Weekend Economists' Battlestar Galactica Weekend May 29-31, 2009

[Demeter]

Folks, we here in the Democratic-Socialist-Populist wing of the United States of America constitute the moral equivalent of the remnants of the human race gathered into Battlestar Galactica. Our enemy, the slaves turned aggressors, the equivalent of the Cylons, are the multinational corporations, especially the financials, originally created by us but now totally out of our control. We are in the stages of battling to the death or to truce with the corporations, trying to save our families and the American dream. Let us learn the lessons about dealing with single-minded collectives: Never Give Them a Chance, a Break, or a Fair Deal. For certain, don't give them perpetual life and citizenship! Or bailouts of taxpayer money.

Battlestar Galactica has a cast of iconic characters. We have Congress. (Good God, Sir, was that fair? John Adams beseeched). We have the courts, riddled with 30 years of activist judges, Republican fascist appointments. We have Obama, who is far too wishy-washy to be a leader in the classical mold. Whether Obama is the leader we need, or the punishment we deserve, has yet to be discovered.

("President Laura Roslin: Maybe if he's more comfortable he'll be a little easier to deal with.
Billy Keikeya: That's smart.
President Laura Roslin: No, it's not smart. It's politics. ")

But in the meanwhile, there's the economy. Have at it! Post what you have, annotate according to our theme, add snark and wit if possible, and enjoy learning more about this mad, mad, mad, mad, world.

[Demeter]

1. No Announcements of Bank Seizures as of 8:40 PM Eastern Daylight Time

See Friday's SMW for a searing indictment of Citibank, which OUGHT to be seized and liquidated, and yet still walks the earth.

[Demeter]

2. Bank of America lead director resigns; Departure may put more pressure on CEO Kenneth Lewis

http://www.marketwatch.com/story/bank-of-americas-top-board-member-resigns?siteid=yahoomy


Temple Sloan, after serving 13 years on the board, stepped down on Tuesday, Bank of America said in a statement released after the markets closed.

He was most recently lead director and served as the chairman of the board's executive and compensation committees. Sloan also had been a member of the corporate-governance committee.

At the bank's annual meeting in late April, roughly a third of shareholders voted against the re-election of Sloan and Lewis to the board.

"The core message that shareholders delivered was the need for leadership change at Bank of America," said Bill Patterson, executive director at CtW Investment Group. Sloan's resignation "is a sign that the board is responding."

The next step for the board is to find a new chief to replace Lewis, Patterson added.

CtW Investment Group, which helps union pension funds be more active investors, has been critical of Lewis for some time. Before the annual meeting, the group called for the bank's shareholders to vote against Lewis, Sloan and governance-committee chairman Thomas Ryan.

"The board has made its position on Mr. Lewis clear," Scott Silvestri, a Bank of America spokesman, said Friday. He declined to comment further.

After the annual meeting last month, Bank of America said Walter Massey was elected chairman, replacing Lewis, who held the chairman and chief executive roles up to that point. The lender also noted that the board "unanimously expressed its support for Lewis to continue" as chief executive.

U.S. regulators have pressured Massey to recruit new board members, and directors other than Sloan already have volunteered to resign, The Wall Street Journal reported late Friday, citing an unidentified person familiar with the situation. More board departures may be announced soon, the paper said.

CtW sent a letter to Massey on Friday asking the new chairman to "expeditiously replace Ken Lewis as CEO and reconstitute the board."
.........

Bank of America has been forced to take more than $40 billion in government support as the mortgage meltdown and the ensuing credit crisis have pummeled the company.

In the wake of stress tests of the nation's largest lenders earlier this month, the Obama administration ordered Bank of America to raise more than $30 billion in new equity capital. The company is on its way to completing the task, but some shareholders have been upset with the resulting dilution of their stakes.

Lewis has come under particular fire for Bank of America's acquisition of Merrill Lynch.

New York Attorney General Andrew Cuomo recently alleged that, under government pressure, Bank of America didn't disclose Merrill's growing fourth-quarter losses before shareholders voted on the transaction. See full story at link

At Bank of America's annual meeting in late April, Lewis defended the decision to go through with the Merrill deal, and said there was "no duty for Bank of America to disclose its negotiations with the government" about the transaction. See full story at link

Despite that, 50.34% of shares held were voted to strip Lewis of his chairman's role, in an unusual display of dissatisfaction for investors at a major U.S. company.

All 18 directors were re-elected, although 32.67% of shares voted against Lewis and 37.4% voted against Sloan. These tallies included controversial broker votes. See related story.

Federal regulators reportedly have been pressuring Bank of America to restructure its board to include more experienced executives.

[Demeter]

3. Doctor Gaius Baltar: All right, that's it! No more Mr. Nice Gaius!

[Demeter]

4. Northern Rock risk revealed in 2004

http://www.ft.com/cms/s/0/4cc9637a-4c8a-11de-a6c5-00144feabdc0.html

By Norma Cohen and Chris Giles

Banking regulators identified Northern Rock as the weak link in Britain’s banking system during secret “war games” held as long ago as 2004, the Financial Times has learned.

The risk simulation planning, conducted by the Financial Services Authority, the Bank of England and the Treasury, made clear the systemic risks posed by Northern Rock’s business model, and its domino effect on HBOS, then the UK’s largest mortgage lender.

The revelation is at odds with the notion that no one could have foreseen the September 2007 collapse of Northern Rock or the subsequent rescue of HBOS, which was sold to Lloyds Bank.

The FT has found the troubled lender and HBOS were at the centre of a 2004 war game that regulators held to test how banks would cope with sudden turmoil in mortgage markets and the withdrawal of the money from foreign banks on which Northern Rock’s business model relied.

Regulators chose that scenario because they were worried about the growing dependency of banks such as Northern Rock and HBOS on such funds rather than on stable retail deposits.

Even though the exercise revealed the banks’ vulnerability, the regulators concluded they could not force the lenders to change their practices, according to several people familiar with the matter.

It was felt that it was too hard to say Northern Rock’s business model was excessively risky, and in any case banks following that strategy were profitable and growing, though the Bank did warn of the growth in wholesale deposits repeatedly in its financial stability reports. However, as wholesale lending markets dried up in mid-2007, the war game’s findings proved eerily prescient.

Both banks sustained irreparable damage beginning in 2007 as wholesale lending markets seized up and mortgage-backed securities became unsaleable.

Regulators on Friday confirmed that Northern Rock and HBOS were central to the war game. But spokespeople for the FSA and the Bank of England said the exercise was focused on uncovering weak regulatory practices rather than predicting individual bank failure.

Mervyn King, Bank governor, alluded to the war games in a 2005 interview with the FT, saying the Bank had looked at a situation in which “there could be a problem in a particular institution which isn’t terribly big, which may for completely unpredictable reasons turn out to pose a liquidity problem to a very big institution”.

But until now no one has known the name of any banks used in the exercise. The Financial Times sought details in early April under the Freedom of Information Act from the Bank and the Treasury, but those requests have so far been unsuccessful.

[Demeter]

5. Lt. Kara 'Starbuck' Thrace: [reacts to a joke] That was weak! So very, very weak!

Samuel T. Anders: Lighten up a little bit. It's only the end of the world.

[Demeter]

6. What One Stimulus Buck Could Do

http://www.motherjones.com/politics/2009/05/what-one-stimulus-buck-could-do

Okay, quick: Which portion of the US economy consumes the most energy?

Nope. It’s not transportation. Not manufacturing either. The correct answer is the building sector, which guzzles about three-quarters of the nation's electricity and half of our overall energy—and is responsible for almost half of America's carbon emissions.

Round two: Which sector, besides banking, has been hardest hit by the recession? You can see where this is going. Construction unemployment stands at 20 percent, more than twice the national rate. For the six months that ended in April, the building industry has shed jobs at a rate of about 120,000 per month—more than 1.2 million jobs have been lost since December 2007. Private construction, which normally accounts for about 9 percent of America's GDP, is on its knees. For near-broke local governments, this means a shrinking tax base, new foreclosures, and more citizens and companies in need of handouts.

But what if there were a way to simultaneously revive this flagging industry, slash energy use, and reduce carbon emissions using federal stimulus cash? And what if the strategy generated all sorts of jobs and filled government coffers and kept people in their homes—even people who have nothing whatsoever to do with the construction?

[tclambert]

82. So many construction jobs lost. What will the illegal immigrants do with all that spare time?

Or is it just the citizens who are laid off? Illegals being cheaper, maybe builders will keep them working.

[Demeter]

86. A Lot Are Going Home

and remittances are way down.

[Demeter]

7. Putting a Headache to bed

Sleep well, all! See you in the morning!

[AnnieBW]

8. John Cavil = Dick Cheney

I think that Kindasleezy would be D'Anna Biers.

And of course, the sleeper Cylons would be:
Sol Tigh - Arlen Specter
Galen Tyrol - Ben Nelson
Helen Tigh - Dianne Feinstein
Sam Anders and Tori Foster, I dunno.

[Demeter]

14. How About Reid and Pelosi, that Great Comedy Team?

[MattSh]

9. A View from Kiev.

A couple of months ago, I wrote a few things about how things look here from Kiev, and hoped to post on a semi-regular basis. Since then, just like in the states, everybody seemed to take an overdose of happy pills, and bad news virtually disappeared. But a few dark clouds are beginning to sneak back into the picture. Whether this is a few passing clouds, or a class 5 hurricane with an accompanying tsunami, well, who knows right now?

I have been known to say that one of the reasons I find Ukraine fascinating is that I can see the future of the USA here. Not that I want the future of the USA to look like this. But I see nobody in a position of power doing much of anything to stop it; indeed, I see little indication that anyone in DC is even aware that there is a problem.

Demographic trends: Marriages still down

The London-based Economist magazine took a look at demographic trends in Ukraine and found: “The 40 percent drop in the number of marriages between 1990 and 2004 underlines the link between the decline in living standards in the post-independence period and the decisions to marry later and to have smaller families. Although the number of marriages has subsequently picked up, in 2007 it was still down by 14 percent compared with the 1990 level. The death rate increased from 12 per 1,000 inhabitants in 1990 to just under 15 per 1,000 in 2001. This reflects the deterioration of the healthcare system since independence, as well as lifestyle factors, such as rising alcohol abuse. This has had an especially strong impact on male life expectancy since independence.”

Economist predicts slow growth ahead in Ukraine

Also, the Economist magazine's May 27 economic forecast for Ukraine wasn’t particularly upbeat. Under a “best-case scenario,” the London-based magazine forecast average growth in gross domestic product of only 2.4 percent annually until 2030. The prediction is based on “optimistic assumptions on labor productivity and the growth in capital stock, and presuppose that sound policies will bring further economic liberalization, disinflation and only limited fiscal deficits. The risk is that policymaking will be worse than expected, given the continued strength of vested interests, resulting in even more modest growth rates.”

The Economist also wrote: “Not only has the population declined by around five million , but the population structure is increasingly dominated by older age groups. This reflects falling birth rates and the large-scale permanent or semi-permanent emigration of younger Ukrainians. The older population, despite increasing in numbers, commands relatively little purchasing power … Owing to the collapse in export markets, east Ukraine is now likely to bear the brunt of the economic downturn, while the agricultural sector is one of the few sectors that is still recording positive growth.”

Egypt takes notice of fewer Ukrainian visitors

Partly because of a sharp drop in Ukrainian vacationers this year, Egypt’s tourism industry is suffering. Citing Egypt’s tourism minister, Zoheir Garrana, Reuters news agency on May 26 reported that arrivals from Ukraine decreased by more than 57 percent in the first four months of the year, compared to the same period a year ago.

Arrivals from Poland and Russia also declined by about 23 percent during the same period, the news agency reported.
Overall, the report says that Egyptian revenues from tourism fell 13.2 percent year-on-year, to $3.6 billion, in the four-month period, with arrivals overall down by 10.3 percent.

Ukraine remains tough place to do business

Although many areas of the business environment have enjoyed significant liberalisation in the past few years, Ukraine will remain a difficult place to conduct business, writes the Economist in a May 27 report. Companies are exposed to pervasive corruption, and an unwieldy and unreformed bureaucracy. The enforcement of property rights is still weak, the tax system remains complex and contradictory, and corporate governance is poor. State involvement in running the economy is excessive, and the liberalisation of key sectors--in particular, energy and utilities--has been delayed. (Hmmm, some of that sounds like the USA these days).

Oh, what else?

Well, it seems that beginning June 1st, some housing and utility fees will double or triple. It will be interesting to see how people react to this. Two years ago, when some fees were raised, many people just stopped paying their bills. Within a few weeks, all rate increases were rolled back, and those who skipped a month only had to pay the lower rate. Those rate increases occurred during winter, so turning off services was out of the question. These rate increases are much larger, and occurring in summer, so maybe this time they hope to wait it out and make the increases stick. This time too, those in new projects and determined to be better off will pay the higher increases. This must be IMF demands being put in place, because no one in the government here would vote higher rates on the rich or moderately well-to-do unless their backs were against the wall.

So, will this be a long hot summer upcoming, or will the world continue to sleepwalk toward a fate no one wants to contemplate? Only time will tell, I guess...

[Demeter]

15. Thank You Matt

I was going to visit the Old Country with my Babcia in 1986, but that summer Chernobyl went up, so going to any part of Europe seemed like a really bad idea for someone who hadn't reproduced yet. Sigh.

At this rate, I'll be lucky to ever visit Canada, and it's only an hour away, but I refuse to buy a passport for such a pedestrian reason.

[DemReadingDU]

45. Thanks for a view from another part of the world, n/t

[tclambert]

84. Spacebo. Sometimes we Americans forget the Earth has other countries.

It's nice to hear what's going on elsewhere. Why, I hear sometimes foreigners actually have good ideas. Universal health care, universal college education, gasoline taxes that encourage fuel efficient cars, corporate executives committing hara kiri when they run a company into dishonorable bankruptcy, etc.

[Dr.Phool]

10. Kick

[Dr.Phool]

11. The sharks are in the water.....and you taste good.

http://market-ticker.denninger.net/authors/2-Karl-Denninger


What Was THAT? (Friday Market Close)

Friday's close was "interesting", to put it mildly.

Here's a chart of Friday's price action in the /ES, the S&P 500 "Electronic" Futures:




Notice the huge volume spike (the blue underlay) on the chart at the close.

There were 146,083 contracts traded in that one-minute period between 14:59 and 15:00 (Central); the next minute, when the real dislocation hit, traded 91,774 - after the cash market bell had rung.

The closing bell is usually busy. But this sort of volume is absolutely unheard of. To put it in perspective yesterday the same time recorded 26,540 contracts, and 36,642 the minute after.

Volume was light all day, as is somewhat common in the summer on a Friday. The close started its usual increase, and was up to 23,000 contracts at 14:57 with two minutes remaining.

Then all hell broke loose.

"Paper", or institutional representation, was stalking the close; the pit audio feed so stated. Directly in front of the bell 1,000 contracts were bought - as near as I could tell at the market.

Those are "Big" contracts, each being 5 of the /ES minis; this was, in effect, a 5,000 contract /ES market order.

The reaction was instantaneous. The offer side of the market collapsed and the /ES rocketed higher. In the pit, trades went off as high as 925, but on the E-Mini trades were recorded as high as 927.75. As quickly as it got there, it collapsed back to 922 - a nearly six-handle (3/4 of one percent) straight-up and down spike.

Now here's the problem:

For me to believe this was "organic", that is, this was an un-forced order, I have to believe that someone wanted to go home net long the equivalent of 5,000 /ES contracts into the weekend at a severely disadvantaged price. The market had been calm all day; if you wanted to buy 1,000 spoos (equivalent to 5,000 E-Minis) there was plenty of opportunity to do so all day long. This sort of market order was guaranteed to dislocate the market - so the buyer had to simply not give a damn what sort of price they got.

How bad of a fill was this?

(snip)more

[Demeter]

17. Impossible Things Are Happening Every Day

Unfortunately, it's Cinderella and her fellow poverty-stricken peasants who are getting the shaft.

[Hawkowl]

37. Prelude to a crash

I thought that the "big crash" was going to wait until September/October, (as it historically does), but the way the data is manifesting itself, I'm thinking 2-3 weeks now.

The potential for the mother of all financial disasters with a collapsing dollar, rising interest rates, staggering unemployment, yet another commodity bubble, and no wiggle room with neither monetary nor fiscal policy. This is really beginning to make my head spin.

Frack.

[Demeter]

40. It Will Take More Than a Couple of Weeks, IMO

the bailout/stimulus money is still sloshing around a bit. GM will take a while to bring the entire world to its knees...

[ozymandius]

12. What is not happening on Wall Street: mega companies ask for reduced rents

Rite Aid and CRE

Earlier today Bloomberg reported: Starbucks Pushing Landlords for 25% Cut in Cafe Rents

Starbucks Corp. ... is pushing some U.S. landlords for as much as a 25 percent reduction in lease rates, taking advantage of a declining real estate market to save on rent.

Now I've heard through a reliable source (unconfirmed) that Rite Aid is also asking for rent reductions. Rite Aid apparently held a conference call with 60 Rite Aid landlords and asked for a 25% rent reduction - or they would close the stores.

more about commercial real estate under stress at link...

[Demeter]

18. and So they Should!

I've found the arrogance of commercial real estate (and the cost of newspaper advertising) to be two of the reasons why entrepreneurs can't.

[Dr.Phool]

13. Arnolds advice to grads. "Work like hell and marry a Kennedy".

When Arnold Schwarzenegger appeared on The Tonight Show on Tuesday, he joked with Jay Leno about advice he had given in a recent address to students at the University of Southern California. “I told them to work like hell and marry a Kennedy,” he said, to laughter and applause.

The studio audience loved Mr Schwarzenegger, who is married to Maria Shriver, John F. Kennedy’s niece. Making his 25th appearance on the show, he was in his element sparring with Mr Leno, who poked fun at the California governor’s Austrian accent.

But he has had little to laugh about away from the television studio. In the past two weeks the former movie star has had to deal with the biggest crisis of his short political career after voters in a “special election” spurned revenue-raising measures he hoped would avert financial disaster.

Hailed as the state’s saviour when he replaced Gray Davis, who was ousted in 2003, Mr Schwarzenegger’s poll ratings have reached their lowest ever. Amid a 29 per cent fall in tax revenues since last September, the state faces a budget deficit this year of $24bn (£15bn, €17bn) and the Republican governor is threatening to take a Conan the Barbarian-style sword to spending on health, education and other vital public services. “The people have spoken,” he says in a Financial Times interview. “We have to live within our means.”

http://www.ft.com/cms/s/0/b7139fa2-4c76-11de-a6c5-00144feabdc0.html?nclick_check=1

-----------------------------

You'd think they'd quit electing these dickwad Republican actors out there.

In the mean time, anybody know any Kennedy's I can hook up with? She doesn't even have to be hot.

[ozymandius]

16. Review of Karl Polanyi’s, "The Great Transformation" (1944)

Karl Polanyi’s, The Great Transformation is a truly original and important work published in 1944. Polanyi doesn’t fit well in our standard left/right economic dichotomy and for the refined economic tastes of the past several decades, he includes far too much history and politics. Most contemporary economists would no doubt shake their heads and say, “How can a book about economics be taken seriously, when it doesn’t have one equation?” That would be a great mistake. Mr. Polanyi’s insights deserve great attention.

Polanyi wrote The Great Transformation during World War II. With depression and war, the previous two decades had been a cataclysmic time for the planet. His central thesis was, “The origins of the cataclysm lay in the utopian endeavor of economic liberalism to set up a self-regulating market system.” The book decisively pooh-poohs many of the myths of our ruling economic doctrine. Most importantly, he eviscerates the idea of laissez-faire and uniquely documents Europe’s century and half revolution to a market society. Time after time, Polanyi shows the very visible hand of the government interfering in all aspects of society in order to insure market dominance.

.....

Polanyi is not anti-market. He believes they are indeed beneficial, but they are not self-regulating, and more importantly the ethos of the market should not be the ruling or even dominant ethic of society. The idea of self-regulating markets is utopian, and like all utopias extremely brutal if tried to be realized.

http://www.nakedcapitalism.com/2009/05/guest-post-review-of-karl-polanyis-the-great-transformation.html

---

Yet here is another book to add to my list. I am currently reading "A History of American Law" by Lawrence Friedman. Somewhere down the list is a thorough re-reading of Keynes' "General Theory of Employment, Interest and Money" (1936) and then there's Mr. Polyani's book. It seems that it would make a great companion to Keynes' landmark tome.

