managingtherecession

Finance lesson made simple

2011-12-18T16:13:00.000-08:00

> Lesson #1:

> Why the U.S. was downgraded:
> * U.S. Tax revenue: $2,170,000,000,000
> * Fed budget: $3,820,000,000,000
> * New debt: $ 1,650,000,000,000
> * National debt: $14,271,000,000,000
> * Recent budget cuts: $ 38,500,000,000
>
> Let's now remove 8 zeros and pretend it's a household budget:
> * Annual family income: $21,700
> * Money the family spent: $38,200
> * New debt on the credit card: $16,500
> * Outstanding balance on the credit card: $142,710
> * Total budget cuts: $385

> Got It ?

Be Honest – The European Debt Deal Was Really A Greek Debt Default

2011-10-30T05:26:00.000-07:00

Once the euphoria of the initial announcement faded and as people have begun to closely examine the details of the European debt deal, they have started to realize that this "debt deal" is really just a "managed" Greek debt default. Let's be honest - this deal is not going to solve anything. All it does is buy Greece a few months. Meanwhile, it is going to make the financial collapse of other nations in Europe even more likely. Anyone that believes that the financial situation in Europe is better now than it was last week simply does not understand what is going on. Bond yields are going to go through the roof and investors are going to start to panic. The European Central Bank is going to have an extremely difficult time trying to keep a lid on this thing. Instead of being a solution, the European debt deal has brought us several steps closer to a complete financial meltdown in Europe.

The big message that Europe is sending to investors is that when individual nations get into debt trouble they will be allowed to default and investors will be forced to take huge haircuts.

As this reality starts to dawn on investors, they are going to start demanding much higher returns on European bonds.

In fact, we are already starting to see this happen.

The yield on two year Spanish bonds increased by more than 6 percent today.

The yield on two year Italian bonds increased by more than 7 percent today.

So what are nations such as Italy, Spain, Portugal and Ireland going to do when it costs them much more to borrow money?

The finances of those nations could go from bad to worse very, very quickly.

When that happens, who will be the next to come asking for a haircut?

After all, if Greece was able to get a 50% haircut out of private investors, then why shouldn't Italy or Spain or Portugal ask for one as well?

According to Reuters, German Chancellor Angela Merkel is already trying to warn other members of the EU not to ask for a haircut....

Chancellor Angela Merkel said on Friday it was important to prevent others from seeking debt reductions after European Union leaders struck a deal with private banks to accept a nominal 50 percent cut on their Greek government debt holdings.

"In Europe it must be prevented that others come seeking a haircut," she said.

But investors are not stupid. Greece was allowed to default. If Italy or Spain or Portugal gets into serious trouble it is likely that they will be allowed to default too.

Investors like to feel safe. They want to feel as though their investments are secure. This Greek debt deal is a huge red flag which signals to global financial markets that there is no longer safety in European bonds.

So what is coming next?

Hold on to your seatbelts, because things are about to get interesting.

Around the globe, a lot of analysts are realizing that this European debt deal was not good news at all. The following is a sampling of comments from prominent voices in the financial community....

*Economist Sony Kapoor: "The fact that a deal has been agreed, any deal, impresses people. Until they start de-constructing it and parts start unravelling."

*Economist Ken Rogoff: "It feels at its root to me like more of the same, where they’ve figured how to buy a couple of months"

*Neil MacKinnon of VTB Capital: "The best we can say is that the EU have engineered a temporary reprieve"

*Graham Summers of Phoenix Capital Research:

First off, let’s call this for what it is: a default on the part of Greece. Moreover it’s a default that isn’t big enough as a 50% haircut on private debt holders only lowers Greece’s total debt level by 22% or so.

Secondly, even after the haircut, Greece still has Debt to GDP levels north of 130%. And it’s expected to bring these levels to 120% by 2020.

And the IMF is giving Greece another $137 billion in loans.

So… Greece defaults… but gets $137 billion in new money (roughly what the default will wipe out) and is expected to still be insolvent in 2020.

*Max Keiser: "There will be another bailout required within six months - I guarantee it."

The people that are really getting messed over by this deal are the private investors in Greek debt. Not only are they being forced to take a brutal 50% haircut, they are also being told that their credit default swaps are not going to pay out since this is a "voluntary" haircut.

This is completely and totally ridiculous as an article posted on Finance Addict pointed out...

We now know that private holders of Greek bonds will be “invited” (seriously–this was the word used in the EU summit statement) to take a write-down of 50%–halving the face value of the estimated $224 billion in bonds that they hold. This will help bring the Greek debt-to-GDP ratio down from 186% in 2013 to 120% by 2020. The big question–apart from how many investors they will get to go along with this, given that they couldn’t reach their target of 90% investor participation when the write-down was only going to be 21%–is whether this will trigger a CDS pay-out.

That this is even up for discussion is mind-boggling. These credit default swaps are meant to be an insurance policy in case Greece doesn’t pay the agreed upon interest and return the full principal within the agreed timeframe. If they don’t pay out when bondholders are taking a 50% hit then what’s the point?

European politicians may believe that they have "solved" something, but the truth is that what they have really done is they have pulled the rug out from under the European financial system.

Faith in European debt is going to rapidly disappear and the euro is likely to fall like a rock in the months ahead.

The financial crisis in Europe is just getting started. 2012 looks like it is going to be an extremely painful year.

Let us hope for the best, but let us also prepare for the worst.

The One Percent: Gigantic Government + Gigantic Corporations = Massive Wealth Inequality In America

2011-10-26T16:37:00.001-07:00

Today, there are protests all over America that are targeting "the one percent" and all of the wealth and power that they have accumulated. Unfortunately, many of the solutions that these protesters are advocating simply will not work and will not lead to less wealth inequality. To understand this, you have to understand how we got to this point. Over the past several decades, our federal government has exploded in size and our large corporations have exploded in size. In fact, we have seen this pattern happen pretty much all over the world. Governments and corporations all over the globe are getting much bigger. Whenever you have very, very large concentrations of money and power like that, it is going to lead to massive wealth inequality. The Occupy Wall Street protesters would like to frame this debate as "socialism vs. capitalism", but the truth is that wherever you find big government you will almost always find big corporations, and wherever you find big corporations you will almost always find big government. Sure, they spar once in a while, but the reality is that big government and big corporations work in tandem most of the time. Sometimes big government has the upper hand and sometimes big corporations have the upper hand, but they are both collectivist institutions. Wherever you find collectivism in the world, you will find an elite that receives most of the benefits while the rest of the population suffers. In the United States today, our gigantic government is thriving and our gigantic corporations are thriving and the middle class is rapidly shrinking. The solution to this is not to replace one form of collectivism with another form of collectivism. Rather, what we need is to go back to what our founding fathers intended. They were extremely suspicious of large concentrations of wealth and power, and they intended for us to live in a capitalist system where individuals and small businesses had the freedom to compete and thrive.

Today, Democrats tell us that we need an even bigger government and that we need to redistribute even more wealth to the poor. But the bigger the government gets, the more poor people we seem to have. As you will see below, the only people that seem to be thriving from big government are the bureaucrats.

Republicans tell us that we need to make life better for the big corporations. But the reality is that the bigger our giant corporations get, the faster the middle class shrinks. The big corporations are shipping millions of our jobs out of the country, and they are magnets for wealth and power. If you are not aware of how overwhelmingly dominant corporations have become in our society, just read this article.

Democrats should not be defending big government, and Republicans should not be defending the abuses of the big corporations.

Whenever big government and big corporations work together there is going to be massive income inequality, and massive income inequality is not a good thing.

Yes, there are always going to be some people that do much better than others (and there is nothing wrong with that), but we should not have a system which is designed to funnel almost all of the wealth and almost all of the power to a very small minority.

In essence, this article is arguing the following....

Gigantic government = bad.

Gigantic corporations = bad.

This was the view of our founding fathers, and this is what we need to get back to.

Let's take a look at some of the results of our current system. Let's start with income inequality caused by big government.

Today, the Washington D.C. region has the highest median household income in the entire nation. According to the most recent numbers, median household income in the D.C. area is $84,523.

So what is the cause of this?

Well, it is not because Washington D.C. is a great center of industry or finance. Rather, it is because the federal government is spending over 3 trillion dollars a year and is showering huge piles of cash on hordes of bureaucrats.

In a recent article, I noted some of the mind blowing statistics that show how bureaucrats in Washington D.C. are living the high life at our expense....

*When you total up all compensation (including health care and benefits), the average income for a federal worker in the Washington D.C. area last year was $126,369.

*In 2005, 7420 federal workers were making $150,000 or more per year. In 2010, a whopping 82,034 federal workers were making $150,000 or more per year. That is more than a tenfold increase in just five years.

*In 2005, the U.S. Department of Defense had just nine civilians earning $170,000 or more. When Barack Obama took office, the U.S. Department of Defense had 214 civilians earning $170,000 or more. In June 2010, the U.S. Department of Defense had 994 civilians earning $170,000 or more.

*Last year, federal employees "earned" approximately 447 billion dollars in total compensation.

As I have written about previously, our gigantic federal government also empowers the big corporations to continue to accumulate staggering amounts of wealth and power. This is one reason why the big corporations contribute so much money to political campaigns. The big corporations (and the elite that own and run them) have much more influence over the political process than we do. They have spent decades buying politicians and getting laws passed that tilt the rules of the game radically in their favor.

This is something that our founding fathers did not want to happen. In a 2010 article, Rick Ungar noted that there were very significant restrictions on corporations in the early days of America....

After the nation’s founding, corporations were, as they are today, the result of charters granted by the state. However, unlike today, they were limited in how long they were permitted to exist (typically 20 or 30 years), only permitted to deal in one commodity, they could not own shares in other corporations, and their property holdings were expressly limited to what they needed to accomplish their corporate business goals.

There was a lot of wisdom to that approach. Our founding fathers knew that corporations would become giant magnets for wealth and power if they were allowed to grow unchecked.

Today, multinational corporations completely and totally dominate the global economy. The following comes from a recent article I posted on The American Dream....

Corporations not only completely dominate the U.S. economy, they also completely dominate the global economy as well. A newly released University of Zurich study examined more than 43,000 major multinational corporations. The study discovered a vast web of interlocking ownerships that is controlled by a "core" of 1,318 giant corporations. But that "core" itself is controlled by a "super-entity" of 147 monolithic corporations that are very, very tightly knit. As a recent article in NewScientist noted, these 147 corporations control approximately 40 percent of all the wealth in the entire network

These giant corporations are so dominant that it is nearly impossible to compete with them. The number of small businesses in America is shrinking fast.

According to the Bureau of Labor Statistics, 16.6 million Americans were self-employed back in December 2006. Today, that number has shrunk to 14.5 million.

This is exactly what we would expect to see under "corporatism", but under true capitalism we would expect to see the exact opposite.

As the federal government and the big corporations continue to grow, the middle class is being wiped out. If you doubt that the middle class is shrinking, just read this article.

Yes, there is a limited role for the federal government to play and there is a limited role for corporations to play. But right now things are radically, radically out of balance.

This is creating a tremendous amount of income inequality in the United States. The middle class is being systematically destroyed, and the growth of the gap between the one percent and the rest of us just continues to accelerate.

This was certainly illustrated by numbers that were recently released by the Congressional Budget Office. The very wealthy have done extremely well over the last 30 years. For the rest of us, things have not been so great. The following figures come from a recent blog post by the director of the Congressional Budget Office....

CBO finds that between 1979 and 2007:

For the 1 percent of the population with the highest income, average real after-tax household income grew by 275 percent (see figure below).
For others in the 20 percent of the population with the highest income, average real after-tax household income grew by 65 percent.
For the 60 percent of the population in the middle of the income scale, the growth in average real after-tax household income was just under 40 percent.
For the 20 percent of the population with the lowest income, the growth in average real after-tax household income was about 18 percent.

Meanwhile, as a recent USA Today article noted, the middle class continues to falter in the majority of the communities around the United States....

A USA TODAY analysis of Census data found the Reno area was among 150 nationwide where the share of income going to the middle class — generally made up of households that make $20,700 to $99,900 a year — shrank from 2006 to 2010. Metro areas where the middle class' share of income dropped outnumbered those where it grew by more than 2-to-1.

So just how well is the top one percent doing compared to the rest of us?

The following statistics should be a wake up call for all of us....

*According to the Congressional Budget Office, the top one percent is the only group that saw its share of our national income increase between 1979 and 2007.

*According to a joint House and Senate report entitled "Income Inequality and the Great Recession", the top one percent of all income earners in the United States brought in a total of 10.0 percent of all income income in 1980, but by the time 2008 had rolled around that figure had skyrocketed to 21.0 percent.

*Between 1979 and and 2007, the average household income of the top one percent of all Americans soared from $346,600 to $1.3 million.

*In the United States today, the wealthiest one percent of all Americans have a greater net worth than the bottom 90 percent combined.

*As the "one percent" thrives, the share of the pie being enjoyed by the middle class is shrinking. According to Heidi Shierholz, an economist with the Economic Policy Institute, about 53 percent of all income went to the middle class back in the 1970s, but today only about 46 percent of all income does.

*According to Harvard Magazine, 66% of the income growth between 2001 and 2007 went to the top one percent of all Americans.

*The wealthiest one percent of all Americans now own more than a third of all the wealth in the United States while the poorest 50 percent of all Americans collectively own just 2.5% of all the wealth in the United States.

*The wealthiest one percent of all Americans own over 50% of all the stocks and bonds.

*The top 0.01% of Americans make an average of $27,342,212. The bottom 90% make an average of $31,244.

*This is all happening at a time when the United States as a whole is slipping. Ten years ago, the United States was ranked number one in average wealth per adult. In 2010, the United States fell to seventh.

*Income inequality is not just growing in the United States. Today, the wealthiest one percent of the earth's population controls 39% of the wealth.

There is certainly nothing wrong with being wealthy. If you and your family work really hard and provide great value to the community around you then you should greatly benefit.

But a system that is designed to systematically drain wealth from the general population and transfer it into the hands of an ultra-wealthy elite is not what our founding fathers ever hand in mind. At the time of our founding, England was dominated by big government (the monarchy) and by big business (the East India Company, for example). Our founders warned us over and over about the potential abuses that can happen when very large concentrations of wealth and power are allowed to dominate a society.

Unfortunately, the Occupy Wall Street movement has it all wrong. They recognize the overwhelming wealth and power accumulated by the one percent, but most of them are advocating even more collectivism as the answer.

Some of them even say that they want to "end capitalism" altogether. Michael Moore says that he is not part of the one percent and that he wants to "end capitalism", even though he has made millions upon millions of dollars from his various projects.

But socialism and communism never bring equality. Like other forms of collectivism, socialism and communism almost always bring more tyranny and they almost always funnel most of the financial rewards to a very small elite.

Others simply wish to see the U.S. government transfer more wealth from the hands of the rich to the hands of the poor.

Helping the poor is certainly a noble goal, and handouts can certainly ease suffering at least temporarily. But handouts are never a permanent solution and they can cause large numbers of people to end up becoming completely and totally dependent on the government.

Back in 1980, government transfer payments accounted for just 11.7% of all income. Today, government transfer payments account for 18.4% of all income.

So has the plight of the poor gotten better?

No, we now have more than 45 million Americans on food stamps, last year we had the largest increase in the number of Americans living in poverty in U.S. history and the middle class continues to shrink rapidly.

The truth is that what poor and middle class Americans really need are opportunities. Handouts will keep people alive, but they will not give people hope and a future.

What Americans really need is an environment where they can find jobs or start small businesses. Unfortunately, the environment for small businesses in this country is incredibly toxic and millions of our good jobs have been shipped overseas. The big corporations have discovered that they can make even bigger profits by sending jobs to countries where it is legal to pay slave labor wages. To say that we need big corporations because they are the ones that "create jobs" is simply not true anymore.

So now we have tens of millions of Americans that we have to take care of every single month. There is nothing wrong with helping them survive, but giving them even more handouts is not going to permanently solve anything.

We need to have a population that is empowered to work hard, produce wealth and create a bright future for their families.

Instead, what we have is a system that greatly rewards the top one percent and that is pushing all of the rest of us toward poverty.

Gigantic government plus gigantic corporations is always going to equal massive wealth inequality.

The bigger we allow government to grow and the bigger we allow corporations to grow, the worse it is going to get.

So is any of this going to change any time soon?

Well, considering the fact that the vast majority of our politicians are in the pockets of the big corporations, I would not be getting your hopes up.

What Have We Gotten For The Trillion Dollars We Have Spent On Wars In Afghanistan, Iraq And Libya?

2011-10-24T18:47:00.000-07:00

Over a trillion U.S. taxpayer dollars have been spent on wars in Afghanistan, Iraq and Libya. Whether you are for the wars or against the wars, it is important for all of us to step back and evaluate what we have really gotten for all of that money. In Libya, we have actually helped al-Qaeda forces that were shooting at U.S. soldiers in Iraq and Afghanistan take over the country. Now they have announced that they will be imposing strict Sharia law on all of Libya. After 10 years of having our boys shot up in Afghanistan, the Afghan government is so "grateful" that they are publicly saying that they will side with Pakistan in any future war against the United States. In Iraq, Islamic radicals are beheading and killing dozens and dozens of Christians and the new Iraqi government seemingly can't wait to push the remaining U.S. soldiers out of the country. We ran up well over a trillion dollars of new debt to "liberate" these countries, but are they really in better shape than they were before these wars? Are we really in better shape than we were before these wars?

Today, the United States military has at least one base in more than half of all the nations on the planet.

The U.S. spends more than 7 times as much on the military as any other country on earth does.

Without a doubt, the United States will always need a strong military. But with the national debt soaring to unprecedented heights, is it really wise for us to try to be the police of the entire globe?

We have poured well over a trillion dollars into Afghanistan, Iraq and Libya and we have very little to show for it.

Are Afghanistan, Iraq and Libya safer places than before we went to war with them?

No.

Are Afghanistan, Iraq and Libya producing fewer "terrorists" than before we went to war with them?

No.

Are we safer than before we started all these wars?

No.

Our government has spent well over a trillion dollars and the blood of thousands upon thousands of U.S. soldiers has been spilled and in the final analysis very little has actually been accomplished.

Let's take a closer look at these conflicts and see exactly what we have gotten for all of the money that we have spent....

Libya

In Libya, we have actually helped al-Qaeda take power.

In Afghanistan and Iraq we were supposedly fighting to do just the opposite.

So just what in the world is going on here?

The price tag for the first week of airstrikes on Libya alone was 600 million dollars.

Yes, Gaddafi was a tyrant, but have we invested a lot of time and effort only to watch as an even worse government takes power?

According to The Telegraph, the leader of the Libyan rebels was openly admitting that his "troops" included jihadists that were firing bullets at U.S. forces in Iraq....

Abdel-Hakim al-Hasidi, the Libyan rebel leader, has said jihadists who fought against allied troops in Iraq are on the front lines of the battle against Muammar Gaddafi's regime.

A recent article by Kurt Nimmo for Infowars.com discussed some of the other ways that al-Qaeda has been active in Libya during the fight against Gaddafi....

Despite Aujali’s assurance, Abdel Hakim Belhadj, the former head of LIFG, was appointed to run a military council in September. He fought with al-Qaeda and the Taliban in Afghanistan.

In February, it was reported that al-Qaeda had set-up an Islamic emirate in Derna, in eastern Libya, headed by a former prisoner at Guantanamo Bay, Abdelkarim al-Hasadi.

Now that they have won, the "rebels" have announced that they will be imposing strict Sharia law all over Libya.

According to a new article posted on The Telegraph, Mustafa Abdul-Jalil, the chairman of NATO’s National Transitional Council, has even announced plans to repeal polygamy laws because they are not compliant with Sharia law....

Mr Abdul-Jalil went further, specifically lifting immediately, by decree, one law from Col. Gaddafi's era that he said was in conflict with Sharia - that banning polygamy.

Should we be cheering this?

Why would the U.S. government want to spend a single penny helping al-Qaeda take over Libya and set up Sharia law there?

There should not be a single American (conservative or liberal) that supports what has gone down in Libya.

Afghanistan

The U.S. military has now been in Afghanistan for 10 years. World War II lasted less than 6 years. The U.S. government has spent over 467 billion dollars on the war in Afghanistan, and thousands upon thousands of our troops have been killed or wounded there.

Even after all this time, a single day of the war in Afghanistan costs more money than it took to build the entire Pentagon.

So are the Afghans grateful that we have sacrificed so much to bring "democracy" to that nation?

Of course not.

Just check out what Afghan President Hamid Karzai said during one recent interview....

"God forbid, If ever there is a war between Pakistan and America, Afghanistan will side with Pakistan"

Did you catch that?

Karzai says that in a future war between Pakistan and the United States, Afghanistan is going to be fighting against us.

But didn't we bring them freedom?

No, we did not.

Instead, one radical Islamic government replaced another.

Today, there are officially zero Christian churches left in Afghanistan.

The new constitution of Afghanistan says that that Islam is the "religion of the state".

The new constitution of Afghanistan also states that "no law can be contrary to the beliefs and provisions of the sacred religion of Islam".

Earlier this year, I wrote about one Afghan man that was actually sentenced to death for converting to Christianity....

In Afghanistan right now, a one-legged Afghan Red Cross worker named Said Musa is sitting in a prison cell awaiting his execution. Musa, a father of six children, was arrested by the Afghan government as he attempted to seek asylum at the German embassy last year. He was sentenced to death by an Afghan court that was established by the new Afghan government that the United States worked so hard to set up. He has been tortured and sexually abused for months. An Afghan judge has told him that he will be hung within a matter of days. So what was his crime? He was a Muslim that has become a Christian. Under Sharia law, that is punishable by death. Is this is the "freedom" that we have sacrificed so many American lives to bring to Afghanistan?

Thankfully he was later released from prison and was able to get out of the country.

However, this just shows that the people of Afghanistan are currently experiencing a level of freedom that is quite comparable to what they experienced under the Taliban.

After all that the United States has done over there, very little positive change has taken place.

Iraq

Up to now, it is estimated that the U.S. government has spent over 800 billion dollars on the war in Iraq.

Thousands upon thousands of U.S. soldiers lost arms and legs in Iraq.

Thousands of U.S. soldiers will never be coming home at all.

But after all of our efforts, Iraq is still a far less safe place than it was before we invaded.

Christians and other religious minorities once were able to worship in peace, but now they are racing to get out of Iraq as fast as they can.

Why?

Well, because Christians and other religious minorities are being brutally targeted by Islamic radicals.

For example, about a year ago more than 80 Iraqi Christians were beheaded on a single day. All that the Christians were trying to do was attend a church service. One four-month-old baby was actually beheaded right in front of her parents. You can see pictures of the shocking violence from that day right here.

Iraq is a complete and total disaster zone at this point.

The Iraqi government says that it is willing for U.S. military trainers to stay in the country, but they also say that there will be no more immunity for U.S. soldiers.

We have left the country in far worse shape than we found it, and Iraq is now a bigger breeding ground for terrorists than it ever was before.

You see, the truth is that the populations of these countries will continue to hold a grudge once we leave. They are simply not going to forgive and forget. There are millions of Islamic radicals in these countries that will never, ever, ever forgive the United States. The hatred that they feel for us could be passed down for generations.

We have not brought freedom to the people of Afghanistan, Iraq and Libya. Instead, we have just replaced the tyranny that they were suffering under with new forms of tyranny.

Meanwhile, we continue to spend ourselves into oblivion.

Yes, the U.S. will always need a strong military.

Yes, there are areas where we actually need to spend more on the military. For example, now that Barack Obama has completely gutted our strategic nuclear arsenal, that is one area that we desperately need to attend to.

However, we simply cannot continue to recklessly spend money like we are today. We are in debt up to our eyeballs, and trying to be "the police of the world" is very expensive....

*Before the start of the "War on Terror", the U.S. national debt was under 6 trillion dollars. Today, it is getting very close to 15 trillion dollars.

*Right now, the U.S. military is in nearly 130 different nations and it has a total of approximately 700 military bases around the world. It takes about 100 billion dollars a year to maintain these bases.

*U.S. military spending is greater than the military spending of China, Russia, Japan, India, and the rest of NATO combined.

*The United States accounts for 46.5% of all military spending on the planet. China is in second place with only 6.6%.

Meanwhile, our national security just continues to deteriorate. Millions of people have illegally poured across our border with Mexico and the federal government is actually suing border states such as Arizona to keep them from trying to stop this.

Our national security priorities are way, way out of whack. We continue to waste money in some of the most bizarre ways imaginable and yet we continue to become less secure with each passing year.

Yes, the United States needs a very, very strong military.

Yes, national security needs to be a very, very high priority.

But what we have been doing over the past decade has not worked. In fact, the Bush/Obama foreign policy has been an abject failure. We have poured hundreds of billions of dollars down the drain and we are less secure today than at any point since World War II.

It is time to admit that Barack Obama and George W. Bush have been fundamentally wrong about these wars. Because of their foolishness, we are less safe today and our allies are less safe today.

Afghanistan is not our friend now. Neither is Iraq. Libya looks like it is going to become an al-Qaeda paradise thanks to us.

There is very little "freedom" in those 3 nations today. Instead, "Islamic law" is being shoved down the throats of the people living in those countries.

So, in the final analysis, what have we really accomplished?

Free Trade Or Fair Trade? 20 Reasons Why All Americans Should Be Against The Insane Trade Policies Of The Globalists

2011-10-20T15:47:00.001-07:00

Free Trade Or Fair Trade? 20 Reasons Why All Americans Should Be Against The Insane Trade Policies Of The Globalists
by Michael

It is absolutely amazing how many Americans are still convinced that more "free trade" is the answer to our economic problems. The truth is that there is a vast difference between "free trade" and "fair trade", and in this article I will prove that all true conservatives and all true liberals should be completely against the insane trade policies of the federal government. Yes, we will always need to trade with other nations. Other nations make or have things that we need to trade for. Balanced trade relationships with other nations that have similar economies and that share similar values can be very beneficial. For example, our trading relationship with Canada, though not perfect, is generally beneficial to both sides. However, the United States also has dozens of trading relationships that are highly destructive to the U.S. economy. There are some predatory nations that are blatantly and openly cheating and everyone can see it. They are getting away with bloody murder and they are robbing us blind. The United States of America is being taken advantage of, and as a result thousands of good businesses are being destroyed and millions of good jobs are being lost. If you are an American and you are in favor of all of the unfair trade that is currently going on, then either you don't know much about economics or you actually want to see the U.S. economy be destroyed.

Congress has just passed new free trade agreements with South Korea, Colombia and Panama. The Obama administration has also made "the NAFTA of the Pacific" a very high priority.

Obama says that all of these new trade pacts will create more U.S. jobs.

Well, either Barack Obama is completely ignorant when it comes to economics or else he is lying.

When we merge our economy with the economies of nations where wages are much lower, it is inevitable that large numbers of jobs are going to leave the high wage areas (where we live) and go to areas where wages are much lower.

It also certainly does not help that we have the highest corporate tax rate in the world, that we burden our businesses with mountains of ridiculous regulations, and that we allow our "trade partners" to give their businesses a huge advantage by openly subsidizing them.

The way that the system is set up now, nearly all U.S. businesses are at a massive, massive disadvantage. In general, the only businesses that can compete effectively in this environment are the giant corporations that can offshore huge portions of their operations.

If you are a conservative, then there is no way that you should support our current trade policies. If you are a liberal, then there is no way that you should support our current trade policies.

However, if you are a "George W. Bush Republican" or a "Clinton/Obama Democrat" that believes in globalism and the establishment of a one world economy as part of a "New World Order", then it would make sense why you would want to see America deindustrialized and brought down to the level of the rest of the world.

But if you are a true conservative or a true liberal, then the following are reasons why you should be horrified by our current trade policies....

#1 Other Nations Openly Manipulate Their Currencies In Order To Gain A Significant Competitive Advantage

For example, China keeps its currency set at a super low level relative to the U.S. dollar. By doing this, their products are far cheaper than U.S. products, and U.S. businesses cannot compete with them. This has resulted in the death of large numbers of U.S. businesses and the loss of millions of U.S. jobs.

So just how bad is this problem? Well, a recent CNN article stated the following....

Critics of China's policy estimate that the yuan is still undervalued by 25% to 40%, even with the recent rises in value.

The other day the U.S. Senate passed a bill that would impose tariffs on currency manipulators, and China has already retaliated, even though the bill has not become law yet and even though it almost certainly won't.

China plays hardball. They love the advantage that they are getting right now and they do not plan on losing it.

#2 Millions Of Good Paying Jobs Have Been Shipped Overseas And They Are Never Coming Back

Our politicians all try to tell us how good they are at creating jobs.

But what is the truth?

The truth is that a total of zero jobs were created last decade. The following is a quote from a recent article in Washington Monthly....

"If any single number captures the state of the American economy over the last decade, it is zero. That was the net gain in jobs between 1999 and 2009—nada, nil, zip. By painful contrast, from the 1940s through the 1990s, recessions came and went, but no decade ended without at least a 20 percent increase in the number of jobs."

Last decade we opened up our trade with the rest of the world more than ever before. But instead of creating jobs it destroyed them. Our trade deficits exploded and unemployment skyrocketed.

The Economic Policy Institute says that since 2001 America has lost approximately 2.8 million jobs due to our trade deficit with China alone.

So if you are unemployed, that is probably what happened to the job you are supposed to have.

It went overseas and it is not coming back.

#3 America Is Being Deindustrialized At A Blistering Pace Thanks To Globalism

The advocates of "free trade" cannot dispute the cold, hard facts....

*The United States has lost an average of 50,000 manufacturing jobs per month since China joined the World Trade Organization in 2001.

*The United States has lost a staggering 32 percent of its manufacturing jobs since the year 2000.

*If you can believe it, more than 42,000 manufacturing facilities in the United States have been closed down since 2001.

*Between December 2000 and December 2010, 38 percent of the manufacturing jobs in Ohio were lost, 42 percent of the manufacturing jobs in North Carolina were lost and 48 percent of the manufacturing jobs in Michigan were lost.

*Back in 1970, 25 percent of all jobs in the United States were manufacturing jobs. Today, only 9 percent of the jobs in the United States are manufacturing jobs.

#4 (For Conservatives) True Conservatives Should Be Horrified That We Are Being Taken Advantage Of By A Hardcore Communist Nation That Hates Us

Ronald Reagan would have never engaged in "free trade" with the Soviet Union. The Communist Party is in complete control of China and while we may regard China as a "frenemy", they really do believe that they will totally defeat us someday. If you doubt this, just read what the top generals and politicians in China are writing.

It is so incredibly stupid what we are doing. Our trade relationship with China has enabled the largest communist economy in the world to go from third world status to superpower status. China is now the second largest economy in the world, and that would have never happened without our help.

A lot of people like to talk about how "capitalist" China is becoming, but the truth is that they have never wavered from their pure belief in communism. 7 of the 10 largest corporations in China are owned by the government.

A host of other corporations in China are very deeply subsidized by the government.

U.S. businesses have a very hard time competing with foreign businesses that are deeply subsidized by their own national governments.

It is called cheating, and we let other countries get away with it.

So our businesses die and their products fill up our store shelves.

#5 We Are Endangering Our National Security By Greatly Enriching Our Biggest Potential Enemies

The biggest threats to the United States are not some goat herders hiding out in the caves of Afghanistan.

The biggest threats to the United States are actually China and Russia.

Conservatives are supposed to be the ones that are so concerned about national security. But instead of expressing concerns about China, they just keep pushing for more free trade.

As a result, China has been able to become a true global military superpower.

Someday we will deeply, deeply regret that.

#6 China Brazenly Steals Technology From Anyone And Everyone That They Can

China gets away with bloody murder when it comes to stealing technology. They will do it "legally" if they can, and they will do it in "other ways" if they have to.

At this point, China has invented a whole host of ways to extract technology from any firms that wants to do business in China.

The following is a short excerpt from a recent article on CNN....

Foreign companies are often required to set-up joint ventures with Chinese firms before the can start doing business there. And China is instituting new "indigenous innovation" rules that U.S. companies say force them to transfer their own technology to their Chinese partners.

