Boardwalk from the beach, Atlantic City, New Jersey
Ilargi: First of all, I don’t want to make a statement, of any kind, but I do want to pose some questions. I’m the kind of person who watches the Haiti quake and its aftermath with what may best be labeled “bemused curiosity”. And, no, I find no amusement in suffering, pain or dying.
It’s just as if a whole new religion was born on Tuesday, 12 January 2010 at 21:53:10 UTC. A religion of donations. There are tons of numbers and organizations that will gladly take your money, and the new text message avenues make it even easier to give. You don’t even have to leave your party anymore, or remember till the next morning, you can feel good about yourself by donating $10 right there from the dancefloor. Or the traffic jam, the line before the cash register, or when there’s nothing on TV for a few minutes. The chance to feel good about yourself from the comfort of your own home, make that your very own chair. Who says there's no progress being made in the world today? This is the kind of innovative spirit that will lift us above that pesky recession. Make it more convenient for people to give away the money they borrowed in the first place.
The thing is, Haiti has needed your donations for decades, but you never donated. It had to get bad beyond worse, and televised no less, before you woke up. What does that tell you? That you have a hard time keeping up with progress? That you never paid attention in high school? Or that Haiti was not a major priority in the curriculum of your school, and, apparently, thousands of schools just like yours? Please make a mental note to remind yourself -and me, if you don’t mind- why you ever attended a school like that for six long years to begin with. You want to make a bet about the knowledge former grads in West Palm Beach have about Haiti, a nation 600 miles of ocean water away from where they went to school?
I'll wager that today they know far more about New Orleans post Katrina than they know about 100 years of Haiti, and I don’t have too high hopes for their Katrina savvy either. But it's still a good comparison, NOLA post K, only for decade after decade after.... Let's hold on to that picture.
So you got your Red Cross, and your new-fangled 90999, and all your local versions in the countries you live in, and everybody agrees that it’s very bad and now we have to stick together and "do something". Like from the dancefloor donate an amount that would maybe cover your next drink. Feels a lot better than that drink, and you're going to get that anyway. Or, if you happen to be at home, send a $10 check to some relief address right after you book a vacation 20 times that or a new kitchen 100 times.
Maybe you just want to feel like you’re not so powerless, that those people shouldn't be suffocating in the mud, and maybe $10 will save one. What else is on? Or maybe you’re religious, as in US style, and you need to stomach Pat Robertson's remark that they got it coming, them darned blackies who sold their souls to satan. If that is you, I find it hard not to wish satan will find you when your time comes. Which, if I'd have any say, is roughly five minutes from now.
So why does the US care about Haiti anyway? Just look at the maps. Draw some circles outward, you'll see....
But all that is just a lead-in to what I was thinking about. Which started with 42 and 43, Bill Clinton and George W. Bush, stepping up to the plate to become the poster boys for all the money coming in. You see, the thing with me is, I see that, and I shut off/down/up. If there's any pair of guys I will not trust with my money, or with babysitting my 5-year old (pet hamster) for that matter, it’s 42 and 43. Simply because I’ve never seen either of them do anything but sweeten their own asses and palates. And even that would be fine. How much KY jelly can any one getting-on-in-years presidential ass take, after all? But it's not fine, because it doesn't stop there.
Now first, having Monica Lewinsky’s and Dick Cheney’s side-kicks decide where your $10 donation will go should be enough to wake you up. But you’re still either on that dance-floor or on your couch waiting for The Hills. Yo sé. So what does that mean? You’ve paid off your sins? You say you’re not religious? So why donate? The thing to do? Says who? Why didn’t you donate to Haiti in 1980 or 1990 or 2000, when they could have used your donation to build a life that could have prevented much of the dying this past week?
I may not know exactly what it takes to become president of the United States, but I do know that concern about the citizens of Haiti is not only not high on the list, it's shining in glorious absence. And now these people are supposed to lead the aid effort?
Not enough? Let ‘s take a look at Jeffrey Sachs’ Op-Ed in the Washington Post this Sunday. Sachs was the Chicago School shock therapy good guy who moved into Bolivia and then into Russia. Jeffrey Sachs stands for shock doctrine, which has cost a lot of human lives, dignity and happiness. And you need to wonder if you want the likes of him to determine where your donated dollars will go.
The Sachs/42/43 crowd doesn't care one bit. They have all sent promising thousands of young people to death for the wrong reasons. They are politicians, which in their view means that it’s fully acceptable if people die for their careers. Sachs did the shock therapy thing in Bolivia early 1990’s without as much as overthrowing the government (that's how we define progress!), just squeeze the poor without a squeal, was instrumental in Yeltsin's raising of the oligarchs (admit it, you were fooled too) and now he’s doing the lord's work in Africa.
And just so happens to manage to get an op-ed in the Washington Post that lets him come with this absolute gem:
Typically, a tragedy such as this is followed by international pledges of billions of dollars, but then only a slow trickle of help. The government of Haiti, overwhelmed far before this earthquake, is in no position to pester 20 or more complicated donor agencies to follow up on designing projects and disbursing funds. The recovery operation needs money in the bank -- in a single, transparent, multidonor recovery fund for Haiti and the world to see. Haiti does not need a pledging session; it needs a bank account to fund its survival and reconstruction. The Inter-American Development Bank would be an excellent venue; it is well-run and highly regarded, already serves as Haiti's largest development financier and could bring in donor partners from around the globe.
And you guessed it, you smart cookie: the Inter-American Development Bank mirrors the Asian Development Bank equals the World Bank equals the International Monetary Fund equals Wall Street. They all belong to a set of tools designed to keep the poor blackies in their place. And if they doth protest, send in the people's $10 donations.
The moment Bush and Clinton became the faces of the Haiti campaign, two things became evident. 1) Much more money would come in, and 2) A smaller part of your $10 will ever reach the people who need it.
Your money has become a political tool, a way to make sure Haiti is ready to turn into prime real estate soon. Major military base. Great resort. A dozen Gitmos. All in one.
On this day, just one final question for you: What do you think Martin Luther King would have said about all of this? How do you think he would have commented on Haiti 2010? Would he have stood shoulder to shoulder with W? Or would he have stood with the people of Haiti instead? See, that I find is something interesting to think about.
Dimon Utters the Unthinkable: a Double Dip Recession?
It isn’t so much what J.P. Morgan Chase CEO James Dimon said about the economy that made investors nervous, but what he wouldn’t say. In short, Dimon didn’t say definitively [Friday] that he thought the economy was improving. That is a departure from more recent earnings conference calls. As recently as the third quarter, JP Morgan had predicted that consumer loan losses would peak in the first half of 2010. Here are a couple of examples from [Friday’s] conference call of Dimon’s equivocating on the economic outlook:Dimon: “Look, you guys are just as good at forecasting the economy as anybody else. And we’ve seen delinquencies getting a little bit better, we saw credit card spend be up a little bit…..We think loans in middle market are actually starting to level off and we see small business demand actually go up….there are signs of good signs out there, but we don’t know.
That sounded sort of positive, but a few minutes later, Dimon was invoking the dreaded idea of a double dip recession. Betsy Graseck of Morgan Stanley asked if there was anything preventing JP Morgan from raising its dividend.Dimon: "Not really. I think we’ve said we really want to see a real recovery before we do that because we don’t want to have to do this again, just in case you have another dip down here."
Finally, Calyon analyst Mike Mayo tried to clear things up. “So you expect [nonperforming assets] to go down in mid or late 2010?”Dimon: “Well, Mike, we don’t know when the recovery is.”
Wait. We thought the Fed, the White House, retailers and consumers have all indicated that the recovery is already underway. Does this mean there is still pain ahead in the financial sector and for the broader of the economy?
Jamie, say it isn’t so.
IMF chief: double-dip a risk if stimulus ends too early
Developed countries may slip back into recession if they abandon strategies deployed to battle the global financial crisis too early, the head of the International Monetary Fund warned on Monday. Recovery in private demand and employment are necessary conditions for governments to begin unwinding policies designed to support their economies, though the right timing depends on specific conditions in each nation, Dominique Strauss-Kahn said.
"Recovery in advanced economies has been sluggish," he told reporters in Tokyo. "We have to be cautious because the recovery has been fragile." Marek Belka, the head of the IMF's European department, echoed Strauss-Kahn's comments, saying the continent's economy was not yet on solid ground. "We are no longer at the edge of the abyss that loomed in early 2009, with all but a handful of Europe's economies now pulling out of recession. But it is less clear that we have reached safe ground," Belka, Poland's former prime minister, wrote in a blog (blog-imfdirect.imf.org/). "It is important for fiscal and monetary policies to continue to support the recovery," he wrote.
Strauss-Kahn said Japan's experience with its own financial crisis since the late 1990s shows that recovery begins only when companies and banks have cleaned up their balance sheets, adding that many impaired assets around the world have not yet been disclosed. Tackling high levels of public debt, which many developed countries have piled up to save their economies, will become top priority for many governments, he continued. Governments have committed trillions of dollars in stimulus and guarantees, and central banks have slashed interest rates to record lows since the financial crisis intensified after the collapse of Lehman Brothers in September 2008.
But Strauss-Kahn warned that ending economic stimulus prematurely could be extremely costly, leaving countries with a renewed downturn and unable to cope because they had already used up their fiscal and monetary arsenals. "It would be difficult to find new tools," he said. "The best indicator (for the exit timing) is private demand and employment ... In most countries, growth is still supported by government policies. For as long as you do not have private demand strong enough to offset the need of public policy, you shouldn't exit," he said.
The IMF in October forecast the global economy would resume growth in 2010 by expanding 3.1 percent after contracting in 2009. Strauss-Kahn reiterated that the world economy has been stronger than expected, led by emerging economies in Asia, adding that the IMF sees China's growth this year close to the pre-crisis levels.
Strauss-Kahn also voiced his support for regional frameworks to contain financial crises, such as an Asian fund created last year. Thirteen East and Southeast Asian countries set up a $120 billion emergency fund for use in an economic downturn, the first independent move by Asia to shield itself from financial crisis. Known as the Chiang Mai Initiative, the fund has evolved from a string of bilateral currency swap agreements signed by Asian nations. The idea of creating an Asian fund fell through a decade ago, when Japan proposed the creation of an Asian Monetary Fund after the Asian economic crisis in 1997-98, as Western countries saw the move as undermining the role of the IMF.
Strauss-Kahn, then France's finance minister, also opposed the idea at the time. "I've changed my mind. I think that regional institutions are welcome. There's no reason why we shouldn't have regional funds helping to do the same job as what we are doing, if we can work together," he said, adding that it is important that such a regional body work with the IMF.
Why Many Investors Keep Fooling Themselves
What are we smoking, and when will we stop?
A nationwide survey last year found that investors expect the U.S. stock market to return an annual average of 13.7% over the next 10 years. Robert Veres, editor of the Inside Information financial-planning newsletter, recently asked his subscribers to estimate long-term future stock returns after inflation, expenses and taxes, what I call a "net-net-net" return. Several dozen leading financial advisers responded. Although some didn't subtract taxes, the average answer was 6%. A few went as high as 9%.
We all should be so lucky. Historically, inflation has eaten away three percentage points of return a year. Investment expenses and taxes each have cut returns by roughly one to two percentage points a year. All told, those costs reduce annual returns by five to seven points. So, in order to earn 6% for clients after inflation, fees and taxes, these financial planners will somehow have to pick investments that generate 11% or 13% a year before costs. Where will they find such huge gains? Since 1926, according to Ibbotson Associates, U.S. stocks have earned an annual average of 9.8%. Their long-term, net-net-net return is under 4%. All other major assets earned even less. If, like most people, you mix in some bonds and cash, your net-net-net is likely to be more like 2%.
The faith in fancifully high returns isn't just a harmless fairy tale. It leads many people to save too little, in hopes that the markets will bail them out. It leaves others to chase hot performance that cannot last. The end result of fairy-tale expectations, whether you invest for yourself or with the help of a financial adviser, will be a huge shortfall in wealth late in life, and more years working rather than putting your feet up in retirement. Even the biggest investors are too optimistic.
David Salem is president of the Investment Fund for Foundations, which manages $8 billion for more than 700 nonprofits. Mr. Salem periodically asks trustees and investment officers of these charities to imagine they can swap all their assets in exchange for a contract that guarantees them a risk-free return for the next 50 years, while also satisfying their current spending needs. Then he asks them what minimal rate of return, after inflation and all fees, they would accept in such a swap. In Mr. Salem's latest survey, the average response was 7.4%. One-sixth of his participants refused to swap for any return lower than 10%. The first time Mr. Salem surveyed his group, in the fall of 2007, one person wanted 22%, a return that, over 50 years, would turn $100,000 into $2.1 billion.