[Demeter]

19. When You Think About It, Medieval Markets Always Had a Regulator

whether it was the Crown, the Church, or the local merchants, somebody made rules and enforced them, and this was accepted practice for people who had had enough of pirates, highwaymen, and the like. It was the mark of civilization, and encouraged trade. Would you leave home with valuable cargo, not knowing if you were going to profit, unless there were safe roads and rules of the marketplace?

Not without an army, or in greatest secrecy.

[ozymandius]

20. Government, Law and the Economy

From the book "A History of American Law":

The settlements depended on roads, ferries, bridges and gristmills for transport, communication and basic food supply. These enterprises were therefore the public's concern, though private enterprise built them and ran them.

.....

The miller's rate of toll was regulated throughout the colonial period. In New Hampshire, for example, an act of 1718 set up the "Toll for grinding All Sorts of Corn" at "one Sixteenth part, and no more,"except for Indian Corn, for which the mill shall take One Twelfth." Government also regulated markets, road building and the quality of essential commodities. - Page 76

From England, the colonies copied laws about public markets. These laws told where and when important products could be sold. A scattered market is difficult to administer. When all sellers of wood or hay or grain meet at one place and time, regulation can be cheap and effective." - Page 77

Our ideas of quality control (for the public benefit) and regulation of markets and incomes were derived from localized planning around the provision of essential public services as defined by colonial America and as an extension of laws of crown and empire.

[Demeter]

21. The "CarTalk" SubThread

We should get Tom and Ray to host! News from Detroit (depressing, as it has been since 1967):

GM and Magna reach deal on Opel

http://www.ft.com/cms/s/0/6efc6ae6-4c5d-11de-a6c5-00144feabdc0.html

The European arm of General Motors will be shielded from the expected insolvency of the US group after an 11th hour deal reached on Saturday morning that will see Magna International, the Canadian parts supplier, take over the business with financial backing from the German government.

After a day of drama following Fiat’s withdrawal from talks with Berlin, GM and the US treasury to acquire the operations, which include the Opel and Vauxhall brands, exhausted negotiators announced the breakthrough at shortly after 2 am, after six hours of talks at the office of chancellor Angela Merkel.

Under the signed memorandum of understanding between GM and Magna, shares in GME will be transferred to a trust to protect it from a GM insolvency, expected on to be announced on Monday. GME will also receive €1.5bn in credit guarantees from the German government to keep it afloat while GM and Magna negotiate a final deal...(lots of detail)...Magna’s move marks a setback for Sergio Marchionne, Fiat’s chief executive, who this month launched a plan to combine Opel/Vauxhall with Fiat and Chrysler, thus forging the world’s second-largest carmaker...


.........................

Meanwhile, a local Swedish court on Friday granted GM’s other lossmaking unit Saab a further extension to its protection from creditors, giving it more time to restructure.

The Swedish carmaker, which first sought protection from creditors in February, was granted an extension until August 20 allowing it to line up a new owner and restructure its business.

...............................

● A US bankruptcy judge is expected to rule Monday on the sale of a slimmed down Chrysler to a group including Italy’s Fiat after three days of questioning and legal arguments this week, reports Nicole Bullock from New York. Chrysler’s dealers and a group of secured lenders oppose the transaction.

The sale is the centerpiece of the fast-track bankruptcy of Chrysler which many believe is the model for its larger rival GM. Chrysler filed on April 30.

[Demeter]

22. Tales from a Bankrupt Economy by Bill Bonner

"You're just graduating from college, right?

"You wanna make some real money?

"Then, rush to Detroit. Set up a law firm specializing in bankruptcy."

More advice to college graduates follows...(below)...

Two auto-parts suppliers have already filed under Chapter 11. GM is expected to do so momentarily.

Too bad about GM. It was set up in 1916. If it had been able to hold together for another 7 years, it would have gone 100 years without having to declare bankruptcy.

All people die. All companies die, too. That's why 'buy and hold' is wishful thinking. Buy and hold long enough and you are sure to go broke. And die.

Eventually the undertakers and bankruptcy lawyers get you. And today...business is good in Detroit. What cleared the way for the GM bankruptcy was a deal with the bondholders...in which they take equity in exchange for their debt and agree not to contest the bankruptcy filing. Still, the deal - and other deals relating to it...including the presence of one very big and very odd shareholder, the government of the United States of America - is so complicated, it's bound to give bankruptcy lawyers plenty of work for many years....

dailyreckoning.com

[KoKo]

38. I'm still wondering what to think about Jeff Macke...and his demise...

don't know if you got into how the "Car People Rant" took him down. But...he's one of those Libertarians...and frankly...I've found them to be very duplicitous... Just saying...if you've followed Macke's demise over his comments about the "Car People."

[Demeter]

39. Haven't Encountered Him--Have You a Link?

[KoKo]

42. He's one of the CNBC "Fast Money" trader crowd...it's not worth your time

for me to dig up the link when you are busy with other things. I thought you might know about him...and he's not important enough to bother with unless one is into "CNBC" stuff.

Thanks for all you do Demeter!

[Demeter]

43. Ah! I Am Without Cable

Not that I ever watched TV for the past decade or more anyway...other than the Weather Channel or an occasional "Whose Line Is It Anyway."

[tclambert]

88. Ah, so we should be quoting from the 1970s Battlestar Galactica.

"How could I've been so completely wrong? I led the entire human race to ruin!" - Last words of President Adar aboard the Battlestar Atlantia, moments before its destruction.

Or was that President Bush?

Lucifer: Anything is possible, but the odds are astronomically against it.

Are you old enough to remember Lucifer (Jonathan Harris, aka, Dr. Smith from "Lost in Space")?

Boomer: Just keep it up, old buddy, you're going to get us into real trouble.
Starbuck: Ten thousand light years from nowhere, our planet shot to pieces, people starving, and *I'm* gonna get us in trouble?

Imperious Leader: Welcome, Baltar. I have grave news. A handful of Colonials prevail, but we will soon find them.
Baltar: What of our bargain? My colony was to be spared!
Imperious Leader: I now alter the bargain.
Baltar: How can you change one side of a bargain?
Imperious Leader: When one side is a credit card company.

Okay, I altered the last quote to have some Weekend Economist relevance.

[Demeter]

92. Thank you for the Valiant Efforts

I remember Dr. Smith...

[Demeter]

54. Sweating the Future of Cars in the US

http://www.nakedcapitalism.com/2009/05/sweating-the-future-of-cars-in-the-us.html

The New York Times discusses whether Americans will return to buying cars at the pre-bust level when conditions return to some level of normalcy. Of course, the subtext is that the US economy will get back on track later this year, when many those who anticipate growth starting 3Q/4Q, when pressed, say the recovery will be so lackluster as to be a borderline recession.

The article does point to demographics, that the baby boomers are moving into retirement, and retirees are not big on buying cars. But it still misses or glosses over a couple of key points.

One is that every country experiencing a major financial crisis suffered a permanent decline in its standard of living. It isn’t unreasonable to think that car purchases will take dent longer term. In fact, a very good slide show by David Rosenberg, until recently, chief economist for North America for Merrill Lynch, had a chart that showed the ratio of adults to cars over a long period of time (sadly, I cannot locate said chart, but I would presume it excluded the prison population). It showed a near continuous decline to its recent level of 1.2 adults for every car.

The implication is that not even that long ago, Americans lived with fewer cars, and conceivably could again. I have also been told, but do not have any stats to prove it, that car ownership has fallen sharply among the young in Japan, in part because many are “freeters” with little job security.

The flip side is that if these conservative forecasts do not come to pass, the industry would have gotten so lean that it would be coining money if Americans start buying cars in force again....

[amandabeech]

62. In my lifetime (almost 54 yrs.) I noticed a real increase in two and three family cars

when women went into the workplace in larger and larger numbers from the '70s to early '80s.

Since so much of the U.S. is without decent public transportation and workplaces became increasingly spread out, working women could not often car pool, and second car became much more important. I saw it happen in my own family when my Mom went back to teaching when I was in grade school.

A large percentage of women work in our society, and we still have inadequate public transit and spread out workplaces.

I don't necessarily see the density of autos and light trucks going down too much, but I do see the age of the vehicles increasing and eventually the size decreasing. That is until our public transit system improves or there are so few jobs that pay enough to justify a car (and maybe child care) that only one person from a couple will be able to work regularly.

[tclambert]

89. Not sure how it relates, but on the TeeVee they said the scrap rate for cars now exceeds the puchase

rate, by about 3 million. America now destroys more cars than we manufacture. But I won't believe we really want fewer cars until I hear that bicycle sales have gone way up. And will somebody tell Ed Begley, Jr. to shut the frack up?

[Demeter]

93. A Lot of Front Yards Must Be Getting Cleaned Up

and many cities have done something about abandoned cars these days...

If people will snatch grave markers for the metal, think of the possibilities of doing well by doing good and picking up after junk cars!

[Demeter]

23. And oil is signaling a global rebound, isn't it?

"I don't think so," says MoneyWeek's editor in Paris. "There is no increase in oil consumption. Instead, consumption is still going down. What we're seeing is speculation. The central banks are adding to the funds available for speculation. So far, that money isn't reaching the consumer economy...it's mostly in the natural resources market betting on inflation."


But you have to give the feds credit. Raw materials...gold...oil...emerging markets - all have seen big increases. Major stock markets too are showing big gains.

But the feds' plan is not to reflate the asset bubble, but to reflate the economy. For that, they need rising consumer prices. Consumers need to borrow...and spend. They'll do so, say economists, when prices rise and their dollars lose value. So far, milk and potatoes aren't cooperating. The price of milk fell so low that farmers slaughtered their herds. As for potatoes...we don't know.

In Europe, inflation has disappeared. This is the first time the euro zone has ever had flat and falling prices. In America, too, consumer price inflation is ebbing away.

In other words, the feds may be winning a battle but losing the war!

As usual, there's a lot of smoke and fog on this battlefield. Consumer confidence is rising...but so is unemployment. The New York Times says US joblessness may soon pass Europe's habitually-high rates. The Chinese are still buying America's debt - but only the short-term stuff. America's biggest industrial company goes broke...the government takes a key role in key industries...but investors buy more stocks!

If you look through your binoculars you will have a hard time figuring out who's really winning. In the confusion of the battlefield, even a hardened veteran often fails to tell which way the fight is going. In fact, you might see rising stock prices and get the wrong idea...like watching the Yankees get chased back to Washington after the first battle of Bull Run; you might have thought that that was all there was to it. The war was over and the South had won....

http://dailyreckoning.com/tales-from-a-bankrupt-economy/

[Demeter]

24. Old But Good Joke

"A man and his wife were preparing their wills... The woman asks her husband if he would get married again, if she died first.

"'No, I wouldn't want to marry again,' he said.

"'Well, why not?' she answered. 'Don't you like being married?'

"'Well...yes...'

"'Then why wouldn't you want to get remarried?'

"'Well...okay...maybe I would get remarried.'

"'But where would you live...would you bring your new wife to our house?'

"'I guess so...it's a nice house...I wouldn't want to move.'

"'You mean...you'd let her drive my car and sleep in my bed?'

"'I don't know...I hadn't thought about it...but, yes...I guess so...why not?'

"'And I suppose you'd even let her use my golf clubs?'

"'Oh no, I wouldn't do that. She's left handed.'"

[Demeter]

25. The Only Two Reasons to Own Gold by The Mogambo Guru

http://dailyreckoning.com/the-only-two-reasons-to-own-gold/

Tampa Bay, Florida


I always get a real kick out of hearing that "the consumer is 70 percent of the economy," mostly because it gives me a chance to heap ridicule and scorn on whoever said it, and I say that the consumer is 100 percent of the economy!

One CAN say that, with or without the heaping of ridicule and/or scorn, but at least with an arrogant and smug authority that comes from 100 percent certitude, that "The Mogambo is 100 percent certain that the consumer is 100 Freaking Percent (100FP) of the economy!"

I make this Bold Mogambo Assertion (BMA) for two reasons. First, I hope that by debunking this silly "the consumer is 70 percent of the economy" crapola, I will win a Nobel Prize or some other award that has a cash-award component of the prize winnings, perhaps one that has a LARGE cash-award component.

My argument is that the ultimate consumer pays the price for everything by buying and consuming, for instance, a frozen pizza or delicious candy bars, and maybe something nice to drink, knowing that a slice of the purchase price is used to pay back creditors and producers for the use of capital, labor and land invested in producing these - and more! - delicious 'ready-to-eat' snacks and treats of high caloric content, of which the sugary, chocolaty and salty varieties I find particularly good. Yum!

“...there are only two good reasons to own gold; to preserve wealth when prices are stable, and to make a lot of fiat wealth when your government acts so stupid as to create...excess money and credit...”

And speaking of spending, I was surprised to see that the current- account balance of the USA has collapsed to $673.3 billion in the last 12 months, down from its high of over $800 billion, and the trade balance has fallen to $730.4 billion in the last year, which is down about 20 percent from its high of a couple of years ago, too.

And while the 12.8 percent fall in industrial production in the last year seems like bad news for us Americans, it is worse by whole orders of magnitude other places. Japan has industrial production down 34.2 percent over the last 12 months, and in the euro area it is down by 20.2 percent.

Just when I thought I would go berserk at such horrific economic news, I see John Stepek at Money Morning newsletter had a subhead that caught my eye, which was "Three sound reasons to own gold."

I admit that I did not read the article, but as far as I know, there are only two good reasons to own gold; to preserve wealth when prices are stable, and to make a lot of fiat wealth when your government acts so stupid as to create, or allow to be created, excess money and credit that eventually destroys the currency, especially when undertaken so as to enlarge the size of government, like now, which makes the problem of inflation worse because those more government weenies have a bigger incentive to save their own phony-baloney jobs, but can only make things worse.

Like, I said, I did not read the article because I am lazy, but the advice to buy gold is the lesson of the last 4,500 years of governments acting irresponsibly when given control of a fiat currency with which they could create as much money as they wished; inflation in prices inevitably caused chaos, misery, starvation and revolution....

[tomreedtoon]

26. Well, the new "Galactica" sucked.

The original was a parable of the Exodus. The new version was full of compromise, mendacity, and hidden betrayal. How cute was it that some of the main characters turned out to be the same robots that were killing the human race. It suggests the betrayal of Democratic Congresscritters whose votes betrayed the promises that got them elected.

And just like our economy, the Galacticans ended up in poverty and sorrow, without their technology and without everything they had learned, little more than a bunch of shivering, cold, naked primitives trying to scratch out a bare survival living out of the dirt.

And darkness, and decay, and the Republican Death held illimitable dominion over all.

[Demeter]

28. Life Sucks, and Then You Die

I think that's the Optimists' Creed.

[tomreedtoon]

32. I prefer Steve Chandler's take on the poster...

It's far more optimistic and cheery.



Consider it a public service. And it will be used more and more in America. (100 Japanese a week killed themselves in April because of the economy. It's the newest thing from Japan!)

[tclambert]

90. But in the new version they showed a planet getting nuked!

Tell me you didn't think that was cool. C'mon, doesn't everyone secretly want to nuke a planet and kill billions? Or is that just me?

Did I mention I root FOR the Cylons, and the Terminators, and Colossus and all the other killer machines? Humans are way over-rated.

[Demeter]

94. I Confess, When I Heard of Cheney's Hit Squad, The Plot Bunny Awoke

Love to see him hoist on his own petard.

[Demeter]

27. Goldman Sachs Principal Transactions Update: Collapse In Agency Program Trading Volume

http://www.nakedcapitalism.com/2009/05/guest-post-goldman-sachs-principal.html

In the week ended May 22, NYSE program trading dropped to a statistically significant low of 2.9 billion shares, down from 3.3 billion the week before, and from a 3.8 billion prior 52 week average. As for specific actors, no surprise, Goldman leading the government’s SLP team with a 7:1 ratio of principal to facilitation/agency.



As for today’s market close, with a literally parabolic jump in the last minute of trading, if anyone still thinks this market trades based on anything resembling normal behavior (unless someone had a very Jerome Kerviel-esque fat delta hedging finger or one/two moderate/large quants who had a huge index hedge imploded), I have some BBB+ rated CMBS to sell to you at par. One culprit could be hiding in the huge drop of agency trading, which this week dropped to a several month low of 1.875 billion shares.

http://www.nakedcapitalism.com/wp-content/oldimages/nakedcapitalism/3/_FM71j6-VkNE/SiBAFFmQ38I/AAAAAAAAC7Y/O04ryCQdtbY/s400/agency+5.29.09.jpg

So as essentially no institutional or retail clients are trading any more, it is just a few desperate computers trying to front run each other. And, of course, for the biggest beneficiary of this PT principal bonanza, look no further than the chart below.

http://www.nakedcapitalism.com/wp-content/oldimages/nakedcapitalism/1/_FM71j6-VkNE/SiBA1pO4IpI/AAAAAAAAC7g/UWjyQ409tBg/s400/principal+5.29.09.jpg

Going back to today’s ridiculous close, the chart below shows it all: the complete tape painting volume spike at the very end of the day speaks for itself. And as computers now simply issue forced stock recall orders to each other, painting the tape wet with manipulative intent and volume spikes into the last 20 minutes of trading every day, their human creators are left on the sidelines, trying to outshout each other as to the reason for why the market keeps rising while the economy keeps tumbling.

http://www.nakedcapitalism.com/wp-content/oldimages/nakedcapitalism/3/_FM71j6-VkNE/SiBBUA4c-uI/AAAAAAAAC7o/95yqvJZE3GQ/s400/SPY+Vol+5.29.09.jpg

Is there ever going to be any transparency in this market again?

[Demeter]

29. How economists can misunderstand the crisis By Niall Ferguson

http://www.ft.com/cms/s/0/a635d12c-4c7c-11de-a6c5-00144feabdc0.html

On Wednesday last week, yields on 10-year US Treasuries – generally seen as the benchmark for long-term interest rates – rose above 3.73 per cent. Once upon a time that would have been considered rather low. But the financial crisis has changed all that: at the end of last year, the yield on the 10-year fell to 2.06 per cent. In other words, long-term rates have risen by 167 basis points in the space of five months. In relative terms, that represents an 81 per cent jump.

Most commentators were unnerved by this development, coinciding as it did with warnings about the fiscal health of the US. For me, however, it was good news. For it settled a rather public argument between me and the Princeton economist Paul Krugman.

It is a brave or foolhardy man who picks a fight with Mr Krugman, the most recent recipient of the Nobel Prize for Economics. Yet a cat may look at a king, and sometimes a historian can challenge an economist.

A month ago Mr Krugman and I sat on a panel convened in New York to discuss the financial crisis. I made the point that “the running of massive fiscal deficits in excess of 12 per cent of gross domestic product this year, and the issuance therefore of vast quantities of freshly-minted bonds” was likely to push long-term interest rates up, at a time when the Federal Reserve aims at keeping them down. I predicted a “painful tug-of-war between our monetary policy and our fiscal policy, as the markets realise just what a vast quantity of bonds are going to have to be absorbed by the financial system this year”.

De haut en bas came the patronising response: I belonged to a “Dark Age” of economics. It was “really sad” that my knowledge of the dismal science had not even got up to 1937 (the year after Keynes’s General Theory was published), much less its zenith in 2005 (the year Mr Krugman’s macro-economics textbook appeared). Did I not grasp that the key to the crisis was “a vast excess of desired savings over willing investment”? “We have a global savings glut,” explained Mr Krugman, “which is why there is, in fact, no upward pressure on interest rates.”

Now, I do not need lessons about the General Theory . But I think perhaps Mr Krugman would benefit from a refresher course about that work’s historical context. Having reissued his book The Return of Depression Economics, he clearly has an interest in representing the current crisis as a repeat of the 1930s. But it is not. US real GDP is forecast by the International Monetary Fund to fall by 2.8 per cent this year and to stagnate next year. This is a far cry from the early 1930s, when real output collapsed by 30 per cent. So far this is a big recession, comparable in scale with 1973-1975. Nor has globalisation collapsed the way it did in the 1930s.

