 per cent of their total assets (see chart below). This looks like a recipe for huge shrinkage in balance sheets. Moreover, even these sums ignore the disappearance of securitised lending via the so-called “shadow banking system”, which was particularly important in the US.
The IMF also provides new estimates of the ultimate fiscal costs of rescue efforts (see chart below). At the high end are the US and the UK, at 13 per cent and 9 per cent of GDP, respectively. Elsewhere, costs are far lower. These, happily, are affordable sums. Indeed, compared with the recession’s impact on public debt, they look quite manageable…
A better reason for refusing to bail out banks is its dire effect on incentives. The alternative must then be bankruptcy. Jeremy Bulow of Stanford University and Paul Klemperer of Oxford University have advanced a scheme that would do this neatly. Valuable banking functions of each institution would be split off into a new “bridge” bank, leaving liabilities (apart from deposits) in the old bank. Creditors left behind would be given equity in the new bank. Governments could “top up” some creditors beyond this level, without making all creditors whole, as now.
Respectable opinion assumes that it would be best to provide full bail-outs of creditors in systemically important institutions. The rationale for this is that it is the only way to eliminate further panic. The objection is not the fiscal cost. It is that a limited number of large, complex and “too-big-to-fail” institutions would then emerge. Their creditors would naturally believe they were lending to governments. This would be a recipe for yet bigger catastrophes in future years.
Yet imposing large losses on creditors is indeed risky. It would probably have to be done simultaneously everywhere. Only after it was obvious that surviving banks were sound would anybody be willing to lend to them without guarantees.
Even worse than this choice between grim alternatives is the fact that the path to recovery is likely to be slow, whichever is chosen. As the latest World Economic Outlook notes in an important chapter, recessions that follow financial crises are unusually severe. So, too, are globally synchronised recessions. But now we are living through a globally synchronised recession that coincides with a huge financial crisis that emanates from the core countries of the world economy, particularly the US. This is a recipe for a long recession and a weak recovery. Whatever is done about the financial system, “deleveraging” is the order of the day (see chart). The UK’s position in this looks dire. But that of the US looks quite bad, too, even compared with that of Japan in the 1990s.
For better or worse, the authorities have decided to bail out their financial systems with taxpayer money. Almost all the affected countries should be able to afford to do this, at least on the IMF’s numbers. So now, having made the fundamental decision to prevent bankruptcy, they must return their financial systems to health as swiftly as they possibly can.
Even so, that will prove to be a necessary, not a sufficient, condition for a return to robust economic health. The overhang of debt makes deleveraging inevitable. But it has hardly begun. Those who hope for a swift return to what they thought normal two years ago are deluded.
April 29th, 2009
Google the expression “damned if you do, damned if you don’t,” and a picture of Timothy F. Geithner ought to pop up. The Treasury secretary embodies everything that’s perceived to be wrong with the government’s response to the economic and financial crisis. Since taking the Treasury job, he has been a lightning rod for criticism. And it’s about to get worse.
In the next week, as the Treasury and Federal Reserve complete their closely watched stress tests on the largest U.S. banks and announce how they will proceed to keep the financial system functioning, Geithner will assuredly come in for new blasts from all points on the political spectrum. The potential for this stress test process to add to the economy’s woes is significant. And no matter what he does, it will be judged wrong by someone.
From critics on the left, Geithner has already drawn flack for not moving aggressively to nationalize the biggest banks — at least those that are seen as the most unstable. Because the potential collapse of these tottering institutions poses an enormous risk, the thinking goes, government regulators should take them over now and run them for the benefit of the public — before they can do even more damage.
From the right, the fear is that nationalization is exactly what Geithner intends. Whether by design or by default, the Treasury might end up as the biggest holder of common stock in some of these banks and would possess the ability to dictate their operations in ways that even the most aggressive regulators never could.
Criticism of the stress tests — and fear about where they will lead — comes even from precincts that are relatively politically neutral. For instance, the decision to release details about these high-profile reviews of bank books was a mistake, says longtime bank stock analyst Richard Bove of Rochdale Securities in Lutz, Fla.
In a note last week to his clients, Bove said the reviews may reveal potential losses on various types of loans of between 4 percent and 6 percent in each of the next two years, and up to 10 percent on credit cards. That’s several times the level of losses ever experienced, he said. The result could be a mandated pullback in the availability of credit, which would further sink the economy.
Geithner has put himself in a box, Bove argued in an e-mailed elaboration. If the stress tests show big troubles, shareholders and depositors alike might flee those institutions, leading to failures of weak banks and takeovers by the Federal Deposit Insurance Corporation. If the tests show little immediate problem, the public and the rest of the financial system won’t trust the results.
“There is no good exit strategy here,” Bove wrote. “The history of bank regulation is clear, the results of bank audits are not to be made public. The reason is that the potential for panicking the public is high.”
READ THE ENTIRE COMMENTARY AT http://www.cqpolitics.com/wmspage.cfm?parm1=5
April 29th, 2009
…..beside all the pain and suffering…..
From Reuters’ Tan Ee Lyn this past weekend:
… health experts have long warned that the next flu pandemic was overdue and urged countries around the world to prepare for the dramatic economic impact of such a catastrophe.
Below are estimates of economic costs of such a disaster:
• The World Bank estimated in 2008 that a flu pandemic could cost $3 trillion and result in a nearly 5 percent drop in world gross domestic product. The World Bank has estimated that more than 70 million people could die worldwide in a severe pandemic.
• Australian independent think-tank Lowy Institute for International Policy estimated in 2006 that in the worst-case scenario, a flu pandemic could wipe $4.4 trillion off global economic output.
• Two reports in the United States in 2005 estimated that a flu pandemic could cause a serious recession of the U.S. economy, with immediate costs of between $500 billion and $675 billion.
• One report, from the Congressional Budget Office, said hospitals would have difficulty controlling infection and might become sources for spreading the illness.
• A second report by New Jersey-based WBB Securities LLC predicted a one-year economic loss of $488 billion and a permanent economic loss of $1.4 trillion to the U.S. economy.
• SARS in 2003 disrupted travel, trade and the workplace and cost the Asia Pacific region $40 billion. It lasted for six months, killing 775 of the 8,000 people it infected in 25 countries.