Does that investor really think he can get 22% on his own? Apparently so, or he would have agreed to the swap at a lower rate. I asked several investing experts what guaranteed net-net-net return they would accept to swap out their own assets. William Bernstein of Efficient Frontier Advisors would take 4%. Laurence Siegel, a consultant and former head of investment research at the Ford Foundation: 3%. John C. Bogle, founder of the Vanguard Group of mutual funds: 2.5%. Elroy Dimson of London Business School, an expert on the history of market returns: 0.5%.
Meanwhile, I asked Mr. Salem, who says he would swap at 5%, to see if he could get anyone on Wall Street to call his bluff. In exchange for a basket of 51% global stocks, 26% bonds, 13% cash and 5% each in commodities and real estate—much like a portfolio Mr. Salem oversees—the institutional trading desk at one major investment bank was willing to offer a guaranteed rate, after fees and inflation, of 1%.
All this suggests a useful reality check. If your financial planner says he can earn you 6% annually, net-net-net, tell him you'll take it, right now, upfront. In fact, tell him you'll take 5% and he can keep the difference. In exchange, you will sell him your entire portfolio at its current market value. You've just offered him the functional equivalent of what Wall Street calls a total-return swap. Unless he's a fool or a crook, he probably will decline your offer. If he's honest, he should admit that he can't get sufficient returns to honor the swap. So make him explain what rate he would be willing to pay if he actually had to execute a total return swap with you. That's the number you both should use to estimate the returns on your portfolio.
Fed Policies Likely to Stay as Economy Finds Footing
Although Federal Reserve officials expect the economy to grow too slowly this year to bring the jobless rate down substantially, they are likely to conclude at their Jan. 26-27 meeting that there isn't much more they can do about it. That means sticking to their stated plan to end purchases of mortgages at the end of March, roll back emergency lending programs in February and maintain the vow to keep interest rates exceptionally low for at least several more months. "I think that we are going to be waiting for the economy to improve in a strongly sustainable fashion and until that happens, then it's unlikely that we would be changing policy," Charles Evans, president of the Federal Reserve Bank of Chicago, told reporters this past week. High unemployment is one of several issues that nag at Fed officials as they attempt to gradually pull away from their role as the economy's chief rescuer.
They also are antsy that the housing recovery could stall when they finish buying $1.25 trillion of mortgages in March; the Fed now holds $919 billion worth. Eric Rosengren, Boston Fed president, said through a spokesman that the Fed's mortgage purchases have helped to push mortgage rates down by between a quarter and three-quarters of a percentage point. But when it stops buying, rates likely won't go up by a like amount because the Fed will be holding onto its portfolio rather than selling it down aggressively.
Many Fed officials believe the rise in mortgage rates will be less than half a percentage point and thus won't seriously hurt the housing recovery. A Wall Street Journal survey of economists finds nearly two-thirds predict rates will climb less than half a percentage point when the Fed buying stops. Fed officials are leaving open the possibility of more mortgage-buying if the economy and housing market falter. But if the economy performs as the Fed expects, most officials appear inclined to let the program run out. "There is a desire to phase out these purchase programs as soon as it makes sense and there are stated dates for doing that," Dennis Lockhart, president of the Atlanta Fed said in a recent interview.
Fed officials worry about the risks of expanding their mortgage holdings. The more securities they buy now, the harder it will be to reduce the portfolio later. Additional purchases could cause investors to lose faith in the Fed's ability to fight inflation, trigger a sharp drop in the dollar or a surge in commodity prices. That could lead to higher mortgage rates. The Journal's survey of economists showed that nearly three out of four expect the Fed to let the program expire on schedule.
The Fed is inching toward the exit door in other ways as markets regain their footing. A range of now little-used emergency lending programs expires Feb. 1, including those that offer short-term loans to industrial companies and Wall Street brokers and provide a backstop to money-market mutual funds. The Fed also could soon raise the rate it charges banks for emergency loans, the discount rate. The Fed has cut this rate to 0.5% from 6.25% in August 2007 to encourage banks to come to it directly for funds. As markets have stabilized, banks are borrowing from it less, meaning the Fed could be in a position to start tightening terms on these loans.
The discount rate is less important than the federal-funds rate, which banks charge each other for overnight loans. Fed officials see a discount-rate increase mostly as a signal of the shift away from rescue lending, not a step toward raising interest rates more broadly. Officials are deep into discussions about how to manage the mechanics of broader interest-rate increases, even though that moment still looks to be many months away. The Fed's first step will involve a change in rhetoric, altering its description of the economy and, eventually, its vow to keep interest rates low for "an extended period."
When they want to raise interest rates, Fed officials will have at least two new levers to pull. They could drain some of the $1 trillion they have poured into the financial system. Or they could raise a rate they pay banks directly for money that is kept on reserve with the Fed. Raising that interest rate on reserves would push banks to tighten lending or raise rates on loans they make to others. Either step would tighten financial conditions and could help push up the benchmark fed-funds rate. Fed officials haven't decided which step to take first. With worries about housing and unemployment lingering, they aren't inclined to hurry the decision.
Stephen Colbert - The Word: Honor Bound
The greatest talent on American TV shows once more why he is precisely that.
"Did you know that the Air and Space Museum is actually full of things?”
Iceland Credit Risks Rise ‘Considerably,’ S&P Says
Iceland’s credit risk may rise “considerably” as the island faces the threat of a shelved emergency bailout and a government collapse, Standard & Poor’s said. “The risk is there that the program will fall apart and with that, the downside risks would increase very considerably,” Moritz Kraemer, S&P’s managing director for Europe, the Middle East and Africa, said in a Jan. 15 telephone interview. If the outlook for the bailout program doesn’t improve, “it’s quite possible” the government will collapse.
President Olafur R. Grimsson’s Jan. 5 decision to block a U.K. and Dutch depositor accord called into question the continued disbursement of a $4.6 billion loan from the International Monetary Fund and the Nordic countries that Iceland needs to avert default. Fitch Ratings cut the island’s credit grade to junk the same day and S&P said it may lower its BBB- rating to non-investment grade within a month if the rejection halts bailout flows.
“We were not encouraged by the statement of the president because it also made it clear that predictability of policy implementation in Iceland is not what we thought it would be,” Kraemer said. “The political process has turned out to be even more cumbersome than we had anticipated.” The cost of protecting Iceland’s sovereign bonds from non- payment increased last week, according to CMA DataVision prices in New York. Credit-default swaps on the nation’s debt rose 37 basis points last week to 543.58 basis points. A basis point is 0.01 percentage point.
“The increasing sovereign risk in countries such as Iceland and Greece in Europe will very likely impact the European-based lenders and I could also see it having a spillover effect on some of the U.S. banks,” said Brayan Lai, a Hong Kong-based credit analyst at Calyon. “If that’s the case, the recovery phase is going to be more protracted than people initially thought.” The so-called Icesave bill, which allows the government to guarantee a $5.5 billion loan from the U.K. and Netherlands to repay depositor claims, is due to be put to a referendum by March 6. Most polls since Jan. 5 show Icelanders will reject the legislation, which lawmakers passed 33 to 30 on Dec. 30. The political strain of any failure of the accord with the U.K. and Dutch may be too much for the government to survive, Kraemer said.
“The cohesion in the coalition is superficial in the sense that it’s forced upon the coalition because they have so few options,” Kraemer said. “But the centrifugal powers may just get the upper hand here.” Some members of the Left Greens, the junior coalition partner, don’t want Iceland to continue its cooperation with the IMF. Members of the Left Green’s ruling committee on Jan. 15 put forward a motion to drop the IMF-led bailout, though the party rejected the call in a vote the next day, state broadcaster RUV reported. The Left Green Party, headed by Finance Minister Steingrimur Sigfusson, is also opposed to European Union membership. Prime Minister Johanna Sigurdardottir has said Iceland needs to join the EU, with euro adoption an ultimate goal, to avoid a repeat of its financial collapse.
Grimsson’s decision has interrupted government efforts to resurrect the economy, which buckled in October 2008 under the $80 billion debt burden amassed by its three biggest banks. Sigurdardottir’s coalition of Social Democrats and Left Greens has spent almost a year trying to settle creditor claims and rebuild Iceland’s banking system. A U.K. and Dutch depositor settlement was the final milestone needed to normalize Iceland’s international relations.
Grimsson said in a Jan. 14 interview that his decision to block the bill will leave the economy unscathed, because an earlier accord will take effect. That bill, which he signed in September, was rejected by the U.K. and Netherlands. “There is no cross-border agreement” if the current bill is voted down in a referendum, Kraemer said. “The external financing complementing the IMF stand-by agreement may not be in place, because the Nordic governments had made future disbursements contingent on the resolution of Icesave. That’s where it all ends. Basically if the program were to collapse because there’s no resolution, then the external financing conditions for Iceland could become quite precarious.”
The “common view” of Sweden, Norway, Finland and Denmark on the status of their $2.5 billion loan after Grimsson’s de facto veto of the Icesave bill is that continued disbursement of the loan “would require that Iceland complies with its deposit guarantee scheme obligations,” Dorte Drange, a spokeswoman at Norway’s Finance Ministry said in an e-mailed response to questions. “If the Nordic governments were to conclude that the June legislation does not satisfy their expectations because of its unilateral nature, the IMF loan would have to be renegotiated,” Kraemer said. “That creates a huge amount of uncertainty. The surprising non-signature of President Grimsson gives the indication that one should possibly expect the unexpected.”
Dark Pools May Face Pricing Rules, EU Securities Watchdog Says
The European Union’s top securities supervisor is considering imposing price disclosure rules for trades made in “dark pools,” to bring the off-exchange venues into the spotlight of regulators. The Committee of European Securities Regulators is collecting data on dark pools to address concerns including “pricing, transparency and reporting,” Eddy Wymeersch, CESR’s chairman, said. Dark pools are trading platforms that allow investors to buy and sell securities away from regulated exchanges so they don’t have to disclose positions.
Dark pools are at the centre of a regulatory storm as U.S., European and U.K. securities watchdogs scrutinize market structure, responding to the worst financial crisis since the Great Depression. The U.S. Securities and Exchange Commission proposed rules on Oct. 21 that would require dark pools to publicly report some bids once they handle 0.25 percent of a stock’s average daily volume. “If the price difference is big enough between dark pools and the main markets then we will have to have more price reporting,” Wymeersch said in a telephone interview in Brussels.
The lack of reliable information on volumes and pricing of securities in dark pools has posed a problem for regulators trying to keep pace with market innovation. “We’re still in the process of figuring out how it works,” Wymeersch said. “It’s easy to collect the figures, but the question is whether those figures are reliable. According to some figures I have, the overall use of over-the-counter markets” has decreased.
Regulators dispute how much trading banks carry out in dark pools. The U.K.’s Financial Services Authority says dark pools account for 1.25 percent of trades, whereas the Federation of European Securities Exchanges estimates the figure is closer to 40 percent. Brokers such as Goldman Sachs Group Inc. and ICAP Plc operate dark pools for their clients, as do European bourses NYSE Euronext and Deutsche Boerse AG. London Stock Exchange Group Plc will likely complete the merger of its Baikal dark-pool unit with rival Turquoise in March.
The European Parliament is discussing amendments to a legislative package which would convert CESR into the European Securities and Markets Agency, with more powers. Wymeersch said that CESR would grow from 35 to 85 employees and upgrade its IT and data storage systems once it receives a stronger regulatory mandate next year.
Moody's Puts $572.7 billion In Alt-A RMBS On Watch For Downgrade
Moody's Investors Service put $572.7 billion in Alternative-A residential mortgage-backed securities issued from 2005 through 2007 on watch for possible downgrade after it revised its loss provisions. The rating agency said Alt-A loans that are 60 or more days delinquent "have increased markedly" since it last revised its loss projections. Alt-A mortgages, which sit between prime and subprime, typically were granted without the borrower showing proof of income or assets.
Ratings agencies have been cutting their ratings on billions of dollars of RMBS deals after revising the amount of losses expected. The changes have occurred as delinquencies continue to climb and home prices keep falling. Moody's said it now projects, on average, cumulative losses of 14% of the original balance for 2005 securitizations, 29% for 2006 securitizations and 35% for 2007 securitizations. The updated loss projections will have the greatest impact on senior securities issued in 2005, the firm said.