Credit for averting a second Great Depression should principally go to Fed chairman Ben Bernanke, whose knowledge of the early 1930s banking crisis is second to none, and whose double dose of near-zero short-term rates and quantitative easing – a doubling of the Fed’s balance sheet since September – has averted a pandemic of bank failures. No doubt, too, the $787bn stimulus package is also boosting US GDP this quarter.

But the stimulus package only accounts for a part of the massive deficit the US federal government is projected to run this year. Borrowing is forecast to be $1,8400bn – equivalent to around half of all federal outlays and 13 per cent of GDP. A deficit this size has not been seen in the US since the second world war. A further $10,000bn will need to be borrowed in the decade ahead, according to the Congressional Budget Office. Even if the White House’s over-optimistic growth forecasts are correct, that will still take the gross federal debt above 100 per cent of GDP by 2017. And this ignores the vast off-balance-sheet liabilities of the Medicare and Social Security systems.

It is hardly surprising, then, that the bond market is quailing. For only on Planet Econ-101 (the standard macroeconomics course drummed into every US undergraduate) could such a tidal wave of debt issuance exert “no upward pressure on interest rates”.

Of course, Mr Krugman knew what I meant. “The only thing that might drive up interest rates,” he acknowledged during our debate, “is that people may grow dubious about the financial solvency of governments.” Might? May? The fact is that people – not least the Chinese government – are already distinctly dubious. They understand that US fiscal policy implies big purchases of government bonds by the Fed this year, since neither foreign nor private domestic purchases will suffice to fund the deficit. This policy is known as printing money and it is what many governments tried in the 1970s, with inflationary consequences you do not need to be a historian to recall.

No doubt there are powerful deflationary headwinds blowing in the other direction today. There is surplus capacity in world manufacturing. But the price of key commodities has surged since February. Monetary expansion in the US, where M2 is growing at an annual rate of 9 per cent, well above its post-1960 average, seems likely to lead to inflation if not this year, then next. In the words of the Chinese central bank’s latest quarterly report: “A policy mistake ... may bring inflation risks to the whole world.”

The policy mistake has already been made – to adopt the fiscal policy of a world war to fight a recession. In the absence of credible commitments to end the chronic US structural deficit, there will be further upward pressure on interest rates, despite the glut of global savings. It was Keynes who noted that “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist”. Today the long-dead economist is Keynes, and it is professors of economics, not practical men, who are in thrall to his ideas.

The writer is Laurence A. Tisch professor of history at Harvard University and author of The Ascent of Money (Penguin)

:popcorn:

[Demeter]

30. My Therapeutic Rant on the Current Economic Madness, Posted by Michael Perelman

http://econospeak.blogspot.com/2009/05/my-therapeutic-rant-on-current-economic.html

During the Vietnam War, a U.S. soldier seems to have anticipated the spirit of the current economic policy, explaining: "we had to destroy the village in order to save it." The difference today is that while the government destroys villages of the working classes, it is devoting enormous to improve the castles of the rich.

Anyone can see the care and feeding of bankers and financiers, while treating much of the rest of the economy with an iron fist.

The problem is compounded because alongside the federal stimulus, funding for state and local government is falling off the cliff, in effect, neutralizing much of the stimulus. This contradiction in economic policy is nothing new. A half century ago, E. Cary Brown showed him austerity in state and local governments undid much of the New Deal.

Brown, E. Cary. 1956. "Fiscal Policy in the 'Thirties: A Reappraisal." The American Economic Review, Vol. 46, no. 5 (December): pp. 863-66.

Nowhere is that policy divergence clearer than in California. A Republican minority blocks all tax increases. The budget deficit seems to increase by a few billions every few weeks. The answer is to eliminate welfare, slash payment to home healthcare workers, and decimate education.

I have been looking at papers by Greg Duncan showing the devastating effect of child poverty on children's productive capacity as they mature. In my forthcoming book, The Invisible Handcuffs, I discuss literature that compares the consequences of child poverty on brain development, an effect that resembles the impact of a stroke.

Conservatives worry about future tax costs, but what if the losses in the capacity to pay costs exceeds the presumed future burdens of public debt.

[Demeter]

31. Must See: Ralph Nader on Corporate Personhood, etc

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x5741482

[tclambert]

91. Wait, are you saying that corporations aren't really people?

Surely they are just as human as any other anthropomorhized abstraction. Not that I would want one to marry my sister.

[Demeter]

33. Rail Traffic Down; Truck Traffic Down; Air Cargo Hoping For A Bottom

http://globaleconomicanalysis.blogspot.com/2009/05/rail-traffic-down-truck-traffic-down.html


Green shoots are not yet showing up in cargo statistics. Let's take a look starting with AAR: Rail freight traffic down from a year ago.

Freight traffic on U.S. railroads during the week ended May 23 remained down in comparison with last year, although it did show an increase from the previous week this year, the Association of American Railroads reported today.

U.S. railroads originated 259,265 cars during the week, down 21.5 percent from the comparison week in 2008, but up 4.9 percent from the previous week this year. In comparison with last year, loadings were down 16.4 percent in the West and 28.0 percent in the East.

All 19 carload commodity groups were down from last year, with declines ranging from 4.8 percent for farm products other than grain to 59.7 percent for metallic ores.

Intermodal volume of 188,885 trailers or containers was off 19.1 percent from last year, with container volume down 14.2 percent and trailer traffic off 37.2 percent. Intermodal volume was up 0.2 percent from the previous week this year.

For the first 20 weeks of 2009, U.S. railroads reported cumulative volume of 5,295,843 carloads, down 19.3 percent from 2008; 3,720,454 trailers or containers, down 16.8 percent; and total volume of an estimated 562.0 billion ton-miles, down 18.2 percent.

Canadian railroads reported volume of 53,316 cars for the week, down 33.5 percent from last year, and 37,052 trailers or containers, down 18.9 percent. For the first 20 weeks of 2009, Canadian railroads reported cumulative volume of 1,193,070 carloads, down 23.4 percent from last year; and 810,785 trailers or containers, down 14.5 percent.

Mexican railroads reported originated volume of 13,102 cars, virtually the same as last year, and 5,188 trailers or containers, down 18.8 percent. Cumulative volume on Mexican railroads for the first 20 weeks of 2009 was reported as 219,541 carloads, down 12.3 percent from last year; and 95,217 trailers or containers, down 19.8 percent.

Combined North American rail volume for the first 20 weeks of 2009 on 14 reporting U.S., Canadian and Mexican railroads totaled 6,708,454 carloads, down 19.9 percent from last year, and 4,626,456 trailers and containers, down 16.4 percent from last year.

Rail Carloading Report

The Weekly Railfax Rail Carloading Report has the hollowing charts of interest.



Total Industry Charts, US, Canada, Mexico



Additional charts show numbers up from earlier in the year. However the charts also show a seasonal dip at the beginning of the year.

Is truck freight bottom close?

Fleet Owner is asking Is truck freight bottom close?

Freight tonnage fell again in April, according to numbers released by the American Trucking Assns. (ATA), indicating that trucking companies are still facing lean times.

The ATA said its seasonally adjusted for-hire truck tonnage index fell 2.2% in April, after plunging 4.5% percent in March. Compared with April 2008, tonnage contracted 13.2%, which was the worst year-over-year decrease of the current cycle and the largest drop in thirteen years, said Bob Costello, ATA chief economist.

“While most key economic indicators are decreasing at a slower rate, the year-over-year contractions in truck tonnage accelerated because businesses are right-sizing their inventories, which means fewer truck shipments,” he explained. “The absolute dollar value of inventories has fallen, but sales have decreased as much or more, which means that inventories are still too high for the current level of sales. Until this correction is complete, freight will be tough for motor carriers.” Costello added that truck freight has yet to hit bottom and it could be a few more months before this occurs.

However, Eric Starks, president of research firm FTR Associates, pointed out that while the freight market might not have bottomed out as of yet, it’s very close to doing so. “We still think we’ll reach that bottom around the middle of summer,” he told FleetOwner.

The “million dollar question” from Stark’s perspective is how long the freight market will stay at the bottom. “Even once we reach the bottom, are not out of the woods. We could sit with some very depressed freight levels for some time,” he cautioned.

Air cargo at a bottom?

The International Air Transport Association says air cargo market probably hit bottom.

A decline in the air cargo freight market following the international financial crisis seems to have hit bottom, the head of the International Air Transport Association said on Sunday. Air cargo, a key barometer of world trade, has slumped amid the global economic downturn and shortage of financing. Global air freight volumes in January saw a record 23 percent year-on-year dive.

"I would say, looking at the numbers, that it has hit bottom," the global association's Director-General Giovanni Bisignani told Reuters.
Bisignani said the market had at least been stabilising at levels around 20 percent lower than a year ago.

"It's not yet enough to say that the situation is picking up because this is also linked with the level of inventories of the manufacturers. So we have to wait at least another 3 or 4 months in order to see if we start moving."

Rebound Questionable

Shipping may have bottomed, but as long as the economy is losing 500,000 jobs a month and housing is still in a decline, any rebound will be anemic at best.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

[Demeter]

34. Stupid Burglar Nabbed by Backup Program

http://perens.com/works/articles/Burglar/

The following article was included in the email newsletter distributed to constituents by Berkeley City Council Member Susan Wengraf. It's signed by a Berkeley Police officer - Bruce

As you may already know, some auto burglars who prowl Northeast Berkeley are prolific; one auto burglar may burglarize several cars in one night. Apprehending one of these prolific individuals can obviously have an impact in reducing the number of auto burglaries in an area affected by property crime, like Northeast Berkeley. With that in mind, I thought you might be interested in hearing about an arrest our Property Crimes Detective Division made recently.

On May 5th, at about 6:00 p.m., one of our fellow community members parked his car near the corner of Hearst Avenue and Euclid Avenue. Unknowingly, he left his laptop bag on the back seat of his car. Sometime before 8:00 p.m., someone smashed the car window and stole the laptop from the rear seat. The victim reported the auto burglary but there were no significant investigative leads in the case. This is where the story gets really interesting. The victim had a back-up program installed on his laptop. The burglar proceeded to take photographs of himself with the computer's built-in camera; those photographs were eventually up-loaded to the internet based storage location. The victim discovered the photographs of the suspect and passed them along to Detective Sergeant Ed Spiller and Detective Earl Emelson. The Detectives recognized the suspect, named Vega, who had just been released from jail at the start of the year.

The Detectives closely examined the photographs and noticed that Vega appeared to be sitting in a motel room when he snapped the pictures with the computer's camera. Sgt. Spiller, theorizing that the victim's computer had accessed the internet thorough the motel's wireless internet system, began work to identify the I.P. address utilized by the victim's computer in hopes that it would lead them to the motel where Vega was staying. Not content to wait for the I.P. address information to become available, Sgt. Spiller's Detectives decided to expand their search to Oakland motels. While checking motels on MacArthur Blvd., Det. Emelson spotted Vega getting into a car in a motel parking lot. The Detectives stopped Vega and arrested him for possession of the stolen laptop. During the investigation, the Detectives located additional stolen property (from other auto burglaries) inside Vega's car and in his motel room. Vega's girlfriend, Maria Reynoso of Berkeley, was also arrested during the investigation at the motel.

[Demeter]

35. A finance view of the political nature of the coming GM bankruptcy

http://www.nakedcapitalism.com/2009/05/guest-post-finance-view-of-political.html


...General Motors is a monster company employing a quarter million people worldwide. It sells $150 billion in cars – or at least it used to. It is not just a producer of vehicles. It is also a supplier. It has been through several joint ventures and has owned a number of foreign manufacturers, Isuzu and Opel being but two. In short, the company is a very big player, financially, economically and politically. Yet, somehow you get the impression that many in the financial media think we could just turn the lights out and go home. Witness the video below of CNBC anchors Mark Haines, Erin Burnett and Phil Lebeau and a trio of auto analysts trying to impress upon Haines how important GM is.

SEE LINK FOR VIDEO


The GM bankruptcy is a very big deal and will have wide-ranging implications. Let me review a few of the issues here starting with the politics.

2010 elections

In the U.S., we have just witnessed an historic election that some are comparing to the election of Ronald Reagan in 1980 and Franklin Roosevelt in 1932. Indeed, there has been a sea change in the political climate here in Washington since January, with the Democrats and their agenda taking precedence over the Republicans. But, none of that is going to last if we don’t see a recovery that lasts through the mid-term elections in 2010. And that is already very much on the minds of politicians in Washington. Here is the calculus.

In 2008, the Democrats benefitted greatly from Barack Obama’s election as President, taking large majorities in both houses of Congress. Their mandate was to work with the President to fix America’s economic problem. So, Obama’s and Congressional Democrats’ first priority is to end the recession as quickly as possible. I guarantee you there would be hell to pay if this is not done well before November 2010 when the next general election is held.

From Obama’s perspective, it is crucial that he fix the banks and fix the auto industry as these were the two economic issues front and centre in the election which he said he could tackle. With the banking industry stabilised, the Obama legacy rides crucially on how the Auto Bailout proceeds. Under no circumstances is the Obama Administration going to allow General Motors to do to the economy in 2009 what Lehman Brothers did to it in 2008. They are going to fix GM no matter what it takes. And if this includes heavy-handed tactics, so be it.

So, be very clear that the GM and Chrysler issue is an existential question for this administration. Handle it well and you get the Roosevelt treatment and ensure a good outcome for your party in 2010. Screw things up and the depression bears down on America and you’re out of office in due course. The key policy decision is how to ensure a favourable outcome. And when I say favourable, I mean one that ensures as many jobs as possible while minimizing any wider economic fallout. Other issues like treating bondholders well, not committing taxpayer monies to the effort, or keeping government out of the auto industry are going to be much less important.

German General Election

And if Obama is concerned about his political fortunes because of an election next year, you can bet that Germany’s Chancellor Angela Merkel is concerned given her election is later this year. In Germany, cars have a mythical status. The Autobahn was begun in the Depression as a way to jumpstart the German economy. The first such road was completed in 1931 between Bonn and Cologne, a road I drove I have driven at least 2 or 300 times (it is a great road for fast driving, by the way, and was opened by Germany’s first Chancellor Adenauer when he was Mayor of Cologne. I believe the Bonn Porsche dealership is literally a few hundred meters from the entrance). Shortly thereafter, also during the Depression, the Germans began the car company Volkswagen (literally “the people’s car”) as yet another car-oriented way to jumpstart the economy.

Today there are hundreds of thousands of jobs in Germany tied to the auto sector, which has huge importance in the Rhineland, Germany’s industrial heartland and part of the most populous German state North Rhine-Westphalia, as well as in Lower Saxony, Bavaria, and Baden-Württemberg. In short, destroying auto jobs is a sure-fire way to lose an election. The ruling coalition is keenly aware of this and that is why they too will be very involved in the GM bankruptcy as it affects Germany through GM subsidiary Opel...

[Demeter]

36. Thought for Our Times

The science fiction writer, William Gibson, likes to say: "The future is already here--it is just unevenly distributed."

Likewise, the economic recovery has already started. But its distribution will be highly uneven.

In my opinion, the distributional effects of this recovery will ultimately determine its sustainability. If policymakers don't figure out ways to counterbalance these uneven distributional effects, we risk heading into a protracted period of subpar growth.

http://www.nakedcapitalism.com/2009/05/guest-post-incredibly-uneven-recovery.html

The Incredibly Uneven Recovery? by Leo Kolivakis, publisher of Pension Pulse.

[Demeter]

41. A Return to a Nasty External Dynamic?

http://economistsview.typepad.com/timduy/2009/05/a-return-to-a-nasty-external-dynamic.html

At the moment, the economic dynamic is exceedingly complicated. An understatement, I fear. The crosscurrents in the data and the markets are treacherous, and I suspect will have Fed officials scratching their heads. Hold steady with existing plans? Step up the liquidity provisions? More actively engage plans to tighten policy? The latter option seems almost inconceivable; for the moment, the debate will focus on the issue of further easing. At this point, I think the Fed will sit tight, allowing further easing to come from the already active TALF program, rather than expanding outright purchases of Treasuries.



The core issue is the steep rise in Treasury yields, which apparently were kept in check only by the expectation that the Fed would continued to gobble up the endless stream of securities issues by the US Treasury. The Fed sank that hypothesis at the last FOMC meeting, and a subsequent statement by Federal Reserve Chairman Ben Bernanke made clear that the Fed does not have a 3% target on 10 year Treasury yields. Since then, yields have climbed as high as 3.75% before prices rebounded today, bringing yields down to 3.61%. Should we be concerned with the gains?



Brad DeLong argued a few weeks ago that the Fed's reluctance to cap rates was a policy error in the making. Indeed, it would seem that rising yields are toxic for debt-heavy balance sheets, especially where housing is concerned. Officials repeatedly point to the importance of supporting housing prices, a policy that would be undermined as rising Treasury yields boost mortgage rates higher. And while we have seen some stability in recent months in existing homes sales - of which foreclosures and distressed sales are no small part - the recent Case-Shiller data makes clear that housing markets remains under severe pricing pressure:

Home prices in 20 major metropolitan areas fell in March more than forecast as foreclosures surged, threatening to extend the housing slump.



The S&P/Case-Shiller home-price index decreased 18.7 percent from March 2008, matching the drop in the year ended in February. The measure declined 19 percent in January, the most since data began in 2001.

In contrast is the view that rising yields signal an unambiguously positive environment in future months, a sentiment echoed by US Treasury Secretary Timothy Geithner:

Geithner, 47, also said that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.”

Likewise, Alan Blinder is confused by thoughts that the Fed would attempt to control yields at all:

Blinder said he’s “more dubious” about the Treasury purchases themselves. Any reduction in long-term rates makes it more difficult for U.S. banks to generate earnings to make up for what the Fed estimated earlier this month would be $600 billion in losses under adverse economic conditions. “It makes it harder for them to earn their way out,” he said.

So we are stuck with two apparently contrasting views. On one hand, rising long rates and the related steepening of the yield curve should indicate improving economic conditions - after all, rising yields simply imply that market participants are gaining confidence to put their money to work in more risky endeavors. The steeper yield curve should boost bank earnings and, in time, encourage lending. On the other hand, higher yields may undermine support for the housing market, thus extending the downturn. The Wall Street Journal believes the Fed is choosing the positive spin:

Federal Reserve officials believe the recent sharp rise in yields on U.S. Treasury bonds could reflect a mending economy and a receding risk of financial catastrophe, suggesting the central bank won't rush to react -- even though some investors see danger in the government's rising cost of borrowing.

The WSJ is most likely correct. Indeed, I too want to believe the first story; the steep yield curve should be a clear signal that economic activity is poised to soar. Two things are holding me back. First, the 10-2 spread went positive in mid-2007, which should have indicated that the expected Fed easing later that year would catch fire and the economy would be clear of recession territory by mid-2008. Oops - the signal was premature. Something was different (just as I had come to embrace the yield curve's signals). My second concern is that rising yields indicate capital is fleeing the US, and the shape of the yield curve is being influenced significantly by shifts in patterns of foreign central bank purchases. And while the resulting depreciation of the Dollar will support US growth over time, the transition can be very disruptive. Interestingly, the Wall Street Journal story quoted above does not point to this possibility.



As Brad Setser highlights, the current dynamic is eerily similar to that of late 2007 and early 2008. In hindsight, this should have been anticipated. Financial market stability has improved dramatically as Federal Reserve Chairman Ben Bernanke and Geithner have made clear that no major US bank will be allowed to fail. It just won't happen. That stability makes way for a reversal of the flight to safety, and the Dollar comes under pressure, and, with it, US Treasuries. The reversal must be strong - note how Treasuries sank this week despite a clear escalation in North Korean rhetoric, which should have driven some safety trades. Moreover, with the US consumer widely expected to not be a driver of growth going forward, market participants look toward the emerging markets for growth. In essence, the Fed's ZIRP policy combined with stable financial markets once again makes the Dollar carry trade attractive. Since old habits die hard, this should "force" foreign central banks to accumulate Treasury assets - and it has.



