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History > 2012 > USA > Economy (II)




R.J. Matson

is the editorial cartoonist

at the St. Louis Post-Dispatch and Roll Call,

and is syndicated internationally by Cagle Cartoons.


22 May 2012















U.S. Winds Down

Longer Benefits

for the Unemployed


May 28, 2012
The New York Times


Hundreds of thousands of out-of-work Americans are receiving their final unemployment checks sooner than they expected, even though Congress renewed extended benefits until the end of the year.

The checks are stopping for the people who have the most difficulty finding work: the long-term unemployed. More than five million people have been out of work for longer than half a year. Federal benefit extensions, which supplemented state funds for payments up to 99 weeks, were intended to tide over the unemployed until the job market improved.

In February, when the program was set to expire, Congress renewed it, but also phased in a reduction of the number of weeks of extended aid and effectively made it more difficult for states to qualify for the maximum aid. Since then, the jobless in 23 states have lost up to five months’ worth of benefits.

Next month, an additional 70,000 people will lose benefits earlier than they presumed, bringing the number of people cut off prematurely this year to close to half a million, according to the National Employment Law Project. That estimate does not include people who simply exhausted the weeks of benefits they were entitled to.

Separate from the Congressional action, some states are making it harder to qualify for the first few months of benefits, which are covered by taxes on employers. Florida, where the jobless rate is 8.7 percent, has cut the number of weeks it will pay and changed its application procedures, with more than half of all applicants now being denied.

The federal extension of jobless benefits has been a contentious issue in Washington. Republicans worry that it prolongs joblessness and say it has not kept the unemployment rate down, while Democrats argue that those out of work have few alternatives and that the checks are one of the most effective forms of stimulus, since most of it is spent immediately.

After the most recent compromise reached in February, another renewal seems unlikely.

The expiration of benefits is one factor contributing to what many economists refer to as a “fiscal cliff,” or a drag on the economy at the end of this year when tax cuts and recession-related spending measures will all come to an end unless Congress acts. The Congressional Budget Office warned last week that the combination could contribute to another recession next year.

Candace Falkner, 50, got her last unemployment check in mid-May, when extended benefits were curtailed in eight states. Since then she has applied for food stamps and begun a commission-only, door-to-door sales job. Since losing her job two years ago, Ms. Falkner said, she has earned a master’s degree in psychology and applied for work at numerous social service agencies as well as places like Walmart, but no offers came.

Ms. Falkner, who lives on the outskirts of Chicago, said she was grateful for the checks she received. But when they ended, she said, “They should have had some program in place to funnel those people back into the job market. Not to just leave them out there cold, saying, ‘The job market has improved, but there’s still 60,000 people in the city who can’t find one.’ ”

Unemployment is lower than it was when the emergency unemployment extensions were ramped up in November 2009. Now, it is 8.1 percent, down from 9.9 percent then. But it is still far higher than pre-recession norms, and there are more than three job seekers for every opening.

Proponents of extended benefits say the cuts are premature. Chad Stone, the chief economist at the liberal Center on Budget and Policy Priorities, said Congress had never before put the brakes on extended benefits when the labor market was so weak. “It’s moving in the wrong direction, and it’s occurring at a time when unemployment is very high,” he said.

Conservative economists and political leaders have argued that unemployment benefits prolong joblessness and simply transfer wealth from one area of the economy to another without contributing to growth.

Kevin A. Hassett, director of economic policy studies at the conservative American Enterprise Institute, said, “I haven’t liked the 99-week solution from the beginning because it creates an environment where people are subsidized to become a structural unemployment problem.”

Still, he is troubled by the latest developments. “If you just reduce the weeks of unemployment for people already unemployed but don’t do anything else, it’s a bad deal,” he said, “because they’re already about the worst-off people in society.”

He points to alternatives like using unemployment money to encourage entrepreneurship or paying benefits in a lump sum, rather than over time, to encourage people to find work faster.

Most states offer 26 weeks of unemployment benefits, plus the federal extensions that kicked in after the financial crash.

The number of extra weeks available by state is determined by several factors, including the state’s unemployment rate and whether it is higher than three years earlier. So states like California have had benefits cut even though the unemployment rate there is still almost 11 percent.

“Benefits have ended not because economic conditions have improved, but because they have not significantly deteriorated in the past three years,” Hannah Shaw, a researcher at the Center on Budget and Policy Priorities, wrote in a blog post. In May, an estimated 95,000 people lost benefits in California.

After the recession, 99 weeks became a symbol of the plight of the jobless, with those who exhausted their benefits calling themselves “99 weekers” or “99ers.” But by the end of September, the extended benefits will end in the last three states providing 99 weeks of assistance — Nevada, New Jersey and Rhode Island.

Some states have tightened eligibility as well. Nationwide, most people apply for benefits by phone. Last August, Florida began requiring people to apply online and to complete a 45-minute test to assess their job skills, according to a complaint submitted to the federal labor secretary by the National Employment Law Project and Florida Legal Services.

The complaint said that applicants with limited Internet access or English skills, disabilities or difficulty reading had effectively been shut out, and that failure to complete the assessment was illegally being used to deny benefits. Denials have soared; now just over half of applicants are rejected. Nationally, 30 percent of applicants are rejected, according to the law project.

The changes have saved the state $2.7 million, according to James Miller, a spokesman for the Florida Department of Economic Opportunity. The state’s unemployment rate, he pointed out, has declined for 10 straight months. “The Department of Economic Opportunity provides accommodations to individuals with barriers to filing their claims,” he wrote in an e-mail. “D.E.O. welcomes any review and is certain that Florida’s statutory changes are in full compliance with federal law.”

The Labor Department is reviewing Florida’s unemployment program in response to multiple complaints, a spokesman said.

    U.S. Winds Down Longer Benefits for the Unemployed, NYT, 28.5.2012,






In Western Washington,

Drivers See Gasoline Prices

Heading the Wrong Way


May 24, 2012
The New York Times


TACOMA, Wash. — A lot has come down the pike since the summer of 2008, which for many Americans may already feel like the closed chapter of an old book. But here on the West Coast there is an unhappy echo: gasoline prices.

One thin dime separates the current average price of a regular gallon of gas from Tacoma’s historic high of $4.37 that was set in late June 2008. And while most Americans have caught a break over the last year, with average prices falling more than 4 percent per gallon compared with this time last year, in Western Washington they were up almost 8 percent as of Wednesday, according to the Oil Price Information Service, a petroleum-pricing research group.

A bottleneck in the archipelago of oil refineries that supply the region is the short explanation; some are closed for maintenance, one here in Washington is temporarily disabled after a fire. The resulting pincer — a still-tough economy compounded by stinging transportation costs — has clipped wallets in places like Tacoma, a working town south of Seattle still tied to the world of timber and shipping.

A few hours chatting around the pumps at a local gas stop on Monday underscored the pain.

“Things are a little, little bit better than they were,” said Dennis Barker, a former construction worker who started a home-renovation business about a month ago with a friend. “But I’m spending more — I’m going around trying to drum up some business,” he said. The $50 a week he spends on gasoline imposes strict efficiencies, Mr. Barker said, on everything else.

For people on fixed or reduced incomes, lingeringly high prices create a ripple that changes patterns of life in many ways, large and small. David Moceri, who was laid off this spring from a mattress factory, now buys no more than $10 of gasoline at a time. Harvey Johnson, a self-employed handyman, used to carry his handyman tools, like his ladder, in a pickup truck from job to job.

Now he stuffs it all in his Honda, the ladder jutting from the back-seat windows like an afterthought.

“Half as much gas,” he said.

Roy Harris is a retired metal-plating worker and passionate cyclist — 100 miles a week or more at age 72, and three times on the 200-mile Seattle-to-Portland Classic. But he no longer drives to the trails he once loved with his bicycle in the back of his truck, and instead just rides around his neighborhood.

“We’ve cut our driving down, probably in half,” said Mr. Harris, whose primary income is the Social Security checks that he and his wife receive. “Gas has really killed us.”

A spokesman for AAA Washington, Dave Overstreet, said that spring can often be the cruelest season for gasoline on the West Coast, which is largely cut off from the pipeline and refining system that spiders up from the Gulf of Mexico. The Cascade Range here in the Pacific Northwest and the Sierra Nevada in California mark a kind of boundary from the rest of the nation, he said, in gasoline economics.

Refineries in California also routinely reduce production in the spring, preparing for the summer fuel blends mandated by California regulators. And supplies in Washington and Oregon have been further crimped by the shutdown of Washington’s biggest refinery — Cherry Point, owned by the oil giant BP — after a fire in February. A spokesman for BP said on Tuesday that the plant was restarting, but would take some time to resume full production.

In any event, demand also usually goes up in late May, Memorial Day being the unofficial launching pad of the vacation driving season, putting supply and demand back in collision.

“Once they get up and running again, even with the demand being higher, I think that we’ll certainly see things stabilize,” Mr. Overstreet said. How long before prices actually go back down? “Anybody’s guess,” he said.

Some drivers here in Tacoma say they have just stopped counting the whirring nickels and dimes. Others say they believe that the slowly improving economy, still spotty in its gains, will pick up. The local unemployment rate in Tacoma has actually risen in recent months, to 9.8 percent in March from 8.8 percent last November, according to federal figures, even as the statewide rate and the broader Seattle metro area jobless rates have continued to fall.