The number of foreclosures is likely to hurt home prices in coming months despite modest gains measured by the S&P/Case-Shiller Home Price Index in recent months, Moody's said. The credit rater estimated the proportion of current or 30-day delinquent loans that will become 60 or more days delinquent by the second half of this year will be 10.1%, 19.7% and 21.6% for loans issued in 2005, 2006 and 2007, respectively.
JP Morgan Says Sell Mortgage Bonds as Fed Snaps Up Record MBS
by Diana Golobay
The spread of mortgage-backed securities (MBS) bonds yields to Treasuries is tight and likely to remain tight in the near-term, but swap spreads are currently 5-10 bps too narrow to greatly entice private investors, according to a JP Morgan Securities conference call on MBS and asset-backed securities (ABS).
While private investors largely hold on the buy side, the government continues to buy up agency MBS as part of its $1.25trn agency MBS-purchase program.
JP Morgan researchers recommended selling MBS and buying Treasuries ahead of the Federal Reserve’s exit from the $1.25trn agency MBS-purchase program, which will likely spur a widening of MBS spreads to Treasuries. Further the GSEs are expected to reduce portfolio size by 10% yearly going forward (see graph).
The New York Fed on Thursday said it bought up $14bn of agency MBS, net of another $14.9bn of MBS sales, in the week ending January 13 from Freddie Mac, Fannie Mae and Ginnie Mae. The weekly purchases bring the running total to nearly $1.137trn of net purchases to date, according to research by JP Morgan . The weekly purchased bring the Fed’s balance sheet to a record $2.27trn in the week ending January 13, from $2.22trn a week earlier.
“[A]s we approach the end of the Fed program, mortgages should start approaching the wider levels where private investors will support the market,” JP Morgan said in a presentation for the call this week.
And while “spreads will reflect [the] post-Fed world,” researchers see better relative value in the non-agency or private-label MBS sector.
Additionally, prepayment speeds for the mortgage securitization agencies Freddie and Fannie are “highly likely” to increase in coming months as the agencies buyout delinquent pipelines. The US Treasury Department recently raised the agency portfolio caps, giving Freddie and Fannie greater power to clean up delinquent portfolios.
JP Morgan researchers see a 3- to 6-month time frame for cleanup most likely, as Freddie and Fannie are likely aware of the significant market impact posed by a significant pickup in agency prepay speeds.
Mortgage securitization agency Ginnie Mae is now on the opposite end of its cleanup process, researchers said. Ginnie prepayment speeds are likely to slow materially in Q110 as servicers work through Ginnie’s pipeline of delinquent Federal Housing Administration-ensured mortgages.
Investor confidence in ABS slipped in Europe as well, JP Morgan said in a recent European ABS Outlook:
JP Morgan’s European Confidence Index for ABS investors [pictured above] fell slightly in Q409 from the previous month but remains positive. It marks only the second consecutive period of positive feedback in the Index’s three-year history. Projections for Q110 not only remain in higher positive territory but also expect improvement. UK RMBS performance looks to be stable in 2010.
Grεεk dεbt disastεr
Here’s a singularly-arresting chart from Deutsche Bank’s excellent fixed income team:
That is foreign banks’ holdings of European government debt, and there is an unexpected standout: Greece.
The chart highlights two concerns; firstly, the potential for banks to be burned by the situation in the Hellenic Republic, and secondly, the extent to which the country has relied on outsiders to finance its deficit in recent years.
Here are the DB analysts, headed by Gilles Moec, with a bit more detail:
Such inflows leave an economy vulnerable to a sharp withdrawal of funds at some point in the future should foreigners lose confidence or face liquidity constraints that prevent them from maintaining this exposure. A breakdown of net international investment positions for some of the more vulnerable EMU economies highlights this predicament.
Financing of C/A deficits generally takes two forms – debt creating and non-debt creating inflows. Non-debt related inflows refer to FDI and equity, debt-related inflows can be in the form of either portfolio flows into domestic public or private fixed income markets or loans (e.g. trade credit, syndicated loans). In Greece’s case the majority of its negative net international investment position relates to portfolio flows into the public sector which foreigners can choose to sell whenever they wish. At end-Q3 foreigners held EUR216bn of Greek government debt (72.3% of the total market, 90.2% of GDP), having doubled their position since end-04. Given recent downgrades and another round of revisions to budget data from previous years, a sharp slowdown or even reversal of inflows from foreigners into the local debt market has become an increasing risk.
Matters are made worse by the fact that the ECB has taken a hardline stance on the collateral criteria for its liquidity ops. That means if Greece is downgraded by Moody’s (the only agency still rating it at the A-level) its debt will no longer be eligible for the ECB facilities once the central bank raises its collateral-threshold back to its original level of A-.
Greece is probably hoping that foreigners will continue to finance the government for the rest of 2010, some investors have been piling in to Greek bonds in anticipation of a bailout, but there are signs that may get more difficult.
The country’s Public Debt Management Agency has already said it will not sell any bonds to the market this month, instead opting to focus on T-bills. Bid-to-cover ratios for last week’s auction of 52-week bills was fine at 3.05, but yields rose 119bps to 2.2 per cent. Which means, in short, that investors are demanding more and more of a premium for holding Greek debt.
If foreigners do retreat from Greek debt, the government will no doubt be hoping that its domestic banks could step in to replace them. That however, may also prove problematic, according to DB:
Full financing from the domestic banking sector is probably also not viable. December saw the government sell EUR2bn in bonds in the form of a private placement to 5 banks, 4 of which were Greek. Should the government rely entirely on its domestic banking sector for financing this year, it would result in a 163% increase in their holdings of Greek government debt relative to end- October (EUR32.5bn)1. In the absence of an increase in banking sector liabilities, Greek banks would move from holding 8% of their assets in Greek government debt at end October to 20.2% of their total assets by end-2010. This would only materialise if Greek government debt could not be posted at the ECB as collateral but would undoubtedly translate into a sharp fall in the stock of private sector credit and a more negative growth outcome than is projected by the government, endangering the government’s fiscal targets.
There’s that φαύλος κύκλος again.
Greece Worries Weigh on Euro
Greece's debt problems continued to weigh on the euro in Europe Monday, leaving the dollar mixed and the pound higher. There was little sign of any resolution to the country's budgetary problems over the weekend and the market is now looking at a meeting of euro-zone finance ministers for any comment on the issue. Apart from fear that Greece will default on its debt, there is concern that other euro-zone members could now face further credit rating downgrades.
Elsewhere, however, there are signs of improving market sentiment even though last Friday's University of Michigan consumer confidence sentiment showed a much smaller than expected improvement. At the time, the data undermined market confidence in the recovery and led equity markets lower. However, a slew of fourth-quarter earnings from U.S. banks as well as major data releases from China later this week could turn this slumping sentiment around.
"Bank earnings will be a key focus, with Citigroup, Morgan Stanley, Bank of America, Wells Fargo and Goldman Sachs all set to report this week. Judging by the lackluster reaction to stronger-than-forecast earnings from Intel and JP Morgan Chase [last week], markets may be looking for something more to drive them forward," said Mitul Kotecha, head of global foreign exchange strategy with Calyon in Hong Kong. Hopes for the global recovery could also be lifted by Chinese data, which is forecast to show continued strong growth as well as a possible rise in inflation.
Mr. Kotecha suggested this could well lead to a rise in risk appetite later in the week. "Although debt concerns are unlikely to dissipate quickly, especially given Greece's inability to convince markets of its plans to cut its burgeoning budget deficit, the 'risk on' tone is likely to have a stronger hand later in the week, driven in large part by strong Chinese data," Mr. Kotecha added. The pound got a boost from news that U.K. house price increases are starting to accelerate. According to the latest Rightmove survey, prices rose by 4.1% on the year this month, the largest increase in 12 months. Expectations that Kraft will raise its bid for Cadbury as well as news that France's GDF Suez has made a takeover approach to U.K. International Power have encouraged hopes of sterling-friendly merger and acquisition flows as well.
ECB prepares legal ground for euro rupture as Greek crisis escalates
by Ambrose Evans-Pritchard
Fears of a euro break-up have reached the point where the European Central Bank feels compelled to issue a legal analysis of what would happen if a country tried to leave monetary union. “Recent developments have, perhaps, increased the risk of secession (however modestly), as well as the urgency of addressing it as a possible scenario,” said the document, entitled Withdrawal and expulsion from the EU and EMU: some reflections.
The author makes a string of vaulting, Jesuitical, and mischievous claims, as EU lawyers often do. Half a century of ever-closer union has created a “new legal order” that transcends a “largely obsolete concept of sovereignty” and imposes a “permanent limitation” on the states’ rights. Those who suspect that European Court has the power pretensions of the Medieval Papacy will find plenty to validate their fears in this astonishing text.
Crucially, he argues that eurozone exit entails expulsion from the European Union as well. All EU members must take part in EMU (except Britain and Denmark, with opt-outs). This is a warning shot for Greece, Portugal, Ireland and Spain. If they fail to marshal public support for draconian austerity, they risk being cast into Icelandic oblivion. Or for Greece, back into the clammy embrace of Asia Minor. ECB chief Jean-Claude Trichet upped the ante, warning that the bank would not bend its collateral rules to support Greek debt. “No state can expect any special treatment,” he said. He might as well daub a death’s cross on the door of Greece’s debt management office.
This euro-brinkmanship must be unnerving for the Hellenic Socialists (PASOK). Last week’s €1.6bn (£1.4bn) auction of Greek debt did not go well. The interest rate on six-month notes rose to 1.38pc, compared to 0.59pc a month ago. The yield on 10-year bonds has touched 6pc, the spreads ballooning to 270 basis points above German Bunds. Greece cannot afford such a premium for long. The country must raise €54bn this year – front-loaded in the first half. Unless the spreads fall sharply, the deficit cannot be cut from 12.7pc of GDP to 3pc of GDP within three years. As Moody’s put it, Greece (and Portugal) faces the risk of “slow death” from rising interest costs.
Stephen Jen from BlueGold Capital said the design flaws of monetary union are becoming clearer. “I don’t believe Euroland will break up: too much political capital has been spent in the past half century for Euroland to allow an outright breakage. However, severe 'stress-fractures’ are quite likely in the years ahead.” As Portugal, Italy, Ireland, Greece, and Spain (PIIGS) slide into deflation, their “real” interest rates will rise even higher. “It is tantamount to hiking rates in the already weak PIIGS,” he said. This is the crux. ECB policy will become “pro-cyclical”, too tight for the South, too loose for the North.
The City view is that the North-South split may cause trouble, but that there will always be a bail-out to prevent a domino effect. “If a rescue turns out to be necessary, a rescue will be mounted,” said Marco Annunziata from Unicredit. It comes down to a bet that Berlin will do for Club Med what it did for East Germany: subsidise forever. It is a judgement on whether EMU is the binding coin of sacred solidarity, or just a fixed exchange rate system like others before it.
Politics will decide, and in Greece it is already proving messy as teams of “inspectors” ruffle feathers. The Orthodox LAOS party is not happy that an EU crew dared to demand an accounting from the colonels. “The Ministry of Defence is sacrosanct,” it said. Greece alone in Western Europe treats the military budget as a state secret. Rating agencies guess it is a ruinous 5pc of GDP. Does the country really need 1,700 battle tanks, 420 combat jets, and eight submarines? To fight NATO ally Turkey? Merely to pose the question is to enter dangerous waters.
Who knows what the IMF surveillance team made of their mission in Athens. The Fund’s formula for boom-bust countries that squander their competitiveness is to retrench AND devalue. But devaluation is ruled out. Greece must take the pain, without the cure. The policy is conceptually foolish and arguably cynical. It is to bleed a society in order to uphold the ideology of the European Project. Greece’s national debt will be 120pc of GDP this year. S&P says it will reach 138pc by 2012. A fiscal squeeze – without any offsetting monetary or exchange stimulus – will cause tax revenues to collapse. Debt will rise higher on a shrinking economic base.
Even if Greece can cut wages without setting off mass protest, it lacks the open economy and export sector that may yet save Ireland in similar circumstances. Greece is caught in a textbook deflation trap. Labour minister Andreas Loverdos says unemployment would reach a million this year – or 22pc, equal to 30m in the US. He broadcast the fact with a hint of menace, as if he wanted Europe to squirm. Two can play brinkmanship.