April 28th, 2009
http://www.ft.com/cms/s/0/705574f2-3356-11de-8f1b-00144feabdc0,s01=1.html
The Federal Reserve has been hobbled by at least two major shortcomings that were primarily responsible for the current and several previous credit crises. Its failure to spot the importance of changing financial markets and its commitment to laisser faire economics were big mistakes and justify a fundamental overhaul of the Fed.
The first of these shortcomings was its failure to recognize the significance for monetary policy of structural changes in the markets, changes that surfaced early in the postwar era. The Fed failed to grasp early on the significance of financial innovations that eased the creation of new credit. Perhaps the most far-reaching of these was the securitisation of hard-to-trade assets. This created the illusion that credit risk could be reduced if instruments became marketable.
Moreover, elaborate new techniques employed in securitisation (such as credit guarantees and insurance) blurred credit risks and raised – from my perspective, many years ago – the vexing question, “Who is the real guardian of credit?” Instead of addressing these issues, the Fed was highly supportive of securitisation.
One of the Fed’s biggest blind spots has been its failure to recognise the problems that huge financial conglomerates would pose for financial stability – including their key role in the current debt overload. The Fed allowed the Glass-Steagall Act to succumb without appreciating the negative consequences of allowing investment and commercial banks to be put together. Within two decades or so, financial conglomerates have come to utterly dominate financial markets and financial behaviour. But monetary policymakers failed to recognise that these behemoths were honeycombed with conflicts of interest that interfered with effective credit allocation.
Nor did the Fed recognise the crucial role that the large financial conglomerates have played in changing the public’s perception of liquidity. Traditionally, liquidity was an asset-based concept. But this shifted to the liability side, as liquidity came to be virtually synonymous with easy borrowing. That would not have happened without the marketing efforts of large institutions.
My second major concern about the conduct of monetary policy is the Fed’s prevailing economic libertarianism. At the heart of this economic dogma is the belief that markets know best and that those who compete well will prosper, while those who do not will fail.
How did this affect the Fed’s actions and behaviour? First, it explains to a large extent why the Fed did not strongly oppose the removal of Glass-Steagall restrictions.
Second, it also helps explain why the Fed failed to recognise that abandoning Glass-Steagall created more institutions that were “too big to fail”.
Third, it diminished the supervisory role of the Fed, especially its direct responsibility to regulate bank holding companies. To be sure, the Fed’s supervisory responsibilities have never been very visible in the monetary policy decision-making process. But its tilt toward an economic libertarian approach pushed supervision a notch down just at a time when financial market complexity was on the rise. Fourth, as hands-on supervision slackened, quantitative risk modelling became increasingly acceptable. This approach, especially quantitative modelling to assess the safety of a financial institution, was far from adequate. But it worked hand in glove with a philosophy that markets knew best.
Fifth, adherence to economic libertarianism inhibited the Fed from using the bully pulpit or moral suasion to constrain market excesses. It is difficult to believe that recourse to moral suasion by a Fed chairman would be ineffective. Such public pronouncements about financial excesses are hard to ignore, reaching the broad public as well as market participants.
Sixth, the Fed’s increasingly libertarian philosophy underpinned its view that it could not know how to recognise a credit bubble but knew what to do once a bubble burst. This is a philosophy plagued with fallacies. Credit bubbles can be detected in a number of ways, such as rapid growth of credit, very high price/earnings ratios and very narrow yield spreads between high- and low-quality debt.
By guiding monetary policy in a libertarian direction, the Fed played a central role in creating a financial environment defined by excessive credit growth and unrestrained profit seeking. Major participants came to fear that if they failed to embrace the new world of securitised debt, proxy debt instruments, and quantitative risk analysis, they stood a very good chance of seeing their market shares shrink, top staff defect, and profits dwindle.
Ironically, the problem was made worse by the fact that the Fed was inconsistently libertarian. The central bank stuck to its hands-off approach during monetary expansion but abandoned it when constraint was necessary. And that, in turn, projected an unpredictable and inconsistent set of rules of the game.
We should, therefore, fundamentally re-examine the role of the Fed and the supervision of our financial institutions. Are the current arrangements within the Fed structure adequate – from its regional representation to its compensation for chairman and governors to its terms of office for governors? How can the Fed’s decision-making process be improved? If we were to create a new central bank from the ground up, how would it differ? At a minimum, the Fed’s sensitivity to financial excesses must be improved.
The writer is president, Henry Kaufman & Company
April 28th, 2009
http://www.nytimes.com/2009/04/24/business/24pensions.html?_r=1&ref=your-money
Decisions that the government will make soon on the future of General Motors and Chrysler could accelerate the decline of traditional pension plans, which have sheltered generations of workers from an impoverished old age.
Pension experts predict that a government takeover of the two giant plans would spur other auto companies and all types of manufacturers to abandon such benefits for competitive reasons.
For hundreds of thousands of retired auto workers, a federal pension takeover would mean sharply reduced benefits. For the federal agency that insures pensions, it would mean a logistical nightmare in the short term — and most likely a slow demise eventually as fewer and fewer small plans remain in the system and pay premiums.
So far, the prospect of a grueling grind through bankruptcy court has been a major deterrent to companies that might want to rid themselves of pension obligations. But retirement and labor specialists are watching closely to see whether the administration’s auto task force will give either of the auto companies an easier way to shed their huge pension funds, blazing a simplified trail for others to follow.
With or without a bankruptcy filing, the government is quietly making the preparations that would be needed to take over Chrysler’s pension plan, with its 255,000 participants, according to government officials.
Even if Chrysler manages to strike a deal to sell many of its assets to Fiat, perhaps in conjunction with a bankruptcy filing, experts doubt Fiat will agree to take on its pension plan without extraordinary assistance. One possibility being considered is a cash infusion of $1 billion from Daimler, which previously owned Chrysler and had agreed to backstop a pension failure for several years.
The future of General Motors’ pension plan is also unclear. G.M. has until June 1 to come up with an acceptable business plan. If it declares bankruptcy, it still may try to keep its pension plan afloat. G.M.’s plan for hourly workers, which covers 485,000 people, was in reasonably good shape until last fall’s market turmoil, and would not require cash contributions until 2013.