“You have to get gas either way,” said Robin Senirajjangkul, 23, who is studying at a local community college and tending bar to make ends meet. “But I do love my Yaris,” she said, patting her Toyota compact, which looked ready for the road with its big fuzzy steering wheel. “Good gas mileage,” she said.

    In Western Washington, Drivers See Gasoline Prices Heading the Wrong Way, NYT, 24.5.2012,   






How Change Happens


May 21, 2012
The New York Times


Forty years ago, corporate America was bloated, sluggish and losing ground to competitors in Japan and beyond. But then something astonishing happened. Financiers, private equity firms and bare-knuckled corporate executives initiated a series of reforms and transformations.

The process was brutal and involved streamlining and layoffs. But, at the end of it, American businesses emerged leaner, quicker and more efficient.

Now we are apparently going to have a presidential election about whether this reform movement was a good thing. Last week, the Obama administration unveiled an attack ad against Mitt Romney’s old private equity firm, Bain Capital, portraying it as a vampire that sucks the blood from American companies. Then Vice President Joseph Biden Jr. gave one of those cable-TV-type speeches, lambasting Wall Street and saying we had to be a country that makes things again.

The Obama attack ad accused Bain Capital of looting a steel company called GST in the 1990s and then throwing its workers out on the street. The ad itself barely survived a minute of scrutiny. As Kimberly Strassel noted in The Wall Street Journal, the depiction is wildly misleading.

The company was in terminal decline before Bain entered the picture, seeing its work force fall from 4,500 to less than 1,000. It faced closure when Romney and Bain, for some reason, saw hope for it in 1993. Bain acquired it, induced banks to loan it money and poured $100 million into modernization, according to Strassel. Bain held onto the company for eight years, hardly the pattern of a looter. Finally, after all the effort, the company, like many other old-line steel companies, filed for bankruptcy protection in 2001, two years after Romney had left Bain.

This is the story of a failed rescue, not vampire capitalism.

But the larger argument is about private equity itself, and about the changes private equity firms and other financiers have instigated across society. Over the past several decades, these firms have scoured America looking for underperforming companies. Then they acquire them and try to force them to get better.

As Reihan Salam noted in a fair-minded review of the literature in National Review, in any industry there is an astonishing difference in the productivity levels of leading companies and the lagging companies. Private equity firms like Bain acquire bad companies and often replace management, compel executives to own more stock in their own company and reform company operations.

Most of the time they succeed. Research from around the world clearly confirms that companies that have been acquired by private equity firms are more productive than comparable firms.

This process involves a great deal of churn and creative destruction. It does not, on net, lead to fewer jobs. A giant study by economists from the University of Chicago, Harvard, the University of Maryland and the Census Bureau found that when private equity firms acquire a company, jobs are lost in old operations. Jobs are created in new, promising operations. The overall effect on employment is modest.

Nor is it true that private equity firms generally pile up companies with debt, loot them and then send them to the graveyard. This does happen occasionally (the tax code encourages debt), but banks would not be lending money to private equity-owned companies, decade after decade, if those companies weren’t generally prosperous and creditworthy.

Private equity firms are not lovable, but they forced a renaissance that revived American capitalism. The large questions today are: Will the U.S. continue this process of rigorous creative destruction? More immediately, will the nation take the transformation of the private sector and extend it to the public sector?

While American companies operate in radically different ways than they did 40 years ago, the sheltered, government-dominated sectors of the economy — especially education, health care and the welfare state — operate in astonishingly similar ways.

The implicit argument of the Republican campaign is that Mitt Romney has the experience to extend this transformation into government.

The Obama campaign seems to be drifting willy-nilly into the opposite camp, arguing that the pressures brought to bear by the capital markets over the past few decades were not a good thing, offering no comparably sized agenda to reform the public sector.

In a country that desperately wants change, I have no idea why a party would not compete to be the party of change and transformation. For a candidate like Obama, who successfully ran an unconventional campaign that embodied and promised change, I have no idea why he would want to run a campaign this time that regurgitates the exact same ads and repeats the exact same arguments as so many Democratic campaigns from the ancient past.

    How Change Happens, NYT, 21.5.2012,






More Men Enter Fields Dominated by Women


May 20, 2012
The New York Times


HOUSTON — Wearing brick-red scrubs and chatting in Spanish, Miguel Alquicira settled a tiny girl into an adult-size dental chair and soothed her through a set of X-rays. Then he ushered the dentist, a woman, into the room and stayed on to serve as interpreter.

A male dental assistant, Mr. Alquicira is in the minority. But he is also part of a distinctive, if little noticed, shift in workplace gender patterns. Over the last decade, men have begun flocking to fields long the province of women.

Mr. Alquicira, 21, graduated from high school in a desolate job market, one in which the traditional opportunities, like construction and manufacturing, for young men without a college degree had dried up. After career counselors told him that medical fields were growing, he borrowed money for an eight-month training course. Since then, he has had no trouble finding jobs that pay $12 or $13 an hour.

He gave little thought to the fact that more than 90 percent of dental assistants and hygienists are women. But then, young men like Mr. Alquicira have come of age in a world of inverted expectations, where women far outpace men in earning degrees and tend to hold jobs that have turned out to be, by and large, more stable, more difficult to outsource, and more likely to grow.

“The way I look at it,” Mr. Alquicira explained, without a hint of awareness that he was turning the tables on a time-honored feminist creed, “is that anything, basically, that a woman can do, a guy can do.”

After years of economic pain, Americans remain an optimistic lot, though they define the American dream not in terms of mansions and luxury cars but as something more basic — a home, a college degree, financial security and enough left over for a few extras like dining out, according to a study by the Pew Center on the States’ Economic Mobility Project. That financial security usually requires a steady full-time job with benefits, something that has become harder to find, particularly for men and for those without a college degree. While women continue to make inroads into prestigious, high-wage professions dominated by men, more men are reaching for the dream in female-dominated occupations that their fathers might never have considered.

The trend began well before the crash, and appears to be driven by a variety of factors, including financial concerns, quality-of-life issues and a gradual erosion of gender stereotypes. An analysis of census data by The New York Times shows that from 2000 to 2010, occupations that are more than 70 percent female accounted for almost a third of all job growth for men, double the share of the previous decade.

That does not mean that men are displacing women — those same occupations accounted for almost two-thirds of women’s job growth. But in Texas, for example, the number of men who are registered nurses nearly doubled in that time period, rising from just over 9 percent of nurses to almost 12 percent. Men make up 23 percent of Texas public schoolteachers, but almost 28 percent of first-year teachers.

The shift includes low-wage jobs as well. Nationally, two-thirds more men were bank tellers, almost twice as many were receptionists and two-thirds more were waiting tables in 2010 than a decade earlier.

Even more striking is the type of men who are making the shift. From 1970 to 1990, according to a study by Mary Gatta, the senior scholar at Wider Opportunities for Women, and Patricia A. Roos, a sociologist at Rutgers, men who took so-called pink-collar jobs tended to be foreign-born non-English speakers with low education levels — men who, in other words, had few choices.

Now, though, the trend has spread among men of nearly all races and ages, more than a third of whom have a college degree. In fact, the shift is most pronounced among young, white, college-educated men like Charles Reed, a sixth-grade math teacher at Patrick Henry Middle School in Houston.

Mr. Reed, 25, intended to go to law school after a two-year stint with Teach for America, but he fell in love with the job. Though he says the recession had little to do with his career choice, he believes the tough times that have limited the prospects for new law school graduates have also helped make his father, a lawyer, more accepting.

Still, Mr. Reed said of his father, “In his mind, I’m just biding time until I decide to jump into a better profession.”

To the extent that the shift to “women’s work” has been accelerated by recession, the change may reverse when the economy recovers. “Are boys today saying, ‘I want to grow up and be a nurse?’ ” asked Heather Boushey, senior economist at the Center for American Progress. “Or are they saying, ‘I want a job that’s stable and recession proof?’ ”

In interviews, however, about two dozen men played down the economic considerations, saying that the stigma associated with choosing such jobs had faded, and that the jobs were appealing not just because they offered stable employment, but because they were more satisfying.

“I.T. is just killing viruses and clearing paper jams all day,” said Scott Kearney, 43, who tried information technology and other fields before becoming a nurse in the pediatric intensive care unit at Children’s Memorial Hermann Hospital in Houston.

Daniel Wilden, a 26-year-old Army veteran and nursing student at the University of Texas Health Science Center at Houston, said he had gained respect for nursing when he saw a female medic use a Leatherman tool to save the life of his comrade. “She was a beast,” he said admiringly.

More than a few men said their new jobs had turned out to be far harder than they imagined.

But these men can expect success. Men earn more than women even in female-dominated jobs. And white men in particular who enter those fields easily move up to supervisory positions, a phenomenon known as the glass escalator — as opposed to the glass ceiling that women encounter in male-dominated professions, said Adia Harvey Wingfield, a sociologist at Georgia State University. More men in an occupation can also raise wages for everyone, though as yet men’s share of these jobs has not grown enough to have an overall effect on pay.

“Simply because higher-educated men are entering these jobs does not mean that it will result in equality in our workplaces,” said Ms. Gatta of Wider Opportunities for Women.

Still, economists have long tried to figure out how to encourage more integration in the work force. Now, it seems to be happening of its own accord.

“I hated my job every single day of my life,” said John Cook, 55, who got a modest inheritance that allowed him to leave the company where he earned $150,000 a year as a database consultant and enter nursing school.