In this scenario, stable financial markets are now pushing for further reduction in the US external deficit. To be sure, while the deficit is much smaller, it still exists . And, once again, it looks like much of the world, from the Fed to the Treasury to the emerging market central banks, are resisting the adjustment as it requires continued soft domestic demand in the US to limit imports. Eventually, that resistance will reveal itself. For example, additional US weakness will be offshored to those regions not supporting the Dollar - hence Euro and Yen strength. And commodity prices might catch a stronger bid. Indeed, this explains the gains in oil in recent weeks.



But Brad identifies an important twist on that story:

Third, the rise in central bank reserves isn’t translating into a rise in demand for longer-term US bonds. Central banks are just buying short-term bills. That presumably is one of the reasons why long-term rates are rising now – while they remained (surprisingly) low back in 2006, 2007 and 2008. Central banks weren’t willing to buy long-term notes at 2% — or even at 3%. Maybe they just didn’t want to lock in low rates. Maybe they feared a mark-to-market capital loss if rates rose. Or maybe they fear that inflation will rise, eroding the real value of longer-term claims. In some sense, it doesn’t matter. The dynamics of the market changed …

Brad has more in a subsequent post. It is almost as if foreign central banks know that the endgame of everyone's behavior is inflation, and thus avoid longer dated securities. Not a particularly comforting thought - but one consistent with the steady rise in the 10 year Treasury-TIPS breakeven spread. Perhaps too foreign central banks realize that if the Fed is no longer willing to be a buyer of last resort of longer dated Treasuries, why should they?



How will the Fed behave in this environment? Presumably, if inflation expectations were to rise significantly, policymakers would need to respond by chasing long rates. After all, they have made clear that the target range is 1.7-2%, and want to anchor inflation expectations at those levels. With this in mind, expect policymakers to continue to emphasize their readiness to wind down their programs and raise the Fed Funds rates, when necessary, in order to combat inflation. Also, policymakers will likely turn attention toward commodity prices, particularly oil - saying something to the effect that they are keeping their attention on energy costs, but remain focused on the wide output gap, which suggests disinflation pressure in wages and core prices.



It remains difficult, however, to imagine that the Fed is truly ready to start reversing policy in the near term. Despite green shoots, US economic growth remains anemic. The green shoots really don't look all that green. Initial jobless claims may have peaked, but they are certainly not dropping at a rate consistent with a strong rebound. Hovering just above 600,000 claims a week promises to sustain weak employment reports in the months ahead, as long as rising unemployment. Can we see a policy reversal with unemployment rates on the rise? Consistent with ongoing job market weakness, policymakers continue to commit to a sustained period of near zero rates. See Federal Reserve Vice Chair Donald Kohn last week:

In my view, the economy is only now beginning to show signs that it might be stabilizing, and the upturn, when it begins, is likely to be gradual amid the balance sheet repair of financial intermediaries and households. As a consequence, it probably will be some time before the FOMC will need to begin to raise its target for the federal funds rate. Nonetheless, to ensure confidence in our ability to sustain price stability, we need to have a framework for managing our balance sheet when it is time to move to contain inflation pressures.

Moreover, the financial stability we have seen in recent months is clearly dependent on the willingness of the Fed to commit large quantities of liquidity in various guises. Policymakers are wary that financial markets can stand on their own, and will not be eager to speed up their eventual withdrawal. Start-stop policy would certainly impose a fresh policy uncertainty that could trigger a new chapter in the crisis. No, policymakers will not change course unless a new disorderly Dollar-commodity price dynamic emerges. Even then, Bernanke kept the accelerator to the floor as such a dynamic took hold in the early part of 2008. I would imagine that the bar to policy reversal is very high at this point.



What about additional easing? From Bloomberg:

“The market expects the Fed to enhance buying of Treasuries very soon,” wrote David Ader, head of U.S. government bond strategy at Greenwich, Connecticut-based primary dealer RBS Greenwich Capital, in a note to clients. “The bear market in Treasuries is having an impact on other things. Mortgages were the most notable victim.”

I was expecting more easing last month, believing the output gap would prod policymakers forward. And there is no indication that the Fed is planning to back off the TALF program (they are even expanding it too include "legacy" but possibly soon to be "toxic" assets.) But I am now wary that the Fed will increase the size of the expected Treasury bond purchases at this juncture. This is especially the case if they view rising rates as consistent with economic healing. Moreover, questions of outright monetization of the debt would intensify if the Fed appeared to be compensating for a lack of sufficient demand from the private sector, thereby driving more market participants, including central banks, out of the market.



So where does this leave us? In a environment pushed and pulled by contradictory trends:

*

The wide US output gap suggests there is plenty of room for monetary and fiscal stimulus to operate without triggering higher interest rates. Yet rates have moved higher, and while I can’t say that 3.7%, or even 4.7%, or even 5.7%, would be surprising given the pace of Treasury issuance, the rapidity and direction of the move should give one pause - especially given the likelihood of prolonged US economic weakness. The rate increase should give policymakers pause, too.
*

The continued existence of the current account deficit suggests the US remains dependent on capital inflows. To be sure, the need is not as great as a year ago, but significant nonetheless. Failure to attract those inflows would trigger downward pressure on bonds and Dollars.
*

Greater financial stability should force market participants out of low yielding assets. But, absent a safety flight to US Dollars, there is no reason those assets have to be in the US. Low short term rates - and the Fed's promise to keep those rates low for an extended period of time - open up opportunities for a Dollar carry trade that yields capital outflows.
*

If so, we would expect downward pressure on the Dollar and upward pressure on long rates. The former supports export growth and import compression, while the latter helps prevent the decline from becoming disorderly by attracting capital into the Dollar and by further import compression (slower domestic demand).
*

If foreign central banks choose to resist these trends, we would expect global reserves to rise. We are seeing this. The shift to purchasing at the shorter end of the yield curve, however, indicates that global central banks are wary of taking on additional Treasury risk. Perhaps they are finally beginning to choke on the debt.
*

Downward pressure on the Dollar, in addition to the liquidity provided by central bank reserve accumulation, should put upward pressure on commodities. This is particularly evident in oil prices. This will increase headline inflation, and with it inflation expectations among the general public.
*

US labor market weakness appears inconsistent with a sustainable inflation dynamic; thus, rising oil prices simply cut into domestic demand. Thus, the Fed will be inclined to hold policy steady, rather than exacerbating oil driven weakness by tightening. Tightening policy would also reverse the evolving stability in financial markets and threaten a new credit crunch. And given the Fed's willingness to accept a benign view of the yield increase, they are not likely to increase Treasury purchases. Policy on hold. This may again have the side effect of putting relentless downward pressure on the Dollar. This is probably necessary to achieve further rebalancing of economic activity, but I suspect in the near term it will be disruptive. Alternatively, the dynamic could be reversed again by a new crisis that drove flows back to Dollars. There may be so much directionless liquidity flowing through the global financial system that it just starts constantly shifting here and there, looking for a home.

Bottom Line: I want to believe that the rapid reversal of Treasury yields is a benign, even positive, event. This is likely the Fed's view; consequently, the will hold steady on policy. Challenging this benign view is that the reversal appears to be lock step with a return to dynamics seen in 2007 and 2008 - exceedingly low US rates encouraging Dollar outflows, stepping up the pace of foreign central bank reserve accumulation and putting upward pressure on key commodity prices. I worry that policymakers have forgotten the external dynamic that was hidden by the crisis induced flight to Dollars last fall. Indeed, capital outflows (indicated by a foreign central bank effort to reverse those flows) would signal that much work still needs to be done to curtail US consumption to bring the global economy back into balance. Policymakers are unprepared for this possibility.

[UpInArms]

44. Bernie Madoff for secretary of the Treasury?

http://www.reuters.com/article/ousiv/idUSTRE54S5Y020090529?sp=true

Peter Schiff of Euro Pacific Capital, who in 2006 publicly warned the subprime crisis would drag down financial markets, said Obama's policies will only re-inflate the credit bubble.

"As any drug addict knows, if you stop using drugs you will go through withdrawal. Government is making the situation worse," said Schiff. "We don't need any more stimulus. We are suffering from the stimulus we have already been given."

He joked years of misguided U.S. fiscal policy has created a Ponzi economy, where new Treasury bonds must be sold to repay existing investors just to keep Uncle Sam solvent.

"I don't know why we have Bernie Madoff in jail," Schiff said. "We should appoint him secretary of the Treasury."

Einhorn observed the U.S. budget deficit has grown to 13 percent of GDP, not including the trillions of dollars of potential losses guaranteed under the government's bailout plans. Long-dated U.S. bonds, he said, are already anticipating higher rates inflation

then the loonies say "pump up the banks some more!"

:sheesh:

[Robbien]

46. More on the continuation of housing market mortgage racket

from Singular over at Agonist

European CMO market expanding :-)

Banks securitize their mortgages, sell these structured products to themselves and exchange them to cash on ECB counter

http://agonist.org/singular/20090529/european_cmo_market_expanding

Then from the Mortgage Lender we find out that banksters are trying to keep control of their inflated mortgage appraisal racket:

Despite calls for reform, Countrywide is still showing signs of committing the same predatory lending sins under new owner Bank of America. As Congress rushes the lending reforms through the House this month, banks are still fighting to keep control of how they run the mortgage business, and keep collecting lucrative fees in every step of the lending process.

Exhibit A is a $2.8 billion class action lawsuit filed on March 7th against a BofA subsidiary called Countrywide-KB Home Loans and its wholly owned appraisal firm Landsafe, Inc. The suit accuses the two subsidiaries of an appraisal inflation scheme affecting over 14,000 borrowers

http://ml-implode.com/article/buhl-banks_appraisals

The Mortgage Lender piece is full of interesting info such as:

Sources who've worked for the firm and spoke on the condition of anonymity for fear of retribution told us about a secret database so-called "UVL" or "unapproved vendor list." The list keeps track of all appraisers who've been blackballed for not meeting the lender's price target. In fact, when employees log onto the list, a warning flashes on the screen and tells the user not to disclose the list's existence.

A person who currently works at Landsafe says "At BofA's Landsafe, when the in-house reviewer does his check-off on the appraisal, the first thing we're told is to check the UVL list. If the appraiser is on it, out goes the appraisal in the trash."


The banksters are trying their best to keep the system as it currently is. They truly believe nothing they have done or plan to do is wrong and it is so very profitable. Why are people bitching?

[Hugin]

47. This is a real 'must read' article.

The fact they are still doing what lead to the crisis in the first place is my number one reason for feeling such a disappointment in the Senate's sell out to the MBA on the relief provisions amendment of a few weeks ago.

How many times can they throw the middle-class under the special interest bus and get away with it?

The way I see it, all of this corporate media cheering about a single bank regulating agency is rubbing our noses in the fact single-payer health care isn't going to happen. These people know no shame and no limit to their greed and self-interest.

[Demeter]

48. On the Street and On Facebook: The Homeless Stay Wired

http://online.wsj.com/article/SB124363359881267523.html

By PHRED DVORAK

SAN FRANCISCO -- Like most San Franciscans, Charles Pitts is wired. Mr. Pitts, who is 37 years old, has accounts on Facebook, MySpace and Twitter. He runs an Internet forum on Yahoo, reads news online and keeps in touch with friends via email. The tough part is managing this digital lifestyle from his residence under a highway bridge.

"You don't need a TV. You don't need a radio. You don't even need a newspaper," says Mr. Pitts, an aspiring poet in a purple cap and yellow fleece jacket, who says he has been homeless for two years. "But you need the Internet."

Mr. Pitts's experience shows how deeply computers and the Internet have permeated society. A few years ago, some people were worrying that a "digital divide" would separate technology haves and have-nots. The poorest lack the means to buy computers and Web access. Still, in America today, even people without street addresses feel compelled to have Internet addresses.

New York City has put 42 computers in five of the nine shelters it operates and plans to wire the other four this year. Roughly half of another 190 shelters in the city offer computer access. The executive director of a San Francisco nonprofit group, Central City Hospitality House, estimates that half the visitors to its new eight-computer drop-in center are homeless; demand for computer time is so great that users are limited to 30 minutes.

Shelter attendants say the number of laptop-toting overnight visitors, while small, is growing. SF Homeless, a two-year-old Internet forum, has 140 members. It posts schedules for public-housing meetings and news from similar groups in New Mexico, Arizona and Connecticut. And it has a blog with online polls about shelter life.

Cheap computers and free Internet access fuel the phenomenon. So does an increasingly computer-savvy population. Many job and housing applications must be submitted online. Some homeless advocates say the economic downturn is pushing more of the wired middle class on to the streets.

Aspiring computer programmer Paul Weston, 29, says his Macintosh PowerBook has been a "lifeboat" since he was laid off from his job as a hotel clerk in December and moved to a shelter. Sitting in a Whole Foods store with free wireless access, Mr. Weston searches for work and writes a computer program he hopes to sell eventually. He has emailed city officials to press for better shelter conditions.

Lisa Stringer, who runs a program that teaches job and computer skills to homeless and low-income residents, says some students who can't even read or write save money to buy computers at Goodwill. "It's really a symbol in today's society of being OK and connected," she says. She sometimes urges homeless students to put off buying laptops until their living situations stabilize.

Staying wired on the streets takes determination. Electricity and Internet access can be hard to come by. Threats, including rain and theft, are a problem.

Robert Livingston, 49, has carried his Asus netbook everywhere since losing his apartment in December. A meticulous man who spends some of his $59 monthly welfare check on haircuts, Mr. Livingston says he quit a security-guard job late last year, then couldn't find another when the economy tanked.

When he realized he would be homeless, Mr. Livingston bought a sturdy backpack to store his gear, a padlock for his footlocker at the shelter and a $25 annual premium Flickr account to display the digital photos he takes.

One recent morning, Mr. Livingston sat in a cafe that sometimes lets customers tap its wireless connection, and shows off his personal home page, featuring links for Chinese-language lessons.

Mr. Livingston says his computer helps him feel more connected and human. "It's frightening to be homeless," he says. "When I'm on here, I'm equal to everybody else."

For Skip Schreiber, 64, an amateur philosopher with wispy white hair who lives in a van, power is the biggest challenge to staying wired. Mr. Schreiber tended heating and ventilation systems before work-related stress and depression sidelined him around 15 years ago, he says.

For his 60th birthday, he dipped into his monthly disability check to buy a laptop, connected it to his car battery, and taught himself to use it. "I liked the concept of the Internet," says Mr. Schreiber, "this unlimited source of opinion and thought."

Mr. Schreiber later switched to a Mac because it uses less juice. He keeps the fan and wireless antenna off when possible and cools the laptop by putting it on a damp washcloth. He says that by using such tricks, he can keep the laptop battery going for 16 hours, if he avoids videos.

In the van, stacked with toolboxes, electric gear and bedding, Mr. Schreiber shows the contents of his laptop, including the complete California legal code and files on thinkers from Thomas Aquinas to the psychologist Philip Zimbardo. Mr. Schreiber says writings about human behavior and motivation help make sense of what has happened to him.

"No one creates themselves as a homeless person," he says. "We make the choices we can with what we're offered."

Michael Ross creates his own electricity, with a gas generator perched outside his yellow-and-blue tent. For a year, Mr. Ross has stood guard at a parking lot for construction equipment, under a deal with the owner. Mr. Ross figures he has been homeless for about 15 years, surviving on his Army pension.

Inside the tent, the taciturn 50-year-old has an HP laptop with a 17-inch screen and 320 gigabytes of data storage, as well as four extra hard drives that can hold another 1,000 gigabytes, the equivalent of 200 DVDs. Mr. Ross loves movies. He rents some from Netflix and Blockbuster online and downloads others over an Ethernet connection at the San Francisco public library.

One evening recently, Mr. Ross lay down on his sleeping bag and watched an X-Men cartoon on the laptop, listening through headphones over the roar of the generator. When he travels downtown, he takes all the gear with him for safekeeping. His backpack bulges with cords and bubble-wrapped electronic gadgets. Mr. Ross says he doesn't notice the weight.

Mr. Pitts, the poet who lives under a bridge, keeps a mental list of spots to charge batteries and go online, including a deserted corner of a downtown train station and wired cafes whose owners don't mind long stays and lots of bags.

When he was evicted from his apartment two years ago, Mr. Pitts says, "I thought: My existence and my life don't stop because I don't have a place to live."

He bought a Toshiba laptop. When it died, he bought a used Dell. Last month, that one expired, too, with a cracked screen. Now he checks email and posts to his Internet forum on homeless issues, from computers at libraries, college campuses and a laptop stashed behind the counter of a coffee shop by a friend.

Before the Dalai Lama visited a soup kitchen here a month ago, Mr. Pitts researched the Buddhist leader on Wikipedia and copied the text onto his iPod, to read in bed under the bridge. "I'm under my blanket, under a tarp, reading Dalai Lama this, Dalai Lama that," he says.

Mr. Pitts expects to soon scrape up the money for another computer. He figures he can get one for less than $200.

EVERYBODY TAKING NOTES? I THINK WE'RE GONNA GET THAT REVOLUTION PRETTY SOON.

[Demeter]

49. Harvard datapoint of the day: (DON'T CRY FOR IT, ARGENTINA!)

http://blogs.reuters.com/felix-salmon/2009/05/31/harvard-datapoint-of-the-day/


Posted by: Felix Salmon


Richard Bradley reports:

Harvard has already halted the hiring of junior faculty and announced an early retirement program for tenured professors, and for the first time ever is considering laying off tenured professors.

And why might Harvard be laying off tenured professors? Because it’s down to its last $25 billion, of course.

Bradley adds a bit to what we know about Harvard’s financial mismanagement:

According to the university’s 2008 financial report, in the next 10 years it must pay various private investors some $11 billion in capital commitments. Where will that money come from if, as seems likely, endowment growth over those years is minimal or nonexistent, and alumni’s own strained budgets limit their generosity?

These are the famous capital calls from Harvard’s private-equity investments, which previous HMC managers assumed could be met out of earlier private-equity payouts. Or something. But now — and for the foreseeable future — Harvard is facing a massive liquidity crunch:

HMC “took the university right to the edge of the abyss,” one alumnus, a financier who is privy to details of the university’s balance sheet, told me. I asked what he meant. “Meaning, you’re out of cash.

“That,” he added, “is the definition of insolvency.”

Er no, actually it’s the definition of illiquidity, but never mind. The point is that Harvard has run out of liquid assets, and that’s going to have huge effects on its institutional psyche — and possibly even on the job security of tenured professors. My guess is though that no one with tenure will be laid off involuntarily.

And maybe Harvard’s alumni might start giving a lot more now than they have in the past. After all, until recently, any giving from alumni was dwarfed by the investment gains of the endowment, and so the incentive to add another drop to the bucket was greatly reduced. Now, by contrast, cash from alumni is desperately needed to meet the university’s annual liquidity requirements. It might even feel better, giving money when you know it’s going to actually be spent, rather than giving money simply to augment some gargantuan endowment.

SAY, AREN'T THESE THE FINANCIAL PLANS THAT LARRY SUMMERS SET IN MOTION? I THINK SO!

[Demeter]

53. Harvard Business Students Take Dumb "Ethics" Pledge

http://www.businessinsider.com/harvard-business-students-take-dumb-ethics-pledge-2009-5

Maybe we're a little cynical, but there's something awfully silly and infantilizing about having business school students take an "I will be ethical pledge" upon graduation. Then again, considering some of the rotten apples that have come out of the Harvard Business School (they earned the worst grade in our Magna Cum Lousy ranking of schools), maybe they're just trying to do whatever they can.

According to the NYT, 20% of students have taken this pledge.

THE MBA OATH

As a manager, my purpose is to serve the greater good by bringing people and resources together to create value that no single individual can create alone. Therefore I will seek a course that enhances the value my enterprise can create for society over the long term. I recognize my decisions can have far-reaching consequences that affect the well-being of individuals inside and outside my enterprise, today and in the future. As I reconcile the interests of different constituencies, I will face choices that are not easy for me and others.