If one or both of these plans collapse, the federal agency that insures pension benefits, the Pension Benefit Guaranty Corporation, will lose a big source of the premium revenue it collects from companies with pension funds. But more important, the demise of the bellwether auto plans might set a template for other companies seeking to cut costs and stay competitive.
“If one of these companies solves its pension problem by shunting it off to the federal government, then for competitive reasons the others have to do the same thing,” said Zvi Bodie, a professor of finance at the Boston University School of Management and longtime observer of the government’s pension insurance system. “That is the death spiral.”
Though the automakers’ plans each have a gap between what they have on hand and what they owe their retirees over the years, if they failed, most of that shortfall would be made up by workers in the form of smaller benefits — not by the companies or the government.
The government estimated that Chrysler’s plan was $9.3 billion short as of last November — but said it would be responsible for only about $2 billion of that. Most of the shortfall would be sliced from workers’ benefits. At G.M., the estimated shortfall was $20 billion as of last November, but the government would assume $4 billion of obligations and G.M.’s workers would lose the rest.
When Daimler sold a majority stake in Chrysler in 2007 to a private equity firm, Cerberus, it promised to pay $1 billion into the government’s pension insurance program if the pension plan failed within five years. The Treasury could try to persuade Daimler to put some of that money into the plan to avoid a failure.
For years, traditional pensions — those that shield workers from market risk — have been in a slow decline, with troubled sectors like aviation and steel shedding their plans in bankruptcy court as new types of individually managed benefits like 401(k) plans have taken hold.
But big sectors, particularly manufacturing and financial services, have clung to the old plans. The Pension Rights Center, a consumer group in Washington, estimates that 18 million Americans are still building up such benefits every year, and millions more retirees are receiving guaranteed payments from their former employers.
“Those that are fortunate enough to have those plans are sleeping soundly,” said Karen Ferguson, director of the center.
The loss of the auto pensions would be devastating partly because Detroit sustains many other businesses and partly because of their history. It was the United Automobile Workers union, more than any other force, that pushed Congress to enact laws forcing companies to put money behind their pension promises and creating the federal guarantor. The failure of a major auto workers plan would be a blow to the whole system.
Not only would Ford have reason to opt out of the expense of maintaining a pension plan, but so would Toyota and Honda, which also have pension plans at their American plants, said Teresa Ghilarducci, a professor of economics at the New School for Social Research and former member of the P.B.G.C.’s advisory board.
Professor Ghilarducci said she believed the Obama White House had selected people for its auto task force who understood these stakes, and would strive to find some middle ground.
The pension insurance agency, currently operating with an $11 billion deficit, has long viewed the automakers’ plans with anxiety, though its officials declined to discuss the situation. G.M.’s plan alone is bigger than the guarantor. The agency has roughly $67 billion in assets to cover the benefits of nearly 4,000 failed pension plans; G.M. has $84 billion in trust just to cover promises to its own workers.
In a failure of that size, the agency’s immediate challenge would be logistical, not financial. Its insurance covers a simple benefit, not the much richer pensions negotiated over the years by the U.A.W. It would have to process applications from thousands and thousands of workers, most of whom would get the bad news that they were going to get less than promised.
The government’s maximum benefit is $54,000, but coverage falls off rapidly for workers who are younger when their plan fails. For a 62-year-old the maximum is $42,660, and for a 55-year-old, it is only $24,300.
Calculating which workers would bear how much of the losses would be fiendishly complex. The government’s rules favor older participants and contain tripwires and arbitrary cutoffs that can leave similar workers with sharply different benefits.
None of this can be sorted out in advance, because the calculations also depend on the amount of money in a pension fund on the day it terminates — something the pension benefits corporation does not yet know.
Some pension specialists, aware of these difficulties, are hoping the Obama administration’s auto task force will spare at least the G.M. pension fund. Not only would that let laid off workers keep receiving full benefits, but it could also break the death spiral among other plans.
For traditional pension plans, “maybe this is their last stand,” said Jeffrey B. Cohen, a partner with the law firm Ivins, Phillips & Barker in Washington who was chief counsel for the Pension Benefit Guaranty Corporation from 2005 to 2007. If the automakers’ plans fail, he added, “the biggest domino will have fallen for the P.B.G.C.”
This article has been revised to reflect the following correction:
Correction: April 25, 2009
An article on Friday about the implications of possible pension plan failures at General Motors and Chrysler misstated the maximum benefit guarantee under the federal government’s pension insurance program. The maximum is $54,000, for a person who is 65 or older when a company pension plan fails — not $42,660, which is the maximum for a person who is 62.
April 28th, 2009
From the New York Times:
Last June, with a financial hurricane gathering force, Treasury Secretary Henry M. Paulson Jr. convened the nation’s economic stewards for a brainstorming session. What emergency powers might the government want at its disposal to confront the crisis? he asked.
Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation’s most powerful financial institutions, stunned the group with the audacity of his answer. He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele A. Smith, then an assistant Treasury secretary.
The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars…..
But in the 10 months since then, the government has in many ways embraced his blue-sky prescription….
And more often than not, Mr. Geithner has been a leading architect of those bailouts, the activist at the head of the pack. He was the federal regulator most willing to “push the envelope,” said H. Rodgin Cohen, a prominent Wall Street lawyer who spoke frequently with Mr. Geithner.
Today, Mr. Geithner ….finds himself a locus of discontent… range of critics — lawmakers, economists and even former Federal Reserve colleagues — say that the bailout Mr. Geithner has played such a central role in fashioning is overly generous to the financial industry at taxpayer expense.
An examination of Mr. Geithner’s five years as president of the New York Fed, an era of unbridled and ultimately disastrous risk taking by the financial industry, shows that he forged unusually close relationships with executives of Wall Street’s giant financial institutions….
His actions, as a regulator and later a bailout king, often aligned with the industry’s interests and desires, according to interviews with financiers, regulators and analysts and a review of Federal Reserve records.
In a pair of recent interviews and an exchange of e-mail messages, Mr. Geithner defended his record, saying that from very early on, he was “a consistently dark voice about the potential risks ahead, and a principal source of initiatives designed to make the system stronger” before the markets melted down.