His starting salary will be about a third what he once earned, but database consulting does not typically earn hugs like the one Mr. Cook recently received from a girl after he took care of her premature baby sister. “It’s like, people get paid for doing this kind of stuff?” Mr. Cook said, choking up as he recounted the episode.

Several men cited the same reasons for seeking out pink-collar work that have drawn women to such careers: less stress and more time at home. At John G. Osborne Elementary, Adrian Ortiz, 42, joked that he was one of the few Mexicans who made more in his native country, where he was a hard-working lawyer, than he did in the United States as a kindergarten teacher in a bilingual classroom. “Now,” he said, “my priorities are family, 100 percent.”

Betsey Stevenson, a labor economist at the Wharton School at the University of Pennsylvania, said she was not surprised that changing gender roles at home, where studies show men are shouldering more of the domestic burden and spending more time parenting, are now showing up in career choices.

“We tend to study these patterns of what’s going on in the family and what’s going on in the workplace as separate, but they’re very much intertwined,” she said. “So as attitudes in the family change, attitudes toward the workplace have changed.”

In a classroom at Houston Community College, Dexter Rodriguez, 35, said his job in tech support had not been threatened by the tough economy. Nonetheless, he said, his family downsized the house, traded the new cars for used ones and began to live off savings, all so Mr. Rodriguez could train for a career he regarded as more exciting.

“I put myself into the recession,” he said, “because I wanted to go to nursing school.”

    More Men Enter Fields Dominated by Women, NYT, 20.5.2012,






Facebook Gold Rush: Fanfare vs. Realities


May 19, 2012
The New York Times


IT’S an old line on Wall Street: If you can get your hands on a hot new stock, you probably don’t want it.

This bit of Street wisdom came to mind last week, as Facebook went public amid so much fanfare.

The stock eked out a 23-cent gain on its Day 1, to $38.23. This suggests that many professional money managers viewed all the hype as just that. Whatever the long-term prospects of this company — an issue over which reasonable people reasonably disagree — the idea that small-time investors might get rich fast struck the pros as absurd.

It is true that initial public offerings have increasingly become a game for early investors and their Wall Street enablers. Since the 1980s, average first-day gains on new stock issues have risen steadily. According to one 2006 study, the average first-day return on I.P.O.’s in the 1980s was 7 percent. By the mid-1990s, it was 15 percent. In the 1999-2000 dot-com boom, it was 65 percent.

We all know how that last one turned out.

It’s no coincidence that as those averages were rising, individual investors were becoming more enamored with the stock market. The great democratization of the equity market, which began in the 1980s, lured small investors into the game.

A lot of these people got burned. Academics at the Warrington College of Business Administration at the University of Florida recently compiled a list of about 250 companies that doubled — at least — in price on their first trading day. Many quickly fell back to earth.

Going back to 1975, the list provides some of the greatest hits in I.P.O. land. The top 10 first-day gainers all went public in the Internet boom. They included VA Linux, which rose almost 700 percent, to a market capitalization of more than $1 billion, and The Globe.com, which produced a gain of 606 percent on its first day as a public company. Foundry Networks and WebMethods soared more than 500 percent.

Some of the companies on the list have disappeared or have been acquired. Others are still around, to lesser and greater degrees. TheGlobe.com trades at less than a penny a share. VA Linux is now called Geeknet and, as of Friday, had a market value of $94 million.

Why did Facebook get a relatively slow start out of the trading gate? One possibility is that the investment bankers who priced the stock considered the history of private trading in the shares before the offering. Facebook was unusual in this way, Laszlo Birinyi of Birinyi Associates pointed out last week.

“There was trading before the I.P.O., so many investors have some feel, some idea of pricing,” he noted. Most offerings are priced based upon what the company and its bankers guess the stock will fetch.

Indications are that Facebook was bought primarily by individual investors, not institutions. Indeed, institutions that had invested early were big sellers in the I.P.O. To many market veterans, this showed that the smart money was getting out while the getting was good.

With investors still believing the advice of Peter Lynch, the former Fidelity fund manager who told individuals to buy stocks of companies they knew as consumers, it is easy to see why Facebook’s offering resonated with the public. But now comes the hard part: operating as a company that returns its investors’ favors with actual earnings.

    Facebook Gold Rush: Fanfare vs. Realities, NYT, 19.5.2012,






End of the Affair?


May 14, 2012
The New York Times


Investors are shunning the stock market, and who can blame them? As serial bubbles have burst, faith in the market has been rewarded with shattered retirements. At the same time, trust has been destroyed by scandals and — as demonstrated by the reckless trading at JPMorgan Chase — the slow, uncertain pace of financial reform.

There has been less buying and selling of stock, and there have been huge outflows of investor dollars from domestic stock mutual funds, as detailed recently by The Times’s Nathaniel Popper. If the trend continues, the result could be a less robust market, with fewer companies opting to raise money by issuing shares and fewer investors willing to put their retirement savings into stocks.

Policy makers should pay attention. Evidence suggests that investors are not merely reacting to tough conditions, but rather are staying away because they do not trust the market. Restoring trust is crucial to restoring the market.

American stocks have doubled in price since the market hit bottom three years ago. But trading in the United States stock market has not only failed to recover since the 2008 financial crash, it has continued to fall. In April, average daily trades stood at 6.5 billion, about half their peak four years ago. By comparison, after the market busts of 1987 and 2001, trading recovered within two years. In fact, going back to 1960, trading had never declined for three consecutive years, let alone four and counting.

Investors haven’t just hunkered down, they have headed for the exits. Since the start of 2008, domestic stock mutual funds, a common way for individuals to invest, were drained of more than $400 billion, compared with an inflow of $52 billion in the four years before that.

These investors have increasingly opted for bonds over stocks, with reason. From the peak of the dot-com era in March 2000, stocks have risen about 10 percent, a paltry gain once fees, taxes and risks are factored in. Stocks are still down about 5 percent from the peak in October 2007, even with prices doubling since mid-2009.

There is also the feeling that the market has become increasingly unfair to investors. For example, Mr. Popper also reported recently on rebates to brokers from stock exchanges. In general, brokers are required to find the best prices for clients who pay them to buy and sell shares. But with the nation’s 13 exchanges now paying brokers for sending them business, brokers may have an incentive to search for the biggest rebate rather than the best price. A new study has estimated that rebates could be costing mutual funds, pension funds and individual investors as much as $5 billion a year.

Also known as “maker-taker” pricing, the rebates have caught the attention of market researchers and investor advocates, including two former economists for the Securities and Exchange Commission who issued a report in 2010 saying that “in other contexts, these payments would be recognized as illegal kickbacks.”

So add rebates to to the S.E.C.’s long list of market issues to be investigated. In the meantime, they are a reminder that brokers often do not have an obligation to act in a client’s best interest — and that efforts to change the law to put a client’s interest first have been repeatedly defeated in the face of industry pressure.

    End of the Affair?, NYT, 14.5.2012,






JPMorgan Loss Claims Official Who Oversaw Trading Unit


May 13, 2012
The New York Times


Stung by a huge trading loss, JPMorgan Chase will replace three top traders starting Monday, including one of the top women on Wall Street, in an effort to stem the ire that the bank faces from regulators and investors.

They are the first departures of leading officials since Jamie Dimon, the chief executive, disclosed the bank’s stunning $2 billion loss on Thursday.

The huge scope of the complex credit bet caught senior bank officials off-guard when it began to sour last month and has set off renewed regulatory scrutiny of the industry. Mr. Dimon has largely sidestepped blame for the loss, although he has offered numerous apologies for the blunder, the biggest of his eight-year tenure at JPMorgan, the nation’s largest bank.

Ina Drew, a 55-year-old banker who has worked at the company for three decades and is the chief investment officer, has offered to resign and will step aside Monday, said several bank executives who would not speak publicly because the resignations had not been completed.

Her exit would be a precipitous fall for a trusted lieutenant of Mr. Dimon. Last year, Ms. Drew earned roughly $14 million, making her the bank’s fourth-highest-paid officer. From her desk in Manhattan, she oversaw the London office that assembled the trade, a growing unit that oversees a portfolio of nearly $400 billion. Two traders who worked for Ms. Drew are also likely to leave shortly. Ms. Drew was not available for comment.

Mr. Dimon, who will face shareholders at the company’s annual meeting Tuesday, has been on a public campaign of contrition in recent days. Mr. Dimon, the famously confident, even cocky, executive, repeated his apologies in a broadcast Sunday of NBC’s “Meet the Press.”

“We made a terrible, egregious mistake and there’s almost no excuse for it,” Mr. Dimon said, adding that the bank was “sloppy” and “stupid.” He also acknowledged that the timing of the loss was a gift for advocates of more stringent regulation.

Ms. Drew had tearfully offered to resign multiple times since the scale of the loss became apparent in late April, but Mr. Dimon had held off until now on accepting it, said people familiar with the situation.

A skilled trader who once said she relished a crisis, Ms. Drew — and the disastrous trade — had become a liability for the firm, whose announcement of the trading loss caused JPMorgan’s shares to plunge 9.3 percent on Friday. It was unclear what type of severance package Ms. Drew will receive.

“It’s not surprising that officials there are taking the fall, but this is one of the fastest movements I have seen,” said Michael Mayo, an analyst with Credit Agricole Securities in New York. “Mr. Dimon gets an A for moving to stem the wrath of regulators, but an F for not finding the problem in the first place.”