Therefore I promise:

* I will act with utmost integrity and pursue my work in an ethical manner.
* I will safeguard the interests of my shareholders, co-workers, customers and the society in which we operate.
* I will manage my enterprise in good faith, guarding against decisions and behavior that advance my own narrow ambitions but harm the enterprise and the societies it serves.
* I will understand and uphold, both in letter and in spirit, the laws and contracts governing my own conduct and that of my enterprise.
* I will take responsibility for my actions, and I will represent the performance and risks of my enterprise accurately and honestly.
* I will develop both myself and other managers under my supervision so that the profession continues to grow and contribute to the well-being of society.
* I will strive to create sustainable economic, social, and environmental prosperity worldwide.
* I will be accountable to my peers and they will be accountable to me for living by this oath.

Now technically there's nothing really that awful about the content. Being accountable to this or that is good. And yes, we'd hope that MBA students would uphold laws and contracts.

But honestly, we'd rather hire one of the 80% that didn't get kow-towed into signing the oath -- not because they're more likely to be greedy or ruthless -- but because they feel confident enough not to attach their name to a meaningless oath that ultimately means very little. There's something similar here to when people think they're brave for saying "I don't believe what you're saying, but I'd fight to the death for your right to say it."

It sounds all nice to the ears, but it absolutely confers nothing about the individual saying it, except that they're prone to meaningless pablum.

[Demeter]

50. The CBMS market about to implode (commercial-property mortgage backed securities)

http://www.economicpopulist.org/?q=content/cbms-market-about-implode

Since 2007, if not earlier, all the attention has been focused on the residential real estate troubles. But now the commercial real estate problems are about to come front and center.

In a research note today, Citigroup analysts estimated that "more than $75 billion of CMBS market capitalization has been lost" since the S&P request for comment on changes to their U.S. CMBS rating methodology was issued two days ago.

S&P noted:
Our preliminary findings indicate that approximately 25%, 60%, and 90% of the most senior tranches (by count) within the 2005, 2006, and 2007 vintages, respectively, may be downgraded.

60% and 90% writedowns are HUGE! That will involve hundreds of billions of dollars and the losses will be spread throughout the securities market. It could force dozens of banks into insolvency.

Citi also noted that this will impact the CMBS legacy TALF announced last week by the Fed. According to Citi the "S&P changes could impact nearly 40% of the triple-A TALF eligible universe" and they expect the Fed to change their criteria.

The Fed won't buy non-AAA rated securities. Thus the banks won't be able to pass along the losses to the taxpayer...unless the Fed decides to buy worthless securities as well.

[Robbien]

57. S&P just lowered their ratings on $5.56 billion of commerical CDOs

http://online.wsj.com/article/BT-CO-20090528-713039.html

and they say the delinquency rate of commercial CDOs will go from 7.5% to 15% by the end of the year.


Just 15%, that sure is looking at the world through rose colored glasses.


Another article on the subject says asset managers are still trading these commercial CDOs and "Ten of these assets were sold at prices ranging from 2% to 50% of par while one mezzanine loan was written off as a total loss".



But hey. The recession is over or so says the WH. Green shoots cluttering up the joint all over the place.

[Demeter]

51. Invest in Escapism! Signs of "green shoots" after all?

http://www.financialarmageddon.com/2009/05/green-shoots-in-escapism.html

A quick sift through recent news reports reveals an interesting -- albeit largely anecdotal -- trend: businesses and sectors that cater to "escapism" in its various forms seem to be holding their own or are, in some cases, thriving, despite -- or, perhaps, because of -- the intense financial pressures being felt elsewhere.

Here are a few examples:

"Bartending Means Quick Cash in Recession" (KVUE.com)

Bartender training programs see rise in enrollment

Some say alcohol is recession proof and bartending schools are finding that to be true. Bartender training classes have seen a spike in enrollment during this recession. Rachel Burdett, owner of the Professional Bartending School of San Antonio Inc, says they have seen their highest enrollment in their ten year history.

"Romance Novels Thriving in Tough Economic Times" (Associated Press)

Love may not conquer all in real life, but its power in relatively inexpensive books is quite a comfort in this economy. Publishers are seeing strong sales in the romance genre as other categories decline and consumers cut back on spending.

Harlequin Enterprises Ltd., a global giant in women's fiction, reported fourth-quarter earnings up 32 percent over the same period a year earlier, with U.S. retail sales up 9 percent in 2008.

For the week of May 10, romance book sales overall were up nearly 2.4 percent compared with the same week last year, according to Nielsen BookScan, which covers 75 percent of retail sales. Travel book sales were down 16 percent, detective/mystery and self-help were each down 17 percent and adult fiction overall, of which romance is a subgenre, was up 1 percent.

Jennifer Enderlin, associate publisher for St. Martin's Press, said romance is doing so well, the publisher is releasing 32 titles this year (more could be added), compared to 26 last year.

"Anyone Can Learn to Sing in Key, Experts Say" (New Brunswick Business Journal)

Recession-weary adults are battling the blues by learning to sing them - along with musical theatre, classical, sacred, folk and popular music - via lessons with community choirs, where it's as much about camaraderie as crooning.

"Broadway Beating Recession" (Reuters)

Broadway theatres defied the recession to post record ticket sales in the 2008-09 season in what the Broadway League attributed to a need for escapism.

The trade association representing theatre owners, operators and producers said in the 12 months to May 24, paid attendance on Broadway in New York was 12.15 million tickets, slightly lower than the 12.27 million the previous season.

But producers still managed to raise gross takings by $6 million, or 0.6 per cent, to $943.3 million, beating the previous record set in the 2006-07 season of $938.5 million.

"As we have proven, if you put on a great show, people will come -- even in the midst of an economic downturn," Broadway League executive director Charlotte St. Martin said in a statement.

"Research has shown that theatre provides escape from everyday life and especially during these tough times, we have given the audiences a reason to see a show."

"Music Lovers Pack Halls, Drown the Money Blues" (The Boston Globe)

To save money and make a dent in his debt, Justin Ordman, 26, of Allston is forgoing road trips with friends. Donna Conway, 48, of Malden has put the kibosh on shopping sprees. Cheryl Tong, 51, of Revere is eating out less.

One thing none of them is willing to give up, however, is going to see live music.

"You might not remember a dinner you had two years ago at a restaurant, but you'll remember a good show 20 years from now," Ordman said before heading into the House of Blues recently to check out pop group 3OH!3.

The packed clubs and concert halls across the country make it clear they're not alone. Despite belt-tightening and layoff fears, the live music industry is thriving.

"2008 was a decent year for the concert business despite everything that happened," says Gary Bongiovanni, editor-in-chief of concert industry trade publication Pollstar. "What we've found as we've moved through this year is that fans are still buying concert tickets, and the high-profile tours that went on sale early in the year have done fine."

While attendance in North America was down 2 percent in 2008 compared with 2007, it was a much less steep decline than the 20 percent slide that took place between 2007 and 2006. And concert revenues actually increased by 8 percent last year after a 10 percent decline the year before.

[Demeter]

52. Off the Charts: Troubled Bank Loans Hit a Record High By FLOYD NORRIS

http://www.nytimes.com/2009/05/30/business/economy/30charts.html?_r=1


OVERALL loan quality at American banks is the worst in at least a quarter century, and the quality of loans is deteriorating at the fastest pace ever, according to statistics released this week by the Federal Deposit Insurance Corporation.

The report highlighted that even as the government and major banks have scrambled to deal with the impaired securities the banks own, the institutions have been plagued by an unprecedented volume of old-fashioned loans going bad.

Of the entire book of loans and leases at all banks — totaling $7.7 trillion at the end of March — 7.75 percent were showing some sign of distress, the F.D.I.C. reported. That was up from 6.9 percent at the end of 2008 and from 4.1 percent a year earlier. It also exceeded the previous high of 7.26 percent set in 1990 and 1991, during the last crisis in American banking.

The F.D.I.C. has been collecting the figures since 1984.

Virtually the only encouraging news in the report was that the banks’ loan portfolio might be worsening more slowly than it was. While the increase of 3.65 percentage points in a year is the highest ever, the quarterly rise was smaller than in the fourth quarter of last year.

The figures, as shown in the accompanying charts, include loans that are more than 30 days behind in payments, a category that will include some loans that catch up and become current. But the percentage that are at least 90 days overdue, or on which the bank has stopped accruing interest or written off, is also higher than at any time since 1984.

As recently as mid-2006, the proportion of troubled loans was at a historic low, and bank regulators were confident that the institutions were well capitalized and could survive any likely economic downturn. They were wrong, it turned out.

The problems stretch across nearly every category of loan, and every size of bank, although the loan problems appear to be somewhat less severe at smaller banks.

Over all, 8.77 percent of real estate loans are troubled, but some types of such loans are in far worse shape than others. Construction and development loans are in the worst shape, with 17.68 percent of loans troubled, and loans secured by farmland are in the best shape, with only 2.98 percent of such loans reported as having problems.

One area that could get much worse is loans on commercial buildings, including stores and offices. Just 4.01 percent of such loans are troubled, less than half the peak of the early 1990s. A large number of those loans will need to be refinanced in the next few years, however, which could be impossible where real estate values have fallen sharply.

Loans to businesses — called commercial and industrial loans — also appear to be doing better than they did in the early 1990s. That could reflect the fact that many such loans are no longer on bank balance sheets, having been sold into the securitization market. Some analysts also fear a wave of defaults on these loans.

The rising stress for some consumers is shown by the fact that banks are taking charge-offs for bad debt at an annual rate of 7.79 percent, and that about one in seven of such loans is classified as troubled.

The F.D.I.C. reports that two-thirds of the banks that paid dividends in 2008 either reduced or eliminated their dividends in the first quarter of this year, a sign of the stress being felt even by banks that have raised new capital. Until the tide of bad loans begins to ebb, banks may be hesitant to take on much additional risk by making new loans to risky borrowers.

Floyd Norris’s blog on finance and economics is at nytimes.com/norris.


SEE PREVIOUS POST TO GET A STEREO EFFECT

[Demeter]

56. JP Morgan Says Losses on WaMu Credit Cards Could Reach 24%

http://www.nakedcapitalism.com/2009/05/jp-morgan-says-losses-on-wamu-credit.html


Folks, 24% is a simply breathtaking number for credit card losses, and JP Morgan is saying that is what it may see on its WaMu portfolio. Even keeling-over-and-dying Advanta is up to only 20% losses.

Jamie Dimon, JPMorgan Chase chief executive, warned on Wednesday that loss rates on the credit card loans of Washington Mutual, the troubled bank acquired last year by JPMorgan, could climb to 24 per cent by the year end.

In the past, credit card loss rates have tracked the unemployment rate but that relationship has been breaking down for more troubled credit card portfolios, such as the $25.9bn in WaMu credit card loans.

At the end of the first quarter, 12.63 per cent of the WaMu credit card loans were deemed uncollectable by JPMorgan. The bank estimates that figure could reach 18 to 24 per cent by the end of 2009, depending on economic conditions.

I do wonder at the timing of this announcement, coming on the heels of the press indicating that JP Morgan had gotten quite a steal on the WaMu deal, and could accrete $29 billion of earnings from reversals of writedowns taken at the time of acquisition. That’s a nice little nest egg. I wonder if this comment was to reinforce the notion that WaMu really was a garbage barge, and JP Morgan did a great public service by buying it. A $6+ billion prospective loss is not chump change, but query how much was already marked down.

[Demeter]

55. World income seen to decline by 3.7% By Harvey Morris at the United Nations

http://www.ft.com/cms/s/0/a26830a6-4ae9-11de-87c2-00144feabdc0.html

World income is likely to decline by 3.7 per cent this year on a per capita basis as a result of a global financial crisis that had disproportionately affected livelihoods in the developing world, a team of United Nations economists said on Wednesday.

In a mid-year update on economic prospects for 2009, the economists revised downward an already pessimistic scenario published in January and warned there were “no green shoots to be seen which could signal beginnings of a new spring”.

The team, led by Rob Vos of the UN’s department of economic and social affairs, estimated the world economy would shrink by 2.6 per cent this year. While a mild recovery was possible next year, “risks remain on the downside”.

The report said the spillover of the financial crisis from the developed world had left developing countries, heavily reliant on private capital inflows, particularly vulnerable. It noted that the sharpest drop was in bank lending to emerging economies where inflows of about $400bn in 2007 would turn into a net outflow this year.

It noted there were no international bond issues by African countries in 2008 as a result of the credit crunch and that Kenya, Nigeria, Tanzania and Uganda had all cancelled plans to raise funds in the capital market.

Countries that accumulated large foreign reserves as a safety net were now seeing those funds evaporate. In 2008, developing country reserves totalled $4,000 bn but by this year the reserves of some low-income countries had dropped to below a critical level equal to less than three months of imports.

The authors of the report said recovery would depend on the level of international co-ordination on stimulating the world economy. “We’ve seen a lot of action going on,” Mr Vos said on Wednesday, “but if we want a sustainable way out of this crisis much more has to be done”.

The report echoed recent calls for a UN Global Economic Council to be set up to provide co-ordinated response to global challenges “and set the world on a new but sustainable development path”.

The economists said the prospect that recovery would begin in the second half of 2009 looked increasingly unlikely. It would depend on problems in the financial markets being resolved by mid-year and fiscal stimulus measures taking visible effect during the year. “By May 2009, such conditions were far from present,” the report said.

[Demeter]

58. Strange but true - the credit specs are back

http://www.ft.com/cms/s/0/c1313f68-4a54-11de-8e7e-00144feabdc0.html

By John Dizard

Published: May 27 2009 03:00 | Last updated: May 27 2009 03:00

With all this reflationary work by the central banks and governments, don't you wonder what the new cash is buying?

Know anyone who's getting a new Porsche? Suezmax tanker? Damien Hirst pickled shark? Semiconductor test equipment?

Didn't think so. Neither do I. But the cash is going somewhere, such as into credit and credit derivative speculation.

A few months ago, you might not have expected to see those words again, outside congressional or parliamentary hearing transcripts. But that's what's been going on since March.

The credit specs are back. After all, if the dictates of style and tax auditors say you have to go easy on conspicuous consumption, and if there's no demand for the products of real capital spending, then you might as well take your cash to the track, or the corner credit default swap dealer.

Credit hedge fund managers, and even the banks' own desks, have uncoiled themselves from their foetal positions, and are back taking advantage of what are either risk-free arbitrages or value traps, depending on how the next few months go.

If I were them, I might be taking the money made in the past two and a half months off the table. But then I don't have to be reaching to get past a high-water mark.

"I am totally mystified by this rally," says one friend of mine in the credit fund trade.

He's made money on both the downside and the upside during the past year, and generally isn't at a loss to describe the parallelogram of forces, as they say in classical mechanics.

"Look, the system has taken out some of its financial leverage, but the economy still has too much excess capacity that will have to be dealt with. If we sit in the muck for five years , then there will be a tremendous number of defaults." That isn't being priced in to credit spreads.

Even after they've been reviled by talking heads and politicians from here to Ulan Bator, credit default swaps are still a very low-cost way of putting on speculative positions, as long as they still trade. And so, thanks to the Geithner Treasury's policy of reform, rather than dissolution, CDS trading has regained a vampiric strength the real economy still lacks.

Some specific credit sectors have done particularly well, such as retailers and chemicals. "They are just too expensive," says a German volatility trader. "JC Penney has gone from 800 or 900 over in the five year down to 190 to 200. That shows not short covering, but people jumping in after that." The consumer-dependent retailers and cyclicals such as the chemical companies still have issues with real-world demand, but the credit market people only see them as sources of cheap beta. For now.

The intrinsic leverage of CDS trades makes it possible to hope the portfolio manager might actually get paid a bonus some day.

For five-year CDS on credits such as those back-from-the-dead names every basis point on a $10m position can be worth $3,500 to $4,000.

Apart from going outright long "cheap" credit, there are, once again, fun games such as the "negative basis trades". That is, you can own a corporate bond, or emerging market sovereign bond, buy default protection on the paper with CDS, and collect interest payments for taking no risk. That's right: because CDS prices are depressed, relative to the comparable bonds, you can collect money for taking no risk.

A couple of years ago, someone might have said there was a risk that a CDS counterparty, such as, hypothetically, AIG, might get into trouble, and you would be unable to count on that leg of the trade. Then a risk-free arbitrage could turn into a money trap.

But thanks to Hank Paulson, Tim Geithner, and the rest of Team USA, that risk is no longer seen to be a problem. So you can now collect a couple of hundred basis points of risk-free money, as long as you have a line of credit with a dealer.

You may not be able to use credit markets to make reliably secured loans to auto companies, but the system can be used to collect more than 100 basis points of fully credit risk-hedged income from 10-year Turkish state bonds.

To be sure, not everyone has the nerve for this sort of game, risk free or not. The big problem is that while you don't have credit risk, or, thanks to the taxpayers, counterparty risk, you do fatten up the balance sheet in the process. As a recent Barclays Capital publication put it: "Some banks are still holding back on bond financing in order to shrink their balance sheets in advance of Q2 reporting, but interestingly, some hedge funds that still have cash are taking their places, seduced by rates of nearly 2 per cent over Libor and the ability to manage counterparty risk through tri-party repo arrangements." In a perfect - or even a functional - world, the Law of One Price would prevent such fat arbitrages from opening up. Until that day arrives we have to make do with what's at hand: Steve Rattner to run the auto industry, and negative basis trades for credit portfolios.

[Demeter]

59. The Finance-Government Complex & The End of U.S. Economic Dominance

http://www.wilmott.com/blogs/satyajitdas/index.cfm/2009/5/26/The-FinanceGovernment-Complex--The-End-of-US-Economic-Dominance


Banks remain in the ICU (intensive care unit). Even after around $900 billion in new capital, the global banking system remains short of capital by around $1-2 trillion. This translates into an effective reduction in available credit of around 20-30% from previous levels.

Recent excitement about the "stress tests" of U.S. banks misses an essential point. At best if you accept the premises of the test, the risk of failure of these institutions is much reduced. But the banks’ ability to support lending levels that prevailed in say 2007 has not been restored. In short, the "credit crunch" or shortage of borrowing will continue for a prolonged period....

[Demeter]

60. Will Higher Education Be the Next Bubble to Burst?

http://chronicle.com/free/v55/i37/37a05601.htm

By JOSEPH MARR CRONIN and HOWARD E. HORTON

The public has become all too aware of the term "bubble" to describe an asset that is irrationally and artificially overvalued and cannot be sustained. The dot-com bubble burst by 2000. More recently the overextended housing market collapsed, helping to trigger a credit meltdown. The stock market has declined more than 30 percent in the past year, as companies once considered flagship investments have withered in value.

Is it possible that higher education might be the next bubble to burst? Some early warnings suggest that it could be.

With tuitions, fees, and room and board at dozens of colleges now reaching $50,000 a year, the ability to sustain private higher education for all but the very well-heeled is questionable. According to the National Center for Public Policy and Higher Education, over the past 25 years, average college tuition and fees have risen by 440 percent — more than four times the rate of inflation and almost twice the rate of medical care. Patrick M. Callan, the center's president, has warned that low-income students will find college unaffordable.

Meanwhile, the middle class, which has paid for higher education in the past mainly by taking out loans, may now be precluded from doing so as the private student-loan market has all but dried up. In addition, endowment cushions that allowed colleges to engage in steep tuition discounting are gone. Declines in housing valuations are making it difficult for families to rely on home-equity loans for college financing. Even when the equity is there, parents are reluctant to further leverage themselves into a future where job security is uncertain.

Consumers who have questioned whether it is worth spending $1,000 a square foot for a home are now asking whether it is worth spending $1,000 a week to send their kids to college. There is a growing sense among the public that higher education might be overpriced and under-delivering.

In such a climate, it is not surprising that applications to some community colleges and other public institutions have risen by as much as 40 percent. Those institutions, particularly community colleges, will become a more-attractive option for a larger swath of the collegebound. Taking the first two years of college while living at home has been an attractive option since the 1920s, but it is now poised to grow significantly.

With a drift toward higher enrollments in public institutions, all but the most competitive highly endowed private colleges are beginning to wonder if their enrollments may start to evaporate. In an effort to secure students, some institutions, like Merrimack College near Boston, are freezing their tuition for the first time in decades.

Could it get worse for colleges in the coming years? The numbers of college-aged students in the "baby-boom echo," which crested with this year's high-school senior class, will decline over the next decade. Certain Great Plains and Northeastern states may lose 10 percent of the 12th-graders eligible for college. Vermont is expected to lose 20 percent by 2020.