Sovereign default in the eurozone and the breakup of the eurozone: Sloppy Thinking 101
by Willem Buiter
A recent (January 13, 2009) column in the Financial Times by John Authers provides a good example of a logical slip on the banana peel of an alleged link between the external value of the euro, the likelihood of the eurozone breaking up and sovereign default by a eurozone national government. Versions of this fallacy can be found all over the place, even in the writings of those who ought to know better.
The relevant passages from Authers’ The Short View follow in full:“Greece has always been treated as a peripheral eurozone member, not only in geography. Even before last year’s civil unrest, its bonds traded at a significantly higher yield than those of Germany - showing a higher perceived default risk. The market is nervous about other nations on the eurozone’s periphery, notably Ireland and Spain, which grew overextended during the credit bubble.
A eurozone country defaulting and leaving the euro is close to an unthinkable event. But Friday’s news from Standard & Poor’s that Greece and Ireland were on review for a possible downgrade, followed yesterday by Spain, left many thinking the unthinkable.
The spread of Greek bonds over German bunds is 2.32 percentage points, almost 10 times its level of two years ago. Spanish spreads yesterday rose above 90 for the first time. An Intrade prediction market future puts the odds on a current eurozone member leaving the euro by the end of next year at about 30 per cent. The euro dropped more than 1 per cent against the dollar within minutes of the Spanish news, and is down 9.8 per cent in the last few weeks.”
Three issues are being linked in this passage. The emergence of high levels of sovereign default risk premium differentials between different eurozone member states, the external value of the euro and the likelihood of the eurozone breaking up. There is no self-evident link between these three issues. The first is neither necessary nor sufficient for the second or the third. More than that, the threat or reality of sovereign default by a eurozone member state is much more likely to reduce that country’s incentive to leave the eurozone than to increase it.
It is obviously true that market perceptions of sovereign default risk in the eurozone (as reflected in CDS rates) are rising across the board and are now very high indeed by historical standards. According to Markit, on 12 January 2009, Germany’s 5-year CDS rate was 44 basis points, France’s 51 basis points, Italy’s 155 basis points and Greece’s 221 basis points. The same is true, of course, for the US, with a CDS rate of 55 basis points and and for the UK, with a 103 basis points CDS rate. Sovereign CDS markets may not be particularly good aggregators and measures of default risk perceptions because issuance is patchy and trading is often light, but the numbers make sense.
In addition to the average level of sovereign default risk premia rising across the world, the differentials between the sovereign default risk premia of the various eurozone members have risen. The spreads on the yield on 10 year government bonds over Bunds on January 12 was 88 basis points for Austria and Belgium, 52 basis points for France, 90 basis points for Spain, 105 basis points for Portugal, 135 basis points for Italy, 171 basis points for Ireland and 233 basis points for Greece. These numbers are not directly comparable with the spreads between the CDS rates reported earlier, both because they refer to default risk over different horizons (5 years for the CDS and 10 years for the government bonds) and because the government bonds are traded in liquid, organised markets while CDS are traded over the counter.
Greece and Ireland were put on credit watch (on a negative outlook) last week by the Standard & Poor’s, and this week Portugal and Spain followed. The actual downgrade today of the Greek sovereign debt rating by Standard & Poor’s from A to A minus, only five days after the country was put on credit watch by the same rating agency, will no doubt increase both the level of the Greek sovereign default risk premium and the spread over Bunds of the Greek sovereign 10-year bond yield.
The ECB has adopted the (self-imposed) rule that it will not accept as collateral in repos and at the marginal lending facility (its discount window) sovereign debt rated lower than A minus. If the ECB/Eurosystem stick to this rule, the next downgrade of Greek sovereign debt could have a major impact on the Greek government’s marginal funding costs. The three countries remaining on credit watch - Ireland, Portugal and Spain - are likely to suffer actual downgrades in their credit ratings in the very near future. It is surprising to me that Italy has not even been put on a negative outlook as yet. I expect this will not be long in coming as the eurozone economies continue to deteriorate, increasing government deficits, and rising default risk spreads undo the beneficial effect on sovereign funding costs of declining risk-free interest rates.
It is certainly possible that a eurzone government will default on some of its debt in the near future. It will no doubt be presented as a ‘restructuring’ of part of the sovereign debt, but the markets and the courts interpreting the covenants associated with CDS for the non-performing sovereign debt instruments will recognise what happens as an event of default.
Would a eurozone national government faced either with the looming threat of default or with the reality of a default be incentivised to leave the eurozone? Consider the example of a hypothetical country called Hellas. It could not redenominate its existing stock of euro-denominated obligations in its new currency, let’s call it the New Drachma. That itself would constitute a further act of default. If the New Drachma depreciated sharply against the euro, in both nominal and real terms, following the exit of Hellas from the eurozone, the real value of the government debt-to-GDP ratio would rise.
In addition, any new funding through the issuance of New Drachma-denominated sovereign bonds would be subject to an exchange rate risk premium, and these bonds would have to be sold in markets that are less deep and liquid that the market for euro-denominated Hellas debt used to be. So the sovereign eurozone quitter and all who sail in her would be clobbered as regards borrowing costs both on the outstanding stock and on the new flows.
A sharp depreciation of the nominal exchange rate of the New Drachma vis-a-vis the euro would for a short period improve the competitive position of the nation because, with domestic costs and prices sticky in nominal New Drachma terms, a nominal depreciation is also a real depreciation. Nominal rigidities are, however, less important for eurozone economies than for the UK, and much less important than in the US. Real rigidities are what characterises mythical Hellas, as it does real-world Greece, Italy, Spain, Portugal and Ireland.
The real benefits from a nominal exchange rate depreciation would be eroded after a year - within two years at most - before you could say cyclical recovery. The New Drachma would be a little currency in a big global financial market system - not an instrument to be used to gain competitive advantage or to respond efficiently to asymmetric shocks, but a source of extraneous noise, excess volatility and persistent misalignments, rather like sterling.
A eurozone member state faced with the prospect of sovereign default, or just having suffered the indignity of sovereign default, would be immensely relieved to be a member of the eurozone. The last thing it would want to do is give up the financial shelter provided by membership in the eurozone to try and emulate Iceland, New Zealand or the UK.
Was the depreciation of the euro that more or less coincided with the sovereign credit warnings and the Greek downgrade (although it started earlier) due to increased concern about the fiscal sustainability of some eurozone member states? Who knows? And what is more: who cares? The eurozone member states no doubt welcome the weakening of the euro, which had become the world’s second most overvalued currency, just as UK Ltd welcomed the decline in sterling, which reached more than 25 percent from its previous peak until the recent weakening of the euro. Depending on the fiscal measures taken by the sovereigns of the fiscally challenged nations, and depending on the response, if any, of the ECB to the threat or reality of sovereign default, any response of the euro can be rationalised.
I view the widening of the sovereign risk spreads inside the eurozone as a welcome development. With the revised Stability and Growth Pact effectively emasculated as a fiscal discipline device, it is essential for national fiscal discipline in the euro area, that the market believes (1) that national sovereign debt is indeed just national, not joint and several among all eurozone member states, and (2) that the ECB will not bail out ex-ante or ex-post a eurozone member state that gets itself into fiscal problems. The very low sovereign risk premium differentials in the early years of the eurozone were worrying to me, because it seemed to indicate that the markets believed that a fiscally incontinent government would be bailed out by the other eurozone national governments or by the ECB.
The new larger and healthier sovereign risk premium differentials indicate that the markets may be able to provide more fiscal discipline than suggested by the early years of the common currency. That is good news indeed. So we may well see sovereign defaults by EU national governments, both inside and outside the eurozone. But it is more likely in my view that Scotland will leave the sterling monetary union (and the United Kingdom) and adopt the euro as its currency than that an existing eurozone member will leave the eurozone. We shall see.
The Geithner Deception
Chriss W. Street and Lawrence G. McDonald
In 2005, when Timothy Geithner was head of the New York Fed, he ignored one of the greatest dangers our financial markets have ever faced. And that danger was buried deep inside our banks, in the unregulated market of Credit Default Swaps (CDS). If you buy a stock from another party, the trade is forced to settle by the exchange within three days. This prevents any gray areas of ownership, which is critical for tracking the amount of risk in the financial system. Even if you bought a stock and immediately sold it to someone who then flogged it to another buyer, all these trades must be settled in the exchanges. This is the proper, regulated environment of the stock market.
But with CDS, this is not the case. It is like the Wild West, where trades are settled by hand in an over-the-counter market. Can you imagine the paperwork? And when the market exploded in 2005, during a time when traders made astronomical piles of money, the CDS paperwork piled higher and higher, until a pile the size of Mount Everest sat in the back offices of Wall Street. With months and months of unsettled CDS trades, and with the unstoppable 300 m.p.h. gravy-train steaming forward, Timothy Geithner, our current Secretary of the United States Treasury, just stood there like a bird watcher on the side of tracks, doing absolutely nothing about it.
The "Over-the-Counter Derivatives Markets Act of 2009", which passed the House Financial Services Committee on a party line vote, was cleverly designed with a "trigger" to facilitate a White House takeover of the $54 trillion credit derivatives markets. The draft legislation warns that if the "SEC and the Commodities Futures Trading Commission cannot jointly prescribe uniform rules and regulations under any provision of this act in a timely manner [60 days], the Secretary of the Treasury...shall prescribe rules and regulations under such provision."
Considering the relationship between the SEC and CFTC has been defined by decades of territorial feuding, Secretary Geithner will quickly usurp oversight of this critical market. But Mr. Geithner's dubious regulatory record as President of the Federal Reserve Bank of New York from 2003 to 2008, makes him a curious candidate to become "Master of the Derivative's Universe." When spectacular problems in the Credit Default Swaps (CDS) markets came to his attention following the bankruptcies of Delta and Northwest Airlines in 2005, he allowed the industry to continue to self-regulate its trading activities.
Every day billions of dollars of CDS contracts had been trading between banks, brokers and hedge funds, but contract execution to settle these transactions was often delayed by months. Literally hundreds of billions of dollars of outstanding derivative contract risk was floating off the balance sheets of the major financial institutions. This strategy allowed the derivative traders to engage in the equivalent of "check kiting" on a grand scale. The turmoil in the markets and the size of 2005 losses made clear to the New York Fed that many banks were engaged in activities that skirted prudent banking standards. As head of trading for the world's largest bank, Mr. Geithner could have used his authority to force the derivative industry to comply with settling all trades in three days. Instead of acting decisively to eliminate a known and growing systemic threat, he watched financial cancer quietly metastasize.
In an October 4, 2005 letter to Mr. Geithner, the 'Major Dealers' committed to reducing the number of confirmations outstanding longer than 30 days, by 30% over the next five months. The letter, signed by Bank of America, Barclays Capital, Bear Stearns, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan Chase, Lehman Brothers, Merrill Lynch, Morgan Stanley, UBS and Wachovia states unequivocally that anything less than "significant progress on our backlogs...will be unacceptable."
Over the next two and a half years, the Major Dealers spoke regularly with the New York Fed regarding the "tactical" steps they were taking to reduce the enormous number of outstanding trades. In a March 27, 2006 letter to Geithner, the Major Dealers agreed to provide only "informal updates" on their efforts to implement industry wide processing guidelines by the end of the year. This was a critical moment in the history of the financial markets. It marked the day when the New York Fed and the US Treasury went to bed with Wall St. The grass had become too high to cut, and now they were married to this deadly mountain of unsettled CDS risk. But if Geithner had taken prudent action in 2005, forced Wall Street to settle the trades within seven days, the financial crisis might have been averted.
At a time when dangerous activities in the Credit Derivatives market demanded legal scrutiny and public disclosure, Geithner permitted the industry to avoid unpleasant intrusions into their most profitable business practices. Given confirmations should have been sent in one day, and signed contracts and collateral transferred in a maximum of three days. It is now clear the New York Fed was willing to allow the industry to self police their way back into compliance. It took one of the Major Dealers going bankrupt to spur the necessary change. Two weeks after the collapse of Bear Stearns, in a letter dated March 27, 2008 the "Major Dealers" finally agreed to begin clearing trades electronically. By then, billions of taxpayer dollars had been put at risk, and the market was in a death spiral.