He ate lunch with senior executives from Citigroup, Goldman Sachs and Morgan Stanley at the Four Seasons restaurant or in their corporate dining rooms. He attended casual dinners at the homes of executives like Jamie Dimon, a member of the New York Fed board and the chief of JPMorgan Chase….for all his ties to Citi, Mr. Geithner repeatedly missed or overlooked signs that the bank — along with the rest of the financial system — was falling apart. When he did spot trouble, analysts say, his responses were too measured, or too late.
In 2005, for instance, Mr. Geithner raised questions about how well Wall Street was tracking its trading of complex financial products known as derivatives, yet he pressed reforms only at the margins…..
To Joseph E. Stiglitz, a Nobel-winning economist at Columbia and a critic of the bailout, Mr. Geithner’s actions suggest that he came to share Wall Street’s regulatory philosophy and world view….
In theory, having financiers on the New York Fed’s board should help the president be Washington’s eyes and ears on Wall Street. But critics, including some current and former Federal Reserve officials, say the New York Fed is often more of a Wall Street mouthpiece than a cop.
Willem H. Buiter, a professor at the London School of Economics and Political Science who caused a stir at a Fed retreat last year with a paper concluding that the Federal Reserve had been co-opted by the financial industry, said the structure ensured that “Wall Street gets what it wants” in its New York president: “A safe pair of hands, someone who is bright, intelligent, hard-working, but not someone who intends to reform the system root and branch.”….
Throughout the spring and summer of 2007, as subprime lenders began to fail and government officials reassured the public that the problems were contained, Mr. Geithner met repeatedly with members of Citigroup’s management, records show
From mid-May to mid-June alone, he met over breakfast with Charles O. Prince, the company’s chief executive at the time, traveled to Citigroup headquarters in Midtown Manhattan to meet with Lewis B. Kaden, the company’s vice chairman, and had coffee with Thomas G. Maheras, who ran some of the bank’s biggest trading operations.
(Mr. Maheras’s unit would later be roundly criticized for taking many of the risks that led Citigroup aground.)
His calendar shows that during that period he also had breakfast with Mr. Rubin. But in his conversations with Mr. Rubin, Mr. Geithner said, he did not discuss bank matters. “I did not do supervision with Bob Rubin,” he said.
In a May 15, 2007, speech to the Federal Reserve Bank of Atlanta, Mr. Geithner praised the strength of the nation’s top financial institutions, saying that innovations like derivatives had “improved the capacity to measure and manage risk” and declaring that “the larger global financial institutions are generally stronger in terms of capital relative to risk.”
Two days later, interviews and records show, he lobbied behind the scenes for a plan that a government study said could lead banks to reduce the amount of capital they kept on hand.
His calendars from 2007 and 2008 show that those interactions were a mix of the professional and the private.A bill sent recently by the Treasury to Capitol Hill would give the Obama administration extensive new powers to inject money into or seize systemically important firms in danger of failure. It was drafted in large measure by Davis Polk & Wardwell, a law firm that represents many banks and the financial industry’s lobbying group. Mr. Geithner also hired Davis Polk to represent the New York Fed during the A.I.G. bailout.
Treasury officials say they inadvertently used a copy of Davis Polk’s draft sent to them by the Federal Reserve as a template for their own bill, with the result that the proposed legislation Treasury sent to Capitol Hill bore the law firm’s computer footprints. And they point to several significant changes to that draft that “better protect the taxpayer,” in the words of Andrew Williams, a Treasury spokesman.
But others say important provisions in the original industry bill remain. Most significant, the bill does not require that any government rescue of a troubled firm be done at the lowest possible cost, as is required by the F.D.I.C. when it takes over a failed bank.
Traditionally, the New York Fed president’s intelligence-gathering role has involved routine consultation with financiers, though Mr. Geithner’s recent predecessors generally did not meet with them unless senior aides were also present, according to the bank’s former general counsel.
By those standards, Mr. Geithner’s reliance on bankers, hedge fund managers and others to assess the market’s health — and provide guidance once it faltered — stood out.
____________________________
This storm, like the tax fracas, will pass. But Geithner is nevertheless looking more and more like damaged goods. Geithner is captured by the industry. It will now be much easier for Obama to cut Geithner loose should that prove necessary. But with Summers still in the mix, I’m dubious that even an outster of Geithner would produce much of a change in policy direction.
April 27th, 2009
Regulators are supposed to tell you to obey the law, not to disobey the law. If you’re the CEO, your first obligation is not to your regulator, it’s to your institution and shareholders.”
-Jonathan R. Macey, deputy dean of Yale Law School
I have not commented on the allegations by Bank of America CEO Ken Lewis that he was forced into making a disastrous acquisition of Merrill Lynch.
Why? Because they appeared to me be utter and shameless nonsense, an attempt to worm out of responsibility. Indeed, the very statements by Bank of America CEO Ken Lewis appeared to be excuse-making for a lousy acquisition (which Bof A has quite the history of). Its the sort of weasely responsibility evading CEO speak we have come to expect these days. To be blunt, I was astonished anyone took them very seriously.
Yet they were taken seriously, by quite a few people — including a huge front page Wall Street Journal article. The mere accusation means that we are likely to see former Treasury Secretary Hank Paulson — a major cause of the credit crisis and a horrific bailout steward — up for a major grilling in Congress.
This morning, in the same WSJ venue, we learn that many of the statements Ken Lewis made under oath were directly contradicted by former Merrill CEO John Thain (but not under oath). Thain claims these understandings were in in writing.
One of these two CEOs is lying, and if its the guy who was doing so in sworn testimony, he may have a very big problem on his hands.
Read the rest of this entry »
April 27th, 2009
As if the global economy, let alone the world itself, needed another thing to worry about, swine flu comes along. Having lived through the experience of SARS 6 years ago, the Hang Seng and Shanghai stock markets were hard hit. Economically sensitive commodities such as crude and copper are also weak.
The Mexican peso is having its biggest one day decline vs the US$ since Oct 22nd also in response as businesses where people congregate temporarily close. Most global bond markets are the sole beneficiary of the nervousness.