In the meantime, online, nontraditional institutions are becoming increasingly successful at challenging high-priced private colleges and those public universities that charge $25,000 or more per year. The best known is the for-profit University of Phoenix, which now teaches courses to more than 300,000 students a year — including traditional-age college students — half of them online. But other competitors are emerging. In collaboration with an organization called Higher Ed Holdings--which is affiliated with Whitney International University, owner of New England College of Business and Finance, where one of us is president and the other a trustee--some state universities have begun taking back market share by attracting thousands of students to online programs at reduced tuition rates. One such institution is Lamar University, in Texas, which has seen its enrollment mushroom since working with Higher Ed Holdings to increase access to some of its programs.

Moreover, increases in federal financial aid and state scholarships have been unable to keep up with the incessant annual increases in tuition at traditional four-year colleges. For example, Congress has raised the Pell Grant limits from $4,731 to $5,350 a year by scrubbing the federal loan programs of bank subsidies thought to be excessive. But $5,350 pays for only about four to six weeks at a high-priced private college.

A few prominent universities, including Harvard and Princeton, have made commitments to reduce or eliminate loans for those students from families earning less than $75,000 or even $100,000 a year. But the hundreds of less-endowed colleges cannot reduce the price of education in that fashion. It is those colleges that are most at risk.

What can they do to keep the bubble from bursting? They can look for more efficiency and other sources of tuition.

Two former college presidents, Charles Karelis of Colgate University and Stephen J. Trachtenberg of George Washington University, recently argued for the year-round university, noting that the two-semester format now in vogue places students in classrooms barely 60 percent of the year, or 30 weeks out of 52. They propose a 15-percent increase in productivity without adding buildings if students agree to study one summer and spend one semester abroad or in another site, like Washington or New York. Such a model may command attention if more education is offered without more tuition.

Brigham Young University-Idaho charges only $3,000 in tuition a year, and $6,000 for room and board. Classes are held for three semesters, each 14 weeks, for 42 weeks a year. Faculty members teach three full semesters, which has helped to increase capacity from 25,000 students over two semesters to close to 38,000 over three, with everyone taking one month (August) off. The president, Kim B. Clark, is a former dean of the Harvard Business School and an authority on using technology to achieve efficiencies. By 2012 the university also plans to increase its online offerings to 20 percent of all courses, with 120 online courses that students can take to enrich or accelerate degree completion.

Colleges can also make productivity gains by using technology and re-engineering courses. For the past 10 years, the National Center for Academic Transformation, supported by the Pew Charitable Trusts, has helped major universities use technology to cut instructional costs by an average of 40 percent while reducing the number of large course sections, graduate teaching assistants, and faculty time on correcting quizzes. Grades have increased, and fewer students have dropped out. Meanwhile, students have a choice of learning styles and ways to get help online from either fellow students or faculty members. That "transformation" requires a commitment to break away from the medieval guild tradition of one faculty member controlling all forms of communication, and to give serious attention to helping students think and solve problems in new formats.

The economist Richard Vedder of Ohio University, a member of the federal Spellings Commission, offers more radical solutions. He urges that university presidents' salaries include incentives to contain and reduce costs, to make "affordability" a goal. In addition, he proposes that state policy makers conduct cost-benefit studies to see what the universities that receive state support are actually accomplishing.

Fortunately, some other forces are at work that might help save higher education. The federal government recently raised significantly the amount of money that returning veterans might claim to pursue higher-education degrees, so it reaches at least the level of tuition and fees at many public universities.

In addition, the rest of the world respects American higher education, and whether studying at a college here or an American-based one abroad, the families of international students usually pay in full. The number of international students could rise from 600,000 to a million a year if visa reviews are expedited; the crisis of September 11, 2001, temporarily reduced the upward trajectory of overseas enrollments in American colleges. Accrediting agencies could also develop standards to expedite the exporting of American education into the international market.

But colleges cannot, and should not, rely on those trends. Although questions about the mounting prices of colleges have been raised for more than 30 years and just a few private colleges have closed, the stakes and volume of the warnings are mounting. Only during a critical moment in economic history can one warn of bubbles and suggest that the day of reckoning for higher education is, in fact, drawing near.

Joseph Marr Cronin is the former Massachusetts secretary of educational affairs, and Howard E. Horton is the president of New England College of Business and Finance.

[Demeter]

61. Recession Imperils Loan Forgiveness Programs By JONATHAN D. GLATER

http://www.nytimes.com/2009/05/27/your-money/student-loans/27forgive.html?_r=1&ref=business


When a Kentucky agency cut back its program to forgive student loans for schoolteachers, Travis B. Gay knew he and his wife, Stephanie — both special-education teachers — were in trouble.

“We’d gotten married in June and bought a house, pretty much planned our whole life,” said Mr. Gay, 26. Together, they had about $100,000 in student loans that they expected the program to help them repay over five years.

Then, he said, “we get a letter in the mail saying that our forgiveness this year was next to nothing.”

Now they are weighing whether to sell their three-bedroom house in Lawrenceburg, Ky., some 20 miles west of Lexington. Otherwise, Mr. Gay said, “it’s going to be very difficult for us to do our student loan payments, house payments and just eat.”

From Kentucky to Iowa to California, loan forgiveness programs are on the chopping block. Typically founded by their states to help students pay for college, the state agencies and nonprofit organizations that make student loans and sponsor these programs are getting less money from the federal government and are having difficulty raising money elsewhere as a result of the financial crisis.

The organizations say the repayment programs have been hurt by a broader effort by Congress to tackle the high cost of the federal student loan program by reducing subsidies to lenders.

Curbing the programs will make it harder to lure college graduates into high-value but often low-paying fields like teaching and nursing.The changes leave students without a critical escape hatch from their federal college and graduate school loans, and they throw up a roadblock for those who dream of teaching but fear an oppressive combination of low wages and high debt.

“I remember sitting in the financial aid office and them saying, ‘Pay for every penny of it, pay for your books through loans, because they’re going to be forgiven,’ ” Mr. Gay said. And he dutifully did, using federal loans to cover some of the costs of his undergraduate degree in communications and all the costs of his master’s program in special education, which he finished in 2006.

If he had known the forgiveness program was vulnerable, Mr. Gay said, he would have chosen a different career, perhaps public relations. “Which I am actually contemplating doing right now,” he added.

MORE AT LINK

[Demeter]

63. Japan, Korea, Detroit and banker bonuses

http://brontecapital.blogspot.com/2009/05/japan-korea-detroit-and-banker-bonuses.html


It surprises me how few people followed up the logic from my Japan and Korean banking collapse post.

Japan and Korea had very similar industrial structures. You can get into a lather describing differences between Keiretsu and Chaebol – but if you look at the heavy industry and government support and how the finance worked it was all very similar.

When the system broke down in Japan there was never any great recession – but there was never a recovery. Growth just slowed to anaemic levels and stayed slow for two decades – the lost period. However the average Japanese person doesn’t have a lot to be unhappy about. Real wages stayed high, employment, whilst more difficult than in the boom years, remained fairly easy to obtain. You would describe the situation as malaise – not failure. The people who think it was a failure are largely people who played the Japanese stock market – which forever looked really cheap, only to get significantly cheaper. It is my class (stock-investing capitalists) who think of Japan as a failure.

Korea by contrast had a true banking collapse. The banks were not only insolvent but illiquid. They could not lend – and several Chaebol crashed and burnt. Even quite large modern companies (Hynix for example) failed. Indeed it is only the strongest of the Chaebol that got through (notably Samsung).

But the Korean experience was considerably worse for Mr and Mrs Soon (and their average Korean family) than it was for Mr and Mrs Watanabe (and their average Japanese family). In Korea there was a five fold increase in unemployment (admittedly from very low levels) and a very large increase in small business insolvency.

Korea’s advantage was that it recovered.

I argued that the problem in Japan was their ability to keep zombie corporations (not zombie banks) alive for decades. Japan has a “Rip-Van-Winkle” industrial legacy to go along with its absolutely brilliant modern technology industries. This old industry sucks resources which would better be used by the modern industry. It makes sense to keep the old industries alive during a deep recession because the resources would otherwise be unemployed. It makes no sense to keep them alive long term as you wake up 30 years later (as per Rip-Van-Winkle) and lo – you still have the old industrial structure.

Translate this to America – and the standout yesterday industries are Detroit and mortgage broking. The US at peak had about 500 thousand mortgage brokers or one per sixty mortgages outstanding. This was insane – and it has changed. Detroit also (politely) looks as if it will employ about two thirds as many people (or less) after the bad bits of Chrysler and GM are closed as part of the bankruptcy process.

I also argued that the problem with Korea was that the banks became totally illiquid and hence were unable to lend at all. This mattered because not only inefficient Chaebol died – but plenty of good stuff suffered the same fate. A banking system that cannot lend is indiscriminate about who it kills. It will result in the death of dodgy businesses – but will also kill perfectly fine businesses that need cash for short term requirements.

If you want to avoid the really deep malaise that was Korea then keep the banks liquid. Then at least they will lend to the more worthy borrowers – and whilst industry will die banks can be selective about who they kill.

Killing Detroit whilst bailing out fat-cat bankers is politically unpopular. If you want to see a justifiably upset victim have a look at this letter from a Dodge dealer. I don’t think the political sentiment in the letter is accurate – but it is perfectly understandable.

Likewise there is no end of complaint about bailing out banks so they can continue to pay million dollar bonuses – and the political sentiment in those complaints is accurate and entirely understandable.

So let me say I agree with the unpopular. I think the Obama administration is right to let Detroit file bankruptcy and to bail out banks. I know this is unpopular – I just think the outcomes will be better that way. I am very impressed by an Administration that does things that are so politically offensive but probably ultimately the right thing to do. That doesn't make the political pill any easier to swallow.

WELL, WE WILL JUST HAVE TO WAIT AND SEE--BUT I THINK THERE ARE TOO MANY ZOMBIE BANKS, TOO

[Demeter]

64. When It Comes To Charity, Poor Give Too Much, Get Too Little

http://consumerist.com/5268696/when-it-comes-to-charity-poor-give-too-much-get-too-little
By Phil Villarreal, 2:37 PM on Mon May 25 2009, 12,390 views

One reason rich people stay rich is they don't go wasting it on silly things such as charity. Likewise, a factor that keeps poor people poor is they give too much of what little they have away.

Hey, don't yell at me. These are just the findings of a McClatchy Newspapers story. Reporter Frank Greve sifted through data from the U.S. Bureau of Labor Statistics data and found that the poorest Ameicans — those who make an average of $10,531 — gave the largest percentage of their income (4.3 percent) to charity. Meanwhile, the wealthiest group — which make an average of $158,888 — give only 2.1 percent of what they make.

"The lowest-income fifth (of the population) always give at more than their capacity," said Virginia Hodgkinson, former vice president for research at Independent Sector, a Washington-based association of major nonprofit agencies. "The next two-fifths give at capacity, and those above that are capable of giving two or three times more than they give."

Indeed, the U.S. Bureau of Labor Statistics' latest survey of consumer expenditure found that the poorest fifth of America's households contributed an average of 4.3 percent of their incomes to charitable organizations in 2007. The richest fifth gave at less than half that rate, 2.1 percent.

The figures probably undercount remittances by legal and illegal immigrants to family and friends back home, a multibillion-dollar outlay to which the poor contribute disproportionally.

None of the middle fifths of America's households, in contrast, gave away as much as 3 percent of their incomes.

"As a rule, people who have money don't know people in need," said Tanya Davis, 40, a laid-off security guard and single mother.

You hear that, needy? Just sign up for country club memberships, rub elbows with the moneybags, who will finally have po' folk as a pals, and everyone wins!

[Demeter]

65. Zombie banks walk among us

http://money.cnn.com/2009/05/22/news/companies/zombie_banks/index.htm?section=money_latest

Small banks facing severe loan losses and in need of capital continue to operate, indicating a reluctance on behalf of regulators to shut them down.

By David Ellis, CNNMoney.com staff writer
Last Updated: May 26, 2009: 3:00 PM ET

NEW YORK (CNNMoney.com) -- Maybe the so-called "zombie" banks didn't die after all.

As recently as two months ago, many on Wall Street speculated that the nation's largest financial institutions -- banks like Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) -- were only operating as a result of extensive aid from the U.S. government.

Now, many experts wonder how so many small regional and community lenders that are capital starved and overwhelmed by escalating loan losses are able to stay in business.

In metropolitan Atlanta and the state of Florida, for example, more than 50 banks reported non-performing asset levels of 10% or more of total assets as of the end of March, according to the Raleigh, N.C.-based investment bank Carson Medlin.

Non-performing assets are loans that are not collecting interest or principal payments. In more normal economic times, non-performing asset levels remain below 1%.

Up to this point, small lenders, which serve as the primary source of credit for large parts of the country, were considered a picture of health in the banking industry. Most avoided the toxic mortgage products that ruined so many of their big bank peers.

Experts note that the majority of the 8,000 small banks are still thriving. But the outlook for this corner of the nation's banking industry has been tempered in recent weeks as small lenders endure rising losses, partly as a result of exposure to areas like commercial real estate and small business loans.

Next Wednesday, Wall Street will get a clearer sense of what kind of shape the industry is in when the Federal Deposit Insurance Corp. publishes its first-quarter assessment of the industry. One closely-watched part of that report is the agency's so-called "problem bank" list.

As of the end of 2008, that number stood at 252 institutions and it is expected to have climbed even higher during the first three months of 2009.

So far this year, the government has closed 34 banks, including the FDIC's takeover and subsequent sale of Florida-based lender BankUnited (BKUNA) late Thursday to a group of private equity investors.

While only a fraction of the institutions on the problem bank list typically reach the point of failure, experts contend that regulators have been unable to shut down some "zombie" lenders, in part, because they are still scrambling to catch up with the variety of ills affecting the sector.

Consider the case of Citizens Community Bank, a New Jersey-based lender located a little more than an hour's drive northwest of New York City. Federal regulators seized control of the bank earlier this month after the firm became overwhelmed by problems in its construction loan portfolio.

Nick Ketcha Jr., a former director of supervision at the FDIC who now serves as a managing director at the New Jersey-based financial services consulting firm FinPro, said that the company could have just as easily have been shut down at the end of last year.

"They were ready to be taken over," said Ketcha. "The fact that didn't get to them may suggest that others are out there."

Two reports published earlier this month by the FDIC's Office of Inspector General charged that the agency was "not timely and effective" in addressing the most significant problems affecting Bradenton, Fla.-based lender Freedom Bank and Alpha Bank & Trust of Alpharetta, Georgia. Both banks failed late last year.

Unprepared for the crisis much in the same way the private sector was, the FDIC has been ramping up efforts since late last year to try and stay ahead of troubles.

In its annual budget for 2009, for example, the agency increased funding for its receivership division, which oversees bank failures, nearly tenfold from $150 million to $1 billion.

But even with that funding increase, it will take time for the FDIC to boost its staff levels enough to be capable of keeping up with all the troubled banks.

In the meantime, regulators may have little choice but to focus their attention on those institutions which are in the most dire shape. As a result, other less-troubled lenders are allowed to live on for another day, notes FinPro's Ketcha.

"Right now they are looking at which are the biggest problem and prioritizing," he said.

Still, experts like Joshua Siegel, managing principal at StoneCastle Partners, whose firm focuses on investing in small-cap banks, suspects there could be forces other than staffing levels at work.

Regulators, he notes, may postpone a bank's downfall especially if the region in which its resides could enjoy an economic recovery in the coming months.

There is also speculation that industry regulators have resisted closing some banks because it may be tough for the FDIC to find buyers for them -- even after they have been seized and scrubbed of their troubled loans.

Despite some interest in failed banks from private equity firms, Jeffrey Adams, managing director at Carson Medlin Co., said many banks are unwilling to buy struggling peers.

"They are battling their own fires if you will," said Adams. "There is just not a natural supply of parties to take over deposits."

[Demeter]

66. Capitalism Produces Rich Bankers, but Socialism Produces Happiness By Phillip Bannowsky

http://www.informationclearinghouse.info/article22702.htm


May 25, 2009 "News Journal" -- Socialism is better than capitalism. So say 20 percent of Americans, and another 27 percent say they can't say which is better, according to an April 9 Rasmussen poll.

There's hope.

When you consider that virtually no newspaper, broadcaster, well-funded think tank, teacher, or anybody's boss or commander ever said something nice about socialism, it's remarkable that only 53 percent of us still favor rule by the moneyed class. Perhaps folks are learning how capitalism sacrifices happiness for individual gain.

As Billy Bragg exhorts us in his update of the socialist anthem "The Internationale": "Stand up, all victims of oppression/for tyrants fear your might/Don't cling so hard to your possessions/For you have nothing if you have no rights."

No less a "capitalist tool" than Forbes Magazine let a red cat out of the bag with a report this month that the happiest countries tend to be Scandinavian socialist democracies. High per-capita GDP certainly plays a role in their felicity, but even social democratic New Zealand, with per-capita GDP only 64 percent of the United States', ranks with the 10 democracies above us in the happiness index. They pay high taxes in these pinkotopias, but folks enjoy entitlements like free college, extensive elder care, and 52-week paid maternity leave.

The 2005 poll measured personal reports of enjoyment, pride in achievement and learning, being respected, among other things. Forbes suggests that such happiness derives from family, social and community networks, and a decent work-life balance, noting that the average workweek in Scandinavia is 37 hours.

Nice dream, but how do we get there? Most of these countries dumped capitalist exploitation long ago and instituted mixed economies with socialist ideals. More contemporary models are the 11 Latin America countries pursuing "Socialism in the 21st Century." They too reject top-down Leninism for a system based on participatory democracy and solidarity.

In Ecuador, a land I have studied and worked in, a broad coalition of indigenous, environmentalists, trade unions, professional organizations, feminists, gay activists, left parties, and students laid the groundwork for transformation. They just re-elected Rafael Correa, their leftist standard-bearer, as president. They fought racism, oligarchs, oil companies, and corrupt politicians for decades.

The economies of Latin America's red eleven are improving, although none of them has instituted a socialist utopia. They are still subject to the slings and arrows of egotism, error, and internecine conflict. But they have overcome the greatest impediments to their advancement, including the U.S.-based bankers who are draining our treasury now. And the civil society they created in the struggle is the guarantor of their democracy.

Before finding the path of progress, many of these countries had lurched from violent paroxysm to confusion and resignation, not unlike what the U.S. currently endures.

For example, our Auto Industry Task Force just bankrupted GM and Chrysler, fired tens of thousands of employees, extorted immense sacrifices from active and retired autoworkers, and is dominated by the investment bankers who absorbed trillions in national wealth to keep themselves rich after destroying the economy.

Instead of seizing plants as our Canadian comrades are doing, or adding "bossnapping" to plant occupations as the French have done, we shake our heads as the union negotiates the terms of surrender.

What could we do with socialism? Well, take banks for starters: take them, so instead of private scams that go broke gambling with money they don't own, they'd become public utilities that finance production, infrastructure, and homes. And treat aging industries like autos: instead of dumping, we'd transform them according to a national plan for green jobs and a healthy environment.

Solidarity is the path as well as the destination of socialism. Solidarity grieves when a worker loses his job or sees her pension slashed. Solidarity cheers when a union wins middle-class pay. Solidarity rejects the greed of insurers as the distributor of healthcare and demands single payer for all.

Solidarity smells the rat who divides white from black, black from gay, native from newcomer, or America from the rest of humanity.

"So come brothers and sisters/For the struggle carries on/The Internationale/Unites the world in Song.

"So comrades come rally/For this is the time and place/The international ideal/Unites the human race."

Phillip Bannowsky is a member of The News Journal Community Advisory Board and is a retired autoworker. His novel, "The Mother Earth Inn," recounts the early stirrings of Ecuador's current transformation.

[Demeter]

67. Unemployment in U.S. Probably Surpassed 9% in May (Update1)

http://www.bloomberg.com/apps/news?pid=20601087&sid=aSc829RcWzSc&refer=home


By Shobhana Chandra

May 31 (Bloomberg) -- Unemployment in the U.S. probably surpassed 9 percent in May for the first time in more than 25 years, underscoring forecasts that the economy will be slow to pull out of the worst recession in half a century, economists said before a report this week.