With the furor intensifying, former JPMorgan executives said, Ms. Drew was clearly feeling pressure to step down, especially with regulators and members of Congress pointing to the loss as an example of why tighter oversight of the nation’s biggest financial institutions is needed.

“The bank has taken bigger losses in investment banking and elsewhere, but because of the timing, she is being piled upon as this huge failure,” said a former senior executive, who spoke on the condition of anonymity because of the delicate nature of the situation.

Executives said that within the last several months, Ms. Drew told traders at the bank’s chief investment office to execute trades meant to shield the bank from the turmoil in Europe. Ms. Drew thought those bets could protect the bank from losses and even earn a tidy profit, these employees said.

But when market tides abruptly shifted in April and early May, Ms. Drew’s instructions to traders to trim what had become a gigantic bet came too late to avoid racking up losses that could eventually exceed the current $2 billion estimate. Within the bank, there is also ample frustration that instead of reducing the losses, Ms. Drew’s traders may have worsened them.

Besides Ms. Drew, Achilles Macris, a top JPMorgan official in London, is expected to depart, as is a senior London trader, Javier Martin-Artajo. Under Mr. Dimon’s leadership, the chief investment office has grown substantially in recent years, which until recently was little noticed by analysts and investors.

Some former colleagues said Ms. Drew pushed hard for the bank to take calculated risks. She was never a “schmoozer” and kept a very low profile, bank executives said, at both JPMorgan and Chemical Bank, one of JPMorgan’s predecessor companies, which she joined in 1982. But Ms. Drew was not shy with her opinions. She routinely told senior executives in the firm’s trading businesses if she did not agree with their positions, one of the former colleagues said.

Also under scrutiny is another of Ms. Drew’s subordinates, Bruno Iksil, the trader in London who gained notoriety last month for his role in the losses. He was nicknamed the London whale, because the positions he took were so large that they distorted credit prices. Other departures in London are likely.

Former senior-level executives at JPMorgan said the loss was the first real misstep that Ms. Drew had experienced, having successfully navigated the financial crisis. They added that the recent trades were not meant to drum up bigger profits for the bank, but to offset risk.

“This is killing her,” one of the former JPMorgan executives said, adding that “in banking, there are very large knives.”

In February, Ms. Drew traveled to Washington with other JPMorgan executives, including Barry Zubrow, who oversees regulatory affairs, to explain why strategies like the one that later soured could offset risk within the bank. It was Ms. Drew’s first such trip to Washington, and she was called upon as an expert to discuss how to manage the gap between assets and liabilities for big banks, specifically how to handle the capital risks posed by having more in deposits than in loans.

“She’s a person of the highest integrity,” said Walter Shipley, the former chief executive of Chase Manhattan and before that, Chemical Bank. “She was conservative on the risk side, she’s not a speculator.” Mr. Shipley retired from Chase in 2000, just before its merger with J.P. Morgan, but has kept in touch with Ms. Drew.

Mr. Shipley had lunch with her two months ago, he said, adding that Ms. Drew, her husband, and two children live in Short Hills, N.J., not far from his home in Summit.

Despite Ms. Drew’s low profile beyond JPMorgan Chase — many top Wall Street figures said Sunday that they had never heard of her until the news of the trading loss — she was a passionate advocate for women within the firm. In the largely male word of the banking elite, trading is an especially testosterone-laden niche, but Ms. Drew encouraged women to go into trading, arguing that working predictable market hours was actually a benefit in terms of balancing career and family.

“I’m very upset for her,” said William Harrison, who was chief executive of JPMorgan Chase before Mr. Dimon’s tenure. “She looked out for the company first. I’ve always been a great fan.”


Michael J. de la Merced and Ben Protess contributed reporting.

    JPMorgan Loss Claims Official Who Oversaw Trading Unit, NYT, 13.5.2012,






U.S. Added Only 115,000 Jobs in April; Rate Is 8.1%


May 4, 2012
The New York Times


The United States had another month of disappointing job growth in April, the latest government report showed Friday.

The nation’s employers added 115,000 positions on net, after adding 154,000 in March, according to the Labor Department. April’s job growth was less than what economists had been predicting. The unemployment rate ticked down to 8.1 percent in April, from 8.2 percent, but that was because workers dropped out of the labor force.

The share of working-age Americans who are in the labor force, either by working or actively looking for a job, is now at its lowest level since 1981 — when far fewer women were doing paid work.

“It’s a pretty sluggish report over all,” said Andrew Tilton, a senior economist at Goldman Sachs, noting that economists had expected more younger workers to join the labor force as the economy improved. “There were a lot of younger people who had gone back to school to get more education and training, and we thought we’d see more of them joining the work force now. May, June and July — the months when people are typically coming out of schooling — will be the big test.”

The report contained other discouraging news; the average workweek, for example, remained unchanged at 34.5 hours.

Government job losses, which totaled 15,000 in April, continued to weigh on the economy, tugging down job growth as state and local governments grapple with strained budgets. Private companies added 130,000 jobs, with professional and business services, retail trade, and health care doing the most hiring.

Such job growth is not nearly fast enough to recover the losses from the Great Recession and its aftermath. Today the United States economy is producing even more goods and services than it did when the recession officially began in December 2007, but with about five million fewer workers.

Given the many productivity gains across the economy — that is, the fact that employers have learned how to make more with fewer workers — there is also debate about what exactly “healthy” employment would look like in the current economy, and whether it still makes sense to use the pre-financial-crisis economy as a benchmark for what the employment landscape should look like.

On Thursday, John Williams, president of the Federal Reserve Bank of San Francisco, suggested that the “natural” rate of unemployment might now be as high as 6.5 percent. Before the recession, economists generally believed it was around 5 percent.

Productivity fell last quarter, though, which could spell good news for the nearly 14 million idle workers sitting on the sidelines, if not necessarily for the employers trying to squeeze more profits out of their existing work forces.

In one bright spot in Friday’s report, job growth figures for March and February were revised upward, by a total of 53,000.

Economists are once again cautiously optimistic about what the next few months may bring for the nation’s unemployed.

Job growth had picked up earlier this year, just as it had at the start at the beginning of 2010 and 2011. In both of those years severe shocks to the global economy — including the Arab Spring and Japanese tsunami last year — braked some of that momentum. Economists are concerned that over the coming months rising gasoline prices and slowing growth in places like China may similarly weigh on demand for products and services from American businesses, and on hiring by those businesses as well.

    U.S. Added Only 115,000 Jobs in April; Rate Is 8.1%, NYT, 4.5.2012,






How to Get Business to Pay Its Share


May 3, 2012
The New York Times


JAMES MADISON never played with an iPhone, but he might have had something to say about the news last weekend about Apple. Over the last few years, the company has avoided paying billions of dollars in state and federal taxes by routing profits through subsidiaries based in tax havens from Reno, Nev., to the Caribbean.

This is a common practice among major American businesses, and back in 1787, Madison saw it coming. Someday, he warned, companies could grow so large they “would pass beyond the authority of a single state, and would do business in other states.” To make sure the companies remained accountable to government, he said the federal government should “grant charters of incorporation in cases where the public good may require them, and the authority of a single state may be incompetent.”

In other words, a National Companies Act.

Such an act would create a common corporate architecture for all American companies doing business across state lines and internationally. It would establish not only uniform tax policies but also national standards for the structure of corporate boards, the power of chief executives, the relations of management with workers and shareholders and the interaction of American companies with other nations. National companies would have to abide by national rules, and the option of shopping around for the most favorable laws or tax policies simply wouldn’t exist.

It’s an idea that has been proposed and pursued many times, particularly during the early 1900s, when companies like Standard Oil, which was a collection of companies incorporated in various states and assembled into a national “trust,” were becoming increasingly powerful. Theodore Roosevelt, William Howard Taft, Woodrow Wilson and, later, Franklin D. Roosevelt all supported the creation of a national companies law, but the measures were consistently opposed by the business community and eventually defeated.

Today, however, considering how much effort and money American companies expend on keeping a competitive advantage by figuring out which loopholes to exploit from the bewildering array of rules now in effect, they might not entirely oppose reform. In an era of global competition, it could help to have a clear set of standards. It’s certainly what other nations have. In Germany, for example, national legislation established rules for the structure of corporate boards. Britain’s Parliament establishes how a corporation can be created and what its rights and responsibilities are.

Legally, there is little doubt that the United States Congress could impose similar rules under the Commerce Clause of the Constitution. Although the states have traditionally been the main arena for corporate rules, the federal government has long created national corporations, from the First Bank of the United States in 1791 to the Corporation for Public Broadcasting in 1967. Congress could use this same power to require that companies doing business across state lines have national corporate charters, which would subject them to federal rules. Alternatively, it could simply set rules for corporate organization and conduct that would apply to all interstate companies of a certain size.

Passing a National Companies Act won’t be easy. Companies would hire lobbyists to push for favorable rules. And some states with particularly easy incorporation terms, like Delaware, might resist. Around 60 percent of Fortune 500 companies are incorporated in Delaware, and the state earns a great deal in fees and tax revenues as a result.

But the Apple controversy shows that the nation is ready for reform. While the company is a symbol of private enterprise, its existence is made possible by a charter that some government writes and grants. It should serve public as well as private ends — and pay its rightful share in taxes — or it should not exist at all.


Alex Marshall is a senior fellow at the Regional Plan Association,

an urban research and advocacy group,

and the author of the forthcoming book “The Surprising Design of Market Economies.”