May German consumer confidence was a touch better than expected but the Euro is lower as two ECB members over the weekend said they will support another rate cut next week. The only question over the next few months is if they stop at 1% or not from 1.25% now. Earnings, auto restructurings, bank stress test capital raises and US Treasury supply will again be the focus this week.
April 27th, 2009
So the accounting rules say that a decline in the market value of a bank’s debt thanks to increased credit default swap spreads — that is, because investors think you’re more likely to fail — counts as a a profit. On the other hand, if your bank looks stronger, the spreads fall, and you book a loss.
FT Alphaville has the story. Citigroup reported
A net $2.5 billion positive CVA on derivative positions, excluding monolines, mainly due to the widening of Citi’s CDS spreads
while Morgan Stanley reported
Morgan Stanley would have been profitable this quarter if not for the dramatic improvement in our credit spreads – which is a significant positive development, but had a near-term negative impact on our revenues.
So Citigroup is profitable because investors think it’s failing, while Morgan Stanley is losing money because investors think it will survive. I am not making this up.
http://krugman.blogs.nytimes.com/
April 27th, 2009
Check out this photo from today’s Times, about Iceland’s rejection of the free-marketeers.
April 27th, 2009
Useless finance
A derivative is a contingent claim whose payoff depends on the performance of some other financial instrument or security. For instance, an American equity call option gives the purchaser of the call the right (but not the obligation) to buy a share of equity from the issuer or writer of the call option at or before some future date at a price determined today. A credit default swap (CDS) is a credit derivative contract between two (counter)parties in which the holder makes periodic payments to the issuer in return for a payoff if the underlying financial instrument specified in the contract defaults.
A derivative contract is formally identical to a lottery, a (simple or compound) bet or gamble. Like any financial claim, any derivative is an ‘inside asset’ – it is in zero net supply. Because pay-offs associated with a derivative contract are functions of observable properties of other financial claims (prices, interest rates, default states), the derivative contract either re-packages existing underlying uncertainty or creates additional ‘artificial’ uncertainty. It would create additional extraneous uncertainty if it added some noise of its own to the fundamental, exogenous uncertainty that is presumably reflected in the features of the underlying security that determine the pay-offs of the derivative contract.
If the creation and trading of derivatives were costless, derivatives result in zero-sum redistributions of wealth between the issuers and the owners of the derivative contracts. Costless derivatives would be redundant if markets were complete. When markets are incomplete, as they are in our unfortunate universe, introducing derivatives can either lead to an increase or to a reduction in efficiency and social welfare. Lower efficiency and social welfare are possible even if creating and trading derivatives were costless. Derivatives may improve the allocation of risk, but there is no guarantee that they will. It is my contention that the unbridled explosion of certain categories of derivatives has done considerable harm, and that it is necessary to regulate all derivatives trading. Continue reading “Useless finance, harmful finance and useful finance”
April 27th, 2009
Get used to it…
Slacker Friday:
“I have now lived through three major episodes in my life where the political elite have told me quite plainly that neither I nor my fellow citizens are sufficiently mature to suffer the public prosecution of major crimes committed within my government.
The first was when Gerry Ford told me I wasn’t strong enough to handle the sight of Richard Nixon in the dock. (Ed. note–I would have thrown a parade.) Dick Cheney looked at this episode and determined that the only thing Nixon did wrong was get caught. The second time was when the entire government went into spasm over the crimes of the Iran-Contra gang and I was told that I wasn’t strong enough to see Ronald Reagan impeached or his men packed off to Danbury. Dick Cheney looked at this and determined that the only thing Reagan and his men did wrong was get caught and, by then, Cheney had decided that even that wasn’t really so very wrong and everybody should shut up. Now, Barack Obama, who won election by telling the country and its people that they were great because of all they’d done for him, has told me that I am not strong enough to handle the prosecution of pale and vicious bureaucrats, many of them acting at the behest of Dick Cheney, who decided that the only thing he was doing wrong was nothing at all, who have broken the law, disgraced their oaths, and manifestly belong in a one-room suite at the Hague. Not to put too fine a point on it, but I’m sick and goddamn tired of being told that, as a citizen, I am too fragile to bear the horrible burden of watching public criminals pay for their crimes and that, as a political entity, my fellow citizens and I are delicate flowers encased in candy-glass who must be kept away from the sight of men in fine suits weeping as they are ripped from the arms of their families and sent off to penal institutions manifestly more kind than those in which they arranged to get their rocks off vicariously while driving other men mad.
Hey, Mr. President. Put these barbarians on trial and watch me. I’ll be the guy out in front of the courtroom with a lawn chair, some sandwiches, and a cooler of fine beer. I’ll be the guy who hires the brass band to serenade these criminal bastards on their way off to the big house. I’ll be the one who shows up at every one of their probation hearings with a copy of the Constitution, the way crime victims show up at the parole board when their attacker comes up for release. I’ll declare a national holiday — Victory Over Torture Day — and lead the parade right up whatever gated street it is that Cheney lives on these days. Trust me, Mr. President. I can take it.”
April 25th, 2009
Finger of blame points to shadow banking’s implosion Gillian Tett, Financial Times. Makes the oft forgotten point that what has imploded is securitization, not so much bank lending. But I still think she misses the point a tad. Securitization ex government guarantees appears not to be coming back any time soon ex reform, which also does not appear to be a big priority. And so that does mean more lending is needed, even if you accept the proposition that less lending ought to be extended (as in credit standards need to be tightened). Put more simply, if securiitzation is broken, or only to come back as a pale imitation of its former self, banks will have to have bigger balance sheets in aggregate.
http://www.nakedcapitalism.com/2009/04/links-42409.html
April 24th, 2009
I’ve been unimpressed with this oft-quoted bit from Phillip Swagel’s insider account of the Paulson Treasury.
Legal constraints were omnipresent throughout the crisis, since Treasury and other government agencies such as the Federal Reserve must operate within existing legal authorities. Some steps that are attractive in principle turn out to be impractical in reality—with two key examples being the notion of forcing debt-for-equity swaps to address debt overhangs and forcing banks to accept government capital. These both run hard afoul of the constraint that there is no legal mechanism to make them happen. A lesson for academics is that any time the word “force” is used as a verb (“the policy should be to force banks to do X or Y”), the next sentence should set forth the section of the U.S. legal code that allows such a course of action—otherwise, the policy suggestion is of theoretical but not practical interest. Legal constraints bound in other ways as well, including with respect to modifications of loans.