#7 We Should Never Trade With Any Nation That Has A "One Child" Policy

China has a very strict "one child policy" which should be absolutely abhorrent to all Americans.

Most Americans have no idea what is really going on over in China. The following is from a recent article in the Epoch Times....

Pregnant women lacking birth permits are hunted down like criminals by population planning police in China and forcibly aborted.

All over China, mobile abortion vans are used to help enforce the one child policy. What women in China must endure is absolutely sickening, and this kind of behavior should never be accepted in the global community.

But instead of penalizing China, we reward them for this behavior. They even get awards at the United Nations for it.

Look, conservatives are supposed to be pro-life. If you are a social conservative, then it goes against everything that you believe to support trade with China.

You can support trade with China if you want, but then don't even try to call yourself "pro-life" again.

We should never trade with any nation that has a "one child policy". Such a policy is against everything that America is supposed to stand for.

#8 Our Horrendous Trade Imbalance Has Allowed Other Nations To Accumulate Gigantic Amounts Of Our Debt

Every month, we send much more money to the rest of the world than they send to us. One thing that those other nations are doing with all of that money is that they are buying up our debt.

Our trade deficit with China has enabled them to accumulate nearly a trillion dollars of our debt. This gives them tremendous leverage over us and is a very serious threat to our economy and to our national security.

So now China can threaten the stability of our financial system with just a phone call.

#9 Globalist Trade Institutions Are A Serious Threat To Our National Sovereignty

Today, the "global economy" is governed by globalist institutions such as the G20, the WTO, the IMF and the World Bank. The United States has given up huge amounts of national sovereignty to these organizations.

If you are a true conservative, this should greatly disturb you.

We don't want faceless international bureaucrats telling us what our trade policies will be. But to a large degree that is the situation that we have gotten ourselves into.

#10 Liberals (And All Americans) Are Supposed To Care About What Is Best For American Workers

Millions of working class jobs have been shipped overseas, and yet Barack Obama just keeps pushing for more "free trade" agreements which will make the problem even worse.

But instead of screaming bloody murder, liberals keep on supporting Obama.

It's disgusting.

The truth is that the Obama administration actually says that there are certain kinds of jobs that we "don't want" in the United States.

For example, the following is what U.S. Trade Representative Ron Kirk recently told Tim Robertson of the Huffington Post about the Obama administration's attitude toward keeping manufacturing jobs in America....

Let's increase our competitiveness... the reality is about half of our imports, our trade deficit is because of how much oil [we import], so you take that out of the equation, you look at what percentage of it are things that frankly, we don't want to make in America, you know, cheaper products, low-skill jobs that frankly college kids that are graduating from, you know, UC Cal and Hastings [don't want], but what we do want is to capture those next generation jobs and build on our investments in our young people, our education infrastructure.

So where is the outrage?

Is anyone even awake out there?

Even the construction of many of our roads and bridges is being outsourced to China. Just check out the following quote from a recent ABC News article....

In New York there is a $400 million renovation project on the Alexander Hamilton Bridge.

In California, there is a $7.2 billion project to rebuild the Bay Bridge connecting San Francisco and Oakland.

In Alaska, there is a proposal for a $190 million bridge project.

These projects sound like steps in the right direction, but much of the work is going to Chinese government-owned firms.

"When we subsidize jobs in China, we're not creating any wealth in the United States," said Scott Paul, executive director for the Alliance for American Manufacturing.

Liberals are supposed to be working to defend the working class.

So why won't they openly go after Obama on these issues?

Our unfair trade agreements have put American workers in direct competition for jobs with the cheapest labor on the globe.

Until this is fixed, you will continue to hear a "great sucking sound" as millions of jobs continue to leave the United States and go to places where labor is ten to twenty times cheaper.

It is insanity what we are doing. We allow big corporations to send their manufacturing offshore and also to ship their products back into the United States for free.

Where in that equation is good news for the American worker?

#11 Liberals (And All Americans) Should Be Horrified By The Exploitation Of Slave Labor Around The Globe

All over the globe, workers toil in nightmarish conditions for slave labor pay just so that Americans can feed their addiction for cheap foreign products.

Big corporations and collectivist governments such as China are getting unbelievably rich by exploiting this slave labor pool.

Get educated about this and find out the truth. It just might totally change the way that you view "free trade".

#12 Liberals (And All Americans) Should Be Horrified By The Damage To The Environment Our Trade Relationships Cause

Liberals are supposed to deeply care about the environment. But our trade relationship with nations on the other side of the globe result in thousands of factories and businesses leaving our shores and ending up in countries where the environmental regulations are not nearly as strict. In fact, nations such as China are a complete and total environmental nightmare at this point. If liberals truly cared about the environment they would want to keep factories and businesses here.

#13 Very Dangerous Products Continue To Flood Into This Country From Overseas

Isn't product safety supposed to be a big thing for liberals? Today, a huge percentage of the products we buy are made outside the United States far from the watchful eyes of our regulatory agencies. Over the past couple of years, there has been headline after headline about dangerous products made in China. The following is just one example of this: 10 Babies Die Mysteriously At Fort Bragg: Toxic Drywall From China Used In Base Homes The Culprit?

#14 The Globalization Of The Economy Causes Income Inequality To Grow

By paying slave labor wages to workers overseas, the big corporations are becoming very wealthy. At the same time, that means that there are much fewer jobs for average working class Americans, and wages for the jobs that remain are pushed down because of increased competition for jobs.

So the rich get richer and the poor get poorer.

If you don't believe that income inequality in the United States has become a huge problem, just check out this chart.

#15 Because Of All Of The Cheating And All Of The Predatory Behavior That Is Going On, Our Trade Relationships Have Become Incredibly Imbalanced

Today, the United States spends about 4 dollars on goods and services from China for every one dollar that China spends on goods and services from the United States.

So how is that even close to "fair"?

Our store shelves are absolutely packed with stuff from China.

In 2010, the number one U.S. export to China was "scrap and trash".

Even in high technology products we are being destroyed. In 2002, the United States had a trade deficit in "advanced technology products" of $16 billion with the rest of the world. In 2010, that number skyrocketed to $82 billion.

#16 Our Gigantic Trade Deficit Is Destroying Our National Wealth

The United States has had a negative trade balance every single year since 1976, and since that time the United States has run a total trade deficit of more than 7.5 trillion dollars with the rest of the world.

Our gigantic trade deficits are making us poorer as a nation each and every month. Each year, somewhere around half a trillion dollars of our national wealth gets transferred out of the United States. That half a trillion dollars could be going to support U.S. businesses and U.S. jobs. Taxes could be paid on that half a trillion dollars. But instead it leaves the country and makes other nations wealthier.

#17 The Globalization Of The Economy Has Caused Unemployment In The United States To Explode

If you gathered together all of the workers that are "officially" unemployed in the United States today, they would constitute the 68th largest country in the world.

#18 As Our Cities Are Deindustrialized, Many Of Them Are Being Transformed Into Absolute Hellholes

The other day, I wrote the following about what is happening in cities and towns across the United States....

All across America there are cities and towns that were once prosperous and beautiful that are being transformed into absolute hellholes. The scars left by the long-term economic decline of the United States are getting deeper and more gruesome.

#19 Without Good Jobs, An Increasing Number Of Americans Are Having To Turn To Government Assistance

We are going to support U.S. workers one way or another. Either we are going to provide them with good jobs, or we are going to let their jobs be shipped out of the country and we are going to pay for the government to feed and house them.

Today, there are more than 45 million Americans on food stamps. That number has gone up by more than 70 percent since 2007. Almost every single month we set a new all-time record for the number of people being fed by the federal government.

#20 If Nothing Is Done, All Of This Is Going To Get A Lot Worse

According to Professor Alan Blinder of Princeton University, 40 million more U.S. jobs could be sent offshore over the next two decades.

Can you imagine what America is going to look like if that happens?

**********

Okay, so in light of all of that information, can anyone out there defend the current "free trade" policies of the federal government?

The Coming Derivatives Crisis That Could Destroy The Entire Global Financial System

2011-10-20T15:24:00.001-07:00

The Coming Derivatives Crisis That Could Destroy The Entire Global Financial System

Most people have no idea that Wall Street has become a gigantic financial casino. The big Wall Street banks are making tens of billions of dollars a year in the derivatives market, and nobody in the financial community wants the party to end. The word "derivatives" sounds complicated and technical, but understanding them is really not that hard. A derivative is essentially a fancy way of saying that a bet has been made. Originally, these bets were designed to hedge risk, but today the derivatives market has mushroomed into a mountain of speculation unlike anything the world has ever seen before. Estimates of the notional value of the worldwide derivatives market go from $600 trillion all the way up to $1.5 quadrillion. Keep in mind that the GDP of the entire world is only somewhere in the neighborhood of $65 trillion. The danger to the global financial system posed by derivatives is so great that Warren Buffet once called them "financial weapons of mass destruction". For now, the financial powers that be are trying to keep the casino rolling, but it is inevitable that at some point this entire mess is going to come crashing down. When it does, we are going to be facing a derivatives crisis that really could destroy the entire global financial system.

Most people don't talk much about derivatives because they simply do not understand them.

Perhaps a couple of definitions would be helpful.

The following is how a recent Bloomberg article defined derivatives....

Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.

The key word there is "speculation". Today the folks down on Wall Street are speculating on just about anything that you can imagine.

The following is how Investopedia defines derivatives....

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

A derivative has no underlying value of its own. A derivative is essentially a side bet. Usually these side bets are highly leveraged.

At this point, making side bets has totally gotten out of control in the financial world. Side bets are being made on just about anything you can possibly imagine, and the major Wall Street banks are making a ton of money from it. This system is almost entirely unregulated and it is totally dominated by the big international banks.

Over the past couple of decades, the derivatives market has multiplied in size. Everything is going to be fine as long as the system stays in balance. But once it gets out of balance we could witness a string of financial crashes that no government on earth will be able to fix.

The amount of money that we are talking about is absolutely staggering. Graham Summers of Phoenix Capital Research estimates that the notional value of the global derivatives market is $1.4 quadrillion, and in an article for Seeking Alpha he tried to put that number into perspective....

If you add up the value of every stock on the planet, the entire market capitalization would be about $36 trillion. If you do the same process for bonds, you’d get a market capitalization of roughly $72 trillion.

The notional value of the derivative market is roughly $1.4 QUADRILLION.

I realize that number sounds like something out of Looney tunes, so I’ll try to put it into perspective.

$1.4 Quadrillion is roughly:

-40 TIMES THE WORLD’S STOCK MARKET.

-10 TIMES the value of EVERY STOCK & EVERY BOND ON THE PLANET.

-23 TIMES WORLD GDP.

It is hard to fathom how much money a quadrillion is.

If you started counting right now at one dollar per second, it would take 32 million years to count to one quadrillion dollars.

Yes, the boys and girls down on Wall Street have gotten completely and totally out of control.

In an excellent article that he did on derivatives, Webster Tarpley described the pivotal role that derivatives now play in the global financial system....

Far from being some arcane or marginal activity, financial derivatives have come to represent the principal business of the financier oligarchy in Wall Street, the City of London, Frankfurt, and other money centers. A concerted effort has been made by politicians and the news media to hide and camouflage the central role played by derivative speculation in the economic disasters of recent years. Journalists and public relations types have done everything possible to avoid even mentioning derivatives, coining phrases like “toxic assets,” “exotic instruments,” and – most notably – “troubled assets,” as in Troubled Assets Relief Program or TARP, aka the monstrous $800 billion bailout of Wall Street speculators which was enacted in October 2008 with the support of Bush, Henry Paulson, John McCain, Sarah Palin, and the Obama Democrats.

Most people do not realize this, but derivatives were at the center of the financial crisis of 2008.

They will almost certainly be at the center of the next financial crisis as well.

For many, alarm bells went off the other day when it was revealed that Bank of America has moved a big chunk of derivatives from its failing Merrill Lynch investment banking unit to its depository arm.

So what does that mean?

An article posted on The Daily Bail the other day explained that it means that U.S. taxpayers could end up holding the bag....

This means that the investment bank's European derivatives exposure is now backstopped by U.S. taxpayers. Bank of America didn't get regulatory approval to do this, they just did it at the request of frightened counterparties. Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to "give relief" to the bank holding company, which is under heavy pressure.

This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input.

So did you hear about this on the news?

Probably not.

Today, the notional value of all the derivatives held by Bank of America comes to approximately $75 trillion.

JPMorgan Chase is holding derivatives with a notional value of about $79 trillion.

It is hard to even conceive of such figures.

Right now, the banks with the most exposure to derivatives are JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup, Wells Fargo and HSBC Bank USA.

Morgan Stanley also has tremendous exposure to derivatives.

You may have noticed that these are some of the "too big to fail" banks.

The biggest U.S. banks continue to grow and they continue to get even more power.

Back in 2002, the top 10 U.S. banks controlled 55 percent of all U.S. banking assets. Today, the top 10 U.S. banks control 77 percent of all U.S. banking assets.

These banks have gotten so big and so powerful that if they collapsed our entire financial system would implode.

You would have thought that we would have learned our lesson back in 2008 and would have done something about this, but instead we have allowed the "too big to bail" banks to become bigger than ever.

And they pretty much do whatever they want.

A while back, the New York Times published an article entitled "A Secretive Banking Elite Rules Trading in Derivatives". That article exposed the steel-fisted control that the "too big to fail" banks exert over the trading of derivatives. Just consider the following excerpt from the article....

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

So what institutions are represented at these meetings?

Well, according to the New York Times, the following banks are involved: JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup.

Why do those same five names seem to keep popping up time after time?

Sadly, these five banks keep pouring money into the campaigns of politicians that supported the bailouts in 2008 and that they know will bail them out again when the next financial crisis strikes.

Those that defend the wild derivatives trading that is going on today claim that Wall Street has accounted for all of the risks and they assume that the issuing banks will always be able to cover all of the derivative contracts that they write.

But that is a faulty assumption. Just look at AIG back in 2008. When the housing market collapsed AIG was on the wrong end of a massive number of derivative contracts and it would have gone "bust" without gigantic bailouts from the federal government. If the bailouts of AIG had not happened, Goldman Sachs and a whole lot of other people would have been left standing there with a whole bunch of worthless paper.

It is inevitable that the same thing is going to happen again. Except next time it may be on a much grander scale.

When "the house" goes "bust", everybody loses. The governments of the world could step in and try to bail everyone out, but the reality is that when the derivatives market comes totally crashing down there won't be any government on earth with enough money to put it back together again.

A horrible derivatives crisis is coming.

It is only a matter of time.

Stay alert for any mention of the word "derivatives" or the term "derivatives crisis" in the news. When the derivatives crisis arrives, things will start falling apart very rapidly.

Go West, Young Man (To North Dakota)

2011-10-01T08:27:00.001-07:00

Go West, Young Man (To North Dakota)

Are you unemployed and out of options? Well, if you live in most areas of the country there is not much hope for you. But there is one state where hiring is really hot right now. If you are desperate for a job, you just might want to check out North Dakota. Way back in the middle of the 19th centurty, author Horace Greeley gave young Americans the following advice: "Go West, young man, go West". Well, we have reached another moment in U.S. history when it may be wise for many Americans to pick up and move to another part of the country in search of opportunity. Of course traveling to North Dakota is not "going west" for all Americans, but for the majority of the population it is. In the 19th century, many Americans traveled west because they believed those that told them that there was "gold in them thar hills", but today a different kind of "gold" is being found in North Dakota. The state is currently enjoying a boom of "black gold", and all of that oil is creating a huge number of jobs. If you are unemployed and you are desperate, you might want to check out North Dakota. Desperate times call for desperate measures.

As I write about so frequently, unemployment is an absolute nightmare in most areas of the country right now. But in North Dakota there are plenty of jobs and they pay really well. Just check out what a new CNN article is saying about what is going on in the state....

Believe it or not, a place exists where companies are hiring like crazy, and you can make $15 an hour serving tacos, $25 an hour waiting tables and $80,000 a year driving trucks.

You just have to move to North Dakota. Specifically, to one of the tiny towns surrounding the oil-rich Bakken formation, estimated to hold anywhere between 4 billion and 24 billion barrels of oil.

CNBC also recently ran an article about the jobs boom up in North Dakota. According to CNBC, there are "help wanted" signs all over the place in little towns such as Williston....

Unemployment is a national problem in the U.S., but you wouldn't know that if you travel through North Dakota.

The state's unemployment rate hovers around 3 percent, and "Help Wanted" signs litter the landscape of cities such as Williston in the same way "For Sale" signs populate the streets of Las Vegas.

"It's a zoo," said Terry Ayers, who drove into town from Spokane, Wash., slept in his truck, and found a job within hours of arrival, tripling his salary. "It's crazy what's going on out here."

If you are desperate for work and you are looking for a "reboot", North Dakota may be an option for you. According to CNN, there are a significant number of families that have already changed their lives by heading out to North Dakota....

McMullen now works as a nanny in exchange for housing. Her husband, who worked on behavior management programs for a school system in North Carolina where he took home about $1,600 a month, found a job working in the oilfields where he makes that same amount of money in one week -- adding up to an annual salary of about $77,000.

"We want to be debt-free, so we came here to play catch-up," said McMullen. "But when I came here, I thought I was on Mars. It's just so crazy that the rest of the country has no jobs, and here's this one place that doesn't have enough people to fill all the jobs."

So is North Dakota for everyone?

Of course not.

First of all, it gets bone-chilling cold in North Dakota in the winter.

If you cannot handle really cold weather then you should not go up there.

Secondly, there is not nearly enough housing in the boom towns and the housing that is available is really expensive.

So you may either have to commute a long way or deal with accommodations that are less than stellar.

North Dakota is very flat, the geography is not very pleasant, there is not much to do there, the "boom towns" are very far from major population centers and moving there would entail major sacrifices for most people.

But there are good jobs up there.

So if you are looking for some good news, you just got some.

Look, it is better to try to do something than to sit around waiting for Barack Obama to save you. As I have written about previously, the Obama jobs plan is a bad joke and even if it got through Congress it would do very little to create jobs.

The truth is that Barack Obama simply does not know what he is doing when it comes to jobs. He continues to push for even more job-killing "free trade" agreements that will result in millions more American jobs being shipped overseas.

Barack Obama continues to run around the country talking about "infrastructure jobs", but according to ABC News, thousands upon thousands of those jobs are actually going to Chinese workers....

In New York there is a $400 million renovation project on the Alexander Hamilton Bridge.

In California, there is a $7.2 billion project to rebuild the Bay Bridge connecting San Francisco and Oakland.

In Alaska, there is a proposal for a $190 million bridge project.

These projects sound like steps in the right direction, but much of the work is going to Chinese government-owned firms.

The sad truth is that the U.S. economy continues to slide even further down the tubes and the vast majority of our politicians have no idea how to fix things.

When Barack Obama first took office, the official U.S. unemployment rate was 7.6 percent. Today it is 9.1 percent.

There are less jobs in the United States today than there were a decade ago, and the number of good paying jobs continues to shrink.

In 1980, 52 percent of all jobs in the United States were middle income jobs. Today, only 42 percent of all jobs are middle income jobs.

So don't sit around waiting for the economy to fix itself. There is no reason to have blind faith in the system at this point.

We live during unconventional times, and many of us are going to have to find unconventional solutions to our problems.

There are lots of good jobs in the western part of North Dakota.

If you need a job, you might want to look into it.

Unelected, Unaccountable, Unrepentant: The Federal Reserve Is Using Your Money To Bail Out European Commercial Banks Once Again

2011-09-17T11:08:00.000-07:00

Unelected, Unaccountable, Unrepentant: The Federal Reserve Is Using Your Money To Bail Out European Commercial Banks Once Again

For a moment, imagine that there is a privately-owned organization in the United States that can create U.S. dollars out of thin air whenever it wants and can loan that money to whoever it wants to. Imagine that this organization is able to act with the full power of the U.S. government behind it, but that nobody in the organization is ever elected by the American people, and that for all practical purposes the organization is not accountable to the president or to Congress. Imagine that the organization is able to make trillions of dollars of secret loans to banks, to foreign governments and even to their close friends without ever having to face a comprehensive audit. Does that sound preposterous? Well, such an organization actually exists. It is called the Federal Reserve, and today we found out that once again the Fed is going to be taking huge piles of your money and loaning it to commercial banks in Europe. The Congress cannot overrule this decision. Neither can Barack Obama. Because it has so much power, many refer to the Federal Reserve as "the fourth branch of government", but unlike the other three branches of government, there are basically no significant "checks and balances" on the Federal Reserve. If you don't like the fact that the Federal Reserve is racing in to help big foreign banks survive the European debt crisis that is just too bad. The Federal Reserve pretty much gets to do whatever it wants to do, and the folks over at the Fed simply do not care whether you like that or not.

So what in the world just happened today? The following is how an article on CNBC explained it....

Just ahead of the Wall Street open Thursday, the European Central Bank, along with the U.S. Federal Reserve, Bank of England, Bank of Japan and Swiss National Bank announced they would offer three-month dollar loans to Europe's commercial banks, easing dollar funding constraints.

It must be nice to do whatever you want without having to get the approval of anyone else.

What do you think Barack Obama would give for such power right about now?

The Federal Reserve and other major central banks around the world decided that lending big European banks gigantic piles of dollars would be a good idea, so they are just doing it.

No debate, no votes and no democracy - they just tell us how things are going to be and that is that.

It is a bit ironic that all of this happened on the third anniversary of the collapse of Lehman Brothers. It is almost as if the central bankers of the world are trying to send some sort of a message.

So how much money is going to be loaned out?

Well, according to an article in The Daily Mail, big European banks are going to be able to borrow an "unlimited" amount of money....

The deal announced yesterday means banks will be able to borrow ‘any amount’ of money in three separate auctions in October, November and December. Banks will have to put up collateral, or security, to tap the emergency funds.

Wow - I wish someone would offer to lend me an "unlimited" amount of money.

But of course this really is not going to solve anything in the long run. You can't solve a raging debt problem with more debt.

Yes, it will help the big European banks with their short-term liquidity problems, but it will do nothing to fix the long-term structural problems that are tearing Europe to pieces.

Win Thin, a senior currency strategist at Brown Brothers Harriman, said essentially the same thing to CNBC today....

"They're taking care of the symptoms, but the underlying illness is still out there. On the margin, it's positive. Until Greece defaults and we clear this whole thing up, they're still treading water"

So, no, the financial problems of Europe have not been solved.

Just think of this latest move as a temporary band-aid.

So why get upset about it?

Well, what all of this shows is just how arrogant the Federal Reserve is.

The Federal Reserve gets to throw around trillions of dollars without any accountability to the American people.

As I have written about previously, the Federal Reserve made $16.1 trillion in secret loans to their friends during the last financial crisis.

This was revealed in a GAO report, and members of Congress such as Ron Paul and Bernie Sanders tried to get people to pay attention to this. The following is a statement about this report that was taken from the official website of Senator Sanders....

"As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world"

So how much of that money went overseas? Well, it turns out that approximately $3.08 trillion of that money was loaned to big banks and major financial institutions in Europe and Asia.

Barack Obama can't lend trillions of dollars to foreign banks.

So why does the Federal Reserve get to do it?

Sadly, most Americans know very little about the Federal Reserve. In the United States today, most Americans graduate from high school without ever learning much of anything about the Fed.

But if you really want to understand what is going on with our economy, it is absolutely critical that you understand the Federal Reserve.

The following are some more reasons why you should be upset about what the Federal Reserve has been doing....

*The Federal Reserve is a perpetual debt machine. Today, the U.S. national debt is 4700 times larger than it was when the Federal Reserve was created back in 1913.

*The Federal Reserve has recently been actually paying banks not to make loans. Right now banks can park money at the Federal Reserve and make risk-free income without having to make loans to the American people.

*Current Federal Reserve Chairman Ben Bernanke has a track record of failure that is legendary, and yet George W. Bush and Barack Obama both backed him 100%.

*The Federal Reserve system is designed to create inflation. The truth is that the United States has only had a persistent, ongoing problem with inflation since the Federal Reserve was created back in 1913.

*Since 2008, what the Federal Reserve has been doing to our money supply has been absolutely insane. Eventually this is going to have very serious consequences for us.

*The U.S. government has handed over the task of "centrally planning" our economy to the Federal Reserve. The Fed decides what the target rate of inflation should be, what the target rate of unemployment should be, what interest rates are going to be and what the size of the money supply is going to be. This is quite similar to the "central planning" that goes on in communist nations, but very few people in our government seem upset by this.

*The Federal Reserve picks "winners" and "losers" in the financial system. For example, when the last financial crisis hit, the Fed bent over backwards to help out the big Wall Street banks, but hordes of small banks were left out in the cold.

*As mentioned above, the Federal Reserve has become way, way too powerful. The Fed is able to do a lot of things that the three branches of government are simply not able to do. Fortunately, there are a few of our leaders that are alarmed by this. For example, Ron Paul once told MSNBC that he believes that the Federal Reserve is now more powerful than Congress.....

"The regulations should be on the Federal Reserve. We should have transparency of the Federal Reserve. They can create trillions of dollars to bail out their friends, and we don’t even have any transparency of this. They’re more powerful than the Congress."

As long as we continue to use a debt-based currency that is controlled by a privately-owned central bank, we are going to continue to have permanent inflation and government debt that expands at an exponential pace.

The "central planning" done by the Federal Reserve has created bubble after bubble after bubble. Our dollars is on the verge of dying and our financial system is about to collapse.

The Federal Reserve system simply does not work.

Hopefully we can start sending more politicians to Washington D.C. that will be willing to stand up to the Federal Reserve.

But for now, the Federal Reserve is going to keep running around doing whatever it wants to do whether we like it or not.

Will the US and the Fed bail out the banks again

2010-11-21T16:03:00.000-08:00

Economic View

2010-10-10T04:57:00.000-07:00

I Can Afford Higher Taxes. But They’ll Make Me Work Less.
By N. GREGORY MANKIW

AN important issue dividing the political parties is whether to raise taxes on those earning more than $250,000 a year. Democrats say these taxpayers can afford to chip in a bit more. Republicans say raising taxes on those who already face the highest marginal tax rates will hurt the economy.

So I thought it might be useful to do a case study on one of these high-income taxpayers. Fortunately, I have one handy: me.

As a professor at Harvard and the author of some popular textbooks, I am comfortably in the income range that would be hit by this tax increase. I have been thinking — narcissistically, to be sure — about how higher taxes would affect me. Maybe these thoughts can shed some light on some of the broader policy issues.

First, I have to acknowledge that the Democrats are right about one thing: I can afford to pay more in taxes. My income is not in the same league as superstar actors and hedge fund managers, but I have been very lucky nonetheless. Unlike many other Americans, I don’t have trouble making ends meet.

Indeed, I could go so far as to say I am almost completely sated. One reason is that I don’t aspire for much more than a typical upper-middle-class lifestyle. I don’t fly around on a private jet. I have little desire to own a yacht or a Ferrari. I own only one home, in which I have lived since 1987. Paying an extra few percent in taxes wouldn’t create a lot of hardship.

Nonetheless, as Republicans emphasize, taxes influence the decisions I make. I am regularly offered opportunities to earn extra money. It could be by talking to a business group, consulting on a legal case, giving a guest lecture, teaching summer school or writing an article. I turn down most but accept a few.

And I acknowledge that my motives in taking on extra work are partly mercenary. I don’t want to move to a bigger house or buy that Ferrari, but I hope to put some money aside for my three children. They will never lead lives of leisure, but I hope they won’t have to struggle to find down payments to buy their own homes or to send their kids to college.

Suppose that some editor offered me $1,000 to write an article. If there were no taxes of any kind, this $1,000 of income would translate into $1,000 in extra saving. If I invested it in the stock of a company that earned, say, 8 percent a year on its capital, then 30 years from now, when I pass on, my children would inherit about $10,000. That is simply the miracle of compounding.

Now let’s put taxes into the calculus. First, assuming that the Bush tax cuts expire, I would pay 39.6 percent in federal income taxes on that extra income. Beyond that, the phaseout of deductions adds 1.2 percentage points to my effective marginal tax rate. I also pay Medicare tax, which the recent health care bill is raising to 3.8 percent, starting in 2013. And in Massachusetts, I pay 5.3 percent in state income taxes, part of which I get back as a federal deduction. Putting all those taxes together, that $1,000 of pretax income becomes only $523 of saving.

And that saving no longer earns 8 percent. First, the corporation in which I have invested pays a 35 percent corporate tax on its earnings. So I get only 5.2 percent in dividends and capital gains. Then, on that income, I pay taxes at the federal and state level. As a result, I earn about 4 percent after taxes, and the $523 in saving grows to $1,700 after 30 years.

Then, when my children inherit the money, the estate tax will kick in. The marginal estate tax rate is scheduled to go as high as 55 percent next year, but Congress may reduce it a bit. Most likely, when that $1,700 enters my estate, my kids will get, at most, $1,000 of it.

HERE’S the bottom line: Without any taxes, accepting that editor’s assignment would have yielded my children an extra $10,000. With taxes, it yields only $1,000. In effect, once the entire tax system is taken into account, my family’s marginal tax rate is about 90 percent. Is it any wonder that I turn down most of the money-making opportunities I am offered?

By contrast, without the tax increases advocated by the Obama administration, the numbers would look quite different. I would face a lower income tax rate, a lower Medicare tax rate, and no deduction phaseout or estate tax. Taking that writing assignment would yield my kids about $2,000. I would have twice the incentive to keep working.

Now you might not care if I supply less of my services to the marketplace — although, because you are reading this article, you are one of my customers. But I bet there are some high-income taxpayers whose services you enjoy.

Maybe you are looking forward to a particular actor’s next movie or a particular novelist’s next book. Perhaps you wish that your favorite singer would have a concert near where you live. Or, someday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist. Like me, these individuals respond to incentives. (Indeed, some studies report that high-income taxpayers are particularly responsive to taxes.) As they face higher tax rates, their services will be in shorter supply.

Reasonable people can disagree about whether and how much the government should redistribute income. And, to be sure, the looming budget deficits require hard choices about spending and taxes. But don’t let anyone fool you into thinking that when the government taxes the rich, only the rich bear the burden.

N. Gregory Mankiw is a professor of economics at Harvard. He was an adviser to President George W. Bush.

Milton Friedman on Donahue 1979

2010-10-05T05:55:00.000-07:00

World Collapse Explained in 3 Minutes

2010-06-12T05:36:00.000-07:00

Did a Big Bet Help Trigger 'Black Swan' Stock Swoon?

2010-05-11T05:43:00.000-07:00

Did a Big Bet Help Trigger 'Black Swan' Stock Swoon?

By SCOTT PATTERSON And TOM LAURICELLA

Shortly after 2:15 p.m. Eastern time last Thursday, hedge fund Universa Investments LP placed a big bet in the Chicago options trading pits that stocks would continue their sharp declines.

On any other day, this $7.5 million trade for 50,000 options contracts might have briefly hurt stock prices, though not caused much of a ripple. But coming on a day when all varieties of financial markets were deeply unsettled, the trade may have played a key role in the stock-market collapse just 20 minutes later.
WSJ Professional

* Fixing the Flash Crash

The trade by Universa, a hedge fund advised by Nassim Taleb, author of "Black Swan: The Impact of the Highly Improbable," led traders on the other side of the transaction—including Barclays Capital, the brokerage arm of British bank Barclays PLC—to do their own selling to offset some of the risk, according to traders in Chicago.

Then, as the market fell, those declines are likely to have forced even more "hedging" sales, creating a tsunami of pressure that spread to nearly all parts of the market.

The tidal wave of selling fed into a market already on edge about the economy in Europe. As the selling spread, a blast of orders appears to have jarred the flow of data going into brokerage firms, such as Barclays Capital, according to people familiar with the matter.

Exchanges, in turn, were clogged by huge volumes of offers to buy and sell stocks, say traders and exchange executives. Even before some individual stocks collapsed to just a penny a share, data from the NYSE Euronext's electronic Arca exchange started to appear questionable, say traders.