    How to Get Business to Pay Its Share, NYT, 3.5.2012,






How Apple Sidesteps Billions in Taxes


April 28, 2012
The New York Times


RENO, Nev. — Apple, the world’s most profitable technology company, doesn’t design iPhones here. It doesn’t run AppleCare customer service from this city. And it doesn’t manufacture MacBooks or iPads anywhere nearby.

Yet, with a handful of employees in a small office here in Reno, Apple has done something central to its corporate strategy: it has avoided millions of dollars in taxes in California and 20 other states.

Apple’s headquarters are in Cupertino, Calif. By putting an office in Reno, just 200 miles away, to collect and invest the company’s profits, Apple sidesteps state income taxes on some of those gains.

California’s corporate tax rate is 8.84 percent. Nevada’s? Zero.

Setting up an office in Reno is just one of many legal methods Apple uses to reduce its worldwide tax bill by billions of dollars each year. As it has in Nevada, Apple has created subsidiaries in low-tax places like Ireland, the Netherlands, Luxembourg and the British Virgin Islands — some little more than a letterbox or an anonymous office — that help cut the taxes it pays around the world.

Almost every major corporation tries to minimize its taxes, of course. For Apple, the savings are especially alluring because the company’s profits are so high. Wall Street analysts predict Apple could earn up to $45.6 billion in its current fiscal year — which would be a record for any American business.

Apple serves as a window on how technology giants have taken advantage of tax codes written for an industrial age and ill suited to today’s digital economy. Some profits at companies like Apple, Google, Amazon, Hewlett-Packard and Microsoft derive not from physical goods but from royalties on intellectual property, like the patents on software that makes devices work. Other times, the products themselves are digital, like downloaded songs. It is much easier for businesses with royalties and digital products to move profits to low-tax countries than it is, say, for grocery stores or automakers. A downloaded application, unlike a car, can be sold from anywhere.

The growing digital economy presents a conundrum for lawmakers overseeing corporate taxation: although technology is now one of the nation’s largest and most valued industries, many tech companies are among the least taxed, according to government and corporate data. Over the last two years, the 71 technology companies in the Standard & Poor’s 500-stock index — including Apple, Google, Yahoo and Dell — reported paying worldwide cash taxes at a rate that, on average, was a third less than other S.& P. companies’. (Cash taxes may include payments for multiple years.)

Even among tech companies, Apple’s rates are low. And while the company has remade industries, ignited economic growth and delighted customers, it has also devised corporate strategies that take advantage of gaps in the tax code, according to former executives who helped create those strategies.

Apple, for instance, was among the first tech companies to designate overseas salespeople in high-tax countries in a manner that allowed them to sell on behalf of low-tax subsidiaries on other continents, sidestepping income taxes, according to former executives. Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corporations — some of which directly imitated Apple’s methods, say accountants at those companies.

Without such tactics, Apple’s federal tax bill in the United States most likely would have been $2.4 billion higher last year, according to a recent study by a former Treasury Department economist, Martin A. Sullivan. As it stands, the company paid cash taxes of $3.3 billion around the world on its reported profits of $34.2 billion last year, a tax rate of 9.8 percent. (Apple does not disclose what portion of those payments was in the United States, or what portion is assigned to previous or future years.)

By comparison, Wal-Mart last year paid worldwide cash taxes of $5.9 billion on its booked profits of $24.4 billion, a tax rate of 24 percent, which is about average for non-tech companies.

Apple’s domestic tax bill has piqued particular curiosity among corporate tax experts because although the company is based in the United States, its profits — on paper, at least — are largely foreign. While Apple contracts out much of the manufacturing and assembly of its products to other companies overseas, the majority of Apple’s executives, product designers, marketers, employees, research and development, and retail stores are in the United States. Tax experts say it is therefore reasonable to expect that most of Apple’s profits would be American as well. The nation’s tax code is based on the concept that a company “earns” income where value is created, rather than where products are sold.

However, Apple’s accountants have found legal ways to allocate about 70 percent of its profits overseas, where tax rates are often much lower, according to corporate filings.

Neither the government nor corporations make tax returns public, and a company’s taxable income often differs from the profits disclosed in annual reports. Companies report their cash outlays for income taxes in their annual Form 10-K, but it is impossible from those numbers to determine precisely how much, in total, corporations pay to governments. In Apple’s last annual disclosure, the company listed its worldwide taxes — which includes cash taxes paid as well as deferred taxes and other charges — at $8.3 billion, an effective tax rate of almost a quarter of profits.

However, tax analysts and scholars said that figure most likely overstated how much the company would hand to governments because it included sums that might never be paid. “The information on 10-Ks is fiction for most companies,” said Kimberly Clausing, an economist at Reed College who specializes in multinational taxation. “But for tech companies it goes from fiction to farcical.”

Apple, in a statement, said it “has conducted all of its business with the highest of ethical standards, complying with applicable laws and accounting rules.” It added, “We are incredibly proud of all of Apple’s contributions.”

Apple “pays an enormous amount of taxes, which help our local, state and federal governments,” the statement also said. “In the first half of fiscal year 2012, our U.S. operations have generated almost $5 billion in federal and state income taxes, including income taxes withheld on employee stock gains, making us among the top payers of U.S. income tax.”

The statement did not specify how it arrived at $5 billion, nor did it address the issue of deferred taxes, which the company may pay in future years or decide to defer indefinitely. The $5 billion figure appears to include taxes ultimately owed by Apple employees.

The sums paid by Apple and other tech corporations is a point of contention in the company’s backyard.

A mile and a half from Apple’s Cupertino headquarters is De Anza College, a community college that Steve Wozniak, one of Apple’s founders, attended from 1969 to 1974. Because of California’s state budget crisis, De Anza has cut more than a thousand courses and 8 percent of its faculty since 2008.

Now, De Anza faces a budget gap so large that it is confronting a “death spiral,” the school’s president, Brian Murphy, wrote to the faculty in January. Apple, of course, is not responsible for the state’s financial shortfall, which has numerous causes. But the company’s tax policies are seen by officials like Mr. Murphy as symptomatic of why the crisis exists.

“I just don’t understand it,” he said in an interview. “I’ll bet every person at Apple has a connection to De Anza. Their kids swim in our pool. Their cousins take classes here. They drive past it every day, for Pete’s sake.

“But then they do everything they can to pay as few taxes as possible.”

Escaping State Taxes

In 2006, as Apple’s bank accounts and stock price were rising, company executives came here to Reno and established a subsidiary named Braeburn Capital to manage and invest the company’s cash. Braeburn is a variety of apple that is simultaneously sweet and tart.

Today, Braeburn’s offices are down a narrow hallway inside a bland building that sits across from an abandoned restaurant. Inside, there are posters of candy-colored iPods and a large Apple insignia, as well as a handful of desks and computer terminals.

When someone in the United States buys an iPhone, iPad or other Apple product, a portion of the profits from that sale is often deposited into accounts controlled by Braeburn, and then invested in stocks, bonds or other financial instruments, say company executives. Then, when those investments turn a profit, some of it is shielded from tax authorities in California by virtue of Braeburn’s Nevada address.

Since founding Braeburn, Apple has earned more than $2.5 billion in interest and dividend income on its cash reserves and investments around the globe. If Braeburn were located in Cupertino, where Apple’s top executives work, a portion of the domestic income would be taxed at California’s 8.84 percent corporate income tax rate.

But in Nevada there is no state corporate income tax and no capital gains tax.

What’s more, Braeburn allows Apple to lower its taxes in other states — including Florida, New Jersey and New Mexico — because many of those jurisdictions use formulas that reduce what is owed when a company’s financial management occurs elsewhere. Apple does not disclose what portion of cash taxes is paid to states, but the company reported that it owed $762 million in state income taxes nationwide last year. That effective state tax rate is higher than the rate of many other tech companies, but as Ms. Clausing and other tax analysts have noted, such figures are often not reliable guides to what is actually paid.

Dozens of other companies, including Cisco, Harley-Davidson and Microsoft, have also set up Nevada subsidiaries that bypass taxes in other states. Hundreds of other corporations reap similar savings by locating offices in Delaware.

But some in California are unhappy that Apple and other California-based companies have moved financial operations to tax-free states — particularly since lawmakers have offered them tax breaks to keep them in the state.

In 1996, 1999 and 2000, for instance, the California Legislature increased the state’s research and development tax credit, permitting hundreds of companies, including Apple, to avoid billions in state taxes, according to legislative analysts. Apple has reported tax savings of $412 million from research and development credits of all sorts since 1996.

Then, in 2009, after an intense lobbying campaign led by Apple, Cisco, Oracle, Intel and other companies, the California Legislature reduced taxes for corporations based in California but operating in other states or nations. Legislative analysts say the change will eventually cost the state government about $1.5 billion a year.

Such lost revenue is one reason California now faces a budget crisis, with a shortfall of more than $9.2 billion in the coming fiscal year alone. The state has cut some health care programs, significantly raised tuition at state universities, cut services to the disabled and proposed a $4.8 billion reduction in spending on kindergarten and other grades.

Apple declined to comment on its Nevada operations. Privately, some executives said it was unfair to criticize the company for reducing its tax bill when thousands of other companies acted similarly. If Apple volunteered to pay more in taxes, it would put itself at a competitive disadvantage, they argued, and do a disservice to its shareholders.

Indeed, Apple’s decisions have yielded benefits. After announcing one of the best quarters in its history last week, the company said it had net profits of $24.7 billion on revenues of $85.5 billion in the first half of the fiscal year, and more than $110 billion in the bank, according to company filings.