When Lehman Brothers failed on September 15, 2008, credit froze at banks around the word for the main reason that banks couldn't determine who was exposed to Lehman. The settlement of Credit Default Swaps, an-over-the-counter market, did not keep up with the volume of trading. Our Fed and Treasury were flying blind when they let Lehman fail. And we'll be paying the price for many years. The mantra of the Administration has been "you never want a serious crisis to go to waste." However, before handing the keys of the regulatory kingdom back to the deceptive Mr. Geithner, the public deserves to know about his three years of total incompetence, and they need to hear about the billowing risk in the credit derivatives markets, and how he failed to protect our nation.
The Show Must Not Go On
Political theater and public scolding are good ways to draw attention to important issues and bad behavior, and Phil Angelides, chairman of the Financial Crisis Inquiry Commission, made use of both last week. As he swore in four of the nation’s top bankers, it was impossible not to think of that famous scene with executives from the tobacco industry. During the questioning, he rebuked Lloyd Blankfein, head of Goldman Sachs, for his firm’s practice of selling mortgage-related securities and at the same time betting they would fall in value.
Now that he has everyone’s attention, Mr. Angelides and his fellow commissioners can get to the hard part. Inconclusive sparring at hearings will not fulfill the mandate Congress gave the panel to investigate the causes of the crisis. Indeed, the bankers who testified last week did not say much they had not said before. The commission must uncover what bankers, investors, government officials and other people in positions of power, past and present, would prefer not to say — or perhaps do not know or understand — about the crash and the bailouts. The primary aim is not to air issues and foster debate, but to test views, resolve contradictions and arrive at evidence-based conclusions.
Yet the commission — which is supposed to file a final report by Dec. 15 — has not issued a single subpoena for documents. Instead, investigators have apparently been relying on voluntary cooperation, public records and information-sharing agreements that have been negotiated with federal agencies. A thorough investigation requires source documents that reveal what people were thinking and doing at the time of the events and that illuminate, buttress or contradict testimony.
Take, for example, Mr. Blankfein’s explanation that the clients Goldman bet against were sophisticated investors who demanded the doomed securities that Goldman sold them. Apart from the fact that the notion of “sophisticated investors” has been discredited by the crisis, does that explanation go far enough? Without peering into the internal workings of Goldman and other financial firms that engaged in similar practices, it is hard to know how far bankers went in creating demand rather than responding to it, or if the securities were purposely designed to perform poorly.
The answers could cast light on when Wall Street practices cross the line from prudent hedging to excessive speculation. A crucial related issue is whether Wall Street’s role as the underwriter of securities, which implies a level of approval of the investments being offered for sale, misled investors into buying questionable securities, and thus contributed to the credit bubble.
If so, that would make the argument for barring too-big-to-fail banks from operating hedge funds all the more compelling. Given the stakes, the chances seem remote that Wall Street will voluntarily hand over the papers that could get to the bottom of it all. The inquiry is getting under way at a critical moment. The House has passed a financial regulatory reform bill that was enfeebled in important respects by bank lobbyists.
The Senate banking committee recently rejected a generally robust proposal by Senator Christopher Dodd. It has yet to produce an alternative, but it is likely that lobbying and partisan politics will generate a weak bill. President Obama’s call for a new tax on big banks is a good idea, but must not pre-empt other needed changes, including a tax on bankers’ bonuses and more direct regulation to limit the size of financial firms. Serious investigative work is the only way to counter the banks’ political power and alter the course of a reform effort that is headed in the wrong direction.
Obama Tax Prompts Put-Upon Bankers to Break Out the Violins
The keening from the banking industry in response to the Obama Administration's proposal to levy a special $90 billion tax on the largest banks is almost touching. It's unfair. It's punitive. It's vindictive. Worst of all, banks won't pay the fee anyway. Their customers will. "Using tax policy to punish people is a bad idea," said JPMorgan Chase Chief Executive Jamie Dimon in remarks after a Financial Crisis Inquiry Commission hearing in Washington earlier in the week. "All businesses tend to pass their costs on to customers."
What is it that has bankers upset? The Administration wants to charge banks a fee that is expected to raise some $90 billion over 10 years. (The two biggest U.S. banks, Bank of America and JPMorgan, will be on the hook for $1.5 billion each, according to a report by Wisco Research analyst Sean Ryan.) The money will go toward defraying the cost of the $700 billion Troubled Asset Relief Program (TARP), which used taxpayer money to prop up a tottering U.S. banking system at the height of the financial crisis. The tax calculation limits the impact of the fee to larger banks, and it's designed to create an incentive for banks to stay smaller and keep their leverage in check.
"It's not unfair to say that these big institutions that have benefited one way or another have got to carry part of that burden," said Paul Volcker, the former Federal Reserve chairman and Obama Administration adviser in a recent talk before the Economic Club of New York. He's right. The banks have already repaid some $165 billion to the Treasury as well as $13 billion in dividends and fees. Yet the tax seems a reasonable charge for the bailout. If anything, the amount is too low. To put the figure in context, the Administration projects that the tax will raise about $9 billion a year over the coming decade.
The yearly profits of the targeted banks run close to $90 billion a year, and their bonuses are likely to be in the same neighborhood, estimates Dean Baker, economist and co-director of the Center for Economic & Policy Research in Washington. In other words, he writes, the proposed tax adds up to a mere 5% of the combined profits and bonuses at the large banks. These numbers support President Obama's contention that the tax could come out of banker bonuses and not customer accounts. "I'd suggest you might want to consider simply meeting your responsibilities, and I'd urge you to cover the costs of the rescue not by sticking it to your shareholders or your customers or fellow citizens with the bill, but by rolling back bonuses for top earners and executives," said the President.
That may well be, but bankers would prefer to have customers absorb the cost, as Dimon indicated. Yet it's doubtful the banks will be able to follow through on their threat. The affected banks have already alienated a large part of their customer base. Some customers are disgusted that taxpayers had to bail out the big banks and now these same banks are insisting on paying out gargantuan bonuses. Other customers are increasingly upset as the big banks slash lines of credit, close credit-card accounts, and hike fees.
WHAT IF WAL-MART ENTERED BANKING?
The big banks can try to pass on the tax to customers, but that provides an opening for their competitors, including credit unions, community banks, independent banks, and some online banks. For instance, Arianna Huffington and Rob Johnson of the Huffington Post recently launched a Move Your Money campaign urging Americans to do business with smaller community banks. These smaller institutions won't have to pay the levy, and they can pass on that savings to customers.
For just a moment, however, let's take industry lobbyists at face value. The banks will pass on the cost of this unfair, punitive, vindictive tax to customers. In that case, Washington should call the bankers' bluff by changing the competitive environment. Several years ago Wal-Mart wanted to get into the banking business, and the industry opposed the retailing giant's move. But the world is quite a different place now, and opening up the market to more competition for basic banking services, such as checking, savings, and debit cards, could benefit consumers. Wal-Mart, in particular, could bring its monolithic drive for everyday low prices into the basic banking business. All of a sudden people may well ask themselves, "Why should I bank with big, high-fee banks when I can get good service at a cheap price at Wal-Mart?" Why indeed?
While consumers may fantasize about a customer-focused bank featuring smiley faces and low fees, the present reality remains ugly. Here's the real problem with Obama's proposed tax: It's a highly indirect and inefficient way to get at the issue of bank size, leverage, and risk-taking. There are other, far more important and dramatic regulatory initiatives to address the too-systemic-to-fail risk. The industry won't like them, but these changes include everything from higher mandated capital requirements to lower leverage ratios to off-the-shelf bankruptcy filings to contain financial contagion. As Raghuram Rajan, economist at the University of Chicago's Booth School of Business, recently put it: "You want a bank to face the full costs of any stupid thing it does on its own."
Simply put, the tax doesn't really amount to much. It's O.K. if it brings in some revenue to repay taxpayers. Under ideal circumstances, it would be a down payment on a much bigger reform package.
Wall Street Weighs Constitutional Challenge to Proposed Tax
Wall Street’s main lobbying arm has hired a top Supreme Court litigator to study a possible legal battle against a bank tax proposed by the Obama administration, on the theory that it would be unconstitutional, according to three industry officials briefed on the matter.
In an e-mail message sent last week to the heads of Wall Street legal departments, executives of the lobbying group, the Securities Industry and Financial Markets Association, wrote that a bank tax might be unconstitutional because it would unfairly single out and penalize big banks, according to these officials, who did not want to be identified to preserve relationships with the group’s members.
The message said the association had hired Carter G. Phillips of Sidley Austin, who has argued dozens of cases before the Supreme Court, to study whether a tax on one industry could be considered arbitrary and punitive, providing the basis for a constitutional challenge, they said. Administration officials and other legal experts have called those claims dubious.
Indeed, President Obama urged the financial lobby to stand down when he introduced the tax proposal last week: “Instead of sending a phalanx of lobbyists to fight this proposal or employing an army of lawyers and accountants to help evade the fee, I suggest you might want to consider simply meeting your responsibilities.” A spokesman for the lobbying group, Andrew DeSouza, confirmed on Sunday that Mr. Phillips was working with the group on a series of regulatory and legislative matters, including the tax. But because no formal tax legislation has been proposed by Congress, Mr. DeSouza said it was “premature to speculate on any potential actions beyond opposing the proposal itself as both punitive and counterproductive to increasing lending.”
A court challenge would open a new front in the banking industry’s assault on additional financial regulation. It might also further splinter the powerful financial lobby. The issue has already pitted smaller banks, which would be exempt from the tax, against their less popular Wall Street peers, and it has even stirred debate within the large banks over whether such an aggressive legal strategy would be politically wise.
Privately, executives at several large banks said they believed a legal battle was doomed to fail in Washington and risked escalating public rage over the bailouts of the banks. These executives say the industry may be better off pushing for a watered-down version of the tax. Most banks are just beginning to consider how, or whether, they would oppose it. This political tug of war is centered on Wall Street bonuses, which have already returned to precrisis levels. The banks have tried to head off criticism by starting new charitable programs and by structuring executive bonuses in line with principles set by the federal pay adviser, like paying bonuses mostly in stock instead of cash and deferring the payout of some bonus money in case business declines again.
Administration officials hoped their proposed bank tax would serve much the same purpose. Democratic leaders in Congress have welcomed the plan, which could raise up to $117 billion to recoup projected losses from the bank bailout program. Republicans have remained unusually silent on the tax, hoping to avoid a choice between supporting a tax increase and defending big bankers. Meanwhile, some liberal Democrats have gone further than the administration has, proposing a heavy tax on bank bonuses. Political analysts expect the bank tax to pass easily in the House but face resistance in the Senate.
There may be room for compromise. Administration officials hope to keep the proposed tax limited to major financial institutions with more than $50 billion in assets but consider that a difficult line to draw. For example, the proposed tax would not apply to large hedge funds; the mortgage finance giants Fannie Mae and Freddie Mac; or the carmakers Chrysler and General Motors. “We believe the lines we have drawn are sound and sensible,” said Gene B. Sperling, a senior Treasury Department official. “We understand these are the type of things we will need to keep an open mind on in negotiations with Congress.”
The financial lobby has insisted that it is unfair for banks to cover the cost of losses tied to nonbank bailout recipients like the automakers and the American International Group, the giant insurer that is now majority-owned by the government. In an appearance on CNBC on Thursday, Representative Barney Frank, chairman of the House Financial Services Committee, called the argument over including the automakers legitimate. At the lobbying group, the selection of Mr. Phillips of Sidley Austin raised eyebrows because it suggests that Wall Street may be spoiling for a fight. Davis Polk & Wardwell, another white-shoe law firm, has been advising the same lobbying group on legal matters tied to new financial regulation.
Mr. Phillips, who was an appellate lawyer in the Justice Department during the Reagan administration, brought his first case in front of the Supreme Court when he was just 29 years old. Since then, he has appeared before the court more than 60 times. Mr. Phillips declined to comment about his work for the industry, referring all questions to the lobbying group. The group has hired him before. Last spring, it retained Mr. Phillips to examine similar legal questions after lawmakers prepared to heavily tax Wall Street bonuses in response to the public’s outrage over bonuses for A.I.G. traders. Through an extensive phone campaign and relentless lobbying on Capitol Hill, the financial lobby successfully beat back the legislation without using the courts.
This time around, Mr. Phillips is working with the group to determine whether it has legal grounds to challenge the tax proposal, including the possibility that the tax might amount to a retroactive policy. The original bailout bill, however, spelled out that the government needed to recover that money.