The jobless rate climbed to 9.2 percent, the highest level since September 1983, according to the median of 59 estimates in a Bloomberg News survey before the June 5 Labor Department report. Other data may show manufacturing and service industries shrank at a slower pace and consumer spending dropped.

“The economy is decaying at a slower rate and that is the best you can say,” said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York. “I can’t tell you we are out of the woods yet.”

Economists forecast the jobless rate will head to almost 10 percent by the end of the year, depriving Americans of the income needed to propel spending and stoke a vigorous recovery. Access to credit will likely also be limited as record defaults and foreclosures make banks reluctant to lend.

The unemployment rate is predicted to rise from 8.9 percent in April. Payrolls probably fell by 521,000 this month after declining by 539,000 in April, the median of 60 estimates showed. Job losses peaked at 741,000 in January, the most since 1949.

The economy has lost 5.7 million jobs since the recession began in December 2007, the most of any economic slump in the post-World War II era.

Auto Slump

Restructuring at automakers including General Motors Corp. and Chrysler LLC may generate more job losses. AutoNation Inc., the largest U.S. new-vehicle retailer, has said it will close seven showrooms in line with bankrupt Chrysler’s termination of 789 dealerships.

Economists project the Labor report will show manufacturers cut payrolls by 150,000 in May, after slashing them by 149,000 in April.

Workforce reductions aren’t limited to the auto industry. American Express Co., the largest U.S. credit-card company by purchases, said on May 18 it will cut 4,000 positions as cardholders squeezed by rising unemployment fail to pay debts.

The chief executive officers of Caterpillar Inc. and Xerox Corp. said hiring at their companies probably won’t pick up until markets and the economy show more signs of stability.

Reducing Employment

“We have had to continue reducing employment,” Caterpillar CEO Jim Owens said today on NBC’s “Meet the Press” program. “We will probably not be able, in a position to, rehire until mid next year as we see these markets begin to recover.”

Xerox’s Anne Mulcahy said that “if you look at net head count it’s still coming down, because that’s what our intent is, until we’re sure that things are improving.” She said “we’re hiring, but very modestly.”

Consumer spending has taken a turn for the worse after improving in the first quarter. Purchases fell in April for a second month, and incomes declined for the sixth time in the last seven months, economists project a Commerce Department report tomorrow will show.

Household purchases rose at a 1.5 percent annual rate from January to March, less than previously estimated, after plunging at a 4.3 percent annual rate in the last three months of 2008, revised figures from Commerce last week showed.

Gross domestic product shrank at a 5.7 percent pace in the first quarter, less than the government previously estimated in April, the figures also showed. Following the 6.3 percent pace of decline in the last three months of 2008, the drop capped the worst six-month performance in five decades.

Factory Index

Also tomorrow, a report may show manufacturing shrank this month at a slower pace. The Institute for Supply Management’s factory index rose to 42 in May from 40.1 in April, according to the median estimate of 63 economists. Readings of the index of less than 50 signal a contraction.

Underscoring the improvement at manufacturers, orders placed with factories probably rose 0.8 percent in April, the second gain this year, economists predicted ahead of a Commerce Department report June 3.

An ISM report the same day may show service industries, which make up almost 90 percent of the economy, are also stabilizing. The Tempe, Arizona-based group’s gauge of non- manufacturing businesses probably increased to 45 in May from 43.7 the prior month, according to the Bloomberg survey.

Stock Surge

Stocks have surged and Treasuries have dropped amid reports showing the worst of the downturn may have passed. The Standard & Poor’s 500 Index has gained 36 percent since March 9, when it hit the lowest level in more than 12 years, closing at 919.14 on May 29. Yields on the benchmark 10-year note climbed to 3.74 percent last week from 2.86 percent during that period.

In other reports this week, the National Association of Realtors may report on June 2 that the number of Americans who signed contracts to buy previously owned homes rose in April for the third straight month as buyers took advantage of lower prices, according to the Bloomberg survey median.

[Demeter]

68. 2 Readings of Krugman

FIRST, THE CHIRPY US VERSION

http://www.reuters.com/article/ousiv/idUSTRE54O20L20090525

World economy stabilizing: Krugman
Mon May 25, 2009 2:31pm EDT

ABU DHABI (Reuters) - The world economy has avoided "utter catastrophe" and industrialized countries could register growth this year, Nobel Prize-winning economist Paul Krugman said on Monday.

"I will not be surprised to see world trade stabilize, world industrial production stabilize and start to grow two months from now," Krugman told a seminar.

"I would not be surprised to see flat to positive GDP growth in the United States, and maybe even in Europe, in the second half of the year."

The Princeton professor and New York Times columnist has said he fears a decade-long slump like that experienced by Japan in the 1990s.

He has criticized the U.S. administration's bailout plan to persuade investors to help rid banks of up to $1 trillion in toxic assets as amounting to subsidized purchases of bad assets.

Speaking in UAE, the world's third-largest oil exporter, Krugman said Japan's solution of export-led growth would not work because the downturn has been global.

"In some sense we may be past the worst but there is a big difference between stabilizing and actually making up the lost ground," he said.

"We have averted utter catastrophe, but how do we get real recovery?

"We can't all export our way to recovery. There's no other planet to trade with. So the road Japan took is not available to us all," Krugman said.

Global recovery could come about through more investment by major corporations, the emergence of a major technological innovation to match the IT revolution of the 1990s or government moves on climate change.

"Legislation that will establish a cap-and-trade system for greenhouse gases' emissions is moving forward," he said, referring to the U.S. Congress.

"When the Europeans probably follow suit, and the Japanese, and negotiations begin with developing countries to work them into the system, that will provide enormous incentive for businesses to start investing and prepare for the new regime on emissions... But that's a hope, that's not a certainty."

THEN THE SOMBER. SOBER UK VERSION

http://www.independent.co.uk/news/business/news/green-shoots-set-to-wither-warns-nobel-prize-winner-1690706.html

Green shoots set to wither, warns Nobel Prize winner

By David Prosser


The global economy may finally be bottoming out but there is little prospect of any imminent recovery, Paul Krugman, the Nobel Prize-winning economist said yesterday.

Mr Krugman, an economics professor at Princeton University in the US, who has often been one of the most gloomy commentators on the global slowdown, said most data suggested the contraction was beginning to come to an end, but said he could not see what would lead the economy back to health.

"Just about all of the economic indicators out there are suggesting that the freefall has come to an end, that we've stabilised, and probably the worst of the shocks is over," said Mr Krugman.

"I don't think we've hit bottom, but the bottom is not too much further below us. My big concern is that we don't hit the bottom and bounce, we hit the bottom and stay there. It's not obvious where the recovery comes from."

Mr Krugman, who has previously accused President Barack Obama's administration of "half measures" by trying to tackle the slowdown with fiscal stimulus packages, repeated his warning that the US had not yet pumped enough money into the economy to sustain a recovery. Without further aid, the economy could remain depressed for five years, he cautioned.

Mr Krugman now expects the value of the dollar to fall against other global currencies, as its safe-haven status becomes less important to investors. However, he said there was little prospect of America recovering on the back of rising exports, because while a less valuable dollar would make US goods more affordable, the global nature of the downturn meant there was depressed demand around the world.

[Demeter]

69. Marc Faber says “I am 100% sure that the U.S. will go into hyperinflation”

http://www.nakedcapitalism.com/2009/05/guest-post-marc-faber-says-i-am-100.html

Submitted by Edward Harrison of the site Credit Writedowns.

You have to hand it to Marc Faber; he knows how to grab your attention. Earlier this year, I posted a video of him saying “don’t underestimate the power of printing money“, a quote that has become mantra for me. Basically, he believes a rising tide of quantitative easing is going to buoy stock markets globally and the global economy (at least for the medium-term). This is a view I agree with and one reason I have taken a more bullish tack at Credit Writedowns.

Earlier today, I also posted a video of Faber talking about Nouriel Roubini and the pressure not to overstay a bearish call and miss the turn which I found rather interesting (Here’s a video of Roubini sounding rather bullish - for him). However, later in that same interview, Faber makes his most quotable statement yet: “I am 100% sure that the U.S. will go into hyperinflation.” That is a very bold claim.

Just last week, I made similar comments in my post, “More thoughts on the fake recovery.”

In my view, the Federal Reserve has effectively demonstrated it is willing to risk hyperinflation in order to beat back the deflationary forces.

But I was using hyperbole. Faber, however, is dead serious. It is the secret desire of the Fed to want inflation that has U.S. government bond yields going bezerk. But, most people are not expecting hyperinflation in the United States ever.

The video of Faber is below (at link). Is this headline-seeking exaggeration or serious punditry?

[Demeter]

70. FDIC Won’t Rule Out Banks as Buyers of Toxic Assets

http://www.nakedcapitalism.com/2009/05/guest-post-fdic-wont-rule-out-banks-as.html

Submitted by Rolfe Winkler, publisher OptionARMageddon

During a press conference today, FDIC Chairwoman Sheila Bair was asked about the Journal’s report that banks are lobbying to buy assets under Geithner’s toxic asset plan, the PPIP.

She says banks will not be able to bid on their own assets, but clearly leaves open the possibility that they’d be allowed to buy the assets of other banks.

This is highly problematic. If banks can act as buyers in any capacity, what’s to prevent collusion? With just a sliver of equity and a pile of non-recourse federal loans, Citigroup could fund a special purpose vehicle to overpay for BofA’s bad assets. In exchange BofA would overpay for Citi’s assets. The beauty of using non-recourse debt is that you can walk away from it. The lender, in this case the taxpayer, is stuck eating the loss on the bombed-out asset.

All banks stand to lose is their small equity investment. And even this amount could be offset if banks collude to overpay.

The ranking Republican member of the House Financial Services Committee, Spencer Bachus, previously expressed outrage that such collusion might be possible. He promised to introduce legislation to prevent it from happening. I’m not aware that he has and have a call in to the Financial Services Committee for comment.

Below, I’ve transcribed Bair’s full response to the question she was asked about PPIP….

No will not be able to bid on their own assets. I think there has been some confusion about that….There will be no structure where we would allow banks to bid on their own assets. I think there have been separate issues about whether banks can be buyers on other bank assets and I think that’s an issue that we continue to look at. There’s also a question of whether banks who come to the PPIP to sell assets, while they would not be involved in the bidding process—private investors would set the prices—whether part of the consideration they would take back once the price has been set by the private sector, would be in an equity piece in the PPIP. Those are things we’re actively discussing….

I think there are a couple of factors that are still at play here as we try to devlop this structure and look toward the launch of PPIP. One is we’re finding on both the buyer and the seller side there continues to be discomfort about Congress’s view of this program, whether the rules could potentially change. The Boxer/Ensign amendment I think is a good amendment…it addresses conflict of interest issues and we want that too. Nonetheless I think this has created some uncertainty about certain aspects of the Boxer/Ensign amendment and the Treasury will need to issue regulations I think to clarify those issues before we will have comfort by market participants.

Bair’s sentence beginning “nonetheless” was not clear. What I transcribed is what she said. It sounds as if she’s uncomfortable about the amendment (more below)…..she quickly changes the subject…..

Also the good news is banks have been able to raise a lot of new capital before taking more aggressive steps to cleanse their balance sheets. The incentives to sell may be less for good reasons because they’ve been able to raise new capital.

So there are still some issues we are working through…

She knows taxpayers are getting a raw deal, which is why it would be “good news” that banks’ have less incentive to sell assets to these vehicles. She also knows that banks are still swimming in so much toxic junk, it has to be flushed away somehow. But she’s apprehensive that the public might have a transparent view of the cleansing process.

Enter the Boxer/Ensign amendment, which is attached to S. 896. It reads:

To provide for oversight of a Public-Private Investment Program, and to authorize monies for the Special Inspector General for the Troubled Asset Relief Program to audit and investigate recipients of non-recourse Federal loans under the Public Private Investment Program and the Term Asset Loan Facility.

In other words, Senators Boxer and Ensign want to give Neil Barofsky oversight over PPIP in addition to TARP. Is Bair uncomfortable with this because she knows Barofsky would publicize some of the very abuses the administration is counting on to help banks push their losses onto taxpayers?

[Demeter]

71. Warehouse club:How fewer warehouse lending lines hurts those searching for a mortgage

http://www.marketwatch.com/story/warehouse-mortgages-dy-up-hurting-borrowers?siteid=rss

By Amy Hoak, MarketWatch

CHICAGO (MarketWatch) -- Here's another reason it might be harder and more expensive for borrowers to get a mortgage today, even though average rates on the 30-year fixed-rate mortgage are still near record lows: The disappearance of many warehouse lending lines.

Warehouse lending refers to the short-term revolving lines of credit that mortgage bankers tap to fund the closing of mortgages before they are sold on the secondary market. Capacity in this area has fallen dramatically, from more than $200 billion in 2007 to about $20 to $25 billion in 2008, the Mortgage Bankers Association reports. That's more than an 85% decline, the industry group points out.

Low prices, but houses not selling

WSJ economics reporter Kelly Evans and Phil Izzo discuss the latest jobless claims and a report showing existing-home sales slowed despite declining prices.

The drop affects many small banking operations -- many of them "Main Street, small-business lenders," said John Courson, president of the MBA. That's because access to warehouse lines is the lifeline for mortgage banks that aren't depository institutions, said Jonathan Corr, chief strategy officer of Ellie Mae, a software and services provider for the mortgage industry.

"Who suffers in the end? It's going to be the consumer," said Corr, who attended the MBA's National Secondary Market Conference and Expo in Chicago last week.

Here's why: Because smaller bankers have limited access to these warehouse funds, more borrowers are forced to get mortgages through large money-center banks and the limited set of smaller bankers with warehouse capacity, he said. That, in turn, puts stress on companies that still are able to make loans, as demand heats up to refinance mortgages. Many financial institutions trimmed their staffs during the credit crunch.

"With the demand that is going on right now, with the refi boom, you have way more demand than supply," Corr said. "There is so much demand coming into the bigger lenders, that they don't have the capacity to fulfill those loans."

"What do they do? Supply and demand -- they raise the prices," he added.

Lenders can hike costs or increase interest rates.
Some developments

There have been some recent developments that seem promising, including new commitments from Wells Fargo and GMAC that would add more warehouse capacity to the mortgage market, Courson said. But that's "sort of like a drop of rain in Lake Michigan, in terms of capacity," he said.

Some warehouse lenders have completely gone out of business; others have reeled in lines due to the perceived risk of mortgages today. Investment banks, including the defunct Lehman Brothers and Bear Stearns, also once provided this kind of warehouse lending, Courson said. MBA members really started feeling the impact in the fall, he said.

The MBA is urging Congress and the Obama administration to take steps that would maintain existing warehouse lines and create new ones -- and in turn create capacity to make loans to home buyers and homeowners who want to refinance.

Opening up more warehouse lines would benefit smaller mortgage bankers like Michael Kodsi, CEO of Choice Mortgage Bank in Boca Raton, Fla. While he has access to a warehouse line, securing one in this environment is nearly impossible, he said. Kodsi said he is extra diligent in meeting requirements to retain the warehouse funds he currently is able to access.

"I'm always nervous because I can't control what is happening on Wall Street," he said.

In the current environment, the time it takes to underwrite a mortgage is "ridiculously long," Kodsi said. He's finding the mortgage process especially difficult for home buyers seeking mortgages to buy condos in his Florida area. And it isn't unusual for it to take two to three months to refinance in some instances, as underwriters require additional information from borrowers about their finances, he said.

Even with near record-low mortgage interest rates recorded by Freddie Mac and MBA, the imbalance between mortgage supply and demand is affecting pricing, making loans more expensive, Courson said. "Borrowers are not able to enjoy the full effect... because lenders have to ration their dollars, and they're using rate to do that," he said.
Remember this

While it's always important to shop around for the best mortgage rates, current conditions perhaps underscore that point even more, Courson said.

Don't rule out credit unions, either, said Mike Schenk, senior economist for the Credit Union National Association.

Even as the economy is struggling, credit unions are expecting to increase their overall lending by 6% in 2009 compared with 2008; real-estate lending by credit unions is expected to grow 12.1% year over year, according to CUNA. Partly because credit unions largely didn't make riskier loans -- including those that didn't require full income documentation -- these institutions are in a better position to lend, Schenk said.

Regardless of where you choose to shop for a mortgage, remember if something "seems to good to be true, it probably is," Schenk said. Also, factor in all costs as you compare mortgages; compare loans by APR, not interest rates, he added.

[Demeter]

72. How libertarian dogma led the Fed astray By Henry Kaufman

http://www.ft.com/cms/s/0/705574f2-3356-11de-8f1b-00144feabdc0,s01=1.html

[Demeter]

73. MISSED LAST MONTH: fraudulent hedge fund associated with the Vice President’s family

Tuesday, April 28, 2009
Alleged fraudulent hedge fund associated with the Vice President’s family harasses blogger

http://brontecapital.blogspot.com/2009/04/fraudulent-hedge-fund-associated-with.html

I wrote a post about Ponta Negra – a hedge fund that I thought was more likely than not to be fraudulent. I did not name Ponta Negra in the post but I put two of their marketing documents on the web and some people found them.

I withdrew that post after threats from lawyers. I also removed the documents from the web.

I have reposted the two marketing documents I have from Ponta Negra here and here and the first threat from the lawyer here.

I have done this because Francesco Rusciano of Ponta Negra has formally had his assets frozen by a Federal Judge at the request of the SEC. Also see here for the formal charges.

Anyway I asked the lawyers for the things that I would need to do due diligence on Ponta Negra – that is the identity of the auditor, permission to talk to the auditor, identity of the prime broker and permission to talk to the prime broker.

I was denied. The lawyers argued that I was “just a blogger”. Their denial letter is here.

The first marketing document however identified a supposed prime broker as Citigroup. I wrote to citigroup several times – and spoke to senior people in their government relations area and told Citigroup the entire story. I believe that Citigroup did not react appropriately to a fraud committed in their name.

Anyway I will save you the suspense. All of this would not be the biggest story on my blog except that Ponta Negra is marketed out of the office of Paradigm Global – a fund of hedge funds owned and controlled by Hunter Biden and James Biden. Hunter and James are the son and brother of Vice President Joe Biden respectively.

You can find this several ways.

1. Ponta Negra gives its address in the second marketing document as 650 Fifth Avenue, 17th Floor. This is the same address as Paradigm Global.

2. The contact on the first marketing document for Ponta Negra is Jeffry Schneider. This is the same Jeffry Schneider who is quoted in this Wall Street Journal article as being the marketer for Paradigm Global and effectively spins for the Bidens.

3. This SEC filing gives an address and phone number for Ponta Negra. The address and phone number is a number through the switchboard of Paradigm Global and until recently it was a way of getting into contact with Ponta Negra.

At a minimum Paradigm Global – a fund of fund managers owned the Vice President’s family, housed an alleged fraudster. The alleged fraudster used the same phone number as the Vice President’s family business, the same marketing machine and traded off the good name of the Vice President’s family business.

There are numerous posts about Ponta Negra, Paradigm and other assorted entities (Onyx Capital for one) that I have withheld posting on. I will put them up as a series. The ties between the Vice President’s family and some very questionable dealings are very strong.

The next step for the SEC has the surname Biden. Are they up to it?

To be continued...

http://brontecapital.blogspot.com/2009/05/question-about-appropriate-ethical.html

BUT WAS IT CONTINUED?

http://www.cjr.org/the_audit/bronte_capital_with_a_major_sc.php

Bronte Capital with a Major Scoop on Alleged Fraudster

By Ryan Chittum

John Hempton the excellent Aussie blogger who writes Bronte Capital appears to have a blockbuster of a scoop.

A Connecticut hedge fund called Ponta Negra Group, run by 27-year old Francesco Rusciano has been frozen by the SEC, which accused it of fraud. Hempton was all over this a few weeks ago, but had to take down his posts when Ponta Negra lawyers threatened to sue him. They’re back up now.