A Global Tax Strategy

Every second of every hour, millions of times each day, in living rooms and at cash registers, consumers click the “Buy” button on iTunes or hand over payment for an Apple product.

And with that, an international financial engine kicks into gear, moving money across continents in the blink of an eye. While Apple’s Reno office helps the company avoid state taxes, its international subsidiaries — particularly the company’s assignment of sales and patent royalties to other nations — help reduce taxes owed to the American and other governments.

For instance, one of Apple’s subsidiaries in Luxembourg, named iTunes S.à r.l., has just a few dozen employees, according to corporate documents filed in that nation and a current executive. The only indication of the subsidiary’s presence outside is a letterbox with a lopsided slip of paper reading “ITUNES SARL.”

Luxembourg has just half a million residents. But when customers across Europe, Africa or the Middle East — and potentially elsewhere — download a song, television show or app, the sale is recorded in this small country, according to current and former executives. In 2011, iTunes S.à r.l.’s revenue exceeded $1 billion, according to an Apple executive, representing roughly 20 percent of iTunes’s worldwide sales.

The advantages of Luxembourg are simple, say Apple executives. The country has promised to tax the payments collected by Apple and numerous other tech corporations at low rates if they route transactions through Luxembourg. Taxes that would have otherwise gone to the governments of Britain, France, the United States and dozens of other nations go to Luxembourg instead, at discounted rates.

“We set up in Luxembourg because of the favorable taxes,” said Robert Hatta, who helped oversee Apple’s iTunes retail marketing and sales for European markets until 2007. “Downloads are different from tractors or steel because there’s nothing you can touch, so it doesn’t matter if your computer is in France or England. If you’re buying from Luxembourg, it’s a relationship with Luxembourg.”

An Apple spokesman declined to comment on the Luxembourg operations.

Downloadable goods illustrate how modern tax systems have become increasingly ill equipped for an economy dominated by electronic commerce. Apple, say former executives, has been particularly talented at identifying legal tax loopholes and hiring accountants who, as much as iPhone designers, are known for their innovation. In the 1980s, for instance, Apple was among the first major corporations to designate overseas distributors as “commissionaires,” rather than retailers, said Michael Rashkin, Apple’s first director of tax policy, who helped set up the system before leaving in 1999.

To customers the designation was virtually unnoticeable. But because commissionaires never technically take possession of inventory — which would require them to recognize taxes — the structure allowed a salesman in high-tax Germany, for example, to sell computers on behalf of a subsidiary in low-tax Singapore. Hence, most of those profits would be taxed at Singaporean, rather than German, rates.

The Double Irish

In the late 1980s, Apple was among the pioneers in creating a tax structure — known as the Double Irish — that allowed the company to move profits into tax havens around the world, said Tim Jenkins, who helped set up the system as an Apple European finance manager until 1994.

Apple created two Irish subsidiaries — today named Apple Operations International and Apple Sales International — and built a glass-encased factory amid the green fields of Cork. The Irish government offered Apple tax breaks in exchange for jobs, according to former executives with knowledge of the relationship.

But the bigger advantage was that the arrangement allowed Apple to send royalties on patents developed in California to Ireland. The transfer was internal, and simply moved funds from one part of the company to a subsidiary overseas. But as a result, some profits were taxed at the Irish rate of approximately 12.5 percent, rather than at the American statutory rate of 35 percent. In 2004, Ireland, a nation of less than 5 million, was home to more than one-third of Apple’s worldwide revenues, according to company filings. (Apple has not released more recent estimates.)

Moreover, the second Irish subsidiary — the “Double” — allowed other profits to flow to tax-free companies in the Caribbean. Apple has assigned partial ownership of its Irish subsidiaries to Baldwin Holdings Unlimited in the British Virgin Islands, a tax haven, according to documents filed there and in Ireland. Baldwin Holdings has no listed offices or telephone number, and its only listed director is Peter Oppenheimer, Apple’s chief financial officer, who lives and works in Cupertino. Baldwin apples are known for their hardiness while traveling.

Finally, because of Ireland’s treaties with European nations, some of Apple’s profits could travel virtually tax-free through the Netherlands — the Dutch Sandwich — which made them essentially invisible to outside observers and tax authorities.

Robert Promm, Apple’s controller in the mid-1990s, called the strategy “the worst-kept secret in Europe.”

It is unclear precisely how Apple’s overseas finances now function. In 2006, the company reorganized its Irish divisions as unlimited corporations, which have few requirements to disclose financial information.

However, tax experts say that strategies like the Double Irish help explain how Apple has managed to keep its international taxes to 3.2 percent of foreign profits last year, to 2.2 percent in 2010, and in the single digits for the last half-decade, according to the company’s corporate filings.

Apple declined to comment on its operations in Ireland, the Netherlands and the British Virgin Islands.

Apple reported in its last annual disclosures that $24 billion — or 70 percent — of its total $34.2 billion in pretax profits were earned abroad, and 30 percent were earned in the United States. But Mr. Sullivan, the former Treasury Department economist who today writes for the trade publication Tax Analysts, said that “given that all of the marketing and products are designed here, and the patents were created in California, that number should probably be at least 50 percent.”

If profits were evenly divided between the United States and foreign countries, Apple’s federal tax bill would have increased by about $2.4 billion last year, he said, because a larger amount of its profits would have been subject to the United States’ higher corporate income tax rate.

“Apple, like many other multinationals, is using perfectly legal methods to keep a significant portion of their profits out of the hands of the I.R.S.,” Mr. Sullivan said. “And when America’s most profitable companies pay less, the general public has to pay more.”

Other tax experts, like Edward D. Kleinbard, former chief of staff of the Congressional Joint Committee on Taxation, have reached similar conclusions.

“This tax avoidance strategy used by Apple and other multinationals doesn’t just minimize the companies’ U.S. taxes,” said Mr. Kleinbard, now a professor of tax law at the University of Southern California. “It’s German tax and French tax and tax in the U.K. and elsewhere.”

One downside for companies using such strategies is that when money is sent overseas, it cannot be returned to the United States without incurring a new tax bill.

However, that might change. Apple, which holds $74 billion offshore, last year aligned itself with more than four dozen companies and organizations urging Congress for a “repatriation holiday” that would permit American businesses to bring money home without owing large taxes. The coalition, which includes Google, Microsoft and Pfizer, has hired dozens of lobbyists to push for the measure, which has not yet come up for vote. The tax break would cost the federal government $79 billion over the next decade, according to a Congressional report.

Fallout in California

In one of his last public appearances before his death, Steven P. Jobs, Apple’s chief executive, addressed Cupertino’s City Council last June, seeking approval to build a new headquarters.

Most of the Council was effusive in its praise of the proposal. But one councilwoman, Kris Wang, had questions.

How will residents benefit? she asked. Perhaps Apple could provide free wireless Internet to Cupertino, she suggested, something Google had done in neighboring Mountain View.

“See, I’m a simpleton; I’ve always had this view that we pay taxes, and the city should do those things,” Mr. Jobs replied, according to a video of the meeting. “That’s why we pay taxes. Now, if we can get out of paying taxes, I’ll be glad to put up Wi-Fi.”

He suggested that, if the City Council were unhappy, perhaps Apple could move. The company is Cupertino’s largest taxpayer, with more than $8 million in property taxes assessed by local officials last year.

Ms. Wang dropped her suggestion.

Cupertino, Ms. Wang said in an interview, has real financial problems. “We’re proud to have Apple here,” said Ms. Wang, who has since left the Council. “But how do you get them to feel more connected?”

Other residents argue that Apple does enough as Cupertino’s largest employer and that tech companies, in general, have buoyed California’s economy. Apple’s workers eat in local restaurants, serve on local boards and donate to local causes. Silicon Valley’s many millionaires pay personal state income taxes. In its statement, Apple said its “international growth is creating jobs domestically, since we oversee most of our operations from California.”

“The vast majority of our global work force remains in the U.S.,” the statement continued, “with more than 47,000 full-time employees in all 50 states.”

Moreover, Apple has given nearby Stanford University more than $50 million in the last two years. The company has also donated $50 million to an African aid organization. In its statement, Apple said: “We have contributed to many charitable causes but have never sought publicity for doing so. Our focus has been on doing the right thing, not getting credit for it. In 2011, we dramatically expanded the number of deserving organizations we support by initiating a matching gift program for our employees.”

Still, some, including De Anza College’s president, Mr. Murphy, say the philanthropy and job creation do not offset Apple’s and other companies’ decisions to circumvent taxes. Within 20 minutes of the financially ailing school are the global headquarters of Google, Facebook, Intel, Hewlett-Packard and Cisco.

“When it comes time for all these companies — Google and Apple and Facebook and the rest — to pay their fair share, there’s a knee-jerk resistance,” Mr. Murphy said. “They’re philosophically antitax, and it’s decimating the state.”

“But I’m not complaining,” he added. “We can’t afford to upset these guys. We need every dollar we can get.”


Additional reporting was contributed by Keith Bradsher in Hong Kong,

Siem Eikelenboom in Amsterdam, Dean Greenaway in the British Virgin Islands,

Scott Sayare in Luxembourg and Jason Woodard in Singapore.

    How Apple Sidesteps Billions in Taxes, NYT, 28.4.2012,






U.S. Growth Slows to 2.2%, Report Says


April 27, 2012
The New York Times


The economic recovery slowed more than expected early this year, raising fears of a spring slowdown for the third year in a row and giving Republicans a fresh opportunity to criticize President Obama’s policies.