Mr. Phillips’s primary argument, however, might be that a tax so narrowly focused would penalize a specific group. Legal scholars say the Supreme Court has overturned only a handful of laws on those grounds, and those were typically rules that singled out political outcasts like former members of the Confederacy or people accused of being communists. Officials of the lobbying group suggest that a bank tax would be punitive because it would seek to recoup bailout losses from companies that have already paid back their money — with warrants and interest.
But Mr. Sperling, the Treasury official who was one of the architects of the proposal, said the industry’s claims had little standing. “That sounds more like a political sound bite masquerading as a legal argument,” he said. Outside legal scholars agree. “It seems to me that it is not even a close question,” said Laurence H. Tribe, a constitutional law professor at Harvard who was a legal adviser to the Obama campaign. Mr. Tribe contends that imposing a fee or requirement to return a sum of money cannot be construed as a punishment. Even more important, the administration’s proposal lays out a clear set of criteria, not a list of individual culprits, Mr. Tribe said.
The Securities Industry and Financial Markets Association, an umbrella group for hundreds of financial institutions, is under intense pressure. It has been weakened significantly by the financial collapse that claimed Bear Stearns, Merrill Lynch and other large, dues-paying members. Just last week, the group ended an eight-year affiliation with the American Securitization Forum, its bondholder lobbying unit, after the groups failed to resolve how they would treat their members’ increasingly divergent interests.
The Banker Bonus Diversion
I am so tired of the absolute nonsensical and foolish approach in regards to Banker Bonuses taken by both the Obama administration as well as the bankers themselves. Here's what is really going on and what should should be going on if we lived in a world that was dependent on telling the truth, prudent financial management, reduction of systemic risk, and if a cure to our banking system malady is genuinely being sought.
If one accepts the postulation that the primary core of our banking system problem is the fact that many our our banks, including the group of 19 tagged as “Too Big to Fail”, have severe capital shortfalls, then one is forced to accept the fact that the solution to the problem requires a rebuilding of capital on the balance sheet. Gee, that's fairly complex, isn't it?
Here's the deal in a nutshell:
- Banks have significant capital shortfalls that are being masked by FASB FAS 157 modifications that allow marking of assets to bank “models” versus a mark to market. Got a pile of CDOs or RMBS paper worth 30 cents on the dollar? No problem, mark it at 90 cents and watch the profits roll in. The egregious matter here is that both banks and U.S. Regulators continue to tout the high capital ratios of the group of 19 yet conveniently fail to mention that FASB 157 is the primary reason for this illusion. Do you guys think that these assets are going to magically run back up to par in the future? Do you guys think that a lot of this garbage is going to cash flow?
- While on the subject of capital shortfalls, FASB FAS 166/167 provisions became effective November 2009 (after being postponed from November 2008, interestingly) for Q1 2010. ZH readers are aware that this requires that banks bring off balance sheet assets back on to the balance sheet and it is unlikely that this tsunami of garbage paper is worth anywhere near 100 cents on the dollar. With bank profits quite handsome for Q4, and capital accounts woefully inadequate, it would be prudent to allocate this profit to capital accounts to reserve for losses on this incoming pile of fecal matter, but, no, let's just kick the can down the road further. The FDIC has decided to give a pass to the banks for one and one half years to begin the process of allocating capital in regards these assets. Read it yourself: http://www.fdic.gov/news/news/press/2009/pr09230.html
- With multiple billions of profit earned (engineered?) in Q4 2009, the bankers have decided to abandon prudent balance sheet management and put the vast majority of these profits in their pockets. This is the ultimate in piggishness as well as a dereliction of fiduciary responsibility to properly manage a balance sheet on the behalf of the bank's owners and bondholders. Then again, I'm not so sure that bank equity owners and bondholders are the smartest group in the world, as their investment rests on the good “graces” of the Obama administration regulatory ineptness and the Federal Reserve Bank, an organization with a track record that leaves much to be desired. Caveat Emptor.
- U.S. Regulators have decided that they simply are not going to require the profits to be allocated to capital accounts for loan loss provisioning either. The citizenry of the USA have loaned and given (via Fed balance sheet purchases and who else knows what) the banks trillions of assistance because of these capital shortfalls and now that some money from profits is available for balance sheet reconstruction, our regulators have simply put their fingers in their ears and started yelling “La, La, La, La, I can't hear you”. This is a total and epic failure of the banking regulatory authorities in the U.S.
- The Obama administration, now that the bankers are going to pocket the money, has decided to tax some of this money to fund stimulus version X.0, “X” being a number somewhere between the current number of stimulus items and the eventual Minsky moment. The point of the matter is that Obama's wall street endeared team (it's not political kids, it's the same group that ran the show under Bush, Clinton and many other Presidents) has, once again, failed in its responsibility to ensure proper bank capital standards and, once again, has left the door open for systemic risk. Helluva job, guys and gals!
Here's the simple answer.
The bankers should have taken every nickel of profit and allocated it to capital accounts to provision for loan losses: past, present, and future. The regulators should force every nickel on to the balance sheet irrespective of the menagerie of FASB FAS 157. The government should not be taking this needed capital from the banking system. If we follow this path for a few years, maybe we'll have a chance to avoid a complete zombification of our banking system.
I cannot believe after what we have been through since the lessons of Bear Stearns and Lehman that we are simply not fixing a not so complex matter.
As Wallets Open For Haiti, Credit Card Companies Take A Big Cut
Update at 9:03 AM Friday: Visa, MasterCard, American Express and Discover have now all announced that they will waive fees for some donations related to the crisis in Haiti.
As a massive human tragedy unfolds in Haiti, relief organizations are soliciting credit-card donations through their hotlines and websites. About 97 percent of these donations will actually make it to the designated organizations -- but the other 3 percent will be skimmed off by banks and credit card companies to cover their "transaction costs."
Thanks to this hidden fee, American banks and credit card companies are making huge profits -- somewhere in the neighborhood of $250 million a year -- off of people's charitable donations, according to a Huffington Post analysis. Those profits rise sharply after major disasters, when humanitarian relief organizations such as Oxfam and Operation USA take in more than 85 percent of their donations via credit card -- and the credit card providers, with only a few exceptions, refuse to waive their fees.
Credit card companies have only been willing to waive their processing fee for charity once, Richard Walden, the CEO of Operation USA, tells the Huffington Post, and that was for the tsunami disaster of 2004. "After the tsunami, we had thousands of donations, and American Express and I think one other company temporarily waived their fees. So if this thing ramps up, we'll try to get in touch with these banks and see if they'll waive the fee again for us." Bowing to enormous public pressure in the United Kingdom after the tsunami, British credit card companies have pledged to "waiv[e] interchange fees for all cross-charity and disaster or emergency appeals," according to the UK Card Association website.
One notable exception to the rule in this country is Capital One bank. Through its "No Hassle Giving Site", the bank waives transaction costs for holders of its Visa or MasterCard cards, so that 100 percent of people's donations goes to their chosen charity. "We are pleased to be able to donate these costs, and we believe this will generate customer loyalty and an enduring customer franchise," said Pam Girardo, a spokesperson for Capital One.
Ben Woolsey, director of marketing and consumer research at Creditcards.com, says the hidden processing fees tacked onto all credit card donations cover far more than the transaction costs, allowing the issuing banks, as well as companies like Visa, MasterCard and American Express, to generate significant profits off of online charitable donations. "They certainly profit off of these fees," Woolsey said. "Charities are treated like any other merchant. The credit card company bleeds a few percentage points off each transaction; that's central to their business model."
Non-profits are reluctant to criticize the credit card companies that are providing them a crucial service because there is too much money at stake, and they have no lower-cost options because the four major credit card companies have a small monopoly on the industry. Peter Larson, director of annual giving at the Washington Humane Society, said: "It's unfortunate that a portion of our individual contributions are eaten up by processing fees, but that's the nature of business. We have no choice but to use credit cards because without them, we would lose a great deal of money in donations."
Some charities are able to negotiate a lower processing fee than regular merchants, whose rates can run as high as 5 percent. Habitat for Humanity reports that it pays about 2.15 percent of its donations to credit card processing companies, St. Jude's pays about 2.5 percent, and all charitable organizations that qualify for American Express's "Giving Express" program get a 2.25 percent processing rate. But even these fees are far greater than the marginal cost of the online transaction.
"I have no doubt that millions and millions of dollars are being made off of people's donations, and it's extremely inefficient and wasteful," said Ken Berger, President and CEO of Charity Navigator, an independent charity evaluator. "It would be great if credit card companies could reduce their profit knowing its going to an organization with a mission to help people. They need to step up to the plate and take a lead role in voluntarily cutting their fees."
Spokespersons for Visa and American Express declined to say whether they would consider waiving their fees for the Haiti disaster, or for all charitable donations. But Bill Strathmann, CEO of the online charity portal Network for Good, says they won't: "The reason credit card companies don't waive fees for charities is that they have so many corporate partners who drive high volume through their system. A company like Walmart could say, 'Hey, you're giving them a bettter rate? Last I looked I was passing billions of dollars through your company.'"
According to Strathmann, whose company partners with Capital One to encourage cost-free donating, legislators may have to take the issue into their own hands. "I've always wanted to take this to Capitol Hill," said Strathmann. "There was legislation that made charitable donations tax-deductible, and there's going to have to be similar legislation that either subsidizes those credit card fees for non-profits or bars the fees altogether. There's got to be a better model for encouraging donations."
Right now, the government's only role is to actually subsidize the credit-card skim; charitable donations are 100 percent tax deductible, even when only, say, 97 percent of the donation goes to charity. Without a legislative solution, the only option for charities is to petition banks to voluntarily waive their fees. "We don't want a corporate contribution from the other side of American Express, we want them to say to legitimate NGOs that they're waiving the bank fee," said Walden. "It's probably a good week to ask, because they're about to give out their bonuses."
Britain’s unsavoury debt mire
by Gillian Tett
Which country experienced the biggest jump in debt, relative to gross domestic product, over the past decade? A year ago, as the world reeled from the subprime mortgage crisis, most investors might have said America. And these days, countries such as Iceland, Dubai or Greece tend to spring to mind, in connection with deadly debt burdens.
However, if McKinsey consultants are to be believed, the real leverage giant – at least among the big western economies – is actually the UK. After crunching the data, McKinsey estimates that the gross level of British private and public debt is now 449 per cent of GDP – up from 350 per cent at the start of the decade. And even excluding the liabilities of foreign banks based in the UK, the ratio still runs at 380 per cent – higher than any country except Japan (closely followed by Spain where debt has also spiralled dramatically, according to a McKinsey report issued today.*)
That is sobering stuff, particularly for UK voters. However, it also raises a much bigger point. In the middle of the last decade, it was often frustratingly difficult to get any data on leverage levels, since it was an issue on which precious few policymakers focused. That was partly due to misplaced faith that financial innovation had made debt less dangerous than before. But finance officials and bank supervisors also tended to focus on pretty narrow ways of measuring leverage, that tracked, say, hedge fund debt (a popular obsession, in the wake of the collapse of Long-Term Capital Management fund.)
And since those narrow definitions of leverage looked benign, there was little concern about overall debt levels – or debate about whether deleveraging might be needed. Now, of course, the world is radically different. But, as McKinsey points out, there is still surprisingly little known about the actual mechanics of “deleveraging”, compared with, say, all that research that has been conducted on financial crises. And so it has tried to plug this gap by both plotting the recent pattern of global leverage levels - and then setting it in a wider historical context, to show how deleveraging has (or has not) occurred before.
Like any compendium of statistics, some of the numbers are controversial. Some economists, for example, may complain that the gross number for UK debt looks excessively crude, since it does not take account of assets or cross-holdings. UK voters are not usually liable for, say, the debt held by British industrial groups. Nevertheless, some of the patterns in the report are fascinating – and valuable –precisely because they have often been ignored. Contrary to popular perception, for example, McKinsey points out that, by historical standards, most of the financial world was not crazily leveraged in the past decade. Instead, the crazy debt increase was focused on a small group of brokers, and global banks.
Moreover, alongside the (limited) rise in broker borrowing in the past decade, there was also a far more startling increase in “real economy” debt, particularly in the household and real estate sector. Since the crisis started, this “real economy” debt has declined a tiny bit, while financial sector leverage has fallen considerably. But since public debt has spiralled, gross leverage levels for most large nations have not fallen. And that, in turn, has a crucial implication: namely that, insofar as deleveraging is inevitable, much of it is still to come. From a historical perspective, this challenge is not entirely unprecedented. The UK and US have, after all, slashed vast debt burdens before during the last two centuries, and McKinsey has identified four dozen smaller deleveraging episodes around the world since 1950.