Today’s news (Clusterstock + source docs, WSJ Deal Journal, McArdle, Naked Capitalism, Calculated Risk, Marketwatch), that Henry Paulson, um, forced Bank of America’s near suicidal merger with Merill Lynch kind of clinches the case. Pre-Merrill, BOA was viewed as relatively healthy among large banks. What’s the statute under which a Treasury secretary unilaterally fires and replaces the board of a healthy bank? The Paulson Treasury talked up legal constraints whenever they were faced with something Paulson didn’t want to do. When Paulson, or Bernanke, really did want to do something, they were very creative about bending the law to their will. The Fed’s “special purpose vehicles” are clearly not lending in the sense that the architects of the Federal Reserve Acts “unusual and exigent circumstances” clause foresaw. The FDIC has no statutory authority to issue ad hoc guarantees of bank debt, but flexibility was read into the laws.
With respect to the banks, the Paulson Treasury could have forced any big bank into a bail-out or receivership scenario just by looking at it funny, or by having the Fed take a conservative view of bank asset collateral values under the special liquidity programs. It’s worth noting that Treasury very ostentatiously forced banks to accept TARP capital, and Geithner’s Treasury was able to persuade holders of Citi preferred to convert to common equity.
It’s not exactly right to say that our don’t-ask-don’t-tell quasinationalization policy has given us “ownership but not control”. An assertive Treasury secretary has tremendous leverage over zombie bank managers. Instead, what we have is is control without accountability. An informal, unauditable, hydra-headed set of private managers and public officials controls how quasinationalized banks behave. Neither taxpayers nor shareholders have reason to believe that decisions are being taken in their interest. The informality and disunity of control impedes the kind of hands-on, detail-oriented supervision and risk management that ought to be the core preoccupation of bank managers. Exactly as opponents of nationalization feared, America’s large banks are poorly run behemoths that routinely make idiotic commercial decisions to satisfy tacit political mandates. No one really knows who is responsible for what.
Ironically, there might be less scope for political control if banks were in formal, least-cost-resolution receivership. A bank that has already failed cannot fail. If independent boards are appointed to oversee the receiverships, politicians might have very little leverage. Incumbent private managers face collapse, sacking, disgrace, and potential civil and criminal liability for improprieties that come to light during the post-mortem. New moderately paid, high reputation board members would bear no responsibility for what came before, and could very publicly resign in protest if pushed to act in a manner inconsistent with their charter. (Resignation in protest by long-affiliated board members of a zombie bank would have different reputational consequences, and it would be difficult to recruit high-reputation outsiders to serve on zombie bank boards.) Promoting insiders or recalling retired executives to run zombie firms leaves the leadership weak and compromised. A much higher caliber of outside talent could be recruited to oversee banks in receivership than would accept responsibility for banks that are insolvent but on government life support.
This is not to say that formal public control would be a panacea. The list of public and quasipublic organizations currently being gutted by politically motivated credit expansion includes Fannie Mae, Freddie Mac, FHA, FHLB, FDIC, and the Federal Reserve system. A bank in receivership managed by a weak board or not institutionally segregated from political bodies could easily join the list. But if received banks were put under strong boards, and given clear mandates to divide and sell their assets (maximizing taxpayer value subject to a scale constraint) while running off their lending books, there would be little hazard of politically directed credit or other shenanigans. That would imply that large insolvent banks would reduce their lending, contradicting the Administration’s endless exhortations that banks should lend, lend, lend. My view is that public encouragement of expanding indebtedness is very bad policy (read Finem Respice). But if you misguidedly believe that “credit is the lifeblood of a modern economy”, the thousands of well-run smaller banks in America are fully capable of taking advantage of today’s deeply subsidized lending spreads to serve creditworthy borrowers. Whether in private or in public hands, the big, broken banks are simply too compromised to lend.
Steve Randy Waldman — Friday April 24, 2009 at 1:53am
April 24th, 2009
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.
by Simon Johnson
The Quiet Coup – Simon Johnson
April 23rd, 2009
Morneau Sobeco released the results of its Performance Universe of Pension Managers’ Pooled Funds for the first quarter of 2009:
According to the report, in the first quarter of 2009, diversified pooled fund managers posted a median return of -2.2% before management fees.
According to Jean Bergeron, a Principal in the Asset Management Consulting practice at Morneau Sobeco, “the pension plans’ situation stabilized somewhat in the first quarter of the year mainly because of the stock market rebound that we experienced in March.
However,pension plans’ financial positions will probably continue to be difficult for quite sometime. Actuarial valuations of pension plans will be completed in a few months and will show large deficits. The contributions that will be required to eliminate these deficits will create substantial pressure on plan sponsors.”
On average, pension fund managers added value when their performance is compared to the benchmark portfolio. In fact, the managers’ median return of -2.2% was 0.3% higher than the -2.5% return of benchmark portfolios used by many pension funds (45% fixed income and 55% equity). For the whole year, the managers’ median return was also lower than the benchmark portfolio.
Canadian equity
In the first quarter of 2009, Canadian equity managers obtained a median return of -2.6%, compared to a return of -2.0% for the S&P/TSX.
The S&P/TSX Small Cap Index posted a return of -3.7% in the quarter compared to a return of -4.2% for the S&P/TSX Completion Index that represents mid-cap stocks, and also -1.5% for the large-cap S&P/TSX 60 Index.
Foreign Equity
Foreign equity managers’ median returns and appropriate benchmark indices in the quarter were:
- -8.8% for U.S. equities versus -7.8% for the S&P 500 Index (C$)
- -11.6% for international equities versus -12.3% for the MSCI-EAFE Index (C$)
- -9.2% for global equities versus -10.2% for the MSCI-World Index (C$)
- 3.3% for emerging markets equities versus 3.0% for the MSCI Emerging Markets Index (C$)
Canadian bonds
In the first quarter of 2009, managers obtained a median return of 1.5% on bonds compared to a return of 1.5% for the DEX Universe Bond Index.