The United States gross domestic product grew at an annual rate of 2.2 percent in the first quarter, down from 3 percent at the end of last year, according to a preliminary report released Friday. It was the first deceleration in a year, but it was not nearly as severe as other setbacks in the last couple of years.

Mitt Romney, the presumptive Republican presidential nominee, has been hammering on economic issues all week, insisting that the president has held back the recovery and intends to do further damage.

But the White House focused on the bright spots in the report, like solid growth in consumer spending and a surge in residential building.

“When you look at the report in the totality, I think it shows that the private sector is continuing to heal from the financial crisis,” said Alan Krueger, chairman of the president’s Council of Economic Advisers. Congress should pass elements of the president’s jobs plan, he said, like one that would subsidize the employment of teachers and first responders to emergencies. “We would like to see the pace of economic growth pick up, and those additional measures which the president proposed are well targeted to the areas of weakness in the economy now.”

Representative Kevin Brady, a Republican from Texas and vice chairman of the Joint Economic Committee, called the numbers “beyond disappointing.”

“The damage being done by the Obama administration’s policies have produced a weak recovery,” he wrote in a statement.

The American economy has been growing since the second half of 2009, coming close to a 4 percent growth rate in early 2010 before faltering. Growth slowed nearly to a halt in the first quarter of 2011 but accelerated throughout the rest of the year.

The first-quarter growth was weaker than expected. United States stock markets largely shrugged it off, however, perhaps in part because the country is growing while many economies are contracting.

Economists initially predicted a much weaker showing in the latest quarter, partly because of a large accumulation of inventories in the fall and winter that needed to be worked off. But in the last few weeks, expectations rose on strong jobs reports and rising consumer confidence.

Consumer spending did turn out to be the major strength early this year, growing 2.9 percent compared with 2.1 percent in the last quarter of 2011. Business investment, which had been a bright spot, declined in the most recent quarter.

Government spending also fell more than anticipated, lopping more than half a percentage point off total growth, thanks in part to a particularly large drop in military outlays.

Many economists pointed out that consumer spending, mostly on cars and other large items, seemed to have come at a cost. Consumer savings declined. That suggests that spending growth could become unsustainable as households exhaust their reserves. But estimates of personal income tend to be revised upward, and past declines in the savings rate have been erased by later estimates.

Economists were also troubled by the decline in business investment. Businesses spent more on equipment and software but much less on infrastructure. Some of that decrease was expected because a tax break for capital investment expired at the end of the year.

By far the steepest decline in investment in the first quarter was in construction related to mining, oil and gas, while manufacturers actually increased their spending on factories and office buildings.

Mark Zandi of Moody’s Analytics said the low investment numbers showed that businesses remained “very cautious.”

Growth in residential housing swelled by 19 percent, the fourth consecutive increase in that much-diminished sector and the first time it has shown a straight year of growth since 2005. Economists argued over how much of that increase — and, for that matter, the surprising strength in consumer spending — was caused by the unseasonably warm winter.

Other factors that contributed to the growth have already appeared to soften, contributing to fears of another false dawn. Shipments of durable goods increased last month, but new orders showed the steepest drop since January 2009. The trade balance improved, but job growth weakened and, more recently, new claims for unemployment benefits have risen.

“The G.D.P. report was disappointing,” economists at Morgan Stanley wrote. “The mix of activity pointed to slower growth ahead.”

But Ian Shepherdson of High Frequency Economics dismissed fears of another significant slowdown, saying that last year’s hiccup was the result of a series of external shocks, like a spike in gas prices (this year’s was less severe and is already subsiding) and the Japanese earthquake.

“What have we got this year that’s comparable?” he asked. “Nothing. Europe is sort of a constant rather than a variable now.”

A growth rate of 2.2 percent is barely enough to nudge the unemployment rate down, and it is substantially lower than the 3 percent that is considered the comfort zone for incumbent presidents.

“I don’t think the issue is whether or not the growth rate is sustainable,” said Steven Blitz, chief economist at ITG Investment Research. “I think the question is whether the growth rate that’s sustainable is acceptable — politically and socially acceptable.”

Still, 2.2 percent was enough to generate envy in Europe, where many countries are already in recession and where this week Britain announced that it had entered the dreaded “double dip.” Stagnation in Europe and a slowing of China’s breakneck expansion have weakened global demand even as corporate profits have continued to outpace expectations.

    U.S. Growth Slows to 2.2%, Report Says, NYT, 27.4.2012,






Death of a Fairy Tale


April 26, 2012
The New York Times


This was the month the confidence fairy died.

For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.

Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! “Confidence-inspiring policies will foster and not hamper economic recovery,” declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. Or as I put it way back when, the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue.

The good news is that many influential people are finally admitting that the confidence fairy was a myth. The bad news is that despite this admission there seems to be little prospect of a near-term course change either in Europe or here in America, where we never fully embraced the doctrine, but have, nonetheless, had de facto austerity in the form of huge spending and employment cuts at the state and local level.

So, about that doctrine: appeals to the wonders of confidence are something Herbert Hoover would have found completely familiar — and faith in the confidence fairy has worked out about as well for modern Europe as it did for Hoover’s America. All around Europe’s periphery, from Spain to Latvia, austerity policies have produced Depression-level slumps and Depression-level unemployment; the confidence fairy is nowhere to be seen, not even in Britain, whose turn to austerity two years ago was greeted with loud hosannas by policy elites on both sides of the Atlantic.

None of this should come as news, since the failure of austerity policies to deliver as promised has long been obvious. Yet European leaders spent years in denial, insisting that their policies would start working any day now, and celebrating supposed triumphs on the flimsiest of evidence. Notably, the long-suffering (literally) Irish have been hailed as a success story not once but twice, in early 2010 and again in the fall of 2011. Each time the supposed success turned out to be a mirage; three years into its austerity program, Ireland has yet to show any sign of real recovery from a slump that has driven the unemployment rate to almost 15 percent.

However, something has changed in the past few weeks. Several events — the collapse of the Dutch government over proposed austerity measures, the strong showing of the vaguely anti-austerity François Hollande in the first round of France’s presidential election, and an economic report showing that Britain is doing worse in the current slump than it did in the 1930s — seem to have finally broken through the wall of denial. Suddenly, everyone is admitting that austerity isn’t working.

The question now is what they’re going to do about it. And the answer, I fear, is: not much.

For one thing, while the austerians seem to have given up on hope, they haven’t given up on fear — that is, on the claim that if we don’t slash spending, even in a depressed economy, we’ll turn into Greece, with sky-high borrowing costs.

Now, claims that only austerity can pacify bond markets have proved every bit as wrong as claims that the confidence fairy will bring prosperity. Almost three years have passed since The Wall Street Journal breathlessly warned that the attack of the bond vigilantes on U.S. debt had begun; not only have borrowing costs remained low, they’ve actually fallen by half. Japan has faced dire warnings about its debt for more than a decade; as of this week, it could borrow long term at an interest rate of less than 1 percent.

And serious analysts now argue that fiscal austerity in a depressed economy is probably self-defeating: by shrinking the economy and hurting long-term revenue, austerity probably makes the debt outlook worse rather than better.

But while the confidence fairy appears to be well and truly buried, deficit scare stories remain popular. Indeed, defenders of British policies dismiss any call for a rethinking of these policies, despite their evident failure to deliver, on the grounds that any relaxation of austerity would cause borrowing costs to soar.

So we’re now living in a world of zombie economic policies — policies that should have been killed by the evidence that all of their premises are wrong, but which keep shambling along nonetheless. And it’s anyone’s guess when this reign of error will end.

    Death of a Fairy Tale, NYT, 26.4.2012,






The High Cost of Gambling on Oil


April 10, 2012
The New York Times



THE drastic rise in the price of oil and gasoline is in part the result of forces beyond our control: as high-growth countries like China and India increase the demand for petroleum, the price will go up.

But there are factors contributing to the high price of oil that we can do something about. Chief among them is the effect of “pure” speculators — investors who buy and sell oil futures but never take physical possession of actual barrels of oil. These middlemen add little value and lots of cost as they bid up the price of oil in pursuit of financial gain. They should be banned from the world’s commodity exchanges, which could drive down the price of oil by as much as 40 percent and the price of gasoline by as much as $1 a gallon.

Today, speculators dominate the trading of oil futures. According to Congressional testimony by the commodities specialist Michael W. Masters in 2009, the oil futures markets routinely trade more than one billion barrels of oil per day. Given that the entire world produces only around 85 million actual “wet” barrels a day, this means that more than 90 percent of trading involves speculators’ exchanging “paper” barrels with one another.

Because of speculation, today’s oil prices of about $100 a barrel have become disconnected from the costs of extraction, which average $11 a barrel worldwide. Pure speculators account for as much as 40 percent of that high price, according to testimony that Rex Tillerson, the chief executive of ExxonMobil, gave to Congress last year. That estimate is bolstered by a recent report from the Federal Reserve Bank of St. Louis.

Many economists contend that speculation on oil futures is a good thing, because it increases liquidity and better distributes risk, allowing refiners, producers, wholesalers and consumers (like airlines) to “hedge” their positions more efficiently, protecting themselves against unseen future shifts in the price of oil.