In the disarray, some huge superfast-trading hedge funds that now provide much of the liquidity for the stock market pulled to the sidelines. The working theory among traders and others involved in the exchange meltdown is that the "Black Swan"-linked fund may have contributed to a "Black Swan" moment, a rare, unforeseen event that can have devastating consequences.

"Universa alone couldn't have caused the meltdown," said Mark Spitznagel, Universa's founder. "We had reached a critical point in the market, and it was poised to collapse." Barclays Capital declined to comment.

As more details of last Thursday's collapse become clear, there is less evidence to suggest a "fat-finger" data-entry error caused the collapse. Instead, the picture is one of a highly rare confluence of events, some linked, some unrelated, that exposed weaknesses in the stock market large and small. Within five minutes, the Dow Jones Industrial Average had lost 700 points as trading seized up in individual stocks such as Procter & Gamble and even exchange-traded mutual funds.

"It did point out that there is a structural flaw," said Gus Sauter, chief investment officer at Vanguard Group. "We have to think through how you preserve the immediacy and yet preserve the liquidity."

The episode highlights a bigger question about the stock market. In recent years, the market has grown exponentially faster and more diverse. Stock trading's main venue is no longer the New York Stock Exchange but rather computer servers run by companies as far afield as Austin, Texas; Kansas City, Mo.; and Red Bank, N.J.

This diversity has made stock-trading cheaper, a plus for both institutional and individual investors. It has also made it more unruly and difficult to ensure an orderly market. Today that responsibility falls largely on a group of high-frequency traders who make up an estimated two-thirds of stock-market volume. These for-profit hedge funds look out for their own investors' interests and not those of investors in the stocks they trade.

Hours before the panic began, there were signs that Thursday was not shaping up to be a humdrum day. By 11 a.m., when the Dow was down only about 60 points, selling volume was unusually heavy. One measure of selling—the percentage of stocks falling without first moving upward—was at its highest since the day the market reopened after the Sept. 11 terror attacks, according to Barclays.

By 2 p.m., financial markets of just about every sort were under significant strain. In Europe, the spillover from the Greek debt crisis led to a huge drop in the euro against the dollar and the Japanese yen, as well as a broad bond-market decline. European banks were charging each other higher interest rates to borrow money.

Some 2,800 miles away from Wall Street, in Santa Monica, Calif., Universa placed its trade.

The trade wasn't out of character for Universa, which has about $6 billion under management. Mr. Taleb, who is an adviser to the firm and an investor, gained fame for "The Black Swan," a book that suggested unlikely events in the financial markets are far more likely than most investors believe.

Universa frequently purchases options contracts that will pay off if the market makes a sharp move lower. It posted big gains in the market selloff of late 2008 and launched a fund last year designed to benefit if inflation surges.

Through the trading desks at Barclays, Universa bought 50,000 options contracts, according to people familiar with the matter. The contracts would pay off about $4 billion should Standard & Poor's 500-stock index fall to 800 in June. It was at 1145 points at the time of the trade.

Back across the country in Chicago, the big trade appeared to have had an immediate ripple in the markets. The traders on the other side of the Universa trade were essentially betting stocks wouldn't post big losses.

But to minimize the risk of losing money, they in turn needed to sell, according to traders.

The more the market fell, the more the traders at places like Barclays had to sell to protect their own positions. This, along with likely dozens of other trades across the market, led to a cascade of selling in the futures markets.

As the stock-trading volume soared, data systems across the stock market began to get clogged. At Barclays Capital, a market data feed that delivers to the firm data on "buy" and "sell" orders went down, although a backup system immediately went online without any impact to the firm.

As the turmoil unfolded, every second saw some 300,000 pieces of stock information—stock prices moves, trades—pour into Barclays's system. A normal peak is some 60,000 ticks a second, says Barclays Capital's head of electronic-trading sales, Brian Fagen, who was monitoring the chaos in the market on his screens.

Large hedge funds were juggling huge positions as volume spiked. Two Sigma Investments LLC, a New York hedge-fund manager that engages in complex trading strategies, saw its highest-volume day since launching in 2001, according to a person familiar with the matter.

By 2:37 p.m., the overload seemed to have taken its toll on the NYSE's Arca electronic-trading system. At that point, its rival, the Nasdaq, owned by NASDAQ OMX Group Inc., detected what it felt was questionable information in the data. It sent out a message saying it would no longer route quotes to Arca.

This step—known as declaring "self-help"—doesn't happen often among the major exchanges. But in the coming minutes, the BATS exchange also stopped automatically routing orders to Arca.

For a crucial set of players—high-frequency-trading hedge funds—all this turmoil was becoming too risky to handle. One fear that would prove all too real was that in the extreme swings, some—but not all—trades would later be canceled, leaving them on the hook for unwanted positions.

Manoj Narang, whose Tradeworx Inc. firm runs a high-frequency trading operation in Red Bank, N.J., began to worry the extreme volatility could lead to painful losses in his fund.

At about 2:40, he and a small team of traders scrambled to close the positions held by the high-speed fund, which trades rapidly between stock indexes and the individual stocks in the index.

Normally, it takes about a fraction of a second to unwind the trades because of the high-powered computers Mr. Narang uses. But as the market plunged, it took about two minutes—an eternity in today's computer-driven market. Tradebot Systems Inc, a large high-frequency firm based in Kansas City, Mo., was also seeing chaotic action in many of the securities it traded and decided to pull back from the market.

With the high-frequency funds either selling or pulling out of the market, Wall Street brokerage firms pulling back and the NYSE stock exchange temporarily halting trading on some stocks, offers to buy stocks vanished from underneath the market. Normally there can be hundreds of offers to buy the iShares Russell 1000 Growth Index exchange-traded fund, but at 2:46 p.m., there were just four bids north of $14 for a fund that had been trading at $51 minutes earlier, according to data reviewed by The Wall Street Journal.

Around 3 p.m., the selling pressure abated. Just as swiftly as the market fell, it recovered ground. One factor behind the swift recovery, traders say, were funds that use computers and formulas to sniff out bargains in the market. These funds swooped in on hundreds of cheap stocks, helping push the market higher.

Mark Cuban Wall Street

2010-05-11T05:25:00.000-07:00

What Business is Wall Street In ?

May 9th 2010 11:36AM

My last two posts were designed to stimulate discussion. But lets talk the real problem that regulators, public companies, investor/shareholders and traders face. The problem is that Wall Street doesn’t know what business it is in. Regulators don’t know what the business of Wall Street is. Investor/shareholders don’t know what business Wall Street is in.

The only people who know what business Wall Street is in are the traders. They know what business Wall Street is in better than everyone else. To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible.

The best analogy for traders ? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, traders do the same thing. A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it. A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade because they provide liquidity to the market.

I recognize that one is illegal, the other is not. That isn’t the important issue.

The important issue is recognizing that Wall Street is no longer what it was designed to be. Wall Street was designed to be a market to which companies provide securities (stocks/bonds), from which they received capital that would help them start/grow/sell businesses. Investors made their money by recognizing value where others did not, or by simply committing to a company and growing with it as a shareholder, receiving dividends or appreciation in their holdings. What percentage of the market is driven by investors these days ?

I started actively trading stocks in 1992. I traded a lot. Over the years I’ve written quite a bit about the market. I have always thought I had a good handle on the market. Until recently.

Over just the past 3 years, the market has changed. It is getting increasingly difficult to just invest in companies you believe in. Discussion in the market place is not about the performance of specific companies and their returns. Discussion is about macro issues that impact all stocks. And those macro issues impact automated trading decisions, which impact any and every stock that is part of any and every index or ETF. Combine that with the leverage of derivatives tracking companies, indexes and other packages or the leveraged ETFs, and individual stocks become pawns in a much bigger game than I feel increasingly less comfortable playing. It is a game fraught with ever increasing risk.

The Pimco (who I think are the smartest guys on the Street) guys talk about a new normal as it applies to today’s state of the world economy. I think just as important is the new normal as it applies to Wall Street. Wall Street is now a huge mathematical game of chess where individual companies are just pawns. This is money in the bank for the big players like Goldman, Morgan, etc. Why ? Because the game of chess is far too complicated for 99pct of the institutions out there investing money. So to keep up, they turn to Goldman, Morgan and the like to invent products for them. “You don’t know how to play the housing boom, let us show you”. “You think the housing boom is about to crash, let us show you how to play that”. “You think that PIIGS are in trouble because they can’t print money to pay debt holders, let us create a product to allow you to play that game” The big houses have the best hackers in the business and they put together the games and sell them to the many, many institutions managing Billions and Billions of dollars. They are the ultimate Hackers selling their attacks to the highest bidder, regardless of which side they are on. That is a new normal.

Again, I’m not passing judgement one or the other. I’m just recognizing what is going on in the financial world today.

It’s rare for companies to go public these days. Just as rare for secondary offerings. The only thing that keeps me in the market is that most of the stocks (not all) pay dividends or some other sort of cash payout. For the first time in my life, I bought outside the United States. I bought Australia in a big way because it is becoming increasingly hard to find new domestic investments that are not influenced by the “hackers” and the games being played on a macro level. It’s hard to believe, but evaluating countries as an investment is now easier than evaluating companies . Even with all the unrest in Europe. Or maybe because of it.

So back to the original question. What business is Wall Street in ?

Its primary business is no longer creating capital for business. Creating capital for business has to be less than 1pct of the volume on Wall Street in any given period. (I would be curious if anyone out there knows what percentage of transactions actually return money to a company for any reason). It wouldn’t shock me that even in this environment that more money flows from companies to the market in the form of buybacks (which i think are always a mistake), then flows into companies in the form of equity.

My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business. Whether its through a use of taxes on trades, or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for 5 years or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years. However we need to do it, we need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy. It won’t come from traders trying to hack the financial system for a few pennies per trade.

And solutions won’t come from bureaucrats trying to prevent the traders from hacking the system. The only certainty when bureaucrats step in is that the law of unintended consequences will smack us all in the head and the trader/hackers will find new ways to exploit the system that makes them big money and even more money for the big institutions that develop products for the other institutions that are desperate to play the game.

Regulators have got to start to recognize that traders are not investors and vice versa and treat them differently. Different regulations. Different tax structure. Different oversight. Individual investors and the funds that just invest in stocks and bonds are not going to crash the market. Big traders who are always leveraging up and maximizing the number of trades/hacks they make will always put the system at risk. We need to recognize that they do not serve much of a purpose other than to add substantial risk to the global economy. That their stated value add of liquidity does not compensate the US and World Economy nearly enough for the risk of collapse they introduce into the system.

Wall Street as a whole needs to be in the business of creating capital for companies and selling shares to investors who believe they are shareholders. The Government needs to create incentives for this business and extract compensation from the traders/hackers for the systemic failure level of risk they introduce.

There will be another crash, because there are too many players looking for the trillion dollar score. They can’t all win, yet how many do you think wouldn’t risk everything, even what is not theirs, for that remote chance to score big ? Put another way, there is zero moral hazard attached to any trade. So why wouldn’t traders take the biggest risk possible ?

One more consideration. If there are traders of any kind that are unregulated or unmonitored, and trade for their own account, how do we know how big they are and how much of a threat they pose to the system, individually and in aggregate ?. For any High Frequency or big leverage derivative folks out there- is it possible there could be firms that have billions at risk with questionable ability to make a margin call or fulfill their side of the trade if things went against them ? Could there be hidden AIGs that few people know about or a bunch of AIG like situations ,which in aggregate fail and put the system at risk ? I have no idea. Just asking the question.

The national debt and Washington's deficit of will

2010-05-08T13:54:00.000-07:00

It's a trillion-dollar Ponzi scheme, and you are in it up to your eyes. The U.S. government issues more and more debt to pay off previous debt. One day, we'll wake up.

The national debt and Washington's deficit of will

By Joel Achenbach
Sunday, April 25, 2010; B01

Bill Gross is used to buying bonds in multibillion-dollar batches. But when it comes to U.S. Treasury bills, he's getting nervous. Gross, a founder of the investment giant Pimco, is so concerned about America's national debt that he has started unloading some of his holdings of U.S. government bonds in favor of bonds from such countries as Germany, Canada and France.

Gross is a bottom-line kind of guy; he doesn't seem to care if the debt is the fault of Republicans or Democrats, the Bush tax cuts or the Obama stimulus. He's simply worried that Washington's habit of spending today the money it hopes to collect tomorrow is getting worse and worse. It even has elements of a Ponzi scheme, Gross told me.

"In order to pay the interest and the bill when it comes due, we'll simply have to issue more IOUs. That, to me, is Ponzi-like," Gross said. "It's a game that can never be finished."

The national debt -- which totaled $8,370,635,856,604.98 as of a few days ago, not even counting the trillions owed by the government to Social Security and other pilfered trust funds -- is rapidly becoming a dominant political issue in Washington and across the country, and not just among the "tea party" crowd. President Obama is feeling the pressure, and on Tuesday he will open the first session of a high-level bipartisan commission that will look for ways to reduce deficits and put the country on a sustainable fiscal path.

It's a tough task. The short term looks awful, and the long term looks hideous. Under any likely scenario, the federal debt will continue to balloon in the years to come. The Congressional Budget Office expects it to reach $20 trillion over the next decade -- and that assumes no new recessions, no new wars and no new financial crises. In the doomsday scenario, foreign investors get spooked and demand higher interest rates to continue bankrolling American profligacy. As rates shoot up, the United States has to borrow more and more simply to pay the interest on its debt, and soon the economy is in a downward spiral.

Of course, at least in theory, this problem can be fixed. Unlike a real Ponzi scheme, which collapses when no new suckers offer money that can be used to pay off earlier investors, the government can restore fiscal sanity whenever our leaders decide to do so.

But that premise is what has people like Gross worried. In addition to running a budget deficit, Washington for years has had a massive deficit of political will.

Over the past decade, lawmakers have avoided the kind of unpopular decisions -- tax increases, spending cuts or some combination -- needed to keep the debt under control. Federal Reserve Chairman Ben Bernanke testified recently that, for investors, the underlying problem with the debt isn't economic. "At some point, the markets will make a judgment about, really, not our economic capacity but our political ability, our political will, to achieve longer-term sustainability," he said.

The economic recovery has been picking up steam in recent weeks -- "America's Back!" trumpets Newsweek -- but the political recovery has been feeble. Whether on taxes, entitlements, military retooling, financial reform, energy policy or climate change, Washington is mired in a political enmity that makes tough decisions nearly impossible.

In the fiscal debate, the default position, as it were, is to do nothing. Debt is the grease of Washington legislation; for short-sighted leaders, it is less a political problem than a political solution. As long as the government can continue borrowing at reasonable rates, citizens can have their tax cuts and government services, and eventually the growing debt becomes someone else's problem.

"This is all an exercise in current generations shifting burdens on future generations," Brookings Institution economist William Gale says. "Future generations don't vote, of course."

Many careers in Washington have come to an end as casualties of the long battle to restore fiscal balance. President George H.W. Bush in 1990 went back on his "no new taxes" pledge and lost much of his political base. By the narrowest of margins -- with Vice President Al Gore breaking a tied vote in the Senate -- President Bill Clinton raised taxes again in 1993, and House Democrats were pummeled in the following year's midterm elections, giving up control of the chamber to the GOP for the first time in 40 years.

But then, after two decades of deficits, the fiscal picture brightened unexpectedly. The peace dividend at the end of the Cold War combined with the booming economy of the 1990s (and some tech-bubble tax receipts) to create an unexpected dilemma in 2000: what to do with the budget surpluses that were forecast for years to come? One obvious idea was to pay down the existing publicly held debt, then hovering around $3.4 trillion.

But a decade later, we're back in debt madness. The causes of this reversal are not a mystery: tax cuts, two wars, a new Medicare drug benefit, two recessions, massive bailouts and a huge stimulus package -- very little of it paid for in any conventional sense. Obama never misses a chance to remind the public that he inherited an enormous deficit, but as a purely political matter he still needs to persuade the public that he's a prudent fiscal steward.

To that end, the president has proposed a freeze on most nonmilitary discretionary spending. Obama also insisted that the health-care overhaul not add to the deficit, and it won't, according to the CBO. But no one would confuse the health-care law with a deficit-reduction package. Critics say the law worsens the fiscal outlook because its spending cuts and new taxes could have been used to reduce the deficit -- which may run at about $1.3 trillion for 2010 -- instead of being an offset for an entitlement expansion.

Beyond the simplicity of the problem -- the Treasury spends more than it collects -- is a thorny mess of policy options. Conservatives fear that liberals want to expand government by imposing a European-style value-added tax, in which the government sips revenue at multiple stages in the production and sale of goods and services. But a VAT is regressive, would hit the middle class in the teeth and is probably too politically radical to survive beyond the haven of a few Washington think tanks.

Obama's vow not to raise taxes on the middle class -- meaning he's extending George W. Bush's tax cuts for everyone except the most affluent -- eliminates a lot of revenue options. "The Republican view is no new taxes, and the Democratic view is no new taxes on 95 percent of the population. Both of those are so far from reasonable starting points that it's astonishing," Gale argues.

Obama and his fellow Democrats may also be shy of substantial Pentagon cuts, lest they be pegged as weak-kneed liberals. Some of the easiest Medicare cuts have already been made. That leaves Social Security, and such options as postponing the retirement age or means-testing benefits. But recipients figure they paid into Social Security and it's their money, not to be taken away. And they vote -- and live by the millions in swing states such as Florida.

With so many unpleasant options, everyone is looking to Obama's new bipartisan commission for some kind of miracle solution. The 18-member panel, headed by former Clinton White House chief of staff Erskine Bowles and retired Republican senator Alan Simpson, is charged with producing recommendations by Dec. 1, after the midterm elections. Congressional leaders say they'll vote on the recommendations, but the commission has no real clout. A panel proposed by Senate colleagues Kent Conrad (N.D.), a Democrat, and Judd Gregg (N.H.), a Republican, would have had more teeth, but the idea died in the ideological crossfire early this year.

Even before the commission's first meeting, the body is already in the thick of the political battle, with antitax advocate Grover Norquist suggesting that Simpson has a history as a tax hiker. The retired senator struck back in a statement: "This 'Mr. Tax Hike' business is garbage, and is intended to terrify people and at the same time make money for the groups who babble it."

In an interview, Simpson said the capital has an aversion to dealing with debt. "It makes all sorts of sense if you're worshiping the great god hiding behind the screen, which is called reelection," he told me.

The latest news from the Treasury is hopeful: Tax revenues are slightly higher than anticipated so far this year. The TARP program to bail out financial firms has proved far less costly than expected. Investors from around the world still eagerly bid on Treasury notes at auction. During this global recession, the U.S. Treasury has been a safe port in the storm.

When I spoke to Peter Orszag, the director of the Office of Management and Budget, he expressed optimism that the administration can balance the primary budget -- not including interest payments -- by 2015. The longer-term deficits are his bigger worry. Asked if the political process in Washington is broken, he answered: "I think it's too soon to know whether the system's broken. The problem is not what happened last year or this year. The real issue is when we move forward in time, something has to give."

The danger is that what "gives" will be investors' confidence in the United States. Bill Gross told me that Pimco still has $150 billion in Treasuries, but that's seriously "underweight" given that the company controls $1 trillion in assets.

"It's becoming immediately apparent that some countries will not do especially well and may not escape the debt trap from the recent financial crisis, Greece and Iceland being the most prominent cases," Gross said. "But now investors are even looking at the best of the best, including the United States."

That's also the concern of Michael Burry, the investment guru who predicted Wall Street's meltdown and made millions by placing bets against (or "shorting") the financial sector. Burry, one of the protagonists in Michael Lewis's account of the financial crisis, "The Big Short," believes the federal government is behaving like the companies that lost billions in mortgage-backed securities. He told me he sees the common mistake of focusing on short-term benefits -- whether quarterly earnings or the next election.

The world doesn't want America to go broke, he points out. Americans are the planet's greatest consumers. But if this is a bubble, it will burst with little warning, Burry said.

"Strictly looking at the monthly Treasury statement of receipts and outlays," Burry said, "as an 'investor,' you see a company you might want to short."

Joel Achenbach is a reporter and blogger on the national staff of The Washington Post. He will be online on Monday, April 26, to chat with readers at 11 a.m. Submit your questions or comments before or during the discussion.

Fannie Mae and Freddie Mac Pushing Banks to Buy Bad Loans

2010-03-05T15:16:00.000-08:00

Isn't this how we got into trouble in the first place? Banks being forced to write bad mortgages were forced to hold too many bad loans? Then why are the federal government-owned Fannie Mae and Freddie Mac pushing banks to buy back their lousy loans. Its kind of like the "anti-TARP," instead of helping out banks, we are forcing them to rack up losses.

Bloomberg is reporting that Fannie Mae and Freddie Mac may force lenders including Bank of America Corp., JPMorganChase & Co., Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages.

That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says U.S. banks could suffer losses of $7 billion this year when those loans are returned and get marked down to their true value. Fannie Mae and Freddie Mac, both controlled by the U.S. government, stuck the four biggest U.S. banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.

The banks have to accede to the request of the government-owned entities, since they purchase almost three-quarters of all new mortgages.

The surge shows lenders are still paying the price for lax standards three years after mortgage markets collapsed under record defaults. Fannie Mae and Freddie Mac are looking for more faulty loans to return after suffering $202 billion of losses since 2007, and banks may have to go along, since the two U.S.- owned firms now buy at least 70 percent of new mortgages.

“If you want to originate mortgages and keep that pipeline running, you have to deal with the push-backs,” said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, and former examiner for the Federal Reserve. “It doesn’t matter how much you hate Fannie and Freddie.”

But didn't we just spend three-quarters of a trillion dollars to keep these banks from going under? Why in the world would we want to make them take losses?

The government’s efforts might be counterproductive, since the Treasury and Federal Reserve are trying to help banks heal, FBR’s Miller said. The banks have to buy back the loans at par, and then take an impairment, because borrowers usually have stopped paying and the price of the underlying home has plunged. JPMorgan said in a presentation last month that it loses about 50 cents on the dollar for every loan it has to buy back.
Striking a Balance

Great, so now the banks are essentially "bailing-out" Freddie and Fannie.

“It’s a fine line you’re walking, because the government’s trying to recapitalize the banks, not put them in bankruptcy, and then here’s Fannie and Freddie putting more pressure on the banks through these buybacks,” FBR’s Miller said. “If it becomes too big of an issue, the banks are going to complain to Congress, and they’re going to stop it.”

The costs to the banks go beyond taking the losses, Barbara Desoer, head of Bank of America’s mortgage division, said at a Feb. 10 investor conference that the bank added staff to handle increased claims from Fannie Mae and Freddie Mac.

It’s hard to feel sympathy for lenders that slackened or ignored credit standards during the housing boom. But Freddie and Fannie knew what they were getting into when they bought the loans. The quasi-private firms were a major cause of the mortgage crisis, using their (then implicit) government subsidy to expand and leverage up far more than any truly private company could, then using their size to buy or back vast amounts of subprime debt.

This is just another example of what happens when government takes over a buisness, conflicting objectives and really silly decisions.

The Card Act

2010-02-11T17:05:00.000-08:00

Credit CARD Act Guide Part 1: Last Chance for Solo Student Credit Cards

February 1, 2010
By: Curtis Arnold

The Credit CARD Act of 2009 kicks into full effect on February 22, 2010. Consumer advocates hailed the Act's curbs on service fees and interest rate hikes, even though they played a role in some banks reducing credit limits and closing some accounts. Student borrowers earned lawmakers' attention after industry critics complained that casual campus marketing has trapped a generation of young Americans in long-term debt. Americans under the age of 21 must act quickly to receive new lines of credit under their own names.

No New Credit Cards for Students Under 21, Without Co-Signers

The Credit CARD Act prohibits lenders from issuing new credit cards to Americans under the age of 21 unless they find an adult co-signer capable of paying off a new credit line. While promoting financially responsibility, this new stipulation could scare away students who would prefer that their parents not see the itemized details of a weekend road trip. Students tempted to lie on their credit card applications should review another of the Act's new rules--credit bureaus can no longer supply reports on Americans under age 21 without parental consent.

New Credit Card Applications Harder to Find on Campus

Over the past few decades, cash-strapped college kids have traded credit card applications for meal coupons, travel vouchers, and even hackey sacks. A handful of state laws forced marketers off-campus but the Credit CARD Act sets even tougher boundaries for lenders. Marketing teams can no longer exchange "tangible goods" for applications collected on campus or at college-sponsored events off-campus. In addition, the Act backs tougher state laws and institutional rules that mandate financial literacy training at colleges that permit on-campus solicitation.

Parental Credit Card Ties Extend Beyond the 21st Birthday

For teens who convince parents or other relatives to co-sign on a student credit card, credit connections last long past graduation day. Stricter guidelines on credit limits could prevent older students with existing accounts from opening additional credit lines, at least until they can provide proof of reliable income. Any changes to credit limits or other terms on student credit card accounts must be approved by both the cardholder and the co-signer, opening up the possibility of awkward conversations and strained relationships well into graduate school. Many industry analysts expect students to wait until after graduation to complete credit applications instead of remaining tied to parental preferences and credit reports.

College Affinity Credit Cards Under Scrutiny

Whether moving back home or into a new dwelling, recent college graduates often discover that their first mail delivery includes a special credit card offer sponsored by an alumni association. Like retail affinity credit cards, these special accounts often feature exclusive discounts and benefits such as athletic event pre-sales. Under new regulations, these applications must clearly state the nature of the relationship between a credit card issuer and a sponsoring institution. Profits earned or donations made under affinity card agreements must also be publicly disclosed in annual reports. Some school officials have already expressed fears that revealing the results of credit card agreements could chill alumni fundraising efforts.

For financially responsible Americans who have not yet reached age 21, February's new rules force some important decisions about credit. Either open up a student credit card now and be grandfathered under the old rules or wait a few years to enjoy the benefits and the buying power of credit cards. It is important to establish a positive credit history during college and student credit cards will likley remain a popular avenue for young adults. Banks remain eager to do business with good students, but must steadfastly enforce the new guidelines on February 22, 2010.
American credit card customers enter a new era on February 22, 2010. That date marks the full enactment of the Credit CARD Act signed into law the previous spring. Bolstered by populist backlash against "bailed out" banks, lawmakers drafted some of the boldest, strictest regulations ever imposed on private lenders.

New Rules Ban "Unfair" Credit Card Rate Increases

Rapidly rising interest rates on consumer credit card accounts spurred Congress into action, especially after constituents complained of inexplicable changes to credit limits and interest rates. New regulations address three long-term complaints:

· Eliminating "any time, any reason." Under the CARD Act, banks may only change your interest if you are 60 days or more late on your monthly minimum payment. In addition, if you make 6 months of on-time payments, banks must restore your original rate.

· No more universal default. One of the most controversial credit card trends of the last decade, among other things, "universal default" clauses allowed banks to impose penalty rates and fees whenever a third-party credit bureau reported a default with another lender.

· Promotional terms protection. The Credit CARD Act requires promotional rate periods to last at least six months and, with very few exceptions, forbids changes to the purchase rate of any new accounts within the first year.

By changing many existing customers' terms and conditions before the new rules take effect, banks have sought to circumvent the anticipated big negative impact the CARD Act is expected to have on their bottom line. On a related note, while Congress addressed whether banks can change interest rates over time, interest rates themselves can only be capped by state legislation. Most credit card issuers base their lending operations in states with no interest rate caps.

Regulations Ensure Credit Card Fee Fairness

After proposing tougher limits on changing credit card interest rates, some consumer advocates worried that banks would find other ways to extract charges from customers. Therefore, new regulation also imposes restrictions on the ways banks calculate finance charges and penalties:

· Consistent payment cycles. The Credit CARD Act mandates that statements be mailed or posted online no later than 21 days before an account's due date.

· Fair interest calculation. Lawmakers targeted banks that used "double-cycle billing" to inflate interest. Lenders must calculate interest based only on the balance during a single payment cycle.

· Overlimit charges become opt-in. Some credit card issuers expressed concern that banning overlimit transactions would cause embarrassment at the checkout counter. However, lawmakers asserted that consumers should have the right to decide that for themselves.

With the implementation of the new law just around the corner, some banks have already shifted profit centers to other fee sources. For instance, one major credit card issuer has implemented a $1 "statement fee," while others have increased charges for "expedited payments" online or by phone.

Credit Card Contract Terms Become Readable

Earlier rules required credit card issuers to publish the "Schumer Box," a simple grid of account terms that resembled the nutritional information charts on packaged foods. The Credit CARD Act takes that initiative even further, forcing major changes to statements and credit card applications.

· Plain language. New regulations mandate the size and typefaces used on credit card applications, statements, and account notices. Instead of "mice type" legal text printed along the sides or bottoms of account materials, banks must now use clear, readable language to explain products and services.

· Financial Consequences. Congress also challenged credit card issuers to educate consumers by including information about the impact of long-term debt in every account statement. Banks must now calculate how long customers could stay in debt by paying only minimum payments. They must also provide the payment amount necessary to meet a 36-month payoff goal.

Even with new restrictions in place, credit card issuers can still change many terms of any consumer account, provided they offer a written notice at least 45 days in advance. Cards issued to business entities instead of individuals bear no such protection. Fortunately, consumers will be given the opportunity to opt out of many negative account changes. The down side is that refusing to accept changes to terms and conditions usually entails closing your account. Lawmakers have already started debating new regulations that could address these issues and others in 2010 or 2011.

Important Note! The information in this article is believed to be accurate as of the date it was written. Please keep in mind that credit card offers change frequently. Therefore, we can not guarantee the accuracy of the information in this article. Please verify all terms and conditions of any credit card prior to applying

Obama to Unveil Proposal on Bank Taxes

2010-01-14T04:49:00.000-08:00

By DAMIAN PALETTA, JONATHAN WEISMAN And DEBORAH SOLOMON

WASHINGTON — President Barack Obama is expected Thursday to propose taxing large banks and other companies based on their exposure to risk, White House officials said.

The plan marks the latest in a slew of proposed fees, penalties and constraints the White House envisions slapping on Wall Street during the cleanup of the U.S. financial crisis, and marks a new stage in the White House's populist assault on the finance industry.

Administration officials went out of their way Wednesday to show no sympathy for big banks they acknowledged would lobby hard against the proposal.

"The banks that are in question were significantly responsible for the enormous degree of the reckless risk-taking that was borne throughout the economy," one official said.

If approved by Congress, the new tax -- which the White House calls a "financial crisis responsibility fee" -- would force about 50 banks, insurance companies and large broker-dealers to collectively pay the federal government roughly $90 billion over 10 years. Of the 50, about 35 would be U.S. companies and 10 to 15 would be U.S. subsidiaries of foreign financial firms.
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A senior administration official said the largest 10 institutions would pay about 60% of the tax's total cost.

Roughly half the 50 would be U.S. banks, including the largest, Goldman Sachs, J.P. Morgan Chase, Bank of America and Morgan Stanley. Because large firms that benefited from the government's debt guarantees would also be included, the tax would hit companies such as General Electric Co. Banks that have repaid their TARP money wouldn't escape taxation.

The taxed firms are expected to pay the cost of bailout money that went to General Motors Co. and Chrysler LLC, which are exempt from the tax. The administration official defended the omission by contending that U.S. auto makers collapsed in part because of a financial crisis of the banks' making.

The numbers could change as the final tally of losses from the $700 billion Troubled Asset Relief Program is calculated. The White House estimates that with a rash of repayments, TARP costs now stand at $117 billion, down from the $341 billion it estimated last summer. Officials say costs should ultimately fall to $90 billion, about what the tax is expected to raise, but the tax will stay in place until all of the costs are recaptured.

The top five Wall Street banks earned profits of about $30 billion through the third quarter last year. The proposal will also help the administration tackle the U.S.'s budget deficit, projected to reach $1.4 trillion this fiscal year.

The banking industry has already objected to initial reports of the proposal, which Mr. Obama is expected to detail Thursday morning at the White House.