Long-term bonds had a return of 0.3% in the quarter, while medium- and short-term bonds posted returns of 2.6% and 1.7%, respectively. High yield bonds achieved a return of -15.0%, while real return bonds provided a 4.7% return in the quarter.
Alternative Investments
The CSFB/Tremont Hedge Fund Index (C$) posted a return of 4.4% during the first quarter of 2009.
The Performance Universe covers approximately 311 pooled funds managed by more than 47 investment management firms. The pooled funds included in the Universe have a market value in excess of $140 billion.
The results of Morneau Sobeco’s study are based on the returns provided by leading portfolio managers, ranging from independent investment management firms to insurance companies, trust companies, and banks. The returns are calculated before deduction of management fees.
The quarterly Performance Universe results are produced by the Asset Management Consulting team at Morneau Sobeco. This team provides independent consulting services on all aspects of asset and liability management of pension funds, endowment funds, and other institutional investment funds.
These results are Canadian, but global stock markets have also rallied sharply, up over 20% since March 9th. However, as discussed above, pension plans’ financial positions will continue to deteriorate and the contributions that will be required to eliminate these pension deficits will create substantial pressure on plan sponsors.
Perhaps this is why according to a new poll, 88% of Canada’s CEOs say a pension funding crisis looms:
http://www.nakedcapitalism.com/2009/04/guest-post-time-for-new-universal.html
April 23rd, 2009
WASHINGTON (Reuters) – Insolvent financial firms must be allowed to fail regardless of size, a top Federal Reserve official said on Tuesday, as two prominent economists urged Congress to break up the biggest U.S. banks.
In blunt criticism of the government Federal Reserve Bank of Kansas City President Thomas Hoenig told Congress’ Joint Economic Committee that the design of a $700 billion bank bailout last year sowed uncertainty and slowed recovery.
Citing the costs of the economic crisis, Nobel economic laureate Joseph Stiglitz and former IMF chief economist Simon Johnson also told the panel that it was in the interest of taxpayers to dissolve the largest U.S. financial institutions.
“The United States currently faces economic turmoil related directly to a loss of confidence in our largest financial institutions because policymakers accepted the idea that some firms are just ‘too big to fail.’ I do not,” Hoenig said.
“Yes, these institutions are systemically important, but we all know that in a market system, insolvent firms must be allowed to fail regardless of their size, market position or the complexity of operations,” said Hoenig, who will be a voter on the Fed’s policy-setting committee next year.
U.S. anti-trust rules should be used to break up the biggest banks to safeguard the economy, said Johnson, a professor at the Massachusetts Institute of Technology. He added the costs of the financial crisis already dwarf the damage done by industrial monopolies in the last century.
“The use of anti-trust (laws) to break up the largest banks will be essential,” he said. “This is a very serious, imminent danger that needs to be addressed.”
Stiglitz made a similar point, arguing that the American people had not received anything like sufficient benefits from allowing such large financial firms to grow, versus with the costs of the crisis.
“They should be broken up unless a compelling case can be made not to that,” Stiglitz, a Columbia University professor, told the committee.
The biggest 19 U.S. banks are being subjected to a battery of so-called stress tests to restore confidence in their soundness, with guidelines on the process due on Friday and the results on May 4.
Stocks fell sharply on Monday amid fear that some of them still face massive losses, as the severe U.S. recession forces loan default rates to continue rising.
U.S. Treasury Secretary Timothy Geithner has signaled that no firms will ‘fail’ the stress tests, but Hoenig said this would be a mistake.
“Actions that strive to protect our largest institutions from failure risk prolonging the crisis and increasing its cost,” Hoenig said.
“Of particular concern to me is the fact that the financial support provided to firms considered “too big to fail” provides them a competitive advantage over other firms and subsidizes their growth and profit with taxpayer funds,” he said.
Nodding to anger among ordinary Americans over multi-billion dollar bailouts for rich bankers, Hoenig said some of these firms were simply too complicated, and too well-connected in Washington, for the good of the country.
“These “too big to fail” institutions are not only too big, they are too complex and too politically influential to supervise on a sustained basis without a clear set of rules constraining their actions. When the recession ends, old habits will reemerge,” he said.
Hoenig also criticized the government’s Troubled Asset Relief Program, or TARP, which was also separately chided on Tuesday by the Treasury’s watchdog.
“In the rush to find stability, no clear process was used to allocate TARP funds among the largest firms. This created further uncertainty and is impeding recovery,” Hoenig said.
April 23rd, 2009
In these times of unprecedented economic turmoil, an opportunity exists for small businesses to utilize the current financial “perfect storm” to grow through strategic acquisitions.
With changes in the economic climate and the halt in highly leveraged lending, companies that were patient during the M&A boom are now poised to make strategic acquisitions that can strengthen current operations, increase market share, decrease customer concentration, add new product lines and position them for significant future growth — all without the heightened competition experienced over the last five years.
Less competition from financial buyers: The window has closed for the highly leveraged transactions popular with Private Equity Firms during the M&A boom of the last few years. With these financial firms reassessing their approach and struggling to raise debt, it removes them from the market and/or diminishes their buying power.
Healthy companies have a better balance sheet and better banking relationships: Quite simply, companies that were patient will be rewarded for keeping cash high and debt low. Banks, some that are frozen to new lending, look for ways to cultivate existing relationships with healthy customers.
Opportunities to buy or merge with competitors: Companies facing mounting debt, loss of a key customer or other financial or operational “hiccups” need equity and/or a strong partner. Companies that did not move fast enough to fix these problems can be acquired at attractive valuations, or in some cases, 363 sales and/or through a bank workout.
Current economic climate has paved the way for creative deal structures: The market is realizing the need for creative ways to successfully complete a transaction. Seller financing, earn-out structures and other vehicles for contingent payments tied to future performance are key to getting deals done in a market with restricted credit.
Acquisitions always have risk attached and in a slumping economy the risk is greater. However, by continuing to be patient, keeping within your comfort level, and hiring an experienced M&A advisor, attorney and accounting firm, a well planned acquisition can take your business to the next level and generate growth for years to come.