But it’s one thing to have a trading system in which oil industry players place strategic bets on where prices will be months into the future; it’s another thing to have a system in which hedge funds and bankers pump billions of purely speculative dollars into commodity exchanges, chasing a limited number of barrels and driving up the price. The same concern explains why the United States government placed limits on pure speculators in grain exchanges after repeated manipulations of crop prices during the Great Depression.

The market for oil futures differs from the markets for other commodities in the sheer size and scope of trading and in the impact it has on a strategically important resource. There is a fundamental difference between oil futures and, say, orange juice futures. If orange juice gets too pricey (perhaps because of a speculative bubble), we can easily switch to apple juice. The same does not hold with oil. Higher oil prices act like a choke-chain on the economy, dragging down profits for ordinary businesses and depressing investment.

When I started buying and selling oil more than 30 years ago for my nonprofit organization, speculation wasn’t a significant aspect of the industry. But in 1991, just a few years after oil futures began trading on the New York Mercantile Exchange, Goldman Sachs made an argument to the Commodity Futures Trading Commission that Wall Street dealers who put down big bets on oil should be considered legitimate hedgers and granted an exemption from regulatory limits on their trades.

The commission granted an exemption that ultimately allowed Goldman Sachs to process billions of dollars in speculative oil trades. Other exemptions followed. By 2008, eight investment banks accounted for 32 percent of the total oil futures market. According to a recent analysis by McClatchy, only about 30 percent of oil futures traders are actual oil industry participants.

Congress was jolted into action when it learned of the full extent of Commodity Futures Trading Commission’s lax oversight. In the wake of the economic crisis, the Dodd-Frank Wall Street reform law required greater trading transparency and limited speculators who lacked a legitimate business-hedging purpose to positions of no greater than 25 percent of the futures market.

This is an important step, but limiting speculators in the oil markets doesn’t go far enough. Even with the restrictions currently in place, those eight investment banks alone can severely inflate the price of oil. Federal legislation should bar pure oil speculators entirely from commodity exchanges in the United States. And the United States should use its clout to get European and Asian markets to follow its lead, chasing oil speculators from the world’s commodity markets.

Eliminating pure speculation on oil futures is a question of fairness. The choice is between a world of hedge-fund traders who make enormous amounts of money at the expense of people who need to drive their cars and heat their homes, and a world where the fundamentals of life — food, housing, health care, education and energy — remain affordable for all.


Joseph P. Kennedy II, a former United States representative from Massachusetts,

is the founder, chairman and president of Citizens Energy Corporation.

    The High Cost of Gambling on Oil, NYT, 10.4.2012,






The Two Economies


April 9, 2012
The New York Times


The creative dynamism of American business is astounding and a little terrifying. Over the past five years, amid turmoil and uncertainty, American businesses have shed employees, becoming more efficient and more productive. According to The Wall Street Journal on Monday, the revenue per employee at S.&P. 500 companies increased from $378,000 in 2007 to $420,000 in 2011.

These efficiency gains are boosting the American economy overall and American exports in particular. Two years ago, President Obama promised to double exports over the next five years. The U.S. might actually meet that target. As Tyler Cowen reports in a fantastic article in The American Interest called “What Export-Oriented America Means,” American exports are surging.

Cowen argues that America’s export strength will only build in the years ahead. He points to three trends that will boost the nation’s economic performance. First, smart machines. China and other low-wage countries have a huge advantage when factory floors are crowded with workers. But we are moving to an age of quiet factories, with more robots and better software. That reduces the importance of wage rates. It boosts American companies that make software and smart machines.

Then there is the shale oil and gas revolution. In the past year, fracking, a technology pioneered in the United States, has given us access to vast amounts of U.S. energy that can be sold abroad. Europe and Asian nations have much less capacity. As long as fracking can be done responsibly, U.S. exports should surge.

Finally, there is the growth of the global middle class. When China, India and such places were first climbing the income ladder, they imported a lot of raw materials from places like Canada, Australia and Chile to fuel the early stages of their economic growth. But, in the coming decades, as their consumers get richer, they will be importing more pharmaceuticals, semiconductors, planes and entertainment, important American products.

If Cowen’s case is right, the U.S. is not a nation in decline. We may be in the early days of an export boom that will eventually power an economic revival, including a manufacturing revival. But, as Cowen emphasizes, this does not mean nirvana is at hand.

His work leaves the impression that there are two interrelated American economies. On the one hand, there is the globalized tradable sector — companies that have to compete with everybody everywhere. These companies, with the sword of foreign competition hanging over them, have become relentlessly dynamic and very (sometimes brutally) efficient.

On the other hand, there is a large sector of the economy that does not face this global competition — health care, education and government. Leaders in this economy try to improve productivity and use new technologies, but they are not compelled by do-or-die pressure, and their pace of change is slower.

A rift is opening up. The first, globalized sector is producing a lot of the productivity gains, but it is not producing a lot of the jobs. The second more protected sector is producing more jobs, but not as many productivity gains. The hypercompetitive globalized economy generates enormous profits, while the second, less tradable economy is where more Americans actually live.

In politics, we are beginning to see conflicts between those who live in Economy I and those who live in Economy II. Republicans often live in and love the efficient globalized sector and believe it should be a model for the entire society. They want to use private health care markets and choice-oriented education reforms to make society as dynamic, creative and efficient as Economy I.

Democrats are more likely to live in and respect the values of the second sector. They emphasize the destructive side of Economy I streamlining — the huge profits at the top and the stagnant wages at the middle. They want to tamp down some of the streamlining in the global economy sector and protect health care, education and government from its remorseless logic.

Republicans believe the globalized sector is racing far out in front of government, adapting in ways inevitable and proper. If given enough freedom, Economy I entrepreneurs will create the future jobs we need. Government should prepare people to enter that sector but get out of its way as much as possible.

Democrats are more optimistic that government can enhance the productivity of the global sectors of the economy while redirecting their benefits. They want to use Economy I to subsidize Economy II.

I don’t know which coalition will gain the upper hand. But I do think today’s arguments are rooted in growing structural rifts. There’s an urgent need to understand the interplay between the two different sectors. I’d also add that it’s not always easy to be in one of those pockets — including the media and higher education — that are making the bumpy transition from Economy II to Economy I.

    The Two Economies, NYT, 9.4.2012,






After a Winter of Strong Gains, Job Growth Ebbs


April 6, 2012
The New York Times


Although signs pointed to a strengthening economy earlier this year, the jobs report on Friday came with a message: don’t get ahead of yourself.

The country’s employers added a disappointing 120,000 jobs in March, about half the net gains posted in each of the preceding three months. The unemployment rate, which comes from a separate survey of households rather than employers, slipped to 8.2 percent, from 8.3 percent, as a smaller portion of the population looked for work.

Politicians seized on the data, with Mitt Romney, the front-runner in the Republican presidential nominating contest, characterizing the report as “weak and very troubling.” President Obama emphasized that employers had added more than 600,000 jobs in the last three months, but acknowledged the “ups and downs” in the jobs picture.

The slowdown suggests that employers remain cautious about hiring as they digest the impact of rising gas prices, especially on consumers, and as they face uncertainty about health care and pension costs.

Despite some indications, like falling unemployment claims, that the job market was finding its footing, anxieties have built in recent weeks about whether a stronger pace of recovery could be sustained.

The economic outlook abroad is worrisome. Global stock markets grew skittish this week as the ballooning debt and a weak bond offering in Spain raised the specter of a deepening slump in Europe. The United States stock market has also had several days of declines after a strong first-quarter performance. Ben S. Bernanke, chairman of the Federal Reserve, has tried to temper expectations and noted in a speech last month that the “better jobs numbers seem somewhat out of sync with the overall pace of economic expansion.”

With the United States stock market closed for Good Friday, futures on the Dow Jones industrial average and the Standard & Poor’s 500-stock index dropped by more than 1 percent in limited trading.

The March pullback in hiring eerily repeats a pattern set in the last two years, when an apparent pickup in the winter was followed by a slowdown in the spring. The monthly snapshot of the job market from the Labor Department can reflect transitory factors, however, and is often revised. The job gains in February, for example, were revised up to 240,000 from the 227,000 initially reported. Seasonal factors may also be playing a role, after the unusually warm winter.

Economists suggested that the trend among employers to wring more work from fewer people continued to be a hallmark of this recovery.

“What we are seeing now is an agonizingly slow recovery in the job market,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “I believe what this reflects is this laser focus intensity that business leaders have nowadays to try to be able to increase production with less reliance on labor as a means to do so.”

Private sector companies added 121,000 jobs in March as governments shed 1,000 jobs, driven by layoffs in the postal system and at the local level.

Among industries, manufacturing continued its run as the stalwart of job growth, adding 37,000 jobs in March.

But economists cautioned that factories were unlikely to bring back a majority of the two million people who lost their jobs during the recession.

Rather, manufacturers are recalibrating. “In the worst of a downturn like this, they probably kicked too many people out the door,” said Cliff Waldman, senior economist at MAPI/the Manufacturers Alliance. “And now even with modest growth they have to bring people back.”

Joel Long, chief executive of GSM Services, an air-conditioning installer and roofing contractor that also makes some of its parts in Gastonia, N.C., said he had five openings for sales staff, production workers and a project manager. His family-owned company, which employs about 130 people, is doing well enough to hire in part because “the competition has gone away,” he said.

Despite recent improvements in store sales, retailers shed nearly 34,000 jobs last month, a sign to some economists that the rapid incursion of e-commerce had hurt employment in the sector.

“You simply need fewer workers when you’re selling from a distribution center,” said Patrick O