"Using tax policy to punish people is a bad idea," J.P. Morgan Chase Chief Executive James Dimon told reporters after a hearing in Washington. Mr. Dimon said it would be unfair for banks to be left shouldering the cost of the auto bailout.

The proposal wouldn't require small banks to pay the fees, administration officials said, the latest sign that Washington's post-crisis clean-up is hitting large financial institutions most heavily.

Using boldly populist language, a senior administration official rejected criticism from bank executives, lobbyists and Republicans that the fee would be passed on to consumers. Doing so would put the taxed banks at a disadvantage against small-to-medium-sized lenders that would be exempt. He suggested companies look to their bonus pools to pay the tax.

"It is just beyond the pale for any of the any of these major financial institutions to suggest that they were islands unto themselves, untouched and not benefited by the extraordinary policies that have been taken under the Obama administration," the official said.

Under the proposal, a 15% tax would be levied on liabilities. The tax would apply to bank holding companies, thrifts, insurance companies that own financial arms and broker dealers with at least $50 billion in assets that received assistance under TARP, the FDIC's temporary loan program or other crisis efforts.

The tax would be levied on total assets, minus a type of capital considered high quailty, such as common stock, and disclosed and retained earnings. FDIC-covered deposits and insurance policy reserves would be untaxed because such assets are already subject to federal fees, the administration official said.

Under that formulation, banks that lean heavily on funding sources other than customer deposits would pay proportionally higher taxes. That means that Goldman Sachs and Morgan Stanley could get penalized. Another big loser could be Citigroup, whose main U.S. banking unit's insured deposits represent a relatively small slice of the company's liabilities.

The 2008 law creating TARP required the White House to come up with a proposal to recoup any losses. The White House and Treasury Department considered several different options, including a tax on bank profits or a tax on transactions made by large banks.

Ultimately, the White House opted to tax bank liabilities, seeing it as a way to constrain risk at specific firms. Liabilities, traditionally, are defined as what the bank owes -- for example, customers' deposits.

Administration officials believe that the tax would also serve as a constraint against banks taking on too many risky bets with borrowed cash. Many Democrats are expected to support the levy.

House Financial Services Committee Chairman Barney Frank (D., Mass.) said Wednesday that it was "entirely reasonable" for the financial industry to make the taxpayer whole on any losses.

Rep. Scott Garrett (R., N.J.) has said any tax or fee could hinder the economic recovery and further limit the industry's ability to extend more loans. Mr. Dimon, when asked how any tax could be felt by consumers, said "all businesses tend to pass their costs on to their customers."

"How you are going to tax banks and expect them to lend more is frankly lunacy," said Rep. Jeb Hensarling (R., Texas).

As large banks appear to regain their footing on Wall Street, their standing in Washington continues to deteriorate. Sen. Bill Nelson (D., Fla.) said Wednesday that he planned to impose new restraints on executive compensation at large banks.

The new White House tax would be in addition to other fees against big banks authorized by a recent bill passed by the House that would require large financial companies to finance a $150 billion fund to pay for future failures of large companies.

White House officials have said the financial industry should do more to repay taxpayers for the extraordinary public support extended the financial crisis. Public fury at the banking industry remains high, particularly as they report high profits and pay packages while unemployment remains high.

Economist Paul Samuelson Dies at 94

2009-12-13T10:28:00.000-08:00

By JUSTIN LAHART and JON HILSENRATH

Paul A. Samuelson, whose analytical work laid the foundation for modern economics, died Sunday. He was 94.

"Paul Samuelson was both a path-breaking and prolific economic theorist and one of the greatest teachers that economics has ever known," said Federal Reserve chairman Ben Bernanke, a former student of Mr. Samuelson's at the Massachusetts Institute of Technology. "I join with many other former students and colleagues of Paul's in mourning the passing of a titan of economics."

Actively publishing into the 2000s, Mr. Samuelson's career in economics spanned eight decades. As a high school student in 1932, he wandered into an economics lecture at the University of Chicago and was enamored. But attending Chicago as an undergraduate, he became keenly aware, he said in an interview with The Wall Street Journal earlier this year, of the differences between what was being taught in the classroom and "what I heard out the windows and I heard from the street."

In 1935 he went, despite his Chicago professors' protestations, to Harvard University for his graduate work. His 1941 Ph.D. thesis, later published as "Foundations of Economic Analysis," examined the mathematical structure underlying economics. The approach revolutionized the field.

"For me, it is a special bereavement," said Princeton University economist Avinash Dixit. "My whole style of research, and the techniques that support almost all of my own papers, derive from his foundational articles."

Mr. Samuelson started teaching at MIT in 1940, the beginning of a lifelong association with the university that helped its economics program become the most highly-regarded in the world. "Economics," first published in 1948, was for years the most popular undergraduate economics textbook and, now in its 19th edition, is still widely used.

In 1970, he was the first American to win the Nobel Prize in economics, the second year the prize was offered.

"Samuelson's contribution has been that, more than any other contemporary economist, he has contributed to raising the general analytical and methodological level in economic science," wrote the Nobel prize committee. "He has in fact simply rewritten considerable parts of economic theory."

Market sell off

2009-10-29T05:43:00.000-07:00

Schiff Report Video Blog Oct 28th, 2009

Don’t Be Fooled by the Dow

2009-10-21T06:14:00.000-07:00

Don’t Be Fooled by the Dow: Crash Politics and America’s Dark Future
Jon Talton - October 21st, 2009

Stock MarketDon’t be fooled by the Dow.

This great economic disruption is far from over.

The “green shoots” trumpeted daily are largely a result of the vast infusion of federal (i.e. taxpayer) money into the economy. If that funding were going to building high-speed rail and other forward-leaning investments, we could have hope that job creation would be around the corner and the infrastructure would undergird an economic renewal that would repay the Treasury.

Alas, that is not the case.

Aside from individual tax cuts that do little to stimulate the economy and the backfilling of desperate state needs, most of the federal money in the system is being used by Wall Street to get back to business as usual.

Yes, it’s a new bubble. Unlike its real-estate and dot-com predecessors, however, this bubble is not even offering the illusion of widespread prosperity. While America sees its worst unemployment since 1983 — and by some critical measures since the Depression — the new bubble is being skimmed by the elite. This will be a record year for compensation by banks and securities firms — better, even, than before the crash.

If America had a credible opposition party, the Democrats and President Obama would be in deep trouble. They may be anyway. But the political fallout from the economy is unpredictable. It is also potentially volatile and even dangerous.

When Franklin Roosevelt was elected in 1932, he won with a winning smile, soaring oratory and the nation’s anger at his predecessor. Otherwise, Roosevelt was an unknown quantity. He was willing to experiment and innovate. He had a brilliant “brains trust” to help him. And he had a crisis of such magnitude, and enough lawmakers of both parties independent of business interests, to create the New Deal. Yet Depression politics were dangerous and a happy ending was not guaranteed.

Communism in the Soviet Union was in its infancy and the crimes of Stalin were largely unknown. Fascism seemed to work very well in Italy under Mussolini, who was, believe it or not, a respected world statesman at the time. Adolf Hitler had just been elected chancellor in Germany. Both these creeds had adherents in the West. At home, Louisiana’s Huey Long gained popularity with his “share the wealth campaign.” FDR called him “one of the two most dangerous men in America” (the other: Gen. Douglas MacArthur). Father Coughlin pioneered hate radio. The one thing that seemed clear was that capitalism was dead.

Today, the capitalism that led to the crash should lie discredited. It’s not the capitalism of America from the 1940s through the 1970s, which built the greatest middle class in history. Rather, it is a gamed market that has created a new gilded age.

Income inequality is at the highest levels since 1929. Employers are using the bad economy to take away the benefits that American workers had taken for granted until they started to be whittled away in the 1990s. Wages, stagnant through the Bush years, are falling. Rutgers economists predict the economy won’t recover the jobs lost in the recession until 2017.

And yet, no ideology challenges the status quo. No one even seems to widely advocate a return to the capitalism of the mid-20th century. So Wall Street is back to selling derivatives, doing deals, gambling with taxpayers’ money. Even modest reform or regulatory changes have been stopped dead — with the banks using federal money to lobby against them.

It won’t last and when it crashes again, what happens?

Americans today arguably know less than their Depression forebears about history and economics (the latter somewhat defensible, as the bankers themselves don’t understand their complex derivatives). But they are not total fools. As they face foreclosure, job losses and bankruptcy, they will see Wall Street paying record bonuses. They know the economy crashed because of a parade of frauds and swindles — and not one major prosecution of the big banks has resulted. Wall Street that has been bailed out by We the People at great cost and future risk. Meanwhile, we can’t even get health care for average people in the increasingly common situation of lacking employer coverage — or enough coverage.

James Howard Kunstler, the dead-on critic of suburbia and trenchant observer of the American scene, sees a confused, angry and well-armed nation. One that could show up at the tony precincts of the bankers wanting retribution. Aside from the occasional lethal nut, the people do not seem in a revolutionary mood. Today’s bread and circuses are cheap goods at Wal-Mart and electronic distractions. Most Americans seem content to muddle through, even as their living standards fall and fair play and opportunity seem to be artifacts of another America. There is a vehement right-wing cohort, to be sure, that gets all its opposition from Fox News and talk radio. But it’s attempts at protest have been feeble.

All this might change dramatically with another crash — or another terrorist event. The country is in “an awaiting,” to use F. Scott Fitzgerald’s phrase. The only sure thing is that we’re witnessing a sucker’s rally in the market — and in the minds of those who think we will resume business as usual. Of course, the top bankers already know this. They will have their personal fortunes safely out by the time the roof collapses again.

* * *

Jon Talton is the economics columnist for the Seattle Times and proprietor of the blog Rogue Columnist. His latest book is the investigative thriller The Pain Nurse.

Taxpayers face heavy losses on auto bailout

2009-09-09T08:25:00.000-07:00

Taxpayers face heavy losses on auto bailout

By CHRISTOPHER S. RUGABER

WASHINGTON (AP) -- Taxpayers face losses on a significant portion of the $81 billion in government aid provided to the auto industry, an oversight panel said in a report to be released Wednesday.

The Congressional Oversight Panel did not provide an estimate of the projected loss in its latest monthly report on the $700 billion Troubled Asset Relief Program. But it said most of the $23 billion initially provided to General Motors Corp. and Chrysler LLC late last year is unlikely to be repaid.

"I think they drove a very hard bargain," said Elizabeth Warren, the panel's chairwoman and a law professor at Harvard University, referring to the Obama administration's Treasury Department. "But it may not be enough."

The prospect of recovering the government's assistance to GM and Chrysler is heavily dependent on shares of the two companies rising to unprecedented levels, the report said. The government owns 10 percent of Chrysler and 61 percent of GM. The two companies are currently private but are expected to issue stock, in GM's case by next year.

The shares "will have to appreciate sharply" for taxpayers to get their money back, the report said.

For example, GM's market value would have to reach $67.6 billion, the report said, a "highly optimistic" estimate and more than the $57.2 billion GM was worth at the height of its share value in April 2008. And in the case of Chrysler, about $5.4 billion of the $14.3 billion provided to the company is "highly unlikely" to ever be repaid, the panel said.

Treasury Department officials have acknowledged that most of the $23 billion provided by the Bush administration is likely to be lost. But Meg Reilly, a department spokeswoman, said there is a "reasonably high probability of the return of most or all of the government funding" that was provided to assist GM and Chrysler with their restructurings.

Administration officials have previously said they want to maximize taxpayers' return on the investment but want to dispose of the government's ownership interests as soon as practicable.

"We are not trying to be Warren Buffett here. We are not trying to squeeze every last dollar out," Steve Rattner, who led the administration's auto task force, said before his departure in July. "We do want to do well for the taxpayers but the most important thing is to get the government out of the car business."

Greg Martin, a spokesman for the new GM, said the company is "confident that we will repay our nation's support because we are a company with less debt, a stronger balance sheet, a winning product portfolio and the right size to match today's market realities."

The Congressional Oversight Panel was created as part of the Troubled Asset Relief Program, or TARP. It is designed to provide an additional layer of oversight, beyond the Special Inspector General for the TARP and regular audits by the Government Accountability Office.

The panel's report recommends that the Treasury Department consider placing its auto company holdings into an independent trust, to avoid any "conflicts of interest."

The report also recommends the department perform a legal analysis of its decision to provide TARP funds to GM and Chrysler, their financing arms and many auto parts suppliers. Some critics say the law creating TARP didn't allow for such funding.

The panel's members include Rep. Jeb Hensarling, a Texas Republican, who dissented from the report. Hensarling said the auto companies should never have received funding and criticized the government for picking "winners and losers."

Other agencies have also projected large losses on the loans and investments provided to the industry. The Congressional Budget Office estimated in June that taxpayers would lose about $40 billion of the first $55 billion in aid.

Buffett, Gross, health care costs and the China fund

2009-08-22T05:33:00.000-07:00

Taxpayers Need to Act Fast to Take Advantage of Temporary Tax Breaks

2009-08-14T22:12:00.000-07:00

Tax Changes Year to Date, Anticipated Tax Changes to Come

(RIVERWOODS, ILL., August 4, 2009) – If the first half of 2009 is any indication, taxpayers have their work cut out trying to keep up with available tax breaks and potential tax pitfalls of 2009, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com).

In February, Congress passed the Economic Recovery and Reinvestment Act of 2009. The nearly $800 billion economic stimulus package offers significant tax incentives; however, many of the incentives, as well as other tax breaks, are temporary.

“It’s always confusing for taxpayers when rules change,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA. “But with so many people struggling economically, it’s well worth their effort to see where they may be able to save on taxes, even if it’s only temporary relief.”

According to CCH, among the important temporary tax changes affecting individual taxpayers and set to expire during 2009 are:

* First-time homebuyer credit. This credit reaches $8,000 for purchases between January 1 and November 30, 2009. Taxpayers must be qualified buyers and satisfy income requirements. Eligible taxpayers also can file an amended 2008 tax return to receive the credit sooner.

* Motor vehicle sales tax deduction. Taxpayers can take an extra standard deduction for state and local sales taxes paid on the purchase of a new vehicle and, in states without a sales tax, taxpayers can deduct other fees to take advantage of the temporary motor vehicle sales tax deduction enacted as part of the 2009 Recovery Act. The amount of the deduction is limited to the portion of the state sales or excise tax imposed on the first $49,500 of the purchase price of the vehicle and is effective for vehicles purchased between February 17 and December 31, 2009.

* COBRA premium assistance. Individuals laid off from their jobs between September 1, 2008 and December 31, 2009 meeting income limits may qualify for nine months of COBRA premium assistance under the 2009 Recovery Act. Individuals pay 35 percent of the COBRA premium and employers must treat that as full payment. Employers claim a credit for the other 65 percent of the premium on their payroll tax returns.

* Economic recovery payments. The 2009 Recovery Act authorized one-time payments of $250 to individuals receiving Social Security benefits, disabled veterans and others on fixed incomes. The Social Security Administration began sending the bulk one-time payments by mail and direct deposit in May 2009.

* Exclusion of unemployment benefits. Individuals receiving unemployment benefits in 2009 can exclude the first $2,400 from their income. The exclusion is only available for 2009.

* Tax evasion forgiveness. In an effort to shore up tax revenues, the IRS is encouraging taxpayers to disclose unreported foreign bank accounts and assets. In exchange for full disclosure and paying all back taxes plus interest and penalties, the IRS agrees not to criminally prosecute tax evaders and to waive the 75-percent fraud penalty. The settlement offer is only available up to September 23, 2009.

Additionally, Luscombe pointed out that while the Making Work Pay credit, another outcome of the 2009 Recovery Act, is in effect for both 2009 and 2010, taxpayers and pension recipients need to take a look at their withholdings now to make sure they don’t end up owing more than they expected in taxes. Specifically, Making Work Pay is a credit against a worker’s income tax equal to the lesser of 6.2 percent of their earned income or $400 ($800 for married couples filing jointly). This amount can be reduced by any economic recovery payment an individual received and phases out beginning at adjusted gross income of $75,000 for single filers and $150,000 for joint filers. Individuals with multiple jobs may need to adjust their withholdings if the credit results in too little income tax being withheld from their wages. The IRS in May also issued a withholding option for pension plans to offset the credit which could result in some pension recipients underwithholding.
Looking Ahead at Tax Legislation

The rest of 2009 will likely bring additional tax law changes, although many will not take effect until 2010 or beyond. In May, President Barack Obama released details of his tax proposals. These included extensive reform of the international tax rules, higher tax rates on upper income individuals, extended middle income tax breaks and deficit reduction. Individual tax cuts would total $736.5 billion over 10 years and business tax cuts would total $71 billion over 10 years. In addition, in late July, the administration outlined tax proposals to help pay for health care reform, including a surtax on families earning more than $1 million a year.

“Congress has already noted its opposition to some of the president’s proposals,” said Luscombe. “However, there are several more months remaining in the year, a growing deficit, an economy that is still trying to find traction and an urgency to reform health care. As a result, it’s a fluid time where policymakers can shift their priorities and make concessions in order to move forward the programs they think are important.”

US Food Stamp List Tops 34 Million for First Time

2009-08-07T09:08:00.000-07:00

From Forbes.com:

For the first time, more than 34 million Americans received food stamps, which help poor people buy groceries, government figures said on Thursday, a sign of the longest and one of the deepest recessions since the Great Depression

Enrollment surged by 2 percent to reach a record 34.4 million people, or one in nine Americans, in May, the latest month for which figures are available.

It was the sixth month in a row that enrollment set a record. Every state recorded a gain in participation from April. Florida had the largest increase at 4.2 percent.

Food stamp enrollment is highest during times of economic stress. The U.S. unemployment rate of 9.5 percent is the highest in 26 years.

Average benefit was $133.65 in May per person. The economic stimulus package enacted earlier this year included a temporary increase in food stamp benefits of $80 a month for a family of four.

Milton Friedman - Greed

2009-08-01T09:33:00.000-07:00

Traders Blamed for Oil Spike

2009-07-28T03:59:00.000-07:00

Traders Blamed for Oil Spike
CFTC Will Pin '08 Price Surge on Speculators, in a Reversal From Bush Findings

By IANTHE JEANNE DUGAN and ALISTAIR MACDONALD

The Commodity Futures Trading Commission plans to issue a report next month suggesting speculators played a significant role in driving wild swings in oil prices -- a reversal of an earlier CFTC position that augurs intensifying scrutiny on investors.

In a contentious report last year, the main U.S. futures-market regulator pinned oil-price swings primarily on supply and demand. But that analysis was based on "deeply flawed data," Bart Chilton, one of four CFTC commissioners, said in an interview Monday.

The CFTC's new review, due to be released in August, adds fuel to a growing debate over financial investors who bet on the direction of commodities prices by buying contracts tied to indexes. These speculators have invested hundreds of billions of dollars in contracts that were once dominated by producers and consumers who sought to hedge against oil-market volatility.
[Daily change in the price of oil, in dollars per barrel]

The review also reflects shifting political winds. Under Chairman Gary Gensler, appointed by President Barack Obama, the CFTC is departing from the more hands-off approach it took under its previous head, a George W. Bush appointee. The agency is widely expected to adopt new rules to limit the amount of investments in commodities by big institutions betting on their direction purely for financial gain.

The agency didn't make available preliminary figures from the report and declined to discuss the previous data.

Speculators have been a lightning rod of criticism from politicians world-wide, who worry that rising oil prices could damp the recovery potential of their recession-hit economies. Many lawmakers and regulators say they want to ensure that speculators don't make it more costly for consumers to access heating oil, food and other essentials.

These decision makers don't present a united front. The U.K.'s Financial Services Authority has found no evidence that speculators are behind big oil-price swings, people familiar with the matter said Friday. This view, made by the overseer of one of the world's biggest financial markets, contrasts with an opinion piece published in The Wall Street Journal two weeks ago, by French President Nicolas Sarkozy and U.K. Prime Minister Gordon Brown, who said governments need to act to curb "dangerously volatile" oil prices.

In the U.S., the CFTC begins public hearings Tuesday to determine whether to limit speculative investments in commodities. Congress also is weighing whether to give the CFTC the authority, under a broader proposal to revamp financial regulation, to regulate commodities investments that occur off traditional exchanges. Byron Dorgan, a North Dakota Democrat, has called on the CFTC to curb "oil speculators looking for a quick buck at the expense of American consumers."
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7/8/2009

The debate over speculators underscores the shifting nature of commodities trading in recent years. Before the mid-1990s, these markets were dominated by entities that had physical dealings with the underlying commodity, and "speculators" who often took the opposite position, providing liquidity to markets.

But a new group of investors has emerged in recent years. Those who want to bet on commodities prices have increasingly put their money in indexes that track the value of futures contracts, in which investors promise to pay a certain amount in the future for oil and other commodities. As of July 2008, financial investors had about $300 billion riding on these indexes, roughly four times the level in January 2006, according to the International Energy Agency, a Paris-based watchdog.

Separately, these investors may buy derivatives, not directly traded on futures exchanges, that let them make contrary bets to offset their risks.

Crude-oil prices surged in July 2008 to a record $145 a barrel, then dropped to about $33 in December. Oil now trades at around $68 a barrel.

Proponents of index speculation say these parties have added liquidity to markets. They blame price gyrations on supply and demand and say attempts to regulate speculation are foolhardy and could drive investors to less-regulated venues.

CME Group, the world's largest commodities exchange, said in a statement that it hasn't seen "any empirical evidence that index funds and speculators distort prices, as has been widely alleged."
[Crude Measures]

The exchange's chief executive, Craig Donohue, said: "We are deeply concerned that inappropriate regulation of these markets will cause market participants to move to dark pools and other unregulated markets, causing irrevocable harm to the entire U.S. economy." Dark pools are private markets where large orders are transacted.

Last year, CFTC Chief Economist Jeffrey Harris told a House Agriculture subcommittee: "The economic data shows that overall commodity price levels, including agriculture commodity and energy futures prices, are being driven by powerful fundamental economic forces and the laws of supply and demand." Mr. Harris didn't return a call to comment.

The acting CFTC chairman at the time, Bush-appointee Walter Lukken, told the House Agriculture committee that CFTC's economists "did not find direct evidence that speculation was driving up prices." Mr. Lukken, now an executive at the New York Stock Exchange, declined to comment.

In preparing its 2008 report, the CFTC sought information from swaps dealers about their off-exchange derivatives transactions. CFTC commissioner Mr. Chilton -- who was appointed by Mr. Bush and now awaits confirmation of his reappointment under Mr. Obama -- said the data the agency gathered was incomplete, with some players providing partial or no information.

Mr. Chilton dissented from the 2008 CFTC report, saying the agency's conclusions didn't go far enough. He expressed doubt about the amount and type of data received, which he called limited and unreliable. "We didn't have all the information we should have," he said. "And we gave it to Congress anyway, and we spun it."
[U.S. supply of crude oil]

The agency began shifting under Mr. Gensler, its new chairman. During his confirmation process earlier this year, Mr. Gensler said he believed speculation was partly behind the surge in commodity prices.

Mr. Chilton said the new report will contain a more-thorough analysis of the investors in contracts tied to oil and other commodities, and reveal cases in which single traders hold massive market positions. "We now have multiple sources, and confidence from different sources," he says. He said he believes the data on trading outside exchanges is also more reliable.

Meantime, the U.K.'s FSA has been examining whether speculation has driven big oil price swings in recent months. The FSA is leaning toward the conclusion that the moves have more to do with uncertainty over the direction of economic growth than speculation, according to the people familiar with the matter.

The FSA has no jurisdiction over U.S. markets. But it oversees ICE Futures Europe, one of the largest global energy exchanges, which is based in London.

The FSA doesn't believe that limiting the size of trading positions would be "beneficial" for the market. Still, it concedes it doesn't have a "full explanation" as to why it the market has moved as it has.

Citi in $100 Million Pay Clash

2009-07-25T04:33:00.000-07:00

Citi in $100 Million Pay Clash

By MICHAEL SICONOLFI and ANN DAVIS

A top Citigroup Inc. trader is pressing the financial giant to honor a 2009 pay package that could total $100 million, setting the stage for a potential showdown between Citi and the government's new pay czar.

The trader, Andrew J. Hall, heads Citigroup's energy-trading unit, Phibro LLC -- a secretive operation, run from the site of a former Connecticut dairy farm, that occasionally accounts for a disproportionate chunk of Citigroup income.

Mr. Hall's pay package puts Citigroup in a tight spot. Ripping up the contract could trigger Mr. Hall's departure and a potentially messy legal fight. But making any large payouts, even if they're based on previously agreed contracts, could subject Citigroup to political and investor fallout.
[Star trader Andrew Hall ] PatrickMcMullan

Star trader Andrew Hall could set up a showdown with U.S. pay czar.
More

* Citi Taps Directors With Fix-It Expertise

Earlier this year, American International Group Inc.'s bonus payments of $165 million to some executives caused an outcry, given the insurer's U.S.-government bailout. Citigroup has received some $45 billion in bailout money.

It will be an early test for Kenneth Feinberg, the Treasury Department's pay czar, who was appointed last month to a new position with the power to help set pay for top executives and highly paid employees at seven firms receiving the most government financial aid. Banks and others have a mid-August deadline for submitting pay requests to Mr. Feinberg.

"Companies will need to convince Mr. Feinberg that they have struck the right balance to discourage excessive risk-taking and reward performance for their top executives," a spokesman for Mr. Feinberg said.

Mr. Hall is contractually obligated to receive pay based on Phibro's profits, and some observers on Wall Street believe Citigroup has a better chance at repaying the U.S. money with its Phibro unit humming.

Critics, however, argue that pay agreements like these need to be redrawn in light of Citigroup's taxpayer-funded bailout. Soon the U.S. government will be a 34% owner of Citigroup.

Citigroup said in a statement: "Retaining and attracting the best talent is very important to the success of Citi and all its stakeholders. Citi continues to examine ways to ensure its employee-compensation practices are competitive in this very challenging market environment."

Mr. Hall has long operated with remarkable independence. In late 2007 he shot down Citigroup executives who wanted to merge Phibro with the bank's asset-management arm, which could have clipped his ability to make big investment bets.

A far cry from the buttoned-down Wall Streeter, Mr. Hall leaves the office most afternoons to go rowing or to practice calisthenics with a ballet teacher. Outside the energy markets, Mr. Hall ranks among world's top collectors of contemporary art, favoring often-shocking works that explore subjects including the human toll of the Nazis.

Mr. Hall owns a nearly 1,000-year-old castle in Germany where he displays his art collection. For a time, the lawn of his home in Southport, Conn., featured a controversial, 80-foot-long concrete sculpture; he was eventually forced to remove it after a legal battle with the neighbors.

Last year Mr. Hall received pay of more than $100 million, people familiar with the matter say. With this year barely half over, Mr. Hall's specific 2009 pay hasn't yet been set. Citigroup doesn't break out detailed financial reports for Phibro, but traders say the firm is having a good year.

Wall Street pay has been a hot-button issue in the wake of the financial crisis. Goldman Sachs Group Inc. and Morgan Stanley recently disclosed that they have set aside a total of more than $17 billion in compensation and benefits for their employees this year. Some big banks that received government bailouts in the U.S. and Britain, including Citigroup, Bank of America Corp. and Royal Bank of Scotland, are offering handsome pay packages to lure stars.

Hanging in the balance in the Hall matter is an important source of profits for Citigroup, which is trying to rebound after a disastrous 2008. Phibro, with a small core group of traders, has generated hundreds of millions of dollars in profit for Citigroup over the years. This spring, after the new pay curbs were unveiled, Mr. Hall and others on his team threatened to leave if their pay was cut by the new compensation rules, people familiar with the matter said.

Citigroup is considering spinning off Phibro as a separate operation, among other options, in hopes of preserving some payoff from Phibro's profits, people familiar with the matter say.

These kinds of pay conflicts represent uncharted territory for the government and Wall Street alike. If the government pressures banks to abrogate pay contracts, traders and bankers could sue to enforce the pacts. That has its own risks: Amid recession and taxpayer-funded bank bailouts, suing over millions of dollars in pay could expose traders to widespread ridicule and political backlash.

Meanwhile, J.P. Morgan Chase & Co. told investment-banking employees Thursday that it will raise salaries and reduce bonuses for about half of them. Bonuses can entice some Wall Street traders to take big investment risks.

Mr. Hall's pay contract has multiple parts. He has long had a profit-sharing contract with Citigroup and its predecessor banks entitling him to a large percentage of Phibro's gains. The percentage he and his small team of traders get under the contract terms currently stands below 30%.

Mr. Hall's pay and independence from Citigroup's home office reflects a track record of making sizable, successful investment bets. A few years ago, for instance, Mr. Hall, 58 years old, anticipated an important shift in the way the world valued oil, and correctly bet that long-term and short-term energy prices would abandon their historical relationship with each other. In making that investment, Citigroup gave Mr. Hall more leeway to take on risk than it usually gives entire teams, according to traders.

Until this year, Phibro's calendar year ended in September. Now, Phibro's pay will be calculated to a full calendar year, so the pay period for Mr. Hall and others at Phibro ending in December will cover 15 months.

Citigroup executives have been meeting periodically with Mr. Feinberg since last month. Lewis Kaden, a Citigroup vice-chairman, has been handling most of the discussions with the pay czar, trying to capitalize on the two men's longtime friendship, according to people familiar with the matter.

Citigroup doesn't report Phibro's detailed financial results, but a footnote in the company's annual report says that $667 million in 2008 revenue from "principal transactions" related to commodities "primarily includes" Phibro's results.

The results represented a sliver of Citigroup's $52.8 billion in net revenue last year. But considering that Citigroup reported a 2008 net loss of $27.7 billion, Phibro's contribution was especially important. In 2007, Phibro contributed $686 million to Citigroup, and $487 million in 2006, according to the annual report.

In recent months, Citigroup has told about five former top executives that it won't pay them tens of millions of dollars in promised severance payouts, according to people familiar with the matter. Citigroup already has paid more than half the roughly $100 million it promised to the former executives. But company officials decided not to proceed with the remaining payments to avoid the possibility of a public backlash, people familiar with the situation said.

Phibro has one of the most colorful histories on Wall Street. It was founded by the Philipp Brothers nearly a century ago and in 1981 bought Salomon Inc., becoming Phibro-Salomon. (At the time, Phibro had to pay millions of dollars in bonuses to retain Salomon Brothers employees.)

Zero Money Down, Not Subprime, Led To Foreclosure Crisis

2009-07-04T12:40:00.000-07:00

By John Carney
The most important article you can read this weekend is economist Stan Leibowitz's analysis of loan level data on 30 million mortgages. His conclusion is straight-forward: the most important driver of foreclosures is homeowner equity. This means that the loans most likely to default are high loan to value, low-down payment loans.

Equally arresting is the list of things we've come to associate with the boom that make very little difference on foreclosures. Subprime lending--nope. Teaser rates--not the problem. Liar loans--just move along. Predatory loans--sorry, kids.

It's the low down payments.

The analysis indicates that, by far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home. The accompanying figure shows how important negative equity or a low Loan-To-Value ratio is in explaining foreclosures (homes in foreclosure during December of 2008 generally entered foreclosure in the second half of 2008). A simple statistic can help make the point: although only 12% of homes had negative equity, they comprised 47% of all foreclosures.

Further, because it is difficult to account for second mortgages in this data, my measurement of negative equity and its impact on foreclosures is probably too low, making my estimates conservative.

What about upward resets in mortgage interest rates? I found that interest rate resets did not measurably increase foreclosures until the reset was greater than four percentage points. Only 8% of foreclosures had an interest rate increase of that much. Thus the overall impact of upward interest rate resets is much smaller than the impact from equity.

This has serious policy implications. It suggests that programs aimed at lower a borrower's monthly payments may not have all that much influence on stemming foreclosures. And it indicates that stronger under writing standards might be the key to avoiding another foreclosure crisis down the road.

So now we should be asking: how did we wind up with so many low down payment, high LTV mortgages?

WSJ: Climate bill would be 'biggest tax in American history'

2009-06-25T16:36:00.000-07:00

The Cap and Tax Fiction
Democrats off-loading economics to pass climate change bill.