But while governments have sometimes softened this task before by creating rapid growth, often due to exports (via devaluation), or a peace dividend (after a war), those routes do not look offer an easy escape this time. Growth, in other words, could be tough to achieve. So that leaves three, unpalatable options, McKinsey suggests: outright default, inflation or belt-tightening. McKinsey’s best guess – or hope – is that belt-tightening will predominate, and it consequently forecasts a grim climate of austerity for the next decade. It may be right. But to my mind, at least, it remains a very open bet whether western voters will accept austerity without a backlash; personally, I would thus put a higher emphasis on the other options too.
Either way, the real moral is that the task now facing the western governments is monumental. It is a pity that groups such as McKinsey were not producing these leverage charts three years ago. If so, the politicians might now not be in quite such a pickle, even – or especially – in the UK.
More British businesses in critical state
Insolvency specialist says 140,000 firms are in financial difficulties and warns that those in trouble are collapsing faster than in previous recessions. More than 140,000 UK companies were dragged into financial difficulties in the last quarter, according to research that also warned firms are collapsing faster than in previous recessions. Insolvency specialist Begbies Traynor reported that the number of companies experiencing significant or critical financial problems rose 6% in the last three months of 2009, compared with the previous quarter. It also said that firms are finding it harder to struggle along once they hit problems. "A new trend is emerging, which indicates that a higher number of business failures are occurring at an earlier stage of deterioration than in previous recessions," it said.
Begbies Traynor believes the government's attempts to support British business were having some effect, but predicted a spike in failures later this year when this help is terminated. "Experience of the last four recessions tells us that unemployment levels and corporate and personal insolvencies have lagged behind technical recession by one to two years. With tax and interest rates certain to rise, as well as increasing pressure on consumer spending, there is every reason to suggest that the insolvency peaks of this recession remain some way off," warned Ric Traynor, executive chairman. "While business finance is expected to become more readily available during the first half of 2010, we anticipate a rise in the levels of financial distress during the second half of 2010, as temporary financial support measures are unwound."
On an optimistic note, the number of companies facing serious or critical problems was 14% lower than a year ago. Begbies Traynor said this was partly because creditors are now taking a more lenient approach than they did in the immediate aftermath of the collapse of Lehman Brothers, when there was a "near panic" dash to call in debts. Another factor helping the sector is the time-to-pay scheme offered by HM Revenue & Customs, which lets cash-strapped firms defer tax payments. Almost 250,000 companies have taken up this offer, deferring over £4.3bn of tax payments, according to the latest official data.
Begbies Traynor fears some businesses are storing up problems, and will collapse when the need to repay debt catches up with them later in the year. "HMRC remains one of the principal creditors in many insolvencies and we fear that when the current time-to-pay scheme, which provided a lifeline to many businesses, is finished there will be a significant rise in company failures – most probably from the third quarter of 2010 onwards," it predicted. Scottish businesses are suffering particularly badly from the downturn, with 41% more companies facing critical problems than a year ago. To be classed as a company with critical problems, a firm would need to be facing county court judgments of at least £5,000, or a petition to wind the company up. Significant problems would include either a court action, or a set of accounts classed as 'average', 'poor', 'very poor', 'insolvent' or 'out of date'. Begbies Traynor classed 4,040 companies in the critical camp, and 137,487 facing significant problems.
The services sector saw a 22% rise in companies facing significant problems, compared with the previous quarter. Construction firms performed better, with a 2% decline. Research released yesterday warned that Britain faces a decade of "painful readjustment" from the recession, and will see weak economic growth once the government's efforts to stimulate the economy end. Ernst & Young's Item Club predicted the UK economy would grow by just 1% this year, before recovering to 2.5% in 2011.
Abu Dhabi's Dubai aid shrinks to $5 billion
Abu Dhabi's $10 billion December bailout to Dubai included $5 billion already committed by two banks controlled by the emirate, signaling Abu Dhabi's cautious approach to helping its debt-laden neighbor. Analysts said news that Abu Dhabi had directly lent less than previously thought also indicated the wealthy emirate wanted more evidence of Dubai's fiscal probity, after helping it avert an embarrassing default on a state-linked bond.
A Dubai government spokeswoman said on Monday that the last minute lifeline on December 14, included $5 billion raised from Al Hilal Bank and National Bank of Abu Dhabi which had been announced on November 25. Dubai rocked global markets that same day when it requested a standstill on $26 billion in debt linked to its flagship conglomerate Dubai World and its two main property developers, Nakheel and Limitless World.
"Obviously it's a lot less cash than we had assumed," said Raj Madha, an independent analyst based in Dubai. "The interesting thing is what it says about the behavior of Abu Dhabi: whether they are just rushing through a large amount of money or whether they are providing funding where required." Five-year credit default swaps for Dubai stood at 426 basis points, up from 423 basis points on Friday. The $5 billion raised from the two Abu Dhabi banks was part of a $20 billion bond programme announced early last year, and the UAE central bank had signed up for $10 billion of that in February. But it had been unclear whether Abu Dhabi's $10 billion bailout on December 14 -- which enabled Dubai World to repay a $4.1 billion Islamic bond, or sukuk by developer Nakheel -- was entirely new money or included the bond to the Abu Dhabi banks.
The government spokeswoman, who spoke on condition of anonymity, said the Gulf Arab emirate had already drawn down $1 billion of the $5 billion from the banks, provided under a five-year bond priced at 4 percent, with the rest yet to be used. Dubai World is in the midst of talks with its creditors to finalize a formal standstill agreement that would last for six months, during which the conglomerate will restructure its remaining debt burden, estimated at some $22 billion. Uncertainty over the restructuring has weighed on UAE markets as investors fret about the outcome amid a dearth of information and lack of transparency.
The conglomerate said this month it is "some time away" from presenting its formal plan to creditors, though it is expected in coming weeks. "Clearly there were critical time deadlines last year that required extraordinary measures," said Mashreq Capital Chief Executive Abdul Kadir Hussain, of Abu Dhabi's bailout. "But whatever form is required, whether it's the federation or Abu Dhabi, what is critical now is a well-documented plan for repayment and ... a strategy that will show how all of this will be taken care of." On Monday, the Financial Times said some creditors to the conglomerate are seeking to offload loans to reduce their exposure to the conglomerate.
Australia considers tax breaks to woo banks
The Rudd government is considering new tax breaks for banks and reducing financial regulation in an effort to build Australia as a regional financial centre, capitalising on Australia's good performance during the global financial crisis. The measures, contained in a report delivered to the government yesterday, go against the international trend of raising bank taxes and restricting the growth of the financial services industry.
Financial Services Minister Chris Bowen said the government believed the financial crisis had created an opportunity. "For some time, the world's investors will be looking to see who got through the best, and who was a safe haven; Australia stands out," Mr Bowen said. The aggressive pursuit of international banks and funds managers appears at odds with Kevin Rudd's rhetoric about the financial industry demonstrating the "triumph of speculation over value creation" during the crisis.
Mr Bowen said the government's approach was to promote Australia's sound financial regulation. "I don't see it as being in conflict at all," he said. "I don't think the answer to promoting Australia's financial services industry is to have light-touch regulation, but to have the best balance." Mr Bowen said the proposal to build Australia as a financial centre had been part of Labor's platform in opposition and the Prime Minister's support for the strategy was shown in making financial services a cabinet portfolio.
Mr Bowen commissioned the review into the obstacles to the growth of the financial services industry in September 2008, just as the global financial crisis was about to burst with the collapse of Lehman Brothers. The report's release coincided with US President Barack Obama announcing a punitive $US90 billion ($96.8bn) tax on the US banking system to recoup taxpayer losses in bailing it out. Mr Bowen said he did not believe other nations were deliberately trying to shrink their finance sectors. "That may be the result of some policy decisions, but it is not their intent," he said. The study was prepared by a panel of senior finance industry executives, led by former Macquarie Bank chief executive Mark Johnson, but was supported by Treasury officials.
The report recommends a series of tax breaks for banks and funds managers, including the removal of withholding tax on the interest income that foreign banks earn from their Australian branches, and making it easier for overseas investors to use managers in Australia without paying tax on their investment returns. It says one of the biggest obstacles to foreign funds management companies establishing operations in Australia is that our tax law does not allow investors in a unit trust to gain a tax benefit from losses.
The tax office has vigorously opposed efforts by the venture capital industry to allow investors to make use of tax losses, fearing it would open new scope for tax avoidance. Mr Bowen said recommendations on taxation would have to be considered, alongside those of the Henry review, and would also have to be accommodated within the tight budget limits which the Rudd government had imposed to reduce the deficit.
However, the tax breaks were live options for the government. "These recommendations will receive serious consideration. Otherwise we wouldn't have commissioned it," he said.
It urges that tax law be changed to make sure that financial products offered by Islamic banks get the same tax treatment as those of other banks. Islamic banks overcome the religious ban on interest by repaying lenders a larger principal sum, which would have different taxation. One of the arguments made for attracting more foreign financial institutions to Australia is to make it easier to finance Australia's current account deficit by improving access to offshore sources of capital, such as "petro-dollars" from the Middle East.
The report also calls for winding back regulation of financial services, giving particular emphasis to the rules that stop corporate bonds being marketed to retail investors in the same way as shares. The Rudd government's initiative is the third effort to make Australia more attractive to foreign financial institutions. As prime minister, Paul Keating changed offshore banking legislation in 1992, and former treasurer Peter Costello launched a strategy to make Australia a regional finance centre in 1997.
Despite these initiatives, the export of financial services is a tiny share of the Australian finance industry, accounting for barely 3 per cent of total value added by the sector, compared with 50 per cent in Britain, 25 per cent in Singapore, and about 8 per cent in Canada and the US. Mr Bowen said the reason previous efforts had failed was because major obstacles, such as the highest withholding tax in the world, had not been tackled. Coalition finance spokesman Luke Hartsuyker held out the offer of rare bipartisan support, while saying he had yet to study the recommendations in detail.
New Ships Idle, Waiting for Cargo to Fill Them
From Loch Striven in Scotland to the Strait of Malacca in Southeast Asia, more than a tenth of the vessels that transport the world’s manufactured goods in containers are idle. For most, orders to sail will not come for some time. Although world trade, which collapsed last year, is beginning to recover, driven by demand from developing countries, the recovery is being offset by added capacity in the large number of new container ships coming out of shipyards.
Among those suffering the most are lines like the German carrier Hapag-Lloyd and the Danish group A. P. Moller-Maersk. Much like the giant banks crippled by the subprime mortgage crisis, the companies are now paying for having expanded too aggressively during the boom, according to analysts. Drewry Shipping Consultants in London estimates that the 20 or so major carriers, all Asian or European, lost $20 billion in 2009. According to Alphaliner, an industry information provider, seven smaller carriers shut down last year, including Contenemar of Spain. “We’ve never seen anything like this,” said Chris Bourne, executive director of the European Liner Affairs Association. “It’s the worst situation since the start of containerization in the ’60s.”
Carriers have long had to adapt to economic cycles, shifting trade patterns and geopolitics. During the 1970s, they were hit by the oil shocks and the reopening of the Suez Canal, which cut demand for the supertankers that rounded southern Africa. Recovery took a decade, hampered by recession during the 1980s. The current slowdown is weighing not only on the shipping companies, but also on ports and shipyards, especially in Europe.
According to IHS Global Insight, a research and consulting firm, the global liner industry — the companies that mainly transport cargo containers — is responsible for 13.5 million jobs directly or indirectly. The 400 liner services carry 60 percent of international seaborne trade, according to the World Shipping Council, which represents the industry; the remainder is carried mainly by tankers (oil and natural gas) and bulk ships (coal, grain and heavy equipment). One key route is between Europe and the developing countries in Asia.
China, which recently surpassed Germany as the world’s largest exporter, announced last Sunday that exports had risen 17.7 percent in December from a year earlier, the first increase in 14 months; imports rose 55.9 percent. Other developing countries are also seeing strong demand for freight, particularly products like cement or steel for building projects. But that mostly means business for tankers and bulk carriers, not container ships.
Most analysts say that container traffic will probably not recover to prerecession levels until 2012 or later. Drewry Shipping expects a 2.4 percent increase in global trade volume this year, after an estimated 10.3 percent decline last year. “On the demand side, we do see some strength; we see continued strength in China,” said Vikrant S. Bhatia, chief executive of KC Maritime, a bulk-carrier shipping line based in Hong Kong. “The problem we see is really on the supply side.”