April 22nd, 2009
One thing is certain: It was a very bad year for investors. And while this will probably come as cold comfort for most people, your investment losses will serve up certain tax benefits. It’s worth spending some time now, before the end of the year, to be sure you are maximizing any opportunities to trim your tax bill.
The stock market is a risky place but there is a lot of opportunity out there. Risk is prevelent but my general view is that to all those of who were behind in investing and building their IRAs, this could be a 2nd chance! Everyone is down right now, research and then consider buying. Think about it, the federal government has given huge Dow 30 firms billions and billions of dollars. They are not going to let them fail. I don’t pretend to know what is going to happen with all of the firms-but the Feds can’t afford for these companies to fail. So there will be greater insight but also hopefully stronger more agressive companies will prevail.
Keep in mind that taxpayers can use their realized investment losses to offset an equal amount of gains (if you’re lucky enough to have any, of course). But if you don’t have any investment gains, or your losses exceed your gains, those losses can be used to offset up to $3,000 of ordinary income, or $1,500 for married individuals filing separately. Remaining losses can be carried forward to future years — indefinitely.
That means you should assess the damage within your taxable portfolios for investments you want to sell, and get rid of them before the end of the year. Of course, you do not want to sell investments haphazardly simply to generate a loss for tax purposes. Your long-term strategy should always take precedence.
‘If you do sell a security that you still like and expect to buy back later, be aware of ”wash sale” rules, which forbid you from reaping a tax benefit if you buy the same investment within 30 days of selling it at a loss. Any losses logged won’t count.
Here are several other actions to consider, given depressed asset values:
CHARITY Investors often donate appreciated stock to charity so they can circumvent capital gains taxes. This year, investors might consider selling slumping stocks first, realizing the losses, and giving the proceeds to charity, said Susan Hirshman, a wealth adviser at JPMorgan. Or, donate stock that is still trading above its purchase price.
CONVERT TO A ROTH This is an ideal time for individuals to convert their traditional individual retirement accounts to a Roth I.R.A. You must pay income taxes on the entire amount converted, so lower asset values work to your advantage. For now, individuals will face income limits for converting: single and married joint filers must have adjusted gross income of $100,000 or less. But those income limits expire in 2010.
GIFTS You can give any number of people annual gifts of up to $12,000, free of gift tax, which is an effective way to reduce the value of your taxable estate. It works particularly well now because you can give away more shares when they are worth less, and the shares can recoup their value outside of your estate. Likewise, if you want to give someone more than $12,000, you will also be able to give more shares away. And since the value has declined, you will eat into less of your $1 million lifetime gift tax exemption, which applies to gifts over the $12,000 threshold, said Maureen McGetrick, a partner with BDO Seidman.
Beyond opportunities tied to the market’s swoon, some taxpayers might need to rethink their typical tax-savings strategies. Normally, it makes sense to accelerate certain deductions, like paying a portion of next year’s property taxes early, and push as much income, like a bonus, into the next year as possible. But if you expect to land in a higher tax bracket in 2009, you might do the reverse: take as much income as possible now and defer certain deductions.
Some wealthier taxpayers might prefer to take this reverse approach because it’s unclear if and when their taxes will rise.
”The bottom line is that we don’t know where tax rates are necessarily going, but what we do know that the political and economic outlook is ripe for tax increases,” said Ms. Hirshman of JPMorgan. ”And most importantly, we do know our tax rates are at historical lows.”
On the other hand, if you are a victim of the flagging economy and you expect your income to drop significantly next year — or you expect to lose your job — you might accelerate deductions and offset as much of this year’s income as you can, said Mark Luscombe, a principal analyst at CCH.
Of course, all strategies need to be considered in light of the alternative minimum tax, a parallel tax system set up in 1969 to ensure that the wealthiest taxpayers paid their fair share of taxes. People who expect to be caught by the A.M.T. should calculate their taxes twice: once under the regular system and again under the A.M.T., which has its own set of complex rules and excludes certain deductions like property taxes. For joint filers, the amount of income exempt from A.M.T. increases to $69,950 this year from $66,250 in 2007, and, for singles, to $46,200 from $44,350.
Several other tax breaks were either extended or added this year by Congress, including these:
PROPERTY DEDUCTION This new, additional standard deduction for property taxes (up to $500 for single filers and $1,000 for joint return filers) can be claimed by people who take the standard deduction and pay property taxes.
It might end up being a better deal for people who normally itemize their deductions. And, ”if you are in this category, consider turning the usual year-end strategy on its head: Shift as many deductible expenses, such as charitable contributions, from 2008 to 2009,” said Bob Scharin, senior tax analyst from the tax and accounting business of Thomson Reuters. ”That way, you can claim the bigger standard deduction in 2008 and, by shifting what would otherwise be 2008 expenditures into 2009, put yourself in a better position to exceed the standard deduction amount next year.”
SALES TAX Individuals who itemize their deductions have the choice of deducting state and local sales taxes instead of income taxes. This works well for anyone who has made an unusually large purchase or for those in states without income taxes, like Florida.
I.R.A. DONATIONS Individuals who are at least 70 1/2 can use tax-free distributions up to $100,000 from their I.R.A.’s for contributions to qualified charities in 2008 and 2009. Such distributions do not count as income and cannot be deducted as charitable donations.
HOME BUYER CREDIT First-time home buyers can take what amounts to an interest-free loan from the government in the form of a federal tax credit of $7,500 or 10 percent of the purchase price, whichever is smaller. You must pay back the loan over 15 years, and income limits apply.
EDUCATION A deduction for higher education expenses was extended through 2009 and applies to all taxpayers, including those who do not itemize their deductions. Single filers with adjusted gross incomes under $65,000 (or $130,000 for joint filers) can deduct up to $4,000 for education expenses. Taxpayers with income of $65,000 to $80,000 (or $130,000 to $160,000 for joint filers) can claim a reduced deduction of up to $2,000.
KIDDIE TAX Beginning this year, children under age 19 (up from age 18) and full-time students under age 24 with investment income in excess of $1,800 will be subject to their parents’ tax rate.
Source for this article: New York Times
April 21st, 2009
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