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House Speaker Nancy Pelosi has put cap-and-trade legislation on a forced march through the House, and the bill may get a full vote as early as Friday. It looks as if the Democrats will have to destroy the discipline of economics to get it done.

Despite House Energy and Commerce Chairman Henry Waxman's many payoffs to Members, rural and Blue Dog Democrats remain wary of voting for a bill that will impose crushing costs on their home-district businesses and consumers. The leadership's solution to this problem is to simply claim the bill defies the laws of economics.

Their gambit got a boost this week, when the Congressional Budget Office did an analysis of what has come to be known as the Waxman-Markey bill. According to the CBO, the climate legislation would cost the average household only $175 a year by 2020. Edward Markey, Mr. Waxman's co-author, instantly set to crowing that the cost of upending the entire energy economy would be no more than a postage stamp a day for the average household. Amazing. A closer look at the CBO analysis finds that it contains so many caveats as to render it useless.
[Review & Outlook] Associated Press

Henry Waxman

For starters, the CBO estimate is a one-year snapshot of taxes that will extend to infinity. Under a cap-and-trade system, government sets a cap on the total amount of carbon that can be emitted nationally; companies then buy or sell permits to emit CO2. The cap gets cranked down over time to reduce total carbon emissions.

To get support for his bill, Mr. Waxman was forced to water down the cap in early years to please rural Democrats, and then severely ratchet it up in later years to please liberal Democrats. The CBO's analysis looks solely at the year 2020, before most of the tough restrictions kick in. As the cap is tightened and companies are stripped of initial opportunities to "offset" their emissions, the price of permits will skyrocket beyond the CBO estimate of $28 per ton of carbon. The corporate costs of buying these expensive permits will be passed to consumers.

The biggest doozy in the CBO analysis was its extraordinary decision to look only at the day-to-day costs of operating a trading program, rather than the wider consequences energy restriction would have on the economy. The CBO acknowledges this in a footnote: "The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap."

The hit to GDP is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result.

When the Heritage Foundation did its analysis of Waxman-Markey, it broadly compared the economy with and without the carbon tax. Under this more comprehensive scenario, it found Waxman-Markey would cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035.

Note also that the CBO analysis is an average for the country as a whole. It doesn't take into account the fact that certain regions and populations will be more severely hit than others -- manufacturing states more than service states; coal producing states more than states that rely on hydro or natural gas. Low-income Americans, who devote more of their disposable income to energy, have more to lose than high-income families.

Even as Democrats have promised that this cap-and-trade legislation won't pinch wallets, behind the scenes they've acknowledged the energy price tsunami that is coming. During the brief few days in which the bill was debated in the House Energy Committee, Republicans offered three amendments: one to suspend the program if gas hit $5 a gallon; one to suspend the program if electricity prices rose 10% over 2009; and one to suspend the program if unemployment rates hit 15%. Democrats defeated all of them.

The reality is that cost estimates for climate legislation are as unreliable as the models predicting climate change. What comes out of the computer is a function of what politicians type in. A better indicator might be what other countries are already experiencing. Britain's Taxpayer Alliance estimates the average family there is paying nearly $1,300 a year in green taxes for carbon-cutting programs in effect only a few years.

Americans should know that those Members who vote for this climate bill are voting for what is likely to be the biggest tax in American history. Even Democrats can't repeal that reality.

Barney Frank Says Fannie And Freddie's Lending Standards Are Too High

2009-06-24T20:01:00.000-07:00

By Joe Weisenthal on FNM
Of all the things you could say about Fannie Mae (FNM) and Freddie Mac (FRE), too-strict lending standards probably wouldn't come to mind.

Afterall, the companies have been backstopped to the tune of $400 billion, which has to mean their standards were too loose.

But powerful Congressman Barney Frank, in a desperate attempt to reflate the old bubble, says the two GSEs are being too stingy, particularly with respect to condos.

WSJ: Fannie and Freddie have restricted loans to condo buyers in these situations because they represent a red flag that the developments -- many of which were planned and built at the height of the housing bubble -- may face financial trouble down the road. But never mind all that. Messrs. Frank and [Congressman Anthony] Weiner think, in all their wisdom and years of experience underwriting mortgages, that the new rules "may be too onerous."

And in a display of the wit for which Mr. Frank is famous, the letter writers slyly point out that higher lending standards won't reduce taxpayer exposure to bad loans because the Federal Housing Administration has even lower standards for condos. "While the underlying goal may be to reduce taxpayer exposure relating to the current conservatorship of the GSEs [government sponsored entities], such a goal would not have such an effect if it merely results in a shifting of loans from the GSEs to the FHA." Tougher lending standards will merely shift market share from one government program to another, so what's the point in being cautious?

That is clever reasoning, and we could accept the idea that such a move wouldn't increase the government's net exposure at this point. But that's not really the point -- the point is that the government only knows how to turn the wrench in one direction -- it's always loosening, loosening and loosening, whether it's the money supply or lending standards.

You often hear about Bernanke's conundrum -- how he'll "land the plane" and know when to tighten -- but the Congress is in the same boat with all their lending schemes. At one point to these agencies return to normal, and would that be even possible when their political god-parents only want them to go in one direction?

Warren Buffett's Big Bet On Munis

2009-06-10T08:00:00.000-07:00

Warren Buffett's Big Bet On Munis (BRK)
Joe Weisenthal

The most interesting part of Warren Buffett's annual letter to shareholders this year was his discussion on muni bonds, and the meaninglessness of historical default rates. As he noted, past default rates (always quite low) reflected a time when most issuance was un-insured, and thus it really was all on the issue to pay it off, without any expectation that an insurer would 'share in the sacrifice'.

And yet he wasn't so concerned, because Berkshire Hathaway (BRK) itself has gotten into the muni insurance business.

And now Buffett is betting more heavily on muni bonds directly, at yields he previously described as "unthinkable."

Bloomberg: Berkshire increased its investment in debt issued by state and local governments to $4.05 billion as of March 31 from $2.05 billion on June 30, 2008, the Omaha, Nebraska-based company said in regulatory filings. Berkshire added $1.09 billion to the bet in last year’s third quarter and $985 million in the first three months of 2009.

Buffett’s firm bought municipal bonds while scaling back stock purchases and as its cash position fell to the lowest level in five years.

So what's the play here? Well, fat yields, obviously, though yields are fat for reasons Buffett obviously knows well. To some extent, this could be a strategy of "looting" the taxpayer -- like PIMCO does, betting on areas that he intuits are too big to fail. Given the anti-stimulative effects that a wave of defaults would have, a bailout or backstop for the muni industry is probably part of Buffett's calculus here.

Act Now On Systemic Risk!

2009-06-01T11:54:00.000-07:00

Commentary
Act Now On Systemic Risk
Roy C. Smith, 06.01.09, 12:00 AM ET

In 2007, a record $12 trillion of corporate new issues and mergers took place in global capital markets. Approximately 70% of these transactions were handled by 10 banks, the global industry leaders. Since then, the industry has been hobbled by all sorts of difficulties that have resulted in the failure or forced merger of several leading firms (Merrill Lynch, Lehman Brothers, Wachovia, ABN Amro, Royal Bank of Scotland) and the recapitalization and restructuring of several others (Citigroup, UBS, Bank of America) to avoid failure.

Altogether about half of the market shares in the wholesale banking market have been thrown up for grabs by the turmoil. And the battle lines are forming now among the survivors to grab what they can.

American banks affected by having accepted TARP funds are keeping their profiles low, for now, though some are pushing hard to be allowed to redeem their preferred stock and get out from under the government’s restrictive compensation controls and to return their businesses to normal. Several foreign banks have been aggressively hiring skilled professionals from U.S. firms in the New York and London markets, offering attractive compensation packages to be able to do so. These firms all see a recovery of capital market activity coming as a result of all the government stimulus being offered, and want to be able to use the opportunity to climb up the league tables.

This is likely to have two consequences: the battle for market share will be fought over the willingness of the banks to take risks on behalf of their clients (which can become systemic) and the risk-taking venues and platforms will be those globally positioned to minimize regulatory restrictions.

In other words, we may be back where we started from at the beginning of the last crisis, with systemic risk building up as a result of easy money and low rates, and players from overseas helping to bid up the risk level by competitive actions of their own.

What we need is a separate entity charged only with the regulation of systemic risk that can devise rules and methods for preventing it from becoming excessive. Systemic risk is fueled not just by size and interconnectedness, but by inadequate risk management and controls, by misleading accounting practices, and by excessive incentivization of managers to increase growth and profitability. Anthony Saunders, Ingo Walter and I offered a proposal to deal with all this in a paper prepared last fall ("Enhanced Regulation for Large, Complex Financial Institutions") that has since been incorporated into a volume of similar such papers prepared by faculty at NYU Stern School of Business called Restoring Financial Stability (Wiley 2009).

What we hear from the government is that systemic risk will be addressed late in the year, after first dealing with credit cards, derivatives and consolidation of existing federal regulatory bodies, because they expect a substantial battle over it. The battle, however, may be lost if the urgency of the banking crisis is dissipated by market improvements, better bank performance and capitalization, short memories and the inevitable onslaught of industry lobbying. By year-end, the urgency may all be gone and with it the government’s ability to pass a meaningful law that provides tough regulation and enforcement of systemic risk borne by all financial institutions that might be too-big-to-fail in the future--and that generates similar regulatory changes in Europe and elsewhere.

The government should move now to roll out such a law, begin discussions with the bank for International Settlements (which has coordinated the Basel minimum bank capital adequacy agreements) about its becoming the standard for international regulators, and get it out there for discussion while Congress and the public are still appreciative of the considerable hazards of systemic collapse.

Roy C. Smith is a professor of finance at New York University’s Stern Business School.

Buy American

2009-05-30T20:16:00.000-07:00

The stimulus package includes a "Buy American" clause that the steel and other U.S. industries lobbied hard for. However, U.S businesses that export overseas now fear foreign governments will retaliate.

Mounting Speculation That Republican Chrysler Dealers Were Targeted

2009-05-29T07:10:00.000-07:00

Earlier this week we mentioned an internet-borne conspiracy theory that the Chrysler dealership closings had a partisan tilt. Basically, some blogs believed that dealers who donated to Republicans were heavily represented on the list of closed dealers.

We were pretty skeptical, and we got some comments and emails wondering why we even bothered writing up that "wingnut" conspiracy story.

Well, whatever, the story isn't going away. And it's even reached the halls of Congress.

Mark Tapscott at the Washington Examiner picks it up

Evidence appears to be mounting that the Obama administration has systematically targeted for closing Chrysler dealers who contributed to Repubicans. What started earlier this week as mainly a rumbling on the Right side of the Blogosphere has gathered some steam today with revelations that among the dealers being shut down are a GOP congressman and closing of competitors to a dealership chain partly owned by former Clinton White House chief of staff Mack McLarty.

The basic issue raised here is this: How do we account for the fact millions of dollars were contributed to GOP candidates by Chrysler who are being closed by the government, but only one has been found so far that is being closed that contributed to the Obama campaign in 2008?

The story has angered Florida Rep. Vern Buchanan learned from a House colleague that his hometown dealership is on the closed list, so expect to hear some noise in Washington.

As for the Mack McLarty dealership, it is an interesting situation. The basic story is that McLarty is a co-owner of a big dealership chain RLJ-McClarty. The J is Robert Johnson, the founder of Black Entertainment Television (BET) and a big donor to the Democratic party.

The blog Director Blue (warning: it's a right-wing blog, so don't have a heart attack once you get there) notes how odd it is that this multi-dealership chain didn't have a single closure and that in its various markets, it was always a competitor that got shut down. Put another way, RLJ-McClarty Chrysler dealerships in states like Arkansas, Missourri and Alabama just got a lot less competition.

Conversely, stats-god Nate Silver throws cold water on the whole thing, noting that car dealer deanerships go 88% to Republican candidates. He says this isn't a conspiracy, it's just bad math. But as Megan McArdle notes, it's still odd that they've only found one Obama donor on the closed list (12% Democratic donation rate is small, but it's not nil). And the fact that the one really Democratic chain went unscathed also raises eyebrows.

The best way for this to end would be for the government to provide even a smidgen of insight into how it selected dealerships for closure. So far, it really hasn't offered a thing.

Top Buffett Aide Says There's No Sign Of A Recovery

2009-05-29T06:18:00.000-07:00

Joe Weisenthal|May. 29, 2009
During the recent Berkshire Hathaway (BRK) annual meeting, Warren Buffett admitted that signs of an economic recovery were few and far between, at least as his businesses.

His close advisors are saying the same thing. Speaking at the Ira Sohn investment conference in New York, top aide David Sokol, the head of Mid-America energy holdings said there were no signs of a rebound ("We're not seeing the green shoots.") in housing or the economy and that the housing mess might persist through 2011.

Bloomberg: Homes in the process of foreclosure are creating a “shadow backlog” of unsold properties that will continue to hang over the market, Sokol, 52, said in a speech yesterday at the Ira W. Sohn Investment Research Conference in New York.

While official statistics show a 10- to 12-month supply of unsold homes, “we believe the backlog of homes for sale is twice that.”

Many people who want or need to sell their homes haven’t put them on the market yet because the outlook for sales has been poor, he said. “It will be mid-2011 before we see the market in balance,” with no more than a six-month backlog, he said.

GM Bondholder Offer Disappoints, Bringing Bankruptcy Near

2009-05-27T05:35:00.000-07:00

* MAY 27, 2009, 8:09 A.M. ET

GM Bondholder Offer Disappoints

By JOHN KELL

General Motors Corp. said it won't proceed with the repurchase any of the $27.2 billion of notes it sought, saying bondholder interest was far below the 90% threshold it was looking for.

The auto maker had been seeking to swap the debt for a 10% stake in a restructured company that is on the brink of filing for bankruptcy.

GM, which is surviving on government loans, has said it faces bankruptcy if less than 90% of bondholders accepted the deal, a take rate considered almost impossible to meet. GM has been looking to focus on four core brands, while closing and selling off its underperforming lines as it hopes to remake itself amid a sharp downturn in auto sales.

The company could file for bankruptcy before a government-imposed Monday deadline to reorganize itself into a viable company. GM hopes to rush through bankruptcy court in as few as 30 days, but the drive for an expedited bankruptcy could be challenged by GM's investors and dealers.

GM and the United Auto Workers have agreed to a new restructuring plan that would give the union a significantly smaller stake in the company than previously envisioned, and leave the U.S. government owning as much as 70% of the car maker.

The government's plan also calls for paying off in full GM's secured lenders – including banks such as Citigroup Inc. and J.P. Morgan Chase & Co., which are owed about $6 billion. That would remove one potential obstacle to a speedy bankruptcy reorganization.

GM shares were down 9.7% premarket at $1.30.

Get Ready For America's Double-Dip Recession

2009-05-26T13:56:00.000-07:00

WASHINGTON - The U.S. economy appears destined for several years of weak growth and high unemployment that leave it vulnerable to a recession relapse after the massive dose of government stimulus wears off.

While tepid growth looks likely to resume late this year and build modestly into 2010, the credit bust has left households and businesses unable or unwilling to borrow and spend as freely as they did before the crisis.

The U.S. government has stepped in as lender and spender of last resort, but its deep pockets are not bottomless. Waning political and investor appetite for taking on more debt could stand in the way of any additional big spending plans.

"When you remove the government stimulus, what the private sector can generate in terms of growth feels like a recession," said Jeffrey Rosenberg, head of global credit strategy at Banc of America Securities Merrill Lynch in New York.

Rosenberg thinks the U.S. economy may trudge along at a sluggish growth rate somewhere in the range of 0.5 percent to 1.5 percent while banks recover from the credit crisis, which could take another three years.

"If that's what you're able to generate, that economy is not generating the job growth required to bring the unemployment rate down," Rosenberg said.

This is a much darker outlook than the one put forward by President Barack Obama's administration in its latest budget projections, which show economic growth bouncing back to 3.2 percent next year and hitting 4.6 percent by 2012.

It also calls into question the staying power of a recent stock market rally. The Standard & Poor's 500 is up more than 30 percent from an early March low.

The gloomier scenario assumes that banks take years to recover from losses that some economists think could reach $4 trillion; consumers curb borrowing and spending as they repair the $11.2 trillion hole blown through their savings last year; and the explosion in government debt drives up interest rates.

If the forecast proves accurate, it would leave the economy susceptible to a shock, such as a big jump in oil prices, and could force the United States to issue even more debt than investors expect. That would likely increase borrowing costs, both for the government and the private sector.

NEVER SAY NEVER

Typically, deep recessions are followed by powerful recoveries because when demand finally returns, companies quickly ramp up production. That helps explain why Wall Street has been feeling optimistic about recovery prospects.

However, recessions caused by financial crises have a history of being long, deep and difficult to fully escape.

Treasury Secretary Timothy Geithner said Thursday that the current crisis was "caused in large part by too much borrowing and too much lending. And the adjustment process of that will be difficult."

How difficult that adjustment will be depends to a large degree on how dramatically consumers alter their behavior.

The saying, "Never bet against the U.S. consumer" has been a profitable one for many years. But if this crisis has permanently altered consumer attitudes toward debt, it would put a considerable drag on growth because consumer spending accounts for more than two-thirds of U.S. economic activity.

The other anchor is interest rates. Christian Broda, an economist with Barclays Capital, said higher borrowing costs "are an inescapable feature of the post-recovery world" as public deficits and spending grow.

Already, huge government debt issuance is raising questions about long-term U.S. fiscal stability. Concerns grew last week that the country could be stripped of its top-tier AAA credit rating after Standard & Poor's said it was considering downgrading Britain's sovereign rating.

This week marks a big test of investor appetite for U.S. debt. The government plans to issue a massive $101 billion in notes and bonds, matching the weekly record set in April.

Broda thinks the yield on 10-year U.S. government paper may reach 6 percent by 2011, compared with 3.4 percent now. Because so many other loans are based on that rate, that could make it costlier to buy a house or expand a business.

NO WAY OUT

It all adds up to a sluggish economy with less cushion to cope with a shock. What form that shock might take remains to be seen, but a jump in oil prices is one likely suspect. Oil has nearly doubled since the start of the year, topping $60 per barrel Tuesday, and futures prices suggest it will edge higher at least through the peak summer driving season.

"You start firing up demand and guess which price goes up first? Oil," said James Galbraith, an economist who teaches at the University of Texas' LBJ School of Public Affairs.

"If I were in a position to be talking strategy to the (Obama) administration, I would be saying you've got to take the energy business seriously. You're going to end up in a stagflation trap."

If the economy climbs out of one recession and into another, it wouldn't be the first time. It happened most recently in the early 1980s, when the United States endured two recessions in less than three years.

Regardless of what triggers a relapse, the Obama administration won't stand idly by, Banc of America's Rosenberg said. There will be pressure for even more stimulus spending, particularly if the economy is faltering when midterm congressional elections approach in 2010.

"The problem is whether or not (stimulus) can work without itself creating other problems," Rosenberg said. "The most likely 'other problem' is a rise in interest rates.

"What one hand giveth, the other hand taketh away."

Key Economic Indicators

2009-05-26T12:56:00.000-07:00

Cap And Trade Bill Almost A Done Deal In The House

2009-05-22T06:03:00.000-07:00

By Tom Doggett, Reuters - The House Energy and Commerce Committee on Thursday moved into the home stretch of a nearly week-long debate on historic legislation to cap and reduce U.S. greenhouse gas emissions, with the panel expected to pass the measure toward the end of the day.

The roughly 1,000-page bill aims to cut U.S. greenhouse gases that contribute to global warming by 17 percent below 2005 levels by the year 2020.

The legislation would also require utilities to generate more of their electricity supplies from renewable energy sources, such as wind and solar power.

The key part of the legislation is a "cap-and-trade" system that would gradually reduce the amount of greenhouse gases from utilities, oil refineries, steelmakers and other companies by requiring them to have permits to spew their emissions.

Supporters of the bill want to use market forces to push companies to reduce their emissions. Companies that spew emissions above the cap would have to buy permits from less polluting companies, encouraging firms to quickly cut their emissions so they cam make a profit from selling their permits.

The Obama administration has made implementing a cap-and-trade plan one of it top priorities, saying it will help avoid the worst aspects of global warming and create clean energy jobs. However, the House plans would give away about 85 percent of the emissions permits, while the administration wanted to auction off all of the permits to raise more than $600 billion.

Republicans are worried the legislation would hurt the U.S. economy, raise energy prices for consumers and push American companies that use large amounts of energy to other countries.

House Republican Leader John Boehner said the bill would cost American families up to $3,100 a year, a number disputed by Democrats, energy experts and environmental groups.

Public service commissioners from 10 mostly Southern states sent a letter to the committee on Wednesday asking members to balance the benefits of implementing a federal plan to fight climate change with the real cost those actions will have on electric rates.

"We are particularly concerned about the detrimental impact of these costs on low-income families and seniors," the commissioners said.

Representative Joe Barton, the top Republican on the committee, said on Thursday he would not request that the bill be read in full, a procedural move he had threaten earlier in the week that would have slowed action on the legislation.

It would have taken about eight hours to go over every provision of the bill. The committee's Democratic chairman, Henry Waxman, was prepared though and hired a speed reader just in case.

A survey of Democrats on the committee showed there were enough votes to pass the legislation. Of the panel's 59 members, as least 30 lawmakers, all of them Democrats, said they would definitely vote for the bill or were likely to support the measure, the Reuters survey found.

Lawmakers still offered a series of amendments on Thursday to try to modify the legislation before the final vote on the measure.

The committee agreed to include language in the bill to ensure that any profits made off the emissions permits would be used "for the benefit of retail ratepayers."

After the bill clears Waxman's committee, the House Ways and Means Committee will review the legislation. Democratic leaders want to bring the bill up for a full House vote by August.

The legislation would then be sent over to the U.S. Senate, where there is much stronger opposition. A super majority, 60 of the chamber's 100 members, would be needed to approve the bill. The full Senate may not take up the legislation until early next year.

Peter Schiff The Schiff Report

2009-05-18T06:24:00.001-07:00

Insurance co critics When do you say enough is enough?

2009-05-17T07:22:00.000-07:00

The subprime primer

2009-05-16T06:39:00.000-07:00

Is Anyone Minding the Store at the Federal Reserve?

2009-05-15T17:42:00.000-07:00

Rep. Alan Grayson asks the Federal Reserve Inspector General about the trillions of dollars lent or spent by the Federal Reserve and where it went, and the trillions of off balance sheet obligations. Inspector General Elizabeth Coleman responds that the IG does not know and is not tracking where this money is.

Clueless Economists Say Recession Will End By Autumn

2009-05-15T06:00:00.000-07:00

The Wall Street Journal released it's latest survey of economists today, revealing the good news that they see the recession ending by autumn. The bad news is that they say it will take years for the economy to fully recover."

The worse news: economists are just as crappy as everyone else at predicting the future.

Gordon Smith at the Conglomerate searched the WSJ economist survey for the last few years. What he found was that sometime the economists are right but sometimes they were wrong. In short, they're "fairly clueless" about the future. That's hardly surprising--the future is hard predict--but it makes us wonder why the Journal even bothers with these things.

Smith gives us a fair sampling of the good and bad predictions. We don't feel like being that generous. (If you want, click here to read his full sample.) Instead, here are a few of the real whoppers.

* January 2, 2007: "Wall Street Journal survey of economists finds expectation that service sector will keep humming along while housing and manufacturing slumps abate and Federal Reserve begins to reduce interest rates; rapid expansion of technology companies and huge bonuses for investment bankers are signs of sector's strength."

* March 16, 2007: "WSJ.com survey of 60 economists finds 32 believe it is 'very' or 'somewhat' like that trouble in subprime mortgage market will spillover into rest of mortgage market, but only 22% say problems in subprime market have caused them to downgrade their economic forecasts."

* October 12, 2007: "WSJ.com survey finds average forecast for chance of recession among economists fell to 34% from September survey that forecast 36% probability of recession."

It's not all that surprising that economists aren't good at predicting the future. The future is hard to predict because it is contingent on so many unknown factors. But what is a bit surprising is how bad economists are at even reading the present.

On February 7, 2008, two months after the US was in a recession, the WSJ reports: "Latest Wall Street Journal forecasting survey of economists finds respondents put odds of recession at 49%, up from 40% in January and 23% in June."

Obama Warns Of "Unsustainable" Deficits And Spiraling Interest Rates

2009-05-15T05:50:00.000-07:00

The good news is that President Obama is apparently deeply concerned about our level of deficit spending and the reliance on foreign governments.

Bloomberg: “We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

Holders of U.S. debt will eventually “get tired” of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. “It will have a dampening effect on our economy.”

The bad news is that Obama's solution most likely revolves around higher taxes, a strategy that's not only likely to depress growth, but one that probably won't close the gap as much as the government thinks it will.

As it is, the government has all kinds of new spending increases on the way in areas like healthcare, the second stimulus, the further bailouts, etc. Any plans to cut spending appear to be pretty minimal. Now granted, it's not like the rich can't afford to pay higher taxes. Paying what they did under the Clinton administration isn't some form of socialism or class warfare. But the economy's changed in big ways, and one of those has been the violent collapse of many of the formerly rich (aka: high tax bracket folks). And though the government will keep looking for places to hoover up dollars (offshore earnings, carried interest, cap & trade, a traders tax) it's unlikely to add up to enough, especially as each one has its own depressing effect.

Still, we appreciate the concern. Our question is: If (if) the tax revenues don't come in as planned, will there be any willingness to cut spending so as not to mortgage our children's future?

BofA Told To Replace Board With People Who Actually Know About Banking

2009-05-15T05:47:00.000-07:00

Somehow we get the impression that newly elected Bank of America (BAC) chairman Walter Massey shouldn't get too comfortable.

WSJ reports that government officials have told the bank to clean house and replace the board with a group of folks that know a little bit more about how banking works. Massey himself is the former President of Morehouse college and a physician -- not a banker.

Recall that when the stress test was unveiled, one of the conditions was that in addition to coming up with a fundraising plan, the banks also had 30 days to reorganize their boards, and possibly their top officers in a manner pleasing to regulators. At the time, we assumed this meant clean-house time at Citi and BofA.

For its part, Citi has already named four new financial experts to its board.

And though we're not sure exactly how directors were selected before, we're guessing that prior to this crisis, a spot on the board of Citi or Bank of America probably felt more like a spot on some big society charity group. The organizations probably seemed to stable and huge that being on the board was more of like an honor for the elite than a responsibility to oversee a volatile operation.

US 'sham' bank bail-outs enrich speculators, says buy-out chief Mark Patterson

2009-05-15T05:41:00.000-07:00

US 'sham' bank bail-outs enrich speculators, says buy-out chief Mark Patterson
The US Treasury’s effort to stabilise the banking system through the TARP programme is a hopelessly ill-conceived policy that enriches speculators at public expense, according to the buy-out firm supposed to be pioneering the joint public-private bank rescues.

By Ambrose Evans-Pritchard in Doha
Last Updated: 6:16AM BST 14 May 2009
MatlinPatterson took advantage of Tim Geithner's TARP matching funds to buy Flagstar Bancorp in Michigan - he now owns 80pc of the shares and the US government under 10pc.
MatlinPatterson took advantage of Tim Geithner's TARP matching funds to buy Flagstar Bancorp in Michigan - he now owns 80pc of the shares and the US government under 10pc.

“The taxpayers ought to know that we are in effect receiving a subsidy. They put in 40pc of the money but get little of the equity upside,” said Mark Patterson, chairman of MatlinPatterson Advisers.

The comments are likely to infuriate Tim Geithner, the US Treasury Secretary, because MatlinPatterson took advantage of the TARP’s matching funds to buy Flagstar Bancorp in Michigan. His confession appears to validate concerns that the bail-out strategy is geared towards Wall Street.

Under the convoluted deal agreed earlier this year, MatlinPatterson has come to own 80pc of the shares while the US government has ended up with under 10pc.

Mr Patterson said the US Treasury is out of its depth and seems to be trying to put off drastic action by pretending that the banking system is still viable.

“It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn (£66bn) of the $700bn TARP funds. They think they’re doing this for the greater good of society,” he said, speaking at the Qatar Global Investment Forum.

Mr Patterson said it would be better for the US to bite the bullet as Britain has done, accepting that crippled lenders must be nationalised. “At least the British are not hiding the bail-out,” he said.

MatlinPatterson said private equity and hedge funds were deluding themselves in hoping to go back to business as usual after the trauma of the last 18 months.

“This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance,” he said.

“Alfa hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well,” he said.

Like many bears, Mr Patterson expects the great crunch to end in deliberate inflation, deemed a lesser evil than outright depression.

“The US government has thrown 29pc of GDP at this crisis compared to 8pc in the early 1930s. The Fed’s balance sheet has risen from $900bn to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road,” he said.

Matlin Patterson, however, has missed the Spring rebound, the most powerful rise in equities in over 70 years. “We shorted the equity rally because we thought it was lunatic. We’ve kept adding positions seven times, and we’re still holding,” he said. Ouch!

Treasury Ripping Off Taxpayers In Sale Of TARP Warrants

2009-05-14T12:57:00.000-07:00

University of Louisiana prof Linus Wilson has done a lot of work on the economics of the TARP capital injections and the various ideas floated for recapitalizing the banks.

In his latest paper, he looks at the warrants which the Treasury received in exchange for investing in the banks. Remember, there was some talk that the banks were pushing the Treasury to cancel the warrants, which, in the absence of preferred stock interest payments, represent the one way the taxpayer could get its promised "upside" (You do remember, don't you? When they passed the TARP, Treasury swore up and down that there was a good chance taxpayers would actually profit from the scheme).

Anyway, what Linus finds in his new paper is that based on his valuation methodologies, the Treasury is screwing over the taxpayer, selling banks back their warrants at sub-market rates.

He writes:

My analysis suggests that the U.S. Treasury accepted a lowball offer. My paper “Valuing the First Negotiated Repurchase of the TARP Warrants” estimates that the fair market value of these warrants should have been between $1.5 million and $6.9 million. It is too bad that the U.S. Treasury agreed that they were worth only $1.2 million. That is, the U.S. taxpayers only got 71 percent less than the median of my lowest and highest estimates, $4.2 million, and $.3 million or 20 percent less than my lowest estimate. These results indicate that the management at Old National Bank represented their shareholders well. I am not sure that the U.S. Treasury represented taxpayers quite so well.

Taxpayers bore a lot of risk providing capital to the banks, and they deserve to get the fair market value of the warrants that they purchased. Hopefully, if Goldman Sachs (GS) and JP Morgan (JPM) try to repurchase their warrants, Tim Geithner and company will do a better job. I estimate in my paper “The Goldman Sachs Warrants” that TARP warrants at that firm alone could be worth between $250 million to $1.2 billion.

That the Treasury would put the interests of the bailout-receiving banks above the taxpayer isn't particularly surprising. It's been the policy to decide everything in favor of the banks. Yesterday, Ed Liddy confirmed to Congress that the government was buying CDS from its counterparties at above-market rates, having the effect of providing more capital at the expense of taxpayers.
Here is the document described here: http://www.scribd.com/doc/15439696/SSRNid1404069

U.S. Eyes Bank Pay Overhaul

2009-05-13T08:14:00.000-07:00

U.S. Eyes Bank Pay Overhaul
Administration in Early Talks on Ways to Curb Compensation Across Finance

By DEBORAH SOLOMON and DAMIAN PALETTA

WASHINGTON -- The Obama administration has begun serious talks about how it can change compensation practices across the financial-services industry, including at companies that did not receive federal bailout money, according to people familiar with the matter.

The initiative, which is in its early stages, is part of an ambitious and likely controversial effort to broadly address the way financial companies pay employees and executives, including an attempt to more closely align pay with long-term performance.

Administration and regulatory officials are looking at various options, including using the Federal Reserve's supervisory powers, the power of the Securities and Exchange Commission and moral suasion. Officials are also looking at what could be done legislatively.