Until 2008, the liners were cresting; shipyards were humming, building ever larger ships as ports expanded and new services opened, underpinned by low-cost finance. “Everyone thought they could walk on water,” said Jesper Kjaedegaard, a partner with the consulting firm Mercator International in London. “The container liners were like kids in a toy store.” Then, the recession led to a slowdown in trade, and underscored the overcapacity in the industry. Container carriers have responded by slowing their shipbuilding plans; analysts said that financing had yet to be arranged on most ships on order for this year and next.
Some new ships have been deferred, almost certainly involving lost down payments, which are typically 15 to 20 percent — not an insignificant amount if the bill is $160 million. The privately held CMA CGM of France, one large carrier, recently said that it was discussing cancellations and postponements with shipbuilders in South Korea. Even so, shipbuilders are expected to deliver 371 container ships this year and 127 in 2012, according to Alphaliner. The container fleet will grow 14 percent in 2010 and almost 10 percent next, meaning that even more ships will be competing for cargo.
Hercules E. Haralambides, director of the Center for Maritime Economics and Logistics at Erasmus University Rotterdam, said many Asian carriers were in a better position than their European rivals because government subsidies had allowed shipyards to shift canceled orders to domestic liners or owners at low rates.
The European industry has been in decline for years. Italian and German shipyards have recently sought state guarantees, and the European Commission approved aid to the historic Gdansk yard in Poland last year. But government support runs beyond shipbuilding. Tens of billions of dollars were extended to the sector in Europe last year, excluding aid to banks most exposed to the industry, like Royal Bank of Scotland and Commerzbank. Berlin and Hamburg have already stepped in to support HSH Nordbank, the largest shipping finance bank, and the German government has offered Hapag-Lloyd 1.2 billion euros ($1.7 billion) in guarantees.
CMA CGM has also opened talks with the French government, and French ship owners have requested guarantees to meet lenders’ demands. French and German executives have requested “bad banks” in which to unload problem debts. Fabio Pirotta, a spokesman for the European Commission, which polices competition policy in Europe, said approval of such aid for shipping companies was “still under assessment.” But some industry players and shippers are already crying foul. Anders Würtzen, head of public affairs at A. P. Moller-Maersk, said government aid to seaborne carriers was “always bad news, whether granted to European or Asian companies, to the extent that it is used to maintain vessel new-building programs that could otherwise be reduced or delayed.” That sentiment is echoed by shippers.
Maersk, owner of the largest container carrier, Maersk Line, posted a first-half loss in 2009 of $540 million. Morten H. Engelstoft, chief operations officer, said the company had been shedding capacity, using “super-slow steaming,” laying up vessels and examining alliances to share routes, as long as they did not violate antitrust rules. The outlook is still “bumpy,” he said. “Despite the latest rate increases, the rates are below cost and clearly unsustainable.” An European Liner Affairs Association index of European import rates fell below 50 in March, from 100 in 2008, before recovering to 80 in the autumn.
Further out, consolidation is unlikely until the market stabilizes further, and that will take time, said Mr. Bourne of the liner association. The near-term fix still involves mooring vessels offshore. At Loch Striven, Maersk has six ships idle; it expects them to remain there another year. The company has been trying to win over skeptical residents by arranging tours and reducing noise. Local anger is now directed at the port of Clydeport, for sending the vessels to the loch after Maersk had requested mooring facilities.
Our Basic Human Pleasures - Food, Sex and Giving
Want to be happier in 2010? Then try this simple experiment, inspired by recent scholarship in psychology and neurology. Which person would you rather be:
Richard is an ambitious 36-year-old white commodities trader in Florida. He’s healthy and drop-dead handsome, lives alone in a house with a pool, and has worked his way through a series of gorgeous women. Richard’s job is stressful, but he spent Christmas in Tahiti. Unencumbered, he also has time to indulge such passions as reading (right now he’s finishing a book called “Half the Sky”), marathon running and writing poetry. In the last few days, he has been composing an elegy about the Haiti earthquake.
Lorna is a 64-year-old black woman in Boston. She’s overweight and unattractive, even after a recent nose job. Lorna is on regular dialysis, but that doesn’t impede her active social life or babysitting her grandchildren. A retired school assistant, she is close to her 67-year-old husband and is much respected in her church for directing the music committee and the semiannual blood drive. Lorna believes in tithing (giving 10 percent of her income to charity or the church) and in the last few days has organized a church drive to raise $10,000 for earthquake relief in Haiti.
I adapted those examples from ones that Jonathan Haidt, a psychology professor at the University of Virginia, develops in his fascinating book, “The Happiness Hypothesis.” His point is that while most of us might prefer to trade places with Richard, Lorna is probably happier.
Men are no happier than women, and people in sunny areas no happier than people in chillier climates. The evidence on health is complex, but even chronic health problems (like those requiring dialysis) may have surprisingly little long-term effect on happiness, because we adjust to them. Beautiful people aren’t happier than ugly people, although cosmetic surgery does seem to leave patients feeling brighter. Whites are happier than blacks, but only very slightly. And young people are actually a bit less happy than older folks, at least up to age 65.
Lorna has a few advantages over Richard. She has less stress and is respected by her peers — factors that make us feel good. Happiness is tied to volunteering and to giving blood, and people with religious faith tend to be happier than those without. A solid marriage is linked to happiness, as is participation in social networks. And one study found that people who focus on achieving wealth and career advancement are less happy than those who focus on good works, religion or spirituality, or friends and family. “Human beings are in some ways like bees,” Professor Haidt said. “We evolved to live in intensely social groups, and we don’t do as well when freed from hives.”
Happiness is, of course, a complex concept and difficult to measure, and John Stuart Mill had a point when he suggested: “It is better to be a human being dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied.” But in any case, nobility can lead to happiness. Professor Haidt notes that one thing that can make a lasting difference to your contentment is to work with others on a cause larger than yourself. I see that all the time. I interview people who were busy but reluctantly undertook some good cause because (sigh!) it was the right thing to do. Then they found that this “sacrifice” became a huge source of fulfillment and satisfaction.
Brain scans by neuroscientists confirm that altruism carries its own rewards. A team including Dr. Jorge Moll of the National Institutes of Health found that when a research subject was encouraged to think of giving money to a charity, parts of the brain lit up that are normally associated with selfish pleasures like eating or sex. The implication is that we are hard-wired to be altruistic. To put it another way, it’s difficult for humans to be truly selfless, for generosity feels so good.
“The most selfish thing you can do is to help other people,” says Brian Mullaney, co-founder of Smile Train, which helps tens of thousands of children each year who are born with cleft lips and cleft palates. Mr. Mullaney was a successful advertising executive, driving a Porsche and taking dates to the Four Seasons, when he felt something was missing and began volunteering for good causes. He ended up leaving the business world to help kids smile again — and all that makes him smile, too.
So at a time of vast needs, from Haiti to our own cities, here’s a nice opportunity for symbiosis: so many afflicted people, and so much benefit to us if we try to help them. Let’s remember that while charity has a mixed record helping others, it has an almost perfect record of helping ourselves. Helping others may be as primal a human pleasure as food or sex.
Larry Summers, Robert Rubin: Will The Harvard Shadow Elite Bankrupt The University And The Country?
Harvard's Secret Seven
At the heart of the new system of power, says Janine Wedel, is "a decline in loyalty to institutions" and "the proliferation of players who swoop in and out of organizations with which they are affiliated." There is no more vivid example of this phenomenon than Harvard University, which for centuries was held together by institutional loyalty. Today, that loyalty has eroded, and those at the top act much more flexibly. Yet they still enjoy almost unlimited power. Like all forms of mismanagement, Harvard's woes call for transparency and accountability. The story resonates to Washington, where Harvard's power elite is deeply entangled.
Harvard lost $11 billion from its endowment last year, plus another $2 billion by gambling with operating cash and $1 billion in bad bets on interest rate fluctuations. Harvard had been borrowing vast sums to leverage its assets and to expand its physical plant; its president, Lawrence Summers, had described as "extraordinary investments" what ordinary people would call crushing debt. The only way to balance the looming deficits was through huge investment returns. The speculating worked for a while, but when the bubble burst, Harvard was left almost insolvent.
A presidential resignation might have been expected, but Summers, the president most responsible for Harvard's unsustainable growth plan, had resigned already--he is now a top economic adviser to Barack Obama. In any case, plenty of costly mistakes were made after he left. In this era of heightened corporate accountability, one might have expected instead a shake-up of Harvard's board. But Harvard's directors are invulnerable.
Legally, the Harvard Corporation consists of the president and six "Fellows," who serve for life if they wish and cannot be unseated by anyone except themselves. In spite of the privileges it receives as a tax exempt charity, Harvard is not subject to the financial and risk disclosure rules that protect the shareholders of public corporations. The Corporation is stunningly secretive. The members are listed on a Harvard web page--but with no contact information. Their meetings and agendas are unannounced, their decisions unreported. The Fellows, scattered across the country, are isolated from the institution they govern. Even the university's statutes--the closest thing to a constitution limiting the Corporation's discretionary power--are almost impossible to locate. The colonial-era board structure is failing the modern university.
Harvard's board is intertwined with the shadow elite of Wedel's Chapter 5: the team of experts who disastrously advised the Russian government on capitalism in the 1990s. Engaged by the U.S. to show the Russians how the West controls corruption, the advisers became models of what to avoid. Here is the Cambridge-Moscow-Washington story in a nutshell. In 1991, Lawrence Summers became chief economist of the World Bank, moving to the Treasury Department in 1993. When Robert Rubin became Treasury Secretary in 1995, Summers became his Deputy Secretary, later succeeding him as Secretary.
In 1992, Andrei Shleifer, a Harvard professor and a close friend of Summers since Shleifer's college days at Harvard, became head of a Harvard project that directed U.S. government money for the development of the Russian economy. Tens of millions of dollars in noncompetitive U.S. contracts flowed to Harvard for Shleifer's Russian work, and his team directed the distribution of hundreds of millions more. Through the mid-1990s, complaints accumulated in Washington about self-dealing and improper investing by the Harvard team, and by mid-1997, the Harvard contracts had been canceled and the FBI had taken up the case. For two years it was before a federal grand jury.
In September, 2000, the government sued Harvard, Shleifer, and others, claiming that Shleifer was lining his own pockets and those of his wife, hedge fund manager Nancy Zimmerman--formerly a vice president at Goldman Sachs under Rubin. Soon after, when Summers became a candidate for the Harvard presidency, Shleifer lobbied hard for him in Cambridge. Rubin assured the Fellows that the abrasiveness Summers had exhibited at Treasury was a thing of the past. They named him president--in spite of what was already known about his enabling role in the malodorous Russian affair, and the implausibility of a personality metamorphosis.
Summers did not recuse himself from the lawsuit until more than three months after his selection as president, and even then used his influence to protect Shleifer. The Fellows--including Rubin, whom Summers added to the Corporation--fought the case for years, spending upwards of $10M on lawyers. But in 2005 a federal judge found Shleifer to have conspired to defraud the government and held Harvard liable as well. To settle the civil claims, Shleifer paid the government $2M and Harvard paid $26.5M; Zimmerman's company had already paid $1.5M. Shleifer denied all wrongdoing, and Harvard disclosed nothing about any response of its own--a departure from its handling of misconduct by faculty farther from the center of power.
Summers remained close to Shleifer, yet claimed in a February 2006 faculty meeting to know too little about the scandal to have formed an opinion about it. This prevarication brought a gasp from the assembled faculty and solidified faculty opposition to the Summers presidency. Rubin is now gone from his leadership role and his board membership at Citigroup, hauling away $126M from a firm that was $65B poorer than when he joined it, with 75,000 fewer jobs. But he remains on the Harvard board, in spite of the financial meltdowns at both Citigroup and Harvard and his poor oversight of the problematic president he persuaded Harvard to hire.
The Rubin network remains alive and well in the White House, including not just Summers but several other Rubin protégés. Among the strangest of these power loops is that the well-connected Nancy Zimmerman has turned up as a member of Summers's economic policy brain trust. The modern power elites thrive by forgetting any regrettable past. This amnesia is easy at Harvard, where the legal fiduciaries operate in secret and need not answer for their acts. They are the antipodes of the selfless institutional servants who built Harvard and other great American enterprises, and they bear close watching.