But the big news here is Hempton’s discovery that the allegedly fraudulent fund has some, um, oddly coincidental connections to Vice President Joe Biden’s son and brother, who run a firm called Paradigm Global. The firms are run out of the same floor at 650 Fifth Avenue in New York, share the same “marketer,” a guy named Jeffrey Schneider of Onyx Capital LLC, whose website is currently down, and the SEC filing gives a phone number for Ponta Negra that goes through Paradigm’s switchboard.

Ruh roh.

This wouldn’t be the first time the Bidens’ fund has intersected with an alleged fraudster. Two months ago it was discovered to be entangled with disgraced financier Allen Stanford in a $50 million fund co-branded Paradigm Stanford Fund and marketed by Stanford.

Mr. Schneider was involved in that joint venture, which the Bidens say they made without ever even meeting Mr. Stanford:

A Paradigm marketer, Jeffrey Schneider, confirmed accounts provided by others that he brought in the Stanford business. Stanford would bring clients to the fund and Paradigm would manage it, according to Mr. LoPresti.

Now, I suppose there could just be an amazing amount of coincidences here. Hempton is good on the “to-be-sure” stuff:

I was worried at first that Ponta Negra might be a legitimate fund headquartered in another cubicle on the 17th Floor of 650 Fifth Avenue. It turns out that there are several funds also HQ’d there. Paradigm it seems does all the signage on the floor – but once you get past the couple of Paradigm people on the front desk you find several doors behind which reside several hedge funds – a hedge fund hotel if you want. Most of the offices were empty mid-morning – which was very surprising. These funds are largely marketed by Paradigm.

Still there could be a fund (Ponta Negra) independent of Paradigm on the 17th floor. There could be – they too would need to employ a Jeffrey Schneider as a marketing agent.

But let’s face it:

Ok – by this point you should at least be open to the possibility that the Vice President’s son and brother employ someone who uses the good Biden name and a stolen client list to market Ponzi schemes.

There is no allegation here that the Bidens are involved. Just that their standard of due diligence is low. Very low.

Now the Biden’s hedge fund hotel contains an assortment of other colourful funds. One of them is a SIPC registered broker dealer who also manages client money. This broker dealer does not list their auditor anywhere on their website. However they report startlingly good funds management results for 2006 and 2007 though they have surprisingly failed to update their website to include 2008 results. Their website boasts that their trades will be completed with zero commissions and transaction charges allowing them to focus exclusively on the investments that best meet the needs of the clients without the concern of transaction charges and hidden revenue sharing…

Here’s what Dow Jones says about Rusciano:

According to the complaint, Rusciano previously worked at UBS Securities before forming the Ponta Negra Group, but was later forced to resign after he allegedly misreported certain Brazilian bond transactions and non-deliverable forwards. He now also faces charges by the Federal Reserve that he engaged in illegal trading and banking practices and schemed to defraud UBS by trying to conceal major losses, the complaint said. After starting up his own company, the SEC further claims he never disclosed the Fed’s allegations against him or the reasons why he left UBS.

Not only did Hempton break the news on what he originally called a “Ponzi scheme” before having to take it down under legal threat, he’s put together this Biden family connection.

Just outstanding work.

It wouldn’t be the first time a fraud has been cracked by a blogger before the big media and regulators lumber around to it. Alex Dalmady broke the Stanford scandal, with a big push from Felix Salmon, then at Portfolio—and got disgracefully little credit by the media.

This is going to be a big story. I’ll be eyeballing the press closely to see how it handles attributing the news to the Bronte Capital blog.

[Demeter]

74. So, let's recap.

http://www.nakedcapitalism.com/2009/04/guest-post-horrible-self-dealing-of-ken.html

....

* Paulson, Bernanke and Geithner blow Lehman up and everybody panics.

* Merrill looks ready to blow up and take the system down with it.

* Bank of America steps in - or better yet, is coerced in - and pays $44 billion for Merrill.

* But, the market freefall continues, taking WaMu, AIG and Wachovia down with it. Merrill loses its shirt in this disaster.

* By December, Ken Lewis is ready to pull out of the deal, citing the MAC (material adverse change) clause as grounds.

* Paulson and Bernanke go ballistic (Geithner was prepping to be Treasury Secretary) and get Ken Lewis to do something he thinks is bad for shareholders

* By February, BofA needs to be bailed out again to the tune of tens of billions more government money from Tim Geithner. BofA's stock tanks - shareholders are looking at 90%+ losses.

* Now, the SEC is investigating.


This whole episode stinks to high heaven and Ken Lewis doesn't even look the worst of the lot here. That honor goes to Paulson and Bernanke....

[Demeter]

75. Whew! I've Got 7 more in the inbox--

But it's time for food. I'll give you all time to catch up.

Where's the Battlestar annotations?

[DemReadingDU]

76. CNN: Monday is bankruptcy for GM

5/31/09 Monday is bankruptcy for GM
Storied automaker suffering huge losses and plummeting market share will file bankruptcy at 8 a.m. Obama to address nation.

General Motors, the nation's largest automaker and for decades an icon of American manufacturing, stood Sunday on the brink of bankruptcy and a de facto government takeover.

A bankruptcy petition will be filed on Monday at 8 a.m., according to a source with direct knowledge of the bankruptcy proceedings.

Investors who own 54% of $27 billion in GM bonds have agreed to not fight plans for a quick bankruptcy process, GM said on Sunday.

The deal with bondholders could make it easier for GM to restructure by neutralizing some of the opposition to a bankruptcy filing. But it does not wipe away the need for the company to seek court protection for making drastic reductions in dealer, labor and other costs.

President Obama will address the nation shortly before noon on Monday to discuss the bankruptcy, two officials close to the situation told CNN. Obama will explain the rationale for the filing and his hopes that this is the best route for a turnaround.

It is expected that GM will detail some 20,000 job cuts and the closure of about a dozen plants by the end of 2010. The company has already said it will slash 40% of its network of 6,000 retail dealerships by next year and drop four of its brands -- Hummer, Saab, Saturn and Pontiac.

The impact of GM's bankruptcy, which follows a Chapter 11 filing by Chrysler on April 30, will ripple across the nation to dealers, suppliers and other businesses large and small that work in the sector.

The company, once the country's largest private sector employer, has only a fraction of its former staff. Its 80,000 hourly and salaried U.S. employees are half the number it had as recently as 2001.

Nearly 500,000 U.S. retirees, as well as more than 150,000 of their family members, depend on GM health insurance and pension plans. Retirees will see cuts in their health care coverage, although the company's underfunded pension plans are not expected to be affected by a bankruptcy filing.

In addition, some 300,000 employees at GM dealerships will be affected, as well as hundreds of thousands of workers at auto parts makers and other GM suppliers whose jobs depend on the company's survival.

more...
http://money.cnn.com/2009/05/31/news/companies/gm_bankruptcy_looms/index.htm?postversion=2009053119


Never in my life had I ever thought General Motors would go bankrupt
:(

[Demeter]

81. It Was Nice Knowing You All

as the state of Michigan sinks slowly into the Great Lakes, this is Demeter saying:

Goodnight, and Good Luck!

[Demeter]

77. ALSO LATE: Milan Police Seize UBS, JPMorgan, Deutsche Bank Funds (Update2)

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aOGICeXD8TPw

By Elisa Martinuzzi

April 28 (Bloomberg) -- Milan’s financial police seized 476 million euros ($620 million) of assets belonging to UBS AG, Deutsche Bank AG, JPMorgan Chase & Co. and Depfa Bank Plc amid a probe into alleged fraud linked to the sale of derivatives.

The police froze the banks’ stakes in Italian companies, real estate assets and accounts, the financial police said in a statement today. The assets seized yesterday also include those of an ex-municipality official and a consultant, the police said.

The City of Milan is suing the four banks after it lost money on derivatives it bought from the lenders in 2005. The securities swapped a fixed rate of interest on 1.7 billion euros of bonds for a variable rate that was losing the city 298 million euros as of June. Milan is among about 600 Italian municipalities that took out 1,000 derivatives contracts worth 35.5 billion euros in all, the Treasury said.

“Milan is an important case because it can be used as an example by others,” said Alfonso Scarano, who is heading a study into the trades by AIAF, a group representing Italian financial analysts. “This is a unique time for borrowers to shed light on their potential losses and renegotiate contracts” to take advantage of interest rates that have fallen to record lows. AIAF will next week testify before the Italian Senate’s inquiry into the cities’ use of derivatives contracts.

Officials at all four banks declined to comment. In January, JPMorgan filed a lawsuit against the city in London. The bank is seeking to have dispute heard in the U.K., according to two people familiar with the claims.

Cassa Depositi

A spokesman for Milan’s city council declined to comment. A report commissioned by the city last year into the derivatives trades didn’t identify the officials involved in the decision.

The banks reaped about 100 million euros in fees from the transactions, Milan’s financial police said today. Public officials, seeking to cut the cost of their debt and help fund their budgets, turned to the banks to refinance borrowings from the state-owned lender Cassa Depositi e Prestiti.

The 30-year bond carried annual interest of 4.019 percent. With the derivatives, the city swapped the fixed interest rate for a floating rate set at 12-month Euribor. Milan also agreed to repay the principal by annual payments instead of at maturity, according to the city’s report.

The banks and Milan later agreed on so-called interest-rate collars, under which the banks would pay the borrower if Euribor rose above a certain level, the so-called cap, while the borrower would pay the banks if Euribor fell below the so-called floor.

Credit-default Swaps

The banks misled municipal officials on the advantages of buying the derivatives, including the impact of the fees they charged on the contracts, the financial police have said. The banks made three times more money from the cap than Milan did from the floor, according to the city’s report.

Local governments often entered into derivative contracts without soliciting bids from competing buyers. In 2007, Milan also sold a credit-default swap, exposing itself to the risk that the Republic of Italy might default, the document shows.

The Milan case is among lawsuits filed by local governments from Germany to the U.S. amid allegations of mis-selling and fraud. Italy’s Senate is leading a review of the use of derivatives among local administrations.

Italian prosecutors can seize assets, subject to judicial approval, to prevent the worsening of the consequences of the crime or prevent further crimes being committed, according to Andrea Giannelli, a researcher at Milan’s Bocconi University.

‘Intimidating and unprecedented’

“Its use in this case is somewhat intimidating and unprecedented,” said Giannelli. “It’s a measure they may be using to accelerate a solution.”

Deutsche Bank, Germany’s largest bank, last year won dismissal of a lawsuit filed by Hagen, Germany, over losses on derivatives that the city purchased from the lender.

The U.S. Justice Department has been investigating for more than two years whether banks and brokers conspired to overcharge local governments on similar swap agreements.

Alabama challenged a so-called swaption deal last year as local governments across the U.S. faced rising bills after derivative trades with Wall Street banks backfired. The Alabama Public School and College Authority filed a lawsuit in October seeking to void a so-called swaption, or option on an interest- rate swap, that it sold to JPMorgan in 2002.

[Demeter]

78. AIG's Fall: Bad Business Or Criminal Acts?

Let me think....

http://www.cbsnews.com/stories/2009/04/27/cbsnews_investigates/main4972588.shtml

[Demeter]

79. Value for value

http://interfluidity.powerblogs.com/posts/1240888545.shtml

Would it have been better if Timothy Geithner had had the power to guarantee all bank debt early on? As James Surowiecki reminds us, that was part of the Swedish solution. Justin Fox plausibly suggests that we might have avoided a lot of pain with a fast, full guarantee.

But that's not the point. The question isn't whether we could have avoided this crisis, if only we had cut a big check. We could have, and that was not lost to any of us debating these issues more than a year ago. (See e.g. me or Mark Thoma.) Had we done so, the near-to-medium term fiscal costs might have been less than they probably will be now. So, with 20/20 hindight, would it have been a good idea?

How you answer that question depends upon how you view the crisis. Is it an aberration, a shock to a basically sound financial system, or is it a painful symptom of an even more dangerous condition? Under what circumstances would our political system be likely to impose reforms that would prevent large scale misallocations of capital and shifting of losses to taxpayers in the future?

If you think that our financial system just needs some tweaks, some consolidation of regulators' organizational charts and sterner supervision, then you should prefer that we had just cut a check, passed Sarbanes/Oxley Book II, and moved on. But that is not what I, or most proponents of nationalization temporary receivership for insolvent banks, believe.

If you believe, as I do, that we need a root-and-branch reorganization of the financial system, which must necessarily involve the dismemberment and intrusive restraint of deeply entrenched institutions, does that mean pain is the only way forward, "the worse the better" in the old revolutionary cliché? It need not mean that. But it does mean that palliative measures, like giving the banks money, would have to be attached to curative measures, like enacting capital requirements and imposing regulatory burdens that would force financial behemoths to break themselves up or become boring narrow banks. For almost two years, policymakers at the Fed and the Treasury, including Secretary Geithner, have offered bail-out after bail-out and asked for nothing serious in return.

Do I regret that Henry Paulson was not empowered to issue a blanket guarantee of bank assets early on, as the Swedes did? No, I don't regret that at all. Why not? Because I think that "Hank the Tank" was a crappy negotiator, not only for taxpayers in a fiscal sense, but also for the economy and the polity more deeply. He would have offered the financial system sugar without requiring it to make the medicine go down. He may believe, quite sincerely, that a cure would be worse than the disease. He may believe that, but he is wrong. If we "get past this crisis" by restarting a consumer-credit-based, indiscriminate-investor-financed, current-account-deficit-making, income-inequality-expanding economy, we will have increased, not diminished, the likelihood of a major collapse.

You may believe that we have learned our lesson, that if we can just get some stability and comfort for a while we are prepared to do what must be done. That's a respectable position. But I don't share it, and neither do the majority of Americans who are unwilling to allow their representatives to sign off on any more expensive aspirin. We want value for value, an ironclad commitment of root and branch reform in exchange for the unimaginable sums of money we are being asked to hand over.

Surowiecki has in the past suggested that those of us who favor nationalization would criticize any alternative simply because it is not precisely the policy we advocate. But it is not we who have refused to compromise. We've seen variations on the same basic proposal over and over again. Geithner's PPIP really does resemble Paulson's TARP, besides the part about actually asking taxpayers for the money. Each latest plan from our incestuous cadre of economic Mandarins demands only symbolic concessions from the dysfunctional organizations we are asked to support. The "moderate" political class goes on and on about how Geithner and Bernanke have to go all Enron, funding the banks via off-balance-sheet guarantees and special purpose vehicles, because "populist, childish" Congress won't put up the money. Setting aside how audaciously corrosive that sentiment is to Constitutional democracy, it is simply wrong. Congress would, because the public would, support large, explicit transfers, if they were attached to reforms sufficiently radical to prevent a recurrence, and suitably punitive towards the people who managed the system that brought us here. Value for value.

I am a true believer in American-style capitalism. So I would like to see people who earned profits lending to banks in good times bear the high costs of failing to monitor the organizations they funded. Investor fear is what is supposed to prevent the indiscriminate misuse of capital. To the degree that creditors have leaned upon "implicit" government guarantees, I think it would both be just and set a useful precedent if they were reminded that investors have to take responsibility for where they place the precious capital they steward.

That said, like Paul Krugman, I would be willing to hold my nose and tolerate a Swedish-style guarantee of bank creditors. I'd acquiesce to that even without formal nationalization. Nationalization is no one's idée fixée. It is a means to an end, and the desired end is a world in which too big to fail is too big to exist for any financial institution that originates or holds credit risk in any form. Secretary Geithner could send a bill to Congress today that would put all banks with a balance sheet of over $50B into run-off mode, while clearing away legal obstacles so that larger organizations could arrange their own breakups over time. I'd fax my Congressman and support a $2T on-budget buyout of bank creditors as part of that bill, as long as it had teeth. ("Teeth" would include making sure that off-balance-sheet and derivative exposures were included in the size cap, etc.)

It's not that us pitchfork-totin' populists are unwilling to pay the bill. It's that we want to know that in exchange for writing a very, very large check, the people that we are paying will actually deliver the goods. Given the behavior of bankers before the crisis and of shifty policymakers during, we have every reason to watch warily and to insist upon every precaution while we hand over suitcase after suitcase of freshly printed Federal Reserve notes.

[Demeter]

80. That's All, Folks!

The inbox is EMPTY! So are the Treasury, the banks and the cookie jars in America and abroad. Hope June brings us some needed respite and recovery, but I don't count on it. After all, the same clowns are still pulling the levers.

[DemReadingDU]

83. Thanks Demeter for the weekend thread

Trying to catch up on reading now. Yesterday had been out of town and today had to do yardwork. Have a restful evening!

[Demeter]

87. You're Welcome!

[Demeter]

85. The Curious Problem of Gold and Silver Coins as Legal U.S. Tender

http://seekingalpha.com/article/140475-the-curious-problem-of-gold-and-silver-coins-as-legal-u-s-tender?source=article_lb_articles

by: Tim Iacono May 31, 2009

The idea that gold and silver coins are still legal tender in the U.S. has always struck me as one of the more intriguing aspects of our monetary system, a system that appears to teeter a bit more each and every year, its fate sure to be the same as all prior fiat money systems throughout history - they never end well.

The notion that a quarter or a dime from the 1950s or early-1960s that contains 90 percent silver might be worth ten times its face value seems like more of an oddity than anything else since the values are so small.

A dime being worth more than a dollar really isn't that big a deal until you get a whole bag full of them. Then you can sell these coins with a face value of $1,000 for more than $10,000 (maybe $11,000 by the end of the day given how metal prices are soaring).

The name "junk silver" really doesn't do these coins justice as the real "junk" is clearly what followed silver quarters and silver dimes, the citizenry promptly removing them from circulation after the government discontinued them - something about bad money forcing out good money as Gresham once said.

But, gold presents a whole new set of math.

Currently about 63 times as valuable as silver by the ounce (roughly $960 an ounce versus $15 an ounce), the U.S. Mint continues to produce these coins with dollar values printed right on their face.

As shown to the right, a one-ounce American Eagle will get you $50 if you take it to a bank, but, if you wander into a coin shop, you'll be able to get almost 20 times that amount.

Though it's not clear what a bank teller would actually do if confronted with a customer seeking to make such a deposit (a smart one would surely exchange some of their own paper money and pocket the difference), it sets up a host of other odd possibilities.

Say, for example, you wanted to buy a house that costs $400,000 in paper money using gold coins. Could you specify the purchase price as $20,000 payable in gold coins?

That would surely create some interesting questions as far as the Internal Revenue Service was concerned and both the buyer and the seller would likely watch the gold price like a hawk, probably demanding an exceptionally quick escrow.

What if you ran an entire business where payroll transactions were based exclusively on these "legal tender" gold coins? All of a sudden, a salary of $40,000 would turn into income of just $2,000 and Uncle Sam would surely not be happy about the tax implications of that adjustment.

Well, there just so happens to be such a business in Nevada and, according to this report in the Las Vegas Review Journal, many of the above questions are about to be answered as they are about to have their day in court.

Robert Kahre, who owns numerous construction businesses in Las Vegas, is standing trial on 57 counts of income tax evasion, tax fraud and criminal conspiracy. If convicted on most counts, he could live out his life in prison.

But attorney William Cohan paints Kahre as an American "hero" who believes his payroll system helped keep the U.S. monetary system sound, and was also a form of legal tax avoidance.

A self-made entrepreneur, Kahre, 48, paid his workers in gold and silver coin, and said they could go by the coins' face value -- rather than the much higher market value of their precious metal content -- for federal tax purposes. He did not withhold taxes from their wages, and he provided the same payroll system to 35 outside clients, which were other local businesses.
...
Kahre contends his workers had agreed to be independent contractors, so he did not have to withhold taxes for them. His six businesses are in the trades of painting, drywall, tiling, plumbing, heating-cooling and electrical work.

Further, the $50 gold coins and the silver dollars Kahre used for payroll are designated by Congress as legal tender, so people are entitled to value them at their stamped denominations, he also contends. Taken at face value, each defendant's annual coin income placed him below the threshold for filing a federal tax return.
...
Cohan described Kahre's payroll system as a "boycott of the Federal Reserve." But when the lawyer attempted to elaborate on Kahre's view that the nation has debased its paper currency by abandoning its former gold standard, Ezra added, "We're not here to convince the jury that the ... (U.S.) monetary system belongs to an international cabal."