Among ideas being discussed are Fed rules that would curb banks' ability to pay employees in a way that would threaten the "safety and soundness" of the bank -- such as paying loan officers for the volume of business they do, not the quality. The administration is also discussing issuing "best practices" to guide firms in structuring pay.

What may be the shakeout following President Obama's effort to regulate executive pay in the financial world? Matthew Rose discusses.
More

At the same time, House Financial Services Committee Chairman Barney Frank (D., Mass.) is working on legislation that could strengthen the government's ability both to monitor compensation and to curb incentives that threaten a company's viability or pose a systemic risk to the economy.

It is unclear how such a bill would fit with what the Fed and others are already considering. But any legislation passed would make it harder for policy makers to dial back limits once the financial crisis subsides.

Any new compensation rules would likely be rolled out alongside a broader revamp of financial-markets regulation that the Treasury is pushing. The compensation effort is the latest example of the government's increasing focus on aspects of the financial sector that once were untouched.

Regulators have long had the power to sanction a bank for excessive pay structures, but have rarely used it. The Office of the Comptroller of the Currency last year quietly pressed an unidentified large bank to make changes "pertaining to compensation incentives for bank personnel responsible for assigning risk ratings," a spokesman said. Since 2007, it has privately directed 15 banks to change their executive compensation practices.

Government officials said their effort, which is just beginning, isn't aimed at setting pay or establishing detailed rules. "This is not going to be about capping compensation or micro-management," said an administration official. "It will be about understanding what is the best way to align compensation with sound risk management and long-term value creation."

Despite the banking industry's weakened state, it would likely try to push back against curbs on how financial firms can compensate people. Bank executives have complained to federal officials that strict rules could prompt some of their best employees to move to parts of the financial industry that aren't regulated, such as hedge funds, private-equity firms and foreign banks. They've also argued that paying substantial bonuses is integral to how the industry works.
[Cash Flow]

"Our companies have already enhanced, strengthened and expanded the number of compensation programs that are tied to long-term incentives," said Scott Talbott, a senior vice president at the Financial Services Roundtable, a trade group.

Edward Yingling, chief executive of the American Bankers Association, said banks might be able to accept new rules "as long as they are general in nature and could be enforced on a case-by-case basis. What would never work is detailed regulation of compensation."

President Barack Obama and Treasury Secretary Timothy Geithner have both blamed the way banks structured compensation plans for contributing to the financial mess. In February, Mr. Obama said executive pay helped lead to a "reckless culture and a quarter-by-quarter mentality that in turn helped to wreak havoc in our financial system."

Mr. Geithner recently instructed his staff to begin discussions with the Fed, the SEC and others about ways to address compensation practices.

During a recent congressional hearing, Chairman Ben Bernanke said the Fed was working on rules that will "ask or tell banks to structure their compensation, not just at the very top level but down much further, in a way that is consistent with safety and soundness -- which means that payments, bonuses and so on should be tied to performance and should not induce excessive risk."

In an indication of how broad the effort may become, Federal Deposit Insurance Corp. Chairman Sheila Bair said regulators need to examine compensation practices in the mortgage industry, suggesting new limits could stretch beyond banks.

"We need to make sure that incentives are aligned among all parties by making compensation contingent on the long-run performance of the underlying loans," Ms. Bair said on Tuesday.

The discussions follow a narrower effort by the administration to clip pay at firms that get federal aid. Earlier this year, it issued guidelines limiting salaries for top executives at firms that received funds under the Troubled Asset Relief Program.

Congress chimed in with even tougher rules curbing bonuses for top earners at the same firms, among other things. One rule bars firms receiving federal funds from paying top earners bonuses that equal more than a third of their total compensation.

The administration is still wrestling with how to marry those two efforts, which in combination are more punitive than officials intended. The Treasury is expected to issue new rules sometime in the next few weeks.

Firms Face New Tax Curbs

2009-05-04T06:35:00.000-07:00

Firms Face New Tax Curbs
Obama Plan Aims to Limit Use of Offshore Havens by Multinationals and the Wealthy

By JOHN D. MCKINNON and JESSE DRUCKER

WASHINGTON -- The Obama administration will roll out details Monday of what aides are calling a far-reaching crackdown on offshore tax avoidance, targeting many U.S.-based multinational corporations and wealthy individuals.

President Barack Obama will flesh out a proposal included in his February budget blueprint seeking to curb the practice of parking foreign earnings in offshore tax havens indefinitely. By some estimates, $700 billion or more in U.S. corporate earnings have accumulated in overseas accounts in recent years.
[Barack Obama]

Barack Obama

The plan to be announced Monday will go further. It aims to change the legal treatment of offshore subsidiaries and structures that companies have used to avoid not only U.S. taxes, but taxes in other developed countries as well.

In addition, the administration will strive to tighten rules that have encouraged thousands of Americans to open offshore bank accounts in an effort to duck U.S. taxes. The plan would increase information reporting and tax withholding as well as penalties, and make it harder for foreign account-holders to win cases in court. The administration promised new enforcement tools to crack down on tax-haven abuse.

"What we really have is a system that is in many ways broken," a senior administration official said Sunday, one that "allows people to play games...to almost completely avoid paying taxes on active foreign earnings."

The sweep of the administration's plan took some tax experts by surprise, and foreshadows potential fights with big businesses later this year over some of their most cherished breaks, particularly as Congress looks for revenue to pay for new initiatives.

"There absolutely will be" opposition from business, particularly if the administration doesn't allow a suitable adjustment period, said Phil West, a lawyer with Steptoe & Johnson LLP, who was international tax counsel for the Treasury Department under President Bill Clinton.

The president's announcement comes as he prepares to release a more detailed budget blueprint later this week. And the high-level attacks on big business follow a series of White House broadsides on corporate practices. Mr. Obama riled Wall Street last week by crafting a bankruptcy deal for Chrysler LLC that favored the United Auto Workers union over a series of lenders.

White House officials said the latest proposals simply follow through on Mr. Obama's frequent criticism that current U.S. tax rules encourage multinationals to move jobs overseas. The new tax plan also aims to increase incentives for job creation in the U.S., they said, noting that some of the money raised would be used to cover the cost of extending a soon-to-expire federal tax credit for research costs.

Many of Mr. Obama's proposals will require congressional approval. And while Democrats control both houses of Congress, many members of his own party have expressed reluctance about raising taxes, so prospects for the proposals are uncertain, even though none would take effect until 2011.

A senior Republican aide termed the proposals a "revenue grab," predicting they could end up driving more corporate operations overseas. Some or all of the changes could become fodder for broader tax reform next year.
[Chart]

"If rules are changed on tax deferral and we are taxed in the U.S. on non-U.S. profit, this significant additional U.S. tax cost would adversely impact our ability to invest and grow our business in the U.S....and to compete against our foreign competitors who are not subject to this U.S. tax," said John Earnhardt, a Cisco Systems Inc. spokesman.

The president's tax announcement, to be made with Treasury Secretary Timothy Geithner, is part of an administration plan to raise as much as $210 billion in extra tax revenue over the next decade, in an effort to trim budget deficits and pay for job-creation incentives and other programs.

The plan takes aim at a range of financial practices that have combined to erode the U.S. tax base in recent decades. As money has become more readily transferable -- and aggressive tax planning more widespread -- it has become easier for companies and individuals to take advantage of low taxes as well as lack of transparency in many offshore havens.

In one big change, the administration is aiming to curb a practice commonly known as "deferral," which U.S. multinationals use to shave their tax bills on their overseas operations.

Under current law, U.S. companies can defer taxes indefinitely on the many of the profits they say they have earned overseas until they "repatriate" that money back to the U.S. The administration seeks to sharply limit the tax deductions that companies taking advantage of deferral can take.

Still, the proposal is far less dramatic than what many companies had feared: a complete repeal of the deferral regime.

The proposal to be announced Monday also would clamp down on some other overseas tax-avoidance techniques that are widely used by U.S. multinationals.

The Obama administration wants to overhaul what it describes as a much-abused set of regulations known as the "check-the-box" rules. These give companies great latitude in deciding where exactly their subsidiaries should be taxed. Those rules have encouraged companies to take further advantage of low-tax haven countries with their offshore subsidiaries.

The administration also wants to toughen rules governing the tax credits that the U.S. grants companies to offset taxes they pay to foreign governments. That system has become the subject of elaborate gaming, U.S. tax officials say.

Overall, the deferral proposal would raise about $60.1 billion through 2019, according to the administration's estimates. Unlike a similar proposal in the House, it wouldn't affect research deductions, a likely victory for some industries such as pharmaceuticals. The reform of check-the-box rules would raise about $86.5 billion through the same period. The changes in foreign-tax-credit rules would raise about $43 billion. The changes to crack down on individual bank accounts would raise $9 billion.

The current U.S. rules for corporations carry enormous benefits for companies. Unlike most deferred taxes, those stemming from foreign earnings don't cut into a company's bottom line as long as they are considered "permanently reinvested" overseas.

The result can have a huge impact on a company's bottom line. The pharmaceutical and technology industries are particular beneficiaries.

Crafty Americans Are Strip Mining Their Homes Before Foreclosures

2009-04-24T18:54:00.000-07:00

A local news service explains how middle America is reacting to home foreclosures: stripping out everything of value in advance. Guess what that does to foreclosure recovery values.

From 9 News of Denver (via Patrick.Net):

The sales offer everything from the kitchen sink to countertops, cabinets, toilets, the hot water heater and the furnace from a home.

Homeowners hold the sales ahead of foreclosure in an attempt to make money before they leave the house.

Some loans require the government to cover the loss when a homeowner defaults on a loan. When homeowners sell appliances and other fixtures in the home, its value decreases. The government covers the gap between what the home is worth and what the bank can sell it for, and that money comes directly from taxpayers.

Often the pre-foreclosure sales are advertised on the Internet classified ad site Craigslist.

TARP Investigator Examining 20 Cases Of Criminal Fraud

2009-04-21T15:36:00.000-07:00

The TARP itself may be the biggest fraud of all, but Inspector General Neil Barofsky said today that he's already examining 20 potential cases of criminal fraud having to do with the program:

LAT: Barofsky said the complex nature of the bailout program makes it "inherently vulnerable to fraud, waste and abuse, including significant issues relating to conflicts of interest facing fund managers, collusion between participants, and vulnerabilities to money laundering."

The report said little about who is under investigation and how the fraudulent schemes work, but investigators are already on alert for a long list of potential scams. Such schemes could include obtaining bailout money under false pretenses, bilking the government with phony mortgage modifications, and cheating on taxes with fraudulent filings.

"You don't need an entirely corrupt institution to pull one of these schemes off," Barofsky said. "You only need a few corrupt managers whose compensation may be tied to the performance of these assets in order to effectively pull off a collusion or a kickback scheme."

Felix Salmon plucked out another interesting tidbit from Barofsky's report. He worries that the PPIP could be come an avenue for money laundering. And we're not talking about "laundering", where banks buy toxic assets from one another using government money. We're talking laundering-laundering:

Because of the significant leveraging available and the inherent imprimatur of legitimacy associated with PPIP and TALF, these programs present an ideal opportunity to money-laundering organizations. If a criminal organization can successfully invest $10 million of illicit proceeds into a PPIF, not only does the organiza- tion enjoy the possibility of profi ting through the Government-backed leverage, but any eventual distributions from the PPIF are successfully laundered because they appear to be PPIF investment gains rather than drug, prostitution, or illegal gambling proceeds.

Chrysler Liquidation Could Start Next Week

2009-04-21T13:19:00.000-07:00

Just a few months ago, the prospect of the government letting a major car company go into liquidation seemed impossible. Surely, in an effort to protect the UAW, the big three would be propped up as zombie autos in some way or another.

But it looks like the weakest of them, Chrysler, may be kaput. Not restructured, not forced into some kind of government-sponsored pre-packaged bankruptcy, but actually scrapped for parts in an auction.

The Journal reports that the government is still trying to work out a deal between Chrysler, Fiat and the UAW, before the April 30 deadline. But the thinking is that no solution will be worthwhile, and that a Chapter 7 bankruptcy filing might be the best option, and that could come as soon as next week.

Of course, Chrysler is the test case, the canary. A liquidation would serve as a warning to GM (GM) and its bondholders that they better get their act together in the next month, because the government has the will to take drastic action. On the other hand, if the government caves and decides it can't stomach the fallout from a Chrysler liquidation then it's impossible to see how there could be any headway with GM at all.

Why Al Gore's Lockbox Wouldn't Have Saved Social Security

2009-04-13T06:27:00.000-07:00

http://www.businessinsider.com/why-al-gores-lockbox-wouldnt-have-saved-social-security-2009-4

The shocking (except, not really) news that the Social Security surplus is vanishing faster than we thought has some people wishing Al Gore would've won in 2000, so he could've put his famous lockbox into place.

There may be lots of good reasons to wish the 2000 election had turned out different, but the lockbox -- the idea of keeping all payroll tax receipts totally segregated from the rest of the government's balance sheet -- isn't one of them.

As it is now, Social Security tax receipts are used to pay for general government operations, and in exchange the government gives the Social Security administration infamous IOUs, promises to pay the money back.

But consider the alternative: The government leaves the Social Security money in a lockbox, so instead it has to either raise taxes or go deeper into debt to pay for general expenditures. We end up in exactly the same place we are today, but the balance sheet is slightly different

The blog Winterspeak recently put it well:

Think about it -- the Government is a currency issuer, it has no need to "balance its books", nor will it ever bounce a check. Ever. Even Zimbabwe does not bounce cheques (although with it's recent move to the dollar, that might change). He is correct that there is no "fund", as SS obligations are merely part of the Government overall obligations. It certainly makes no sense for a currency issuer to keep a reserve of its own currency. Does American Airlines need to keep a reserve of its frequent flier miles?

I first heard this analogy from Mosler, and it's extremely helpful. Imagine that the US as 300M retirees, and only one worker. Those worried about the SS "shortfall" (whatever that means) are concerned that the 300M retirees will not have enough money to pay the one worker for all the stuff that they want. This is the "nominal" view, and it is clearly ridiculous -- the problem is not how much money the retirees have or do not have, the problem is whether the worker is productive enough to make all the stuff the 300M retirees want.

The bottom line is that we don't have a "Social Security" problem, per se -- we have a problem figuring out how to support all the old people who are retiring along with a diminishing tax base, and plenty of other expenditures we're making. That's the issue. Whether the Social Security administration keeps its own cash on hand -- which the above example about American Airlines should convince you is silliness -- or a bunch of IOUs, or even nothing, is just a matter of accounting standards. What matters is our real ability (and our will) to either make good on the retirement promises we made, or break them, which is also a legitimate option.

Obama Bank Fix "Worse Than A Lie"

2009-04-13T06:19:00.000-07:00

http://www.businessinsider.com/henry-blodget-g-2009-4
We continue to believe the Obama administration's approach to the banking crisis has been warped by its personal relationships with Wall Street. Former regulator William Black, who has been a vocal critic of the current approach, goes further, calling the bank stress tests "a complete sham" and the cover-up of the insolvency of massive financial institutions "felony securities fraud."

William Black was the deputy director of the government agency that insured S&P deposits in the 1980s. He helped identify the Keating Five, a group of senators who tried to prevent the closure of Charles Keating's S&L. He's now a professor at the University of Missouri. Barrons' interviewed him last week:

ON GEITHNER's BANK PLAN

It is worse than a lie. Geithner has appropriated the language of his critics and of the forthright to support dishonesty. That is what's so appalling -- numbering himself among those who convey tough medicine when he is really pandering to the interests of a select group of banks who are on a first-name basis with Washington politicians.

The current law mandates prompt corrective action, which means speedy resolution of insolvencies. He is flouting the law, in naked violation, in order to pursue the kind of favoritism that the law was designed to prevent. He has introduced the concept of capital insurance, essentially turning the U.S. taxpayer into the sucker who is going to pay for everything. He chose this path because he knew Congress would never authorize a bailout based on crony capitalism.

ON THE BIG PICTURE

With most of America's biggest banks insolvent, you have, in essence, a multitrillion dollar cover-up by publicly traded entities, which amounts to felony securities fraud on a massive scale.

These firms will ultimately have to be forced into receivership, the management and boards stripped of office, title, and compensation. First there needs to be a clearing of the air -- a Pecora-style fact-finding mission conducted without fear or favor. [Ferdinand Pecora was an assistant district attorney from New York who investigated Wall Street practices in the 1930s.] Then, we need to gear up to pursue criminal cases. Two years after the market collapsed, the Federal Bureau of Investigation has one-fourth of the resources that the agency used during the savings-and-loan crisis. And the current crisis is 10 times as large.

WHY THE GOVERNMENT WON'T ACKNOWLEDGE REALITY

The government is reluctant to admit the depth of the problem, because to do so would force it to put some of America's biggest financial institutions into receivership. The people running these banks are some of the most well-connected in Washington, with easy access to legislators. Prompt corrective action is what is needed, and mandated in the law. And that is precisely what isn't happening.

The savings-and-loan crisis showed that, too often, the regulators became too close to the industry, and run interference for friends by hiding the problems.

watch our TechTicker interview with Black last week
http://www.businessinsider.com/bank-stress-tests-are-a-complete-sham-says-former-regulator-2009-4

Obama and the banks

2009-04-05T17:18:00.001-07:00

WSJ;

I must be naive. I really thought the administration would welcome the return of bank bailout money. Some $340 million in TARP cash flowed back this week from four small banks in Louisiana, New York, Indiana and California. This isn't much when we routinely talk in trillions, but clearly that money has not been wasted or otherwise sunk down Wall Street's black hole. So why no cheering as the cash comes back?

My answer: The government wants to control the banks, just as it now controls GM and Chrysler, and will surely control the health industry in the not-too-distant future. Keeping them TARP-stuffed is the key to control. And for this intensely political president, mere influence is not enough. The White House wants to tell 'em what to do. Control. Direct. Command.

It is not for nothing that rage has been turned on those wicked financiers. The banks are at the core of the administration's thrust: By managing the money, government can steer the whole economy even more firmly down the left fork in the road.

If the banks are forced to keep TARP cash -- which was often forced on them in the first place -- the Obama team can work its will on the financial system to unprecedented degree. That's what's happening right now.

It's closer to fascism. Communism preaches state ownership of business. Fascism is privately owned business run to the dictate of the state.

Its easier to steal the money when you own the bank.

GM is likely finished.

2009-04-02T05:53:00.000-07:00

GM: Bankrupt, UNLESS....

GM is likely finished.

April 1 (Bloomberg) -- General Motors Corp.’s 60-day deadline to restructure is unlikely to be extended because the U.S. won’t repay $1 billion in convertible notes maturing June 1, according to a person with knowledge of the discussions.

This is basically the government telling GM that either they get the bondholders to agree to whatever is necessary, or they're dead.

They're dead, and here's why.

Back on Monday I wrote about the Automakers and said this in closing:

And then there's the nearly $1 trillion in CDS that will trigger. There is no accurate way to know what the net exposure is on those, but I'd take the "over" on $100 billion, focused in you-know-where.

Here's the problem - I'm willing to bet that a huge percentage of those were written by AIG.

The government has provided a history now that says that if you are a holder of CDS written by AIG, you will get 100 cents on the dollar, even if the notes don't default. In addition that 100 cents is above what you would normally get even if there IS a default, because normally you have to tender the defaulted bond or the payout is limited by the recovery, and recovery on a defaulted bond is almost never zero.

So in this case the winning play, if you're a big bondholder, is to tell GM to suck eggs; you'll get paid 100 cents on your CDS even though AIG has no money, because the taxpayer will make you whole on those CDS, even if the bonds have a recovery in bankruptcy.

In other words you could conceivably get more than 100 cents if you hold those bonds - so long as you also hold a CDS as a hedge.

It must be nice to be able to screw the taxpayer for more than a 100% payout, right?

The bondholders "committee" is all made up of big players who presumably are hedged, ergo, this has to be assumed to be part of their "thought process" - if not the controlling factor.

Small bondholders on the other hand (who have no hedge, unless they were smart enough to buy lots of PUTs a few months ago) are just going to get plain old-fashioned screwed.

Since the only way GM survives is for it to get the bondholder committee to agree to restructuring it therefore follows that the only way this can happen is if the administration (and Fed!) makes very clear that all funding to AIG has been cut off and therefore no further "pass through" payments will (or can) occur.

That is, The Obama Administration has to bankrupt AIG to save GM, or we will instead see the banks again rip off the American Taxpayer through yet another "passthrough" CDS payout stream AND GM will go bankrupt.

Get ready America - you're about to get it in BOTH holes this time.

This is analysis and deduction based on the available and public facts - I have no proof - but I'll bet this is exactly how this deal will go down, and why.

PS: Every firm in America that has a significant amount of CDS outstanding is potentially subject to this same attack. It's all very nice that our government is permitting banks to rob the citizens like this, isn't it?

Some information about credit cards

2009-03-31T10:44:00.000-07:00

Have you noticed anything different about your credit card account lately? Read the fine print. Really read it. Chances are your interest rate has crept or skyrocketed upward, a monthly fee has been tacked on or rewards point redemption rates diluted.
Chances are the new terms aren't good news for your wallet. Credit card users across the country -- including those who pay their bills on time and are good customers -- are being hit with a spate of changes in credit card account terms. Many of the changes have already taken effect; others kick in April 1 and still others, such as the return of routine annual fees, may be on the horizon.
Credit card users across the country -- including those who pay their bills on time and are good customers -- are being hit with a spate of changes in credit card account terms. Many of the changes have already taken effect; others kick in April 1 and still others, such as the return of routine annual fees, may be on the horizon. Changes have come quickly in interest rates, fees, minimum payments, credit limits and rewards -- and none of them favor consumers. (Note: Please disable your pop-up blocker)
Changes have come quickly in interest rates, fees, minimum payments, credit limits and rewards -- and none of them favor consumers.
Interest rates
Although banks are scooping up billions in bailout money, or borrowing money from the Federal Reserve at as low as 0 percent, they aren't passing those savings on to consumers. Credit card interest rates have generally increased for all major card issuers and even doubling or tripling for consumers who pay their bills on time.
Credit cards interest rates are typically pegged to the prime rate, which has fallen from 5.25 percent a year ago to 3.25 percent now. But the national average rate for credit cards has actually risen over that period from 11.3 percent to 12.1 percent, according to the CreditCards.com weekly rate survey of large card issuers.
Fees
Card companies have become fee-addicted. According to industry consultant R.K. Hammer, card issuers raked in $19 billion in penalty fee income in 2008, up 5 percent from 2007. This year, penalty fee income is expected to rise to a record $20.5 billion.
Fees come in many forms:
In January, Chase began charging $10 a month to 400,000 customers who have large balances but little account activity.
Balance transfer fees used to be capped, so that no matter how much you transferred, you paid no more than $50 or $75. The caps have been dropped. The standard balance transfer fee has risen to 3 percent, and Bank of America increased that fee to 4 percent on certain offers.
Cash advance fees had been 3 percent, but Bank of America now has 5 percent cash advance fees for advances obtained through ATMs and at banks and 4 percent on direct deposit and check cash advances.
Analysts also predict issuers will reinstate annual fees as standard features on accounts.
Minimum payments
Chase increased the minimum payment from 2 percent to 5 percent for cardholders with large balances.
Credit limits
Many card issuers are slashing credit limits. Industry analyst Meredith Whitney predicts banks will cut credit card lines by a cumulative $2 trillion this year and $2.7 trillion by the end of 2010.
American Express has taken the most heat over slashing credit limits. Nearly half of its portfolio underwent a major overhaul that included cutting limits by a half or more. Other issuers have cut limits too, sometimes to amounts lower than the balances owed -- triggering over-the-limit fees on a few accounts.
Lowering credit limits also can cause immediate damage to the credit scores of consumers who carry a balance.
Rewards
Many rewards programs have become less rewarding. Citi's Thank You Rewards program thanked its customers by adding a $39 fee for all tickets redeemed through its CitiMiles program. AmEx's Delta Sky Miles "Always Double Miles" program on everyday purchases became "never double miles." The Hess Visa card's 10 percent introductory rebate for the first 90 days will be scaled back to only 60 days and the 5 percent gas rebate will be slashed to 3 percent effective April 1.
Here's $300. Go away
In a bold move, American Express is offering a $300 gift card to certain cardholders who agree to pay their balances in full by April 30 and close their accounts. Other issuers -- including Discover, Bank of America and Capital One -- have closed millions of inactive accounts over the past several months.
Behind the changes
Why so many changes? Why now, especially after the federal government has pumped billions into struggling banks to help bolster lending? Banking and credit industry observers say a tsunami of financial, regulatory and economic forces are driving issuers to drive up the cost of borrowing on credit cards. The recession, financial market turmoil, frozen credit card securities market, job losses and growing credit card payment defaults are fueling some of the changes.
Card issuers are also gearing up for 2010, when sweeping new changes in federal credit card regulations take effect and significantly limit how and when interest rates can be changed (called re-pricing). Congressional attempts to curb card industry practices are also looming -- with the pledge to enact consumer card protections even sooner than 2010.
"What you're seeing now is issuers basically doing some re-pricing of their accounts. They are basically readying themselves for the new world of post July 1, 2010. Certain issuers have actually announced significant re-pricing of their portfolios. That's something you're going to see over the next year," says Curt Beaudouin, vice president and senior analyst at Moody's Investors Service.
The New York credit rating agency used stress analysis to evaluate the strength of the Big Six credit card issuers -- Bank of America, Chase, Citi, American Express, Capital One and Discover -- and found a number of them will struggle to maintain profitability this year. The six issuers have 80 percent of the nation's nearly 1 trillion in outstanding credit card balances.
"I think the industry is obviously going through difficult times," Beaudouin says. "They are dealing with multiple headwinds simultaneously. 2009 is going to be a year to forget for the industry."
Pre-emptive strikes against consumers
Peter Garuccio, spokesman for the American Bankers Association trade group, acknowledges that credit card issuers are making pre-emptive strikes against that "new world" of regulation that's on the horizon. "Some of the changes that you're seeing in the credit card market are the results of changes to Fed rules."
"What banks are doing is taking prudent steps to insure safety and soundness to minimize their risk," Garuccio says. "They'll continue to take steps to minimize their risk."
"We are in a recession and the important thing to recognize is that the risks associated with all types of lending necessarily go up during an economic downturn," Garuccio says. "Those risks are amplified when it comes to credit cards because credit cards are the riskiest form of lending. There is no security backing up a credit card loan unlike a house or a car loan. The only security that a lender has is a borrower's promise to pay."
'A complex dance'
There's a real danger in what card issuers are doing. Fewer than one in 10 card users default on their payments or pay late, yet issuers in many cases are increasing rates on some of those nine good payers. While trying to shore up their balance sheets and profits in the short-term, they may be severing ties with good customers they need for long-term growth.
"There is outrage over these punitive terms being applied. Many consumers are saying 'I'm going to show you. I'm going to close this account,'" says Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling (NFCC), a national credit counseling accrediting agency.
Beaudouin, the Moody's analyst, says issuers are facing "a complex dance. It's a tricky thing."
"Those customers who can go elsewhere do," he says. "What you're left with are people who are not such good customers because nobody else wants them. Issuers are going through that now. They're trying to walk that line between revenue enhancement and not harming the franchise."
Payment industry consultant Bruce Cundiff says card issuers juggle many variables in deciding which cardholders to cut and which to keep. "They are trying to maintain the profitability of their portfolios. For different issuers that takes a different tack. They are asking 'What are the screws that I can loosen or tighten to maintain that profitability?' "
The trick is determining what factors -- job loss, credit utilization rates, spending patterns -- will make a good customer become a bad risk. "Where does the good turn bad and what are the catalysts to making a good cardholder turn into a bad cardholder? Where you set that bar is going to differ from issuer to issuer," says Cundiff, director of payments research and consulting for Javelin Strategy and Research, a Pleasanton, Calif., - based financial services consulting company.
Issuers are focusing on "keeping those good cardholders in your fold and making sure not only that those good cardholders are less risky but are also profitable cardholders," says Cundiff. He calls AmEx's $300 gift card offer to close customer accounts "shrewd" and predicts other issuers will follow suit.
He describes the bank's thinking process toward consumers this way: "It's worth more for us to pay them the $300 than to worry about whether they are a default risk."
Consumer advice
Consumer advocates warn credit card users to read and review all correspondence from their credit card issuers. It may not be easy reading, but it can have a big impact on family finances.
"They need to examine that statement to see if the credit line has been lowered, if the APR has been lowered and if their minimum monthly payments have been increased. That can be back-breaking," says Cunningham from the NFCC."If you're already living on the edge and you're scrambling to make the minimum payments, having it go from $200 to $500 is just a deal breaker."
As for those people who are closing accounts in protest of the changes, Cunnningham cautions against acting in haste. "They may win the battle but they will lose the war." Closing credit card accounts can lower consumers' credit scores, especially for older accounts demonstrating lengthy credit histories.
"Don't get mad at them and close the account," Cunningham says. "Leave it open. Only consider closing if they raise the APR or minimum payment beyond what you can afford to pay."
Actions consumers should take include:
Keep using your cards, moderately: Charge something small and pay it off at the end of the month. "Issuers are closing the cards that you're not using," says the NFCC's Cunningham. "The reason creditors are closing unused accounts is you're a risk to them. They are making zero money off of you. You represent nothing but risk to them."
Redouble efforts to make every payment on time.
Pay down debts to build a good credit score.
And then comparison shop -- good deals still do exist for those with good credit.
A new era of card use
The credit card changes also may signal what's ahead in personal lending. The days of easy credit with unsecured credit card debt are over, credit experts say. Recent jacked up terms are just shock therapy to wean Americans off of over borrowing.
Cundiff, the Javelin research consultant, says there's already evidence of a shift away from credit card spending to other forms of "pay now" payments, including checks and debit cards.
"You're already seeing the consumer begin to de-leverage, which is a good thing," says Moody's Beaudouin. "Maybe the industry will start moving back to the old way, which is to use your credit card sparingly as opposed to charging everything and running

Car Company Chapter 11 Still Not An Option For Government

2009-03-30T18:28:00.000-07:00

The US car companies still have an ace in the hole. The Administration cannot take Chrysler and GM (GM) into bankruptcy without the probability that it will severely undermine stimulus plans meant to save or create 3.5 million jobs over the next year-and-a-half to two years.

There is a range of numbers about how many people would become unemployed if the two car companies go into a structured Chapter 11, of worse, a Chapter 7 liquidation.

At GM and Chrysler alone, nearly 200,000 jobs are at risk. If the bankruptcies ripple out to suppliers in the event that a judge voids some of their receivables, another several thousand jobs could be at stake. Then there are several amorphous estimates about people who work in fields related to the car companies. That could be industries as diverse as restaurants in Detroit and airline that fly there. It is probably safe to say that close to a million jobs are in jeopardy if the two car companies lose their independence.

The Administration is already suggesting that its stimulus package, aid to banks, and budget will stretch the Treasury to raise hundreds of billions of dollars to cover a deficit that will be well over one trillion dollars in the next federal fiscal year. Bringing in that money is already projected to raise interest rates on Treasuries. That will ripple out to business and consumer loans including mortgages. The idea the rates will fall further is bogus.

A million jobs lost in Detroit would also cut deeply into the receipts that the IRS is forecasting over the next year. That puts the revenue projections in the budget at real risk.

The government wants the car companies to believe that it has put a Sword of Damocles over the head of the industry. If GM and Chrysler look up, they will see it is not really there at all.

The Government Crackdown on Peer-to-Peer Lending

2009-03-30T18:23:00.000-07:00

The Government Crackdown on Peer-to-Peer Lending
Just when Americans need small loans the most, the SEC shuts down innovative lenders.
By Hans Eisenbeis Posted Monday, March 30, 2009 - 7:34am

The Internet has spawned many regrettable things, such as dancing babies, sneezing pandas, and Star Trek porn, but peer-to-peer lending isn't one of them. The Web really has created some unique new situations and business opportunities that not even the omniscient Framers of the Constitution could have foreseen. Like electronically bringing together anonymous people who wish to lend their money to other anonymous people in a double-blind auction, facilitated by high tech-Web 2.0 technology of the sort eBay uses. That's precisely what sites like Prosper, Lending Club, and Loanio are trying to do: use the Web to create a network of regular people who wish to borrow and lend money to one another, at agreed upon terms that are a result of bidding and counterbidding. The Web sites even allow pools of people to fund loans partially in amounts that typically range from $1,000 up to $25,000, and to resell their loans to other members. It's like adultfriendfinder.com for financial hookups, minus the tawdry photos. And it's been working beautifully.

But in November 2008, when you might have thought the SEC had bigger fish to fry—like busting the world's biggest Ponzi scheme—they somehow found the time to slap a cease-and-desist order on little old Prosper. Until the San Francisco company registered with the SEC, they were ordered to facilitate no new loans. Oh, and they had to stand mute in the corner for a while, too—the usual mandated "quiet period"—which they are still doing today. Loanio voluntarily followed along without having to be told.

Why, in the depths of the Great Recession, would the federal government be stepping on the necks of John Dough and Joe Sixpack who just want to float a little cash to help each other get through the tough times?
They have shut down, for now, a powerful engine. Up until last fall, when the SEC white hats rode into town, Prosper had enabled 25,000 loans between its 750,000 members that averaged $6,000 each. That's about $150 million in serviced loans. The U.K. site Zopa, usually considered the granddaddy of P2P lending on the Web, reported that it had 200,000 members, and lenders were averaging 7.3 percent returns—better than twice the rate of a typical bank account and infinitely better than your average share of stock. Most impressively, perhaps, Zopa said the default rate of its members' loans was stable at an ultralow 0.02 percent.

But there were nagging questions. What if too many borrowers failed to pay? What if lenders charged criminal levels of interest or started whacking bad borrowers? What if the Web site went out of business? These questions were—as is so often the case on any frontier worth its tumbleweeds—pushed aside. As long as no one showed up at the saloon with a badge, everything was cool. At the heart of the matter was a question only a lawyer could love: Who could or should regulate this market? Traditional banking regulators? Or someone else? What, exactly, was this new thing: animal, vegetable, mineral, or complex three-party electronic transaction?

The crackdown appears to have begun with Lending Club; based in Sunnyvale, Calif., it is Prosper's main competitor in the United States. With venture capital money behind it and a high-powered team of former executives from American Express, Goldman Sachs, MasterCard, and E*Trade, the company decided to be proactive and hired lawyers who reached out to the SEC in early 2008. "We wanted to help define the space, to participate in the dialogue about how our industry would work, and how it would be regulated," CEO Renaud Laplanche says. "Because we really expect this business to grow huge in coming years, and we wanted to be sure everything was done right." Lending Club got in touch with the SEC's Office of Financial Services. Together, the lawyers parsed the business, and they came to see a peer-to-peer loan as a security. They reached this conclusion for a couple of reasons: P2P lending was, crucially, being marketed as an investment opportunity with an expectation of a return; P2P loans were offered to the general public; they enabled lenders to profit from someone else's labor; the Web sites actually issued a promissory note from a bank, which was then sold to the lender; and, most important from a regulator's point of view, there was no expertise required to participate, there were few protections, and there didn't appear to be any other agency or department actively engaging with the new industry.

In April of 2008, Lending Club registered with the SEC and accepted the somewhat daunting task of filing every single loan with the SEC as a security. Starting in October—just in time for the global economic meltdown—Lending Club went online with full federal approval and all paperwork duly filed. Laplanche told TBM that the process has now been mostly automated; the same technology that enables his company to replace a traditional bank or collection agency allows it to make regular automatic filings through the SEC's EDGAR filing system. While there was some initial pain and expense, he thinks they are far outweighed by the potential of the business.

So now Lending Club is quickly gaining ground on the hogtied Prosper and Loanio. While its main competitors twiddle their thumbs waiting to get back into business, the company has facilitated more than 3,000 loans for $30 million. For loans issued since October, only 0.35 percent have been delinquent, and there have been no defaults—though a spokeswoman admitted it's still too early to celebrate that particular data point. The average return for lenders has been 9.05 percent. With return and default rates like that, it's no surprise that business is booming. The company claims it has doubled its registrations from December to February.

The SEC registration and wrist-slapping may be the least of Prosper's worries. It has set the terms for countless additional headaches. Shortly after the SEC's cease-and-desist, a New York law firm filed a class-action lawsuit on behalf of Prosper lenders arguing they'd been hoodwinked into buying unregistered securities. That case goes to court on May 1. And in a separate case, Prosper has already paid $1 million to the North American Securities Administrators Association to try to head off state litigation.

This seems to be why Zopa declined to launch a planned U.S. expansion. In a late November blog post, CEO Giles Andrews said, "We always took the view that the SEC would likely view our platform, as operated in the UK and Italy, as requiring registration with them. ... That's the key reason why we didn't launch our UK model in the U.S. and watched with great interest when others did proceed with platforms that we felt carried regulatory risk." Just so, the global recession seems to have amped their business in the United Kingdom. While the company is stoic about releasing its numbers, spokeswoman Sarah Stocks-Wilson confided that "business in the U.K. is booming!"

For the SEC's part, a kindly spokesman there, John Heine, told me that even though times are crazy at the commission, he's confident that the laws that were written at the very founding of the SEC—the FDR-initiated Securities Act of 1933 and the Securities Exchange Act of 1934—were written broadly enough to handle anything technology could throw at them. "We had to deal with the telephone and the teletype," he laughed. "I think we'll be OK with the Internet." Of course, regular folks fooling around on the Internet had nothing to do with AIG's credit-default swaps, or Lehman's subprime tranches, or Bernie Madoff's prospectuses. So maybe P2P lending is, for the SEC, easy pickings. We can only hope their regulatory acuity trickles up.

Tax Incentives & Government Guarantees For Autos

2009-03-30T18:18:00.001-07:00

This morning we already knew that General Motors Corporation (NYSE: GM) has 60 days and Chrysler has 60 days until D-Day. The Obama administration pledged that GM brands will be on the road and continue with some help, but the president called the situation at Chrysler more challenging. While the viability plans and continuity plans do not assure that bankruptcy will not be used, the US Government is going to guarantee auto warranties and is now going to offer some tax incentives for buying new cars. There are some companies which may win, but the question is what happens to the equity holders of any of these companies in or around any aspect of these beneficiary companies.

At Chrysler, Predident Obama has said that the government will lend up to $6 billion if Fiat and Chrysler can work out an amicable deal to save Chrysler. If no suitable deal can be reached then the likely outcome is a swift bankruptcy which will take out the old debt. President Obama said that if taxpayer money gets used that it will have to be repaid before Fiat can take money out of the company. As a reminder, a bankruptcy at any of the Big Three could trigger waves of bankruptcies throughout the auto sector. Even if companies are fine on an operational basis, many companies will lose their funding if and when their key clients are deemed financially insolvent.

But here is where this gets more interesting. President Obama said that servicing and warranties will be safe, and actually safer than now, because as of today the US government will stand behind auto warranties.

As far as an another incentive, you may be able to deduct sales and excise taxes from income for all new car purchases between now and the end of 2009.

Following a program which has been used in Europe, another incentive would come via turning in old cars that are less fuel efficient for more fuel efficient models of new cars would be made. This will be worked out with the IRS and would also retroact to today.

Government Forces Out Wagoner at GM

2009-03-30T05:35:00.000-07:00

Government Forces Out Wagoner at GM
Most of Board Gone, Too, After Threat to Withhold Bailout Cash; Chrysler Urged to Make Fiat Deal; U.S. Says Bankruptcy an Option

By NEIL KING JR. and JOHN D. STOLL

The Obama administration used the threat of withholding more bailout money to force out General Motors Corp. Chief Executive Rick Wagoner and administer harsh medicine to Chrysler LLC, marking one of the most dramatic government interventions in private industry since the economic crisis began last year.
[GM CEO Rick Wagoner] Associated Press

DETROIT IN CRISIS: The ouster of Rick Wagoner, shown at a February news conference, is a milestone in the state's intervention in the economy.

The administration's auto team announced the departure of Mr. Wagoner on Sunday. In a summary of its findings, the task force added that it doesn't believe Chrysler is viable as a stand-alone company, and suggested that the best chance for success for both GM and Chrysler "may well require utilizing the bankruptcy code in a quick and surgical way."

The move also indicates that the Treasury Department intends to wade more deeply than most observers expected into the affairs of the country's largest and oldest car company.

After over a month of analysis, the administration's auto task force determined that neither company had put forward viable plans to restructure and survive. The verdict was gloomier for Chrysler. The government said it would provide Chrysler with capital for 30 days to cut a workable arrangement with Fiat SpA, the Italian auto maker that has a tentative alliance with Chrysler.
Auto Shake-Up

* Wagoner's Statement
* U.S. Sees Fiat as Chrysler's Best Hope
* Task Force Says GM Can Bounce Back
* Veteran Henderson Takes Reins at GM
* Wagoner Finally Hits a Dead End
* U.S. to Guarantee GM, Chrysler Warranties

Documents

* Chrysler's Viability Assessment
* GM's Viability Assessment
* Fact Sheet: 'New Path to Viability'
* Warranty Commitment Program

If the two reach a definitive alliance agreement, the government would consider investing up to $6 billion more in Chrysler. If the talks fail, the company would be allowed to collapse.

Despite the grim view of Chrysler, the task force said it had no intention of replacing CEO Robert Nardelli. Unlike Mr. Wagoner, who had been at the helm of GM since 2000, Mr. Nardelli is considered an auto-industry outsider who has only been in charge at Chrysler since the company was acquired by Cerberus Capital Management LP in 2007.

In addition to pushing out Mr. Wagoner, the task force said GM is in the process of replacing the majority of its directors. Kent Kresa, a longtime director, will serve as interim chairman. Mr. Wagoner will be replaced as CEO by Chief Operating Officer Frederick "Fritz" Henderson.

The administration said it would provide the company sufficient working capital for 60 more days, during which a revamped GM board and top management has to put forward a much more rigorous restructuring plan than it submitted last month.

"The administration is prepared to stand by GM throughout this process to ensure that GM emerges with a fresh start and a promising future," according to term sheets released by the White House Monday morning.

Administration officials made it clear that an expedited and heavily supervised bankruptcy reorganization was still very much a possibility for both companies. One official, speaking of GM, compared such a proceeding to a "quick rinse" that could rid the company of much of its debt and contractual obligations.

The clearest losers appear to be the thousands of bondholders and lenders to both GM and Chrysler. In both cases, administration officials said that the companies were burdened by inordinate amounts of debt that would have to be scrubbed. Chrysler's survival, the administration said, would require "extinguishing the vast majority" of the company's secured debt and all of its unsecured debt and equity.

To assure consumers reluctant to buy GM or Chrysler cars, the government plans to take the unusual step of guaranteeing all warrantees on new cars from either company. These guarantees would lapse back to the companies once they return to health.

Mr. Wagoner had managed the company through some of its most difficult moments. The company hasn't logged a profit since 2004, reporting losses since then of $82 billion. It nearly ran out of money at the end of 2008 before the Treasury Department provided emergency loans. GM's stock was trading above $70 when Mr. Wagoner took over as CEO in June of 2000. Shares closed last week trading at $3.62, placing the company's market capitalization at $2.21 billion.
Crisis in Motown

The Rise and Fall of American Icon General Motors
[Rick Wagoner] Corbis

1998: Rick Wagoner, shown here in Detroit, was then president and chief operating officer at General Motors. He would manage the company through some of its most difficult moments.

Oct. 5, 1998: G. Richard Wagoner Jr. becomes president of GM.

June 1, 2000: Wagoner adds chief executive to his title.
[Wagoner] Associated Press

2000: Wagoner, just picked as next chief, with GM Vice Chairman Harry Pearce, left, and Chairman Jack Smith.

Sept. 19, 2001: GM unveils 0% financing on new cars and trucks after the Sept. 11 terrorist attacks to "Keep America Rolling."

Oct. 28: GM agrees to sell its Hughes Electronics satellite unit to EchoStar Communications, ending GM's two-decade foray into nonautomotive businesses.

May 1, 2003: Wagoner becomes chairman of the GM board of directors

April 4, 2005: Wagoner takes control of GM's unprofitable North America auto unit

April 14: Wagoner tells The Wall Street Journal that the "one specific issue that has reached crisis proportions…(is) the health-care cost issue. It's clearly outrunning our ability to hold it off with other cost cuts."

Oct. 3: GM reports a sales drop of 24% in September 2005, compared with the same month a year ago, as sales of Detroit's trucks stall amid spiking gas prices and a consumer shift away from SUVs.

Oct. 17: GM reports a net loss of $1.63 billion. Even after a partial overhaul of retiree health-care benefits through union concessions, GM still faces a $51 billion obligation to union members.
[2007: Wagoner, left, and UAW President Ron Gettelfinger, at the opening of contract negotiations.] Getty Images

2007: Wagoner, left, and UAW President Ron Gettelfinger, at the opening of contract negotiations.

Sept. 26, 2007: GM and the United Auto Workers union agree to a new four-year contract, ending a two-day nationwide strike and creating a new trust fund for retiree health care.
[2008: Gasoline prices topped $4 a gallon, as displayed at a Chevron station in Mill Valley, Calif.] Getty Images

2008: Gasoline prices topped $4 a gallon, as displayed at a Chevron station in Mill Valley, Calif.

Week of June 9, 2008: Average price of gas in U.S. crests above $4; U.S. consumers abandon SUVs and pickup trucks in droves.

Aug. 1: GM reports a $15.5 billion net loss for the second quarter of the year, the third-biggest in GM's history, as analysts question whether Wagoner can keep his job.

Nov. 7: GM warns that without federal assistance, it might not have enough cash to operate its business past the middle of 2009.
[GM CEO Rick Wagoner, Chrysler CEO Robert Nardelli, Ford CEO Alan Mulally, testify before a Senate panel on Nov. 18, 2008.] Associated Press

2008: GM CEO Rick Wagoner, Chrysler CEO Robert Nardelli and Ford CEO Alan Mulally testify before a Senate panel on Nov. 18.

Nov. 18: The chief executives of Detroit's Big Three auto makers, including Wagoner, appeal for U.S. taxpayers to help their industry.

Dec. 2: Auto makers return to Congress, this time with turnaround plans in hand. GM says it needs $4 billion to stay afloat until the end of the year. In total, the company says it needs $18 billion in loans -- $6 billion more than it said it would need just two weeks before.

Dec. 7: Wagoner comes under increasing pressure from outside the company to resign as part of any broad bailout.

Dec. 11: Effort in Senate to aid auto makers collapses amid partisan disputes.

Dec. 19: White House agrees to $17.4 billion in bailout loans.

Dec. 31: GM receives first $4 billion in loans.

Feb. 26, 2009: GM announces a $9.6 billion loss in the fourth quarter of 2008, bringing its loss for the year to $30.9 billion and raising new concern about its viability.

March 27: U.S. asks Wagoner to resign as part of an agreement to receive new package of federal aid.

Mr. Wagoner's tenure came amid extraordinary challenges that weren't entirely of his own making -- including costly retiree benefits and union contracts that predate him, and the recent deep recession. Yet GM by most measures performed worse than other auto companies. Among the key decisions that hurt the company: a huge bet on trucks and SUVs that piled up on dealers' lots unsold as high gas prices drove Americans to look for more fuel economy offered by rival companies.

Mr. Wagoner was asked to step down on Friday by Steven Rattner, the investment banker picked last month by the administration to lead the Treasury Department's auto-industry task force. Mr. Rattner broke the news to Mr. Wagoner in person at his office at Treasury, according to an administration official. Afterward, Mr. Rattner met one-on-one with Mr. Henderson, who will fill in as GM's CEO.

"On Friday I was in Washington for a meeting with administration officials," Mr. Wagoner said in a statement released by GM. "In the course of that meeting, they requested that I 'step aside' as CEO of GM, and so I have."

GM spokesman Steve Harris declined to comment.

In a statement released by GM Sunday night, Mr. Kresa said: "The Board has recognized for some time that the Company's restructuring will likely cause a significant change in the stockholders of the Company and create the need for new directors with additional skills and experience."
Plan for Viability

President Obama plans Monday to lay out the administration's interim conclusions on the companies' viability and the many steps that need to be taken to return the companies to health. The president will hold off on granting the companies the $21.6 billion in new loans they requested last month.

In remarks Sunday, Mr. Obama said that he intends to extract "a set of sacrifices from all parties involved-management, labor, shareholders, creditors, suppliers, dealers." The industry, he said on CBS's "Face the Nation," must "take serious restructuring steps now in order to preserve a brighter future down the road." The two companies "are not there yet," he added.

Mr. Wagoner's removal shows that the sacrifices could cut deep. The departure of the company's top executive promises to further shake up a company that has already been through considerable change over the past six months. The 56-year-old executive had been scrambling to craft a global strategy aimed at maintaining leadership in the global sales chase with Toyota Motor Corp., and making big profits in emerging markets.

But Mr. Wagoner's plans came crashing down in the second half of 2008 as the company ran short of cash and was forced to ask the government for billions of dollars in aid. At the same time, his executive team started dismantling several parts of the company, including a plan to shed several brands, slow the pace of new-product introductions and sell off stakes in international operations.
Industry's Outlook

The president's auto task force has spent more than a month digging into the restructuring plans that GM and Chrysler submitted last month. The team has struggled to make two determinations: when will the steep plunge in car sales end, and what will the market look like once it revives.

GM has based its revival plans on the U.S. market rebounding to sales of 14.3 million vehicles a year in 2011, up from a rate of around nine million vehicles so far this year. Many analysts now consider GM's short-term forecasts to be overly optimistic.

The two companies received a total of $17.4 billion in government loans in December, and have requested another dose to keep them going through this year. Of the $21.6 billion, GM is seeking $16.6 billion more, while Chrysler has asked for $5 billion more.

Among challenges the administration faced leading up to this weekend's decision, foremost were the efforts to draw steep concessions from the United Auto Workers union and from the bondholders.

Attempts to solidify deals with the UAW and bondholders were slowed by disagreements by both parties over how exactly the other party needed to budge. The UAW, for instance, insists it already made health-care concessions in 2005 and 2007, and argues that the bondholders have never been asked to concede anything.

"I don't see how the UAW will do anything until they see what the bondholders will give up," one person involved in the negotiations on behalf of the UAW said Sunday.
Bondholder Factor

The bondholders have said that they are willing to make concessions, but they wanted to see the union make further cuts. The fact GM raised most of the unsecured debt to fund union health-care and pension costs is also seen as a reason why the union needs to take bigger steps.

With Mr. Obama potentially holding off on new loans until concessions are made, analysts said GM likely has enough cash on hand to weather at least another month before its need for more government aid becomes urgent. Chrysler may need another infusion of cash sooner. Ford Motor Co. hasn't sought federal assistance.

Both GM and Chrysler are negotiating with the UAW to accept a range of cost-cutting measures, including a greatly reduced work force, lower wages and a revamped health-care fund for retirees.

The U.S. auto industry, hardly robust to start with, has been reeling from a plunge in car sales over the last six months. Sales in February were down about 40% over the same month last year. The drop has sent shock waves through the hundreds of smaller parts companies that supply the big auto makers. To keep the sector afloat, the administration recently announced a $5 billion financing facility to help suppliers cover their expenses.

"We think we can have a successful U.S. auto industry," President Obama said on Sunday. "But it's got to be one that's realistically designed to weather this storm and to emerge -- at the other end -- much more lean, mean, and competitive than it currently is."

Treasury Secretary Timothy Geithner, who is nominally in charge of overseeing the auto bailout, said on Sunday the government was prepared to lend more money "if we believe it's going to provide the basis for a stronger industry in the future that's not going to rely on government support."

The original December loans were given under the agreement that all sides would strike a compromise deal by March 31, but the administration is taking advantage of a clause allowing all sides another month to negotiate. "It was unrealistic to renegotiate a new labor agreement and the unsecured debt in so short a time," said Sean McAlinden, chief economist with the Ann Arbor, Mich.-based Center for Automotive Research. "That has never happened before."

GM and Chrysler are meant to submit by Tuesday assessments of where their restructuring efforts are heading. In February, both companies put forward plans for paring back their operations, reducing their work force and eliminating vehicle models.

GM and representatives for its bondholders remained in talks over the weekend about a deal that would force these investors to turn in at least two-thirds of the value of the debt they hold in exchange for equity and new debt.

This arrangement would force GM to issue significantly more stock than what is currently being traded in the market. In addition, the government is being asked to guarantee the new debt with federal default insurance in order to entice bondholders who otherwise wouldn't be interested in participating in the swap.

If GM can't eventually forge a deal with the ad hoc committee representing the bondholders, the company may be forced to issue a debt-for-equity swap without the blessing of some of its biggest and most influential unsecured investors. This would heighten the possibility of the company eventually needing to file for Chapter 11 bankruptcy protection.

Treasury Plan to Deal With Toxic Assets Banks on Private Cash

2009-03-23T05:59:00.000-07:00

Treasury Plan to Deal With Toxic Assets Banks on Private Cash

By DEBORAH SOLOMON and MAYA JACKSON RANDALL

WASHINGTON -- Noting that the U.S. financial system "is still working against economic recovery," the U.S. Treasury Department on Monday revealed details of its plan to address toxic assets weighing on banks' balance sheets.
[Geithner] Getty Images

Treasury Secretary Timothy Geithner

Treasury said one major reason the financial system is still facing challenges is because of "legacy assets" and securities that are compromising banks ability to raise capital and their willingness to boost lending. Under the new Treasury program -- the Public-Private Investment Program -- the Treasury Department, Federal Reserve, the Federal Deposit Insurance Corp. plan to work with private investors to try to restart a market for these troubled assets.

The federal government will use up to $100 billion in funds from the Troubled Asset Relief Program, or TARP, and capital from private investors in order to generate $500 billion in purchasing power to buy legacy assets, Treasury said in documents provided early Monday. The department noted that the program could potentially expand to $1 trillion over time.

The program has two parts. It will address both the legacy loans and the legacy securities clogging the balance sheets of financial firms.

Under the legacy loan program, banks will identify the assets they wish to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Eligible assets will be determined by banks, regulators, the FDIC and the Treasury Department.

"A broad array of investors are expected to participate in the Legacy Loans Program," Treasury said in a fact sheet it provided Monday. "The participation of individual investors, pension plans, insurance companies and other long-term investors is particularly encouraged."

Under the legacy securities program, non-recourse loans will be made available to investors to fund purchases of legacy securitization assets. Eligible assets are expected to include certain non-agency residential mortgage-backed securities that were originally rated AAA and outstanding commercial mortgage-backed securities and asset-backed securities that are rated AAA.
More

* Statement From Treasury Department
* Opinion -- Geithner: 'My Plan for Bad Bank Assets'
* White House Defends Plan for Toxic Assets
* How Bank Bailout Cost Huntington CEO
* Geithner Gets High-Profile Support

In an interview with The Wall Street Journal on Sunday, Treasury Secretary Timothy Geithner said the only way to remove troubled assets clogging banks' balance sheets -- which lie at the heart of the financial crisis -- is to work with the private sector, even at a time when Wall Street moneymakers are being vilified by the public and politicians.

Mr. Geithner said the government cannot fix the financial crisis alone. "Our judgment is that the best way to get through this is if we can work with the markets," he said. "We don't want the government to assume all the risk. We want the private sector to work with us."

Mr. Geithner's three-pronged program, unveiled Monday, envisions the creation of a series of public-private investments to soak up $500 billion, and maybe as much as $1 trillion, in troubled loans and securities at the heart of the financial crisis. To encourage investors to buy those assets, the U.S. government will offer lucrative subsidies and shoulder much of the risk.

Taxpayers will stand to reap gains -- alongside investors such as hedge funds and private-equity firms -- if the investments ultimately prove profitable.

The effort is part of Mr. Geithner's broader plan to stabilize the financial system and builds on earlier programs to pump capital into banks, restart consumer and small-business lending, and help some homeowners pay their mortgages. Many economists argue that financial firms need to purge troubled loans and securities clogging their balance sheets if they are to regain the confidence to resume lending.

Mr. Geithner outlined the latest effort in general terms last month, and Wall Street has been eagerly awaiting details. But the rollout comes at an inopportune time, with bailout fatigue turning to rage amid a furor over bonus payments to employees of American International Group Inc.
[Geithner Banks on Private Cash]

As a result, whether or not the prescription is correct to fix what ails the financial sector, there is likely to be concern about an effort that appears to reward Wall Street. Some investors have already said they're leery of working with the government for fear the rules will change midstream, as is happening with Congress's moves to cap Wall Street bonuses for firms receiving financial aid.

To encourage investor participation, the Treasury believes participants in the program shouldn't be subject to executive-pay rules imposed by Congress. The law authorizing the $700 billion bailout and a provision in the $787 billion stimulus package impose tough pay restrictions on firms that receive government funds, including limits on bonuses.

The Obama administration believes those provisions shouldn't apply to such broad programs, and an exception was made last month for participants in the Federal Reserve's consumer-lending facility, which provides loans to investors who agree to buy certain asset-backed securities.

Administration officials are hoping the public will draw a distinction between financial firms that receive a government rescue, such as AIG, and those such as hedge funds and private-equity firms that participate as investors in broad government programs.

Some on Wall Street say they want to buy assets but need the government to provide financing. "No one is putting any money to work because every time you dip your toes in, they get cut off," said Blackrock Inc. CEO Lawrence Fink, who was briefed on the plan by the Treasury. He called the furor in Congress over executive compensation "very frightening" but said it wouldn't dissuade Blackrock from participating: "Our intention is to be one of the participants in the program."

Others on Wall Street, shell-shocked from the assault on their practices from Washington, are withholding judgment until they see more details. Banks still holding troubled assets at relatively high values may be reluctant to sell for fear they won't get a high enough bid to avoid having to take a huge write-down. Other firms, such as Goldman Sachs Group Inc. and Morgan Stanley, have already written down the value of their troubled loans and may have an easier time selling assets into the public-private partnerships.

An official at one large U.S. bank said the program will be launched more smoothly if a high income tax on some bonuses, such as passed by the House last week, is watered down or tabled. In recent days, various financial-industry executives have warned against a tax that's retroactive, saying it would hurt their ability to keep valued employees.

The Treasury plans to contribute between $75 billion and $100 billion from its $700 billion bailout to the programs to remove troubled real-estate-related assets from bank balance sheets, with the possibility of additional money in the future. The Fed and the Federal Deposit Insurance Corp. will provide other forms of financing, including low-risk loans.

Targeting mortgages that banks no longer want to hold, the Treasury and the FDIC will provide financing to buyers. The FDIC will auction off pools of loans that a bank wants to sell and will become a co-owner by forming a partnership with the highest bidder.

The partnership will then raise FDIC-guaranteed debt to finance a portion of the purchase price, with the Treasury willing to kick in between 50% and 80% of the equity needed to buy the assets. The Treasury will be an equal investor in the partnerships.

To tackle risky securities, such as those backed by mortgages, the Treasury will create several investment funds run by private investors who meet certain criteria, such as experience managing similar assets. Treasury again will act as a co-investor, in most cases contributing $1 for every $1 contributed by the private sector and sharing equally in any gains or losses.

Lastly, the government will expand the Fed's Term Asset-Backed Securities Loan Facility, or TALF, to help absorb risky assets dating back several years.

In an op-ed piece in Monday's Wall Street Journal, Mr. Geithner wrote that the efforts will help tackle the glut of assets clogging bank balance sheets and will help provide some kind of normal price for these assets, which the Treasury believes are currently undervalued.

"Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets," Mr. Geithner wrote. "The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury."

The rollout represents a test for Mr. Geithner, whose tenure has been marred by controversy over his personal taxes, criticism of the lack of detail in his February bank-bailout announcement, and his involvement in the AIG bonus furor. Some questioned why he didn't know of the AIG bonuses sooner.

President Barack Obama said on CBS's "60 Minutes" Sunday that Mr. Geithner is "as sharp and as skilled a public servant as we have." The president joked that were Mr. Geithner to offer his resignation, he would say, "Sorry, buddy, you've still got the job."

Two senior Republican senators, Charles Grassley of Iowa and Judd Gregg of New Hampshire, offered their support. "In the area of trying to stabilize the financial sector of our economy, they're doing the right things," Sen. Judd said on CNN's "State of the Union."

AIG (AIG): Paying Taxpayers Back With Taxpayer Money

2009-03-18T05:44:00.000-07:00

Using the oblique reasoning techniques of politicians, the Administration has decided to get back the big bonuses that AIG paid to some of its employees by withholding the next of many payments made to the insurance company. Without the infusions, the company would have gone under and may still falter in the future.

According to Reuters, the barely competent Treasury Secretary Timothy Geithner will insist that AIG pay back taxpayers the $165 million in bonuses before the government will send AIG its next $30 billion in bailout cash. The news service reports that Geithner wrote in a letter to Congress, “We will impose on AIG a contractual commitment to pay the Treasury from the operations of the company the amount of the retention awards just paid.”

The planned action is hardly more than spitting into a strong wind.

AIG’ paid out the bonuses, probably obtained by the employees fair and square in outrageous employment packages. No one seems to have disclosed the name of the people who signed the agreements on behalf of AIG, or who approved them in the first place. AIG’s clueless CEO, Edward Libby, will go before Congress to try to explain that.

The long and short of it is that AIG will pay back taxpayers for the bonuses using taxpayer money. AIG has no money of its own. It has planned to sell off some of its divisions to raise capital. With one or two exceptions, there have been no takers. Perhaps the cause of that is tight credit markets, or perhaps the AIG operations that are one the block are not terribly attractive.

After a day or two of thrashing AIG and its employees, Congress and the Treasury can pretend to use government bailout money to pay the government back. Or, they can hang on to the issue because it makes for a good political circus. If the latter path is the preferred plan, the business of putting hundreds of billions of dollars into the economy to save it from a deepening recession can be put off to the side of the agenda and the most important work of the Administration can be delayed.

Obama Wants U.S.-Mexico Trucking Program Restored

2009-03-16T12:53:00.000-07:00

WASHINGTON -- The White House says it wants to work with lawmakers to restore a program that allows cross-border trucking with Mexico.

Mexico Monday put in place tariffs on 90 U.S. products after Washington canceled a program that allowed some trucks from Mexico to operate in the U.S. White House spokesman Robert Gibbs says the administration wants to work with Congress to come up with a plan that would restore that program.

Lawmakers had safety concerns and other reservations and did away with the program in last week's spending bill.

Mr. Gibbs says the White House is working with Sen. Byron Dorgan (D., N.D.) to write a bill that would deal with lawmakers' concerns.

The Mexican Economy Department says the U.S. decision violates a provision of the North American Free Trade Agreement that was supposed to have opened cross-border trucking years ago. Department officials told a news conference Monday that the measure will affect about $2.4 billion in trade, covering agricultural and industrial products from 40 U.S. states.

The Mexican officials didn't name the products or specify the amount by which import tariffs will increase.

Activists in the U.S. had argued that Mexican trucks were unsafe, something Mexico denies.

Juan Enriquez: Beyond the crisis, mindboggling science and the arrival of Homo evolutis

2009-03-16T05:27:00.000-07:00

More Companies At Risk of Failing

2009-03-12T13:06:00.000-07:00

By Rick Newman

Everybody hopes the economy bottoms out and starts to improve tomorrow. Or sooner. But there are few signs of an imminent recovery. One obvious indicator is the health of big companies - you know, the ones that have been announcing all those four- and five-digits layoffs recently. And the outlook for them seems to be getting worse, not better.
Moody's, the ratings agency, recently published a list of "bottom rung" companies most likely to default on their debt. The criteria are technical, but the upshot is that a lot of companies are in deep trouble - and the list is getting longer, not shorter. Moody's predicts that the default rate on corporate bonds this year will be three times higher than in 2008, and 15 times higher than in 2007. Defaults are often the last step before a bankruptcy filing. And bankrupt companies, obviously, don't usually hire people. They dramatically shed costs and workers and sometimes liquidate completely, firing everybody.

So the Moody's findings help explain why most economists expect the unemployment rate, now 8.1 percent, to rise as high as 9 or 10 percent before it starts to drift back down. And right now, real and perceived fears about job security are the main force driving a contraction in consumer spending, and the economy as a whole. Here's what the bottom-rung report tells us about the next several months:

There will be a lot more bankruptcies. Moody's places 283 companies on its bottom-rung list, up from 157 a year ago. Since the quarterly list was last updated, 73 additional companies have fallen to the bottom rung. Twenty-four companies made their way off the list - but mostly because they defaulted on their debts. Only one company, Landry's Restaurants, got off the list because its circumstances improved.

[See why bank nationalization terrifies Wall Street.]
http://www.usnews.com/blogs/flowchart/2009/2/22/why-bank-nationalization-is-so-scary.html

Companies exposed to consumer spending have it toughest. The industries most represented on the list are media, automotive, retail and manufacturing. Companies in the most acute danger are those with reduced cash flow and a high debt load. A lot of big, well-known companies are in danger. On the list: Advanced Micro Devices; AirTran; AMR (parent of American Airlines); Chrysler; Duane Reade; Eastman-Kodak; Ford; General Motors; JetBlue; Krispy Kreme; Palm; R.H. Donnelly; Reader's Digest Association; Rite-Aid; UAL (parent of United Airlines); Unisys; and US Airways.

Many of the other firms on the list are second- or third-tier suppliers to automakers, airlines, and other troubled firms. Being on the list doesn't mean a firm is destined for bankruptcy. But it does mean the company faces severe constraints in terms of raising new capital, making new investments, and hiring. Instead of expanding, it may be far more inclined to sell assets, streamline or close divisions, and lay people off to cut costs and raise cash.

[See 6 possible upsides to a GM bankruptcy.]
http://www.usnews.com/blogs/flowchart/2009/3/8/6-upsides-to-a-gm-bankruptcy.html

America's malls are going to end up looking a lot different. The retail sector is obviously getting hammered, with chains like Circuit City and Linens 'n Things already out of business. Many other retail chains are in trouble. Also on the bottom-rung list: Barney's; BCBG Maz Azria; Blockbuster; Brookstone; Claire's Stores; Eddie Bauer; Finlay Fine Jewelry; Harry & David; Loehmann's; Michael's Stores; Oriental Trading Co.; and Sbarro. Again, this doesn't mean the company is doomed. But many of these firms will restructure, close outlets, shrink, and find ways to transform themselves. So if you ever go back to the mall, and your favorite shop has disappeared, you'll know why.

New York - FDIC Dire Warning: Insurance Fund Could Be Insolvent This Year

2009-03-06T11:38:00.000-08:00

New York - Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency.

“Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.

“A large number” of bank failures may occur through 2010 because of “rapidly deteriorating economic conditions,” Bair said in the letter. “Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative.”

The FDIC last week approved a one-time “emergency” fee and other assessment increases on the industry to rebuild a fund to repay customers for deposits of as much as $250,000 when a bank fails. The fees, opposed by the industry, may generate $27 billion this year after the fund fell to $18.9 billion in the fourth quarter from $34.6 billion in the previous period, the FDIC said.

The fund, which lost $33.5 billion in 2008, was drained by 25 bank failures last year. Sixteen banks have failed so far this year, further straining the fund.

Angry Bankers

Smaller banks are outraged over the one-time fee, which could wipe out 50 percent to 100 percent of a bank’s 2009 earnings, Camden Fine, president of the Independent Community Bankers of America, said yesterday in a telephone interview.

“I’ve never seen emotions like this,” said Fine, adding that he’s received more than 1,000 e-mails and telephone messages from angry bankers.

“The FDIC realizes that these assessments are a significant expense, particularly during a financial crisis and recession when bank earnings are under pressure,” Bair wrote. “We did not want to impose large assessments when the industry and economy are struggling. We searched for alternatives but found none better.”

The agency, which has released the change for 30 days of public comment, could modify the assessment to shift the burden to the large banks “that caused this train wreck,” Fine said. “Community bankers are feeling like they are paying for the incompetence and greed of Wall Street,” he said.

Legal Constraints

Bair dismissed that suggestion.

“For risk-based assessments, our statute restricts us from discriminating against an institution because of size,” Bair wrote.

The deposit insurance fund won’t dry up because the government can get funds from the industry and congressional appropriations, and borrow from the Treasury, Chip MacDonald, a partner specializing in financial services at law firm Jones Day, said today in a telephone interview.

“As a depositor, I am not worried in the least,” MacDonald said. “No one is going to let the FDIC go without any money.”

Consumers should watch this issue closely, said Edmund Mierzwinski, consumer program director at U.S. PIRG, a Boston- based consumer-watchdog group.

“I wouldn’t take their money out of the bank yet,” Mierzwinski said. “If the FDIC is saying that there is this serious problem, then we should all be concerned. I think there is a chance the FDIC is going to have to ask taxpayers for money in the future.”

No Taxpayer Funds

Bair rejected arguments that the agency should use government aid to rebuild the fund. The FDIC has authority to tap a $30 billion line of credit at the Treasury Department and legislation pending in Congress would boost the amount to $100 billion.

“Banks, not taxpayers, are expected to fund the system,” Bair said. Asking for taxpayer support “could paint all banks with the ‘bailout’ brush.”

The FDIC “will revise the interim rule, if appropriate, in light of the comments received,” the agency said in a Federal Register notice.

The Crisis of Credit Visualized

2009-03-06T11:07:00.000-08:00

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Buy a home in the country, nothing down

2009-03-04T11:07:00.000-08:00

By Tim Bryant
ST. LOUIS POST-DISPATCH
Sunday, Feb. 22 2009
Amid the wreckage of the mortgage business nationwide, there's still a way to
get a low-interest, government-backed home loan without putting up a penny for
a down payment.

The catch, if it can be called that, is the borrower's new home must be in a
rural area or a town of 20,000 or fewer people. But those towns may be in the
suburbs, too, meaning that parts of the St. Louis region would qualify.

The consumer-friendly financing is offered by the U.S. Department of
Agriculture's Rural Development program, which was established in 1991 to keep
rural areas and small towns from emptying. The goal remains, but people shut
out by the rest of the home-loan industry are finding their way to the USDA's
program as a way to buy a house with nothing down.

Last year, the number of applicants nationwide reached 62,933, nearly double
the previous year. While many of the program's 265,000 borrowers are in the
Midwest, it backs $24 billion in home loans across the country as well as in
Puerto Rico and U.S. possessions in the

western Pacific.

"Basically, we became the only game in town in rural areas," said Randy
Griffith, who runs the Missouri loan program from his USDA office in Columbia.
"We're really having a run. One of the factors in rural areas is the affordable
housing availability."

The program has become so popular that its funding of $6.9 billion last year
has run out. For now, a congressional resolution is allowing the USDA to make
"conditional" loan commitments, said Joaquin Tremols, the program's acting
director.

Whether the financial stimulus package signed last week by President Barack
Obama will provide more money for the program remains unclear. Tremols said he
was waiting to hear how stimulus funds will be distributed. He touts the
program's advantages:

— Private lenders approved by the government issue fixed-rate 30-year
mortgages. No subprime, adjustable rate funny business here.

— Families may borrow 100 percent of a new or existing home's value, including
mortgage closing costs.

— Earnings guidelines apply, but applicants may borrow up to 115 percent of the
median household income in the county of their desired home. In most of
Missouri and Illinois, a family of four with an adjusted annual income of up to
$70,750 may qualify.

The program's foreclosure rate in Missouri is 1.38 percent, which is slightly
below the state's overall rate, Tremols said. All of Missouri outside the
immediate St. Louis, Kansas City and Springfield areas, plus a few smaller
cities, is covered by the loan program. In the St. Louis area, part of St.
Charles County and much of Jefferson County and the Metro East are eligible.

"There is a lot of rural area" in the United States, Tremols noted.

That includes Marthasville, where Julie Frankenberg and her fiancé, Mike
Brinker, are getting a $125,000 slice of the USDA pie. For now, they are living
separately with their parents, in Washington, Mo. But they are scheduled to
close March 5 on a three-bedroom, two-bath house with a two-car garage in
Marthasville, across the Missouri River from Washington.

Frankenberg, 23, said she is thrilled to be able to buy a house. "It has a big,
beautiful back yard with a fence," she said.

The couple got a 4.25 percent interest rate mortgage and a good price on the
one-year-old home because a job relocation forced the previous owner to sell.
"We actually got a heck of a deal on it," Frankenberg said.

The couple's banker, Sherry Wahle of the Bank of Washington, said the USDA
program is "the only 100 percent financing product left on the market." Bank of
Washington has made most of its USDA-backed loans in Franklin and Warren
counties, Wahle added.

"People get a little concerned when they hear rural development," she said.
"They think country."

But when other mortgage sources vanished as the lending market crashed, more
prospective home-buyers turned to the USDA to see if they were eligible. Last
year, the rural program guaranteed $277 million in home loans to 3,000 Missouri
households — up $80 million from the previous year. Applicants go through a
normal verification process, Griffith said, and they can qualify for a loan
with what the USDA refers to as a "reasonable" credit history.

Brinker, 21, and Frankenberg were looking at houses when a real estate agent
told them about the USDA program. They jumped at the chance to buy a house
without having to come up with a down payment.

Frankenberg said she and Brinker are eagerly anticipating moving to their new
home next month and getting married in October.

"We're just really excited," she said. "We're shopping for furniture now."

Festus, Mo man hopes to save his cave house

2009-03-04T10:39:00.000-08:00

By Stephen Deere
ST. LOUIS POST-DISPATCH
02/26/2009

Wednesday Feb. 25 2009 -- Curt Sleeper stands in front of his cave home in Festus that he hopes to keep if he can find someone to loan him the money. (J.B. Forbes/P-D)
By Stephen Deere
ST. LOUIS POST-DISPATCH
02/26/2009

FESTUS — Inside the cave, the phone won't stop ringing.

"The story has gone viral," Curt Sleeper said. "I've got friends in Paris calling me. ... It's in Australia and New Zealand."

He just turned down an interview with CNN. The network, he said, insisted on having a tour on Wednesday. But his wife had a baby last week, and he didn't want any visitors for a few days.

Sleeper, 46, expects five satellite trucks to pull up in his driveway today.

"CBS, ABC, FOX, the BBC — I've lost track of them," he said.

In the age of foreclosures, it's a novel approach to saving your home: create a massive media campaign.
Of course, it helps if your home is a 17,000-square-foot cave.

Sleeper found the cave on eBay roughly five years ago and immediately fell in love with it. Where others saw an old, worthless hole blasted into sandstone, he envisioned a home.

Some days he would sit in the cave with his friends, dreaming of the place he would build. He moved his wife and two kids into the cave and pitched tents, living there while he worked on the place.

It took four years to build the three-story structure and seal off the front with wood and panels of windows. He got his occupancy permit from the city of Festus last May.

Now the home is back on eBay. The starting bid is $300,000.

'IT'S HIS LIFE'

The cave is a far cry from the 800-square-foot bungalow in Sunset Hills where the Sleeper family used to live.

Sleeper wound up selling that place to a developer. He used the $83,000 he made on the sale to cover a 50 percent down payment on the sandstone mining cave. The rest was financed through the seller on a five-year balloon note. The note is due in May, and Sleeper needs a lender.

Sleeper's credit scores range from 650 to 710, he said, but because he is self-employed as a website designer and software consultant, he can't get a conventional loan for the cave home.

Banks "want me to be employed by some blue-chip company," he said.

It's also difficult to determine the worth of a home when there are no comparable sales. The Jefferson County Assessor's Office values the property at $160,600, but that doesn't include the improvements made to the cave. The site will be reassessed this year.

Rob Wren, an investor who sold the cave to Sleeper, said he has been talking to him about his financing for the past few months. He has never planned to foreclose on the home.

"It's his life," Wren said. "There is no way we are going to take this away from him."

Since he posted the eBay listing on Feb. 9, Sleeper has received more than 3,000 inquiries, and more than 50,000 people are watching the auction.

Sleeper says he's received a cash offer for $450,000, and on his website (caveland.ning.com), one person posted a $210,000 offer. Someone else offered to trade their home in Utah for the cave dwelling.

Sleeper, however, isn't interested in trading the home or selling it. He's hoping that a private lender will step forward and finance the home, and he says more than 1,000 people have offered some form of financing. Still, he wants to make sure he has a deal in hand before relaxing.

Even though the house is on eBay, Sleeper says he's not legally bound to sell it because he must preapprove all bidders.

"The move for sale was just to protect my equity," he said. "This was my savings. This was my 401(k)."

CONCERT HALL, RINK

The cave used to be a roller skating rink, and for a while, it served as a concert venue — Bob Seger and Ted Nugent played there.

It consists of three chambers divided by cinder-block walls. For four years, while the Sleepers built their home in the front chamber, they lived in heated tents. Deborah Sleeper did the family's laundry in buckets.

The home within the cave has running water and a sewer line. The temperature remains steady at 62 degrees, meaning Sleeper doesn't need heat or air conditioning. The entrance is sealed with more than two dozen windows, made from recycled sliding glass doors. He bought 300 of them at $3 each.

The kitchen features granite tile countertops and two ovens. Sleeper estimates he has put roughly $150,000 into the house.

The biggest surprise during construction were the bees.

In January 2005, he put the last window in the facade. The next day, the cave started to heat up. Thousands of bees that had been hibernating in crevices thought it was spring and swarmed the home.

"You let them die and sweep them up," he said. "It was all you could do."

On Wednesday, Sleeper sat in the home, reminiscing with a couple of friends.

A commercial-grade dehumidifier hummed nearby. Water from a spring that runs above the cave dripped from the 35-foot ceiling into a small pond filled with goldfish. A thin layer of sand covered the floors and some furniture. The sandstone cave sheds, Sleeper explained.

Wayne Robinson, a friend who helped with the home, said it was one of the most enjoyable projects he's worked on. "This was once in a lifetime," he said.

Sleeper knows many people are worse off than he is. His marketing campaign has put him in touch with them.

"Three-page stories, these people are sharing with me," he said. "Gut-wrenching stories. ... There are people in this country who are really hurting."

Later in the day, Sleeper got a phone call from another national media outlet. They were calling to cancel. They lost interest in the story.

"My 15 minutes of fame," Sleeper said, "is running out."

Idiotic leadership in the Dept of the Treasury

2009-03-03T16:38:00.000-08:00

Congressman Don Manzullo grills Interim Assistant Treasury Secretary Neel Kashkari on the bailout plan, questioning why a failed company that was bailed out with taxpayer dollars -- AIG -- was allowed to give a $3 million bonus to an executive.

The Power of Oratory

2009-03-02T17:37:00.000-08:00

Buffett Says Economy Will Be ‘In Shambles’ for 2009

2009-03-01T05:10:00.000-08:00

By Rick Levinson

Feb. 28 (Bloomberg) -- Billionaire Warren Buffett said the economy will be “in shambles” for the rest of this year as financial firms take losses tied to reckless loans made during the housing boom.

The Standard & Poor’s 500 Index will probably gain in three-quarters of the next 44 years, just as it did in the period since Buffett took over Berkshire Hathaway Inc. in 1965, he said today in his annual letter to the company’s shareholders.

While Buffett and business partner Charlie Munger can’t predict how stocks will perform in 2009, they’re certain “that the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond,” he wrote.

Gross domestic product shrank at a 6.2 percent annual pace from October through December, the most since 1982, the Commerce Department said yesterday in Washington. Buffett said the consequences of the U.S. housing bubble are now “reverberating through every corner of our economy.”

Home purchases should involve an “honest-to-God down payment of at least 10 percent,” Buffett said. “Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective.”

Buffett endorsed efforts by the U.S. government to prevent the failure of financial firms including Bear Stearns Cos., which was sold to JPMorgan Chase & Co.

‘Immediate Action’

“Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown,” Buffett said. “Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.”

Buffett’s letter accompanied the release of Berkshire’s fourth-quarter results, in which net income fell 96 percent to $117 million on losses from derivative bets tied to stock markets. Berkshire shares have fallen 44 percent in the past year as the value of the firm’s top stock holdings dropped and losses increased on the derivatives.

By the fourth quarter of last year, “the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country,” Buffett said. “A freefall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. - and much of the world - became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear.”

America

2009-02-28T11:16:00.000-08:00

Feeling Unstimulated? Watch This.

2009-02-26T18:45:00.000-08:00

In the below video, Milton Friedman takes Phil Donahue to school on the value of free markets. He expresses what not so long ago were America’s guiding economic principles. These principles may rise again, but not, I fear, before much “stimulating” damage has been done.

If the video inspires an interest in Friedman’s work, I recommend reading Free to Choose, which he co-authored with his wife, Rose.

Explaining the US Stimulus Package

2009-02-26T18:28:00.000-08:00

Shortly after class, an economics student approaches his economics professor and says, "I don't understand this stimulus bill. Can you explain it to me?"

The professor replied, "I don't have any time to explain it at my office, but if you come over to my house on Saturday and help me with my weekend project, I'll be glad to explain it to you." The student agreed.

At the agreed-upon time, the student showed up at the professor's house. The professor stated that the weekend project involved his backyard pool.

They both went out back to the pool, and the professor handed the student a bucket. Demonstrating with his own bucket, the professor said, "First, go over to the deep end, and fill your bucket with as much water as you can." The student did as he was instructed.

The professor then continued, "Follow me over to the shallow end, and then dump all the water from your bucket into it." The student was naturally confused, but did as he was told.

The professor then explained they were going to do this many more times, and began walking back to the deep end of the pool.

The confused student asked, "Excuse me, but why are we doing this?"

The professor matter-of-factly stated that he was trying to make the shallow end much deeper.

The student didn't think the economics professor was serious, but figured that he would find out the real story soon enough.

However, after the 6th trip between the shallow end and the deep end, the student began to become worried that his economics professor had gone mad. The student finally replied, "All we're doing is wasting valuable time and effort on unproductive pursuits. Even worse, when this process is all over, everything will be at the same level it was before, so all you'll really have accomplished is the destruction of what could have been truly productive action!"

The professor put down his bucket and replied with a smile, "Congratulations. You now understand the stimulus bill."

Obama Delivers $3.6 Trillion Budget Blueprint

2009-02-26T14:44:00.000-08:00

Plan Would Raise Taxes on Affluent, Businesses; Aims to 'Break From a Troubled Past'

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By JONATHAN WEISMAN

WASHINGTON -- President Barack Obama delivered a $3.6 trillion budget blueprint to Congress Thursday that aims to "break from a troubled past," with expanded government activism, tax increases on affluent families and businesses, and spending cuts targeted at those he says profited from "an era of profound irresponsibility."

The budget blueprint for fiscal year 2010 is one of the most ambitious policy prescriptions in decades, a reordering of the federal government to provide national health care, shift the energy economy away from oil and gas, and boost the federal commitment to education.
[President Barack Obama (R) announces his administration's proposed Financial Year 2010 federal budget outline with Vice President Joe Biden]

President Obama announces his proposed fiscal 2010 federal budget outline with Vice President Joe Biden.

One war would end, as troops leave Iraq, while another would ramp up in Afghanistan. To fund it all, families earning over $250,000 and a variety of businesses will pay a steep price, but Mr. Obama implored Americans to own up to the mistakes of the past while accepting profound sacrifices.

"We need to be honest with ourselves about what costs are being racked up, because that's how we'll come to grips with the hard choices that lie ahead," Mr. Obama said Thursday morning. "And there are some hard choices that lie ahead."

The president blamed the nation's economic travails on the administration that preceded him and on a nation that lost its bearings. His budget plan projects a federal deficit of $1.75 trillion for 2009, or 12.3% of the gross domestic product, a level not seen since 1942 as the U.S. plunged into World War II.
Budget Breakdown

The budget blueprint estimates a federal deficit of $1.75 trillion for 2009.

View Interactive

"This crisis is neither the result of a normal turn of the business cycle nor an accident of history," the president states in an opening message of the 134-page document. "We arrived at this point as a result of an era of profound irresponsibility that engulfed both private and public institutions from some of our largest companies' executive suites to the seats of power in Washington, D.C."

By 2013, the deficit would drop to $533 billion but begin to climb from there again as the heart of the Baby Boom begins drawing Social Security and Medicare benefits.

The budget's introduction is likely to herald one of the fiercest political fights Washington has seen in years, waged on multiple fronts. Within minutes, Republicans were lambasting a document they called class warfare, designed to mire the nation in recession for years to come. Business lobbyists were girding for battle even before the budget's unveiling. Even Democrats are likely to blanch at cuts to agriculture and other programs that have been tried before – and have failed repeatedly.

The budget sets aside an additional $250 billion to complete the president's effort to rescue the financial markets and stabilize the banking sector. That would come on top of the $700 billion already allocated by Congress. And it is likely to grow. The budget makes clear that the reserve would be used to leverage the purchase of toxic assets weighing down the banking sector's books, $750 billion in asset purchases overall. That could mean a doubling of the original bailout in the end.
[President Obama, accompanied by Budget Director Peter Orszag (right) and Treasury Secretary Tim Geithner, speaks about his fiscal 2010 federal budget on Thursday morning.] Associated Press

President Obama, accompanied by Budget Director Peter Orszag (right) and Treasury Secretary Tim Geithner, speaks about his fiscal 2010 federal budget on Thursday morning.

Mr. Obama proposes large increases in education funding, including indexing Pell Grants for higher education to inflation and converting the popular scholarship to an automatic "entitlement" program. High-speed rail would gain a $1 billion-a-year grant program, part of a larger effort to boost infrastructure spending even beyond the funds in his $787 billion stimulus plan.

The Defense Department would see a $20.4 billion boost in 2010, a 4% increase from this year, slowing its growth from the Bush years but securing personnel increases for the Army and Marine Corps. Mr. Obama will request an additional $75.5 billion for the wars in Iraq and Afghanistan for the rest of 2009 and another $130 billion for 2010, as he withdraws most combat troops from Iraq over 19 months but sends many of them to Afghanistan.

In one of the budget's most ambitious proposals, the president plans to cap the emissions of greenhouse gases, forcing polluters to purchase permits for emissions that would be slowly brought down to 14% below 2005 levels by 2020 and 83% below 2005 levels by 2050. The sale of those permits, beginning in 2012, would reap $646 billion through 2019. Of those revenues, $525.7 billion would be devoted to extending Mr. Obama's signature "Making Work Pay" $800 tax credit for working couples. Another $120 billion would go to clean energy technology.

He acknowledged his $630 billion fund for a national health insurance program will not be enough to ensure access to health care for all Americans, but he said it will be a start.
Budget Stepping Stones

View Interactive

See the steps by which the federal budget will be finalized in the coming months.

To finance his proposals, the president has clearly chosen winners and losers -- with the affluent heading the list of losers. In populist tones that reflect an anger he notably avoided on the campaign trail, Mr. Obama wrote, "Prudent investments in education, clean energy, health care, and infrastructure were sacrificed for huge tax cuts for the wealthy and well-connected. In the face of these trade-offs, Washington has ignored the squeeze on middle-class families that is making it harder for them to get ahead… There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few."

In that sense, the budget is payback. As expected, taxes will rise for singles earning $200,000 and couples earning $250,000, beginning in 2011 -- for a total windfall of $656 billion over 10 years. Income tax hikes would raise $339 billion alone. Limits on personal exemptions and itemized deductions would bring in another $180 billion. Higher capital gains rates would bring in $118 billion. The estate tax, scheduled to be repealed next year, would instead be preserved, with the value of estates over $3.5 million -- $7 million for couples -- taxed at 45%.
[Budget Salve]

Businesses would be hit, too. The budget envisions reaping $210 billion over the next decade by limiting the ability of U.S.-based multinational companies to shield overseas profits from taxation. Another $24 billion would come from hedge fund and private equity managers, whose income would be taxed at income tax rates, not capital gains rates. Oil and gas companies would be hit particularly hard, with the repeal of multiple tax credits and deductions.

The federal government would take over most student lending. Managed care companies would lose their subsidies for offering Medicare plans. Farmers with operating incomes over $500,000 would see their farm subsidies phased out. And cotton storage would no longer be financed by the federal government.

"There are times where you can afford to redecorate your house, and there are times where you need to focus on rebuilding its foundation," Mr. Obama said as he unveiled his plan. "Today we have to focus on foundations."

$318 Billion Tax Hit Proposed

2009-02-25T20:04:00.001-08:00

Upper-Income Americans Would See Deductions Cut on Charity and Mortgage Interest

By LAURA MECKLER

WASHINGTON -- President Barack Obama on Thursday will propose $634 billion in new taxes on upper-income Americans and cuts in government spending over the next decade to pay for his promised health-care expansion.

The tax increases and spending cuts will be included Thursday in Mr. Obama's comprehensive budget blueprint, and signal his ambition to overhaul the health-care system, one of the main planks of his presidential campaign.

The tax increases would raise an estimated $318 billion over 10 years by reducing the value of such longstanding deductions as mortgage interest and charitable contributions for people in the highest tax brackets. Households paying income taxes at the 33% and 35% rates can currently claim deductions at those rates. Under the Obama proposal, they could deduct only 28% of the value of those payments.

The changes would be phased in gradually over the next few years. For the 2009 tax year, the 33% tax bracket starts with couples with taxable earnings of $208,850, when adjusted for personal exemptions and various deductible expenses. A taxpayer in the top bracket paying $1,000 of mortgage interest, for example, would see a tax break worth $350 reduced to $280.

During his presidential campaign, Mr. Obama promised not to raise taxes on families earning under $250,000 a year, and the administration said that this plan would roughly line up with that limit.

The plan targets high-earning families in other ways. Wealthier Medicare beneficiaries would have to pay higher premiums to participate in the prescription-drug plan, much like they pay higher premiums to participate in Medicare's doctor plan.

Aiding the other end of the income scale, the president's budget plan would extend his tax cuts for the middle class and working poor with some of the billions of dollars raised by the sale of new carbon-emission permits for renewable energy projects. The "cap and trade" program to battle global warming would force companies to buy permits if they wish to emit heat-trapping pollutants, and they would be auctioned to businesses beginning in 2012.

The cuts in health-care spending would affect managed-care companies, prescription-drug manufacturers and hospitals, according to a senior administration official. Lobbyists representing these industries reacted mildly Wednesday, emphasizing their interest in seeing health-care reform succeed -- a sign of the momentum already built behind the effort. "We will be a constructive participant in efforts to reform all parts of Medicare," said Robert Zirkelbach, spokesman for America's Health Insurance Plans, a lobby group.

President Obama at an event announcing his nominee for Commerce Secretary on Wednesday.

The administration acknowledges $634 billion is not enough to pay the full cost of health-care reform that Mr. Obama and many congressional Democrats envision; the final price tag is estimated at more than $1 trillion over 10 years. The senior official who previewed the health plan Wednesday said the budget proposal is intended as a down payment and said the administration would work with Congress to find the rest.

The budget will contain few details about how Mr. Obama wants to spend the money. He campaigned on a plan to set up a government-organized marketplace where people and businesses could buy coverage from private insurers and a new government-run health plan.

The administration will release only general guidelines Thursday. Among them: Americans should have a choice of health plans and be allowed to keep their employer-sponsored plan if they wish to. It also says the plan should "put the United States on a clear path to cover all Americans." More details are expected next week at a White House summit on health care.

The budget blueprint focuses on where the money will come from to pay for it all -- half from savings to the health-care system and half from the tax increase.

One concern certain to get attention in Congress: whether a change to the deductions formula would discourage charitable giving among the wealthy, or further depress the housing market given that the interest deduction would fall for some.

The biggest chunk of savings in the budget proposal, estimated at $177 billion over 10 years, would come from changing the pay structure for private managed-care plans that participate in Medicare. Under current law, payments for Medicare Advantage plans are set by a formula, and the result is that private companies are paid, on average, 14% more to care for a Medicare patient than the government would normally spend through the traditional Medicare plan.

The Obama plan would have private plans bid to offer coverage in geographic areas; they would be paid based on an average of the bids. The administration estimates the result would be lower average costs.

The changes being proposed for hospitals would create one bundled Medicare payment to cover both a hospital stay and care for the patient for 30 days after release, a change estimated to save $17 billion over 10 years. The administration is also proposing to cut payments for hospitals that routinely readmit patients after they have been discharged, a sign that the original care was substandard. That change would save $8.4 billion over 10 years.

Mr. Obama's budget proposal signals he is serious about fulfilling his pledge to enact comprehensive health-care legislation this year, a promise he repeated Tuesday during his address to Congress.

It is also a sign he plans to turn aggressively to the ambitious domestic policy agenda he laid out during the presidential campaign -- an agenda curtailed during his first weeks in office by the financial crisis.
[Budget Salve]

Mr. Obama and his aides spent Wednesday putting the finishing touches on the budget blueprint, kicking off the process of rewriting the rules for financial regulation and initiating so-called stress tests to gauge the viability of the country's tottering banks.

The budget plan will go through a rigorous congressional review before it becomes law. But, particularly in the first year of a presidency, the budget document is significant as a broad statement about the new administration's agenda. The budget document will also include an energy plan aimed at controlling carbon emissions, new funding for preschool and higher education, as well as an outline for narrowing a federal deficit that now tops $1 trillion.

Mr. Obama's 10-year blueprint is also expected to contain a large number of tax increases, in addition to the one proposed to cover health care. It will mark a sharp shift from the budgets proposed by President George W. Bush, with sharply reduced tax rates across the board. Mr. Obama will propose letting Mr. Bush's tax cuts on upper-income families expire in 2011, and will propose blocking the estate tax from disappearing as scheduled under current law. He'll also propose a number of taxes on companies, one aimed at blocking companies from moving jobs overseas and others that the administration will portray as "closing loopholes."

AIG’s (AIG) Plan To Bleed The Government Dry

2009-02-23T19:19:00.000-08:00

Management at AIG (AIG) has calculated exactly how much money the Treasury and Fed will have access to after all of the TARP, financial stimulus, and mortgage bailout projects have been funded. The insurance company then plans to ask for whatever is left to fund its deficits so that it can stay in business, effectively making the federal government insolvent.

According toCNBC, AIG is about to post another huge loss. “Sources close to the company said the loss will be near $60 billion due to writedowns on a variety of assets including commercial real estate.” The financial channel also reports that the need for capital may be so great that AIG might have to enter Chapter 11, something the government has spent over $130 billion trying to prevent.

Just like Detroit, Bank of America (BAC), and Citigroup (C), AIG is playing a game of chicken with Washington that the government does not feel it can afford to lose. Imagine what it would be like if all of these businesses failed at the same time.

It is actually worth imagining. The government has so many balls in the air between the financial systems and deteriorating parts of the industrial sector that it may not have either the capital or intellectual capacity to go around. The Treasury has just appointed a prominent investment banker to help oversee the mess in Detroit, but it would take an army of financiers to first comprehend and then advise on what should happen to GM (GM) and Chrysler. The period for comprehension is already in the past. The trouble in the auto industry has to be addressed in the next few weeks or its capacity to operate will go up in flames.

The government made noises about taking a larger position in Citigroup (C). Based on the market’s reaction, not may analysts and investors believe that the action will solve much. The poison of bad investments is in the blood of the financial system. Quarantining Citigroup will not solve that problem. The Treasury and Fed will have to take a holistic approach which involves healing the entire financial system. It is not clear that can even be done. How it would be done is an even more complicated matter.

The Little Dutch Boy is running out of fingers. The water that threatens to swamp the international financial system is getting closer to breaching the walls and pouring in. A month ago that seemed inconceivable. Now the odds that the government will have to allow large operations like AIG go into bankruptcy are fairly high. The trouble with that is not what will happen to AIG. As the market found out with the Lehman Brothers bankruptcy, many of the firms that are doing business with a very large financial institution when it becomes insolvent can have transactions worth billions of dollars wither voided or devalued.

In the intricate global financial system, there is no such things as one big player going down in a vacuum.

Rick Santelli Responds to The White House Attack

2009-02-23T06:01:00.000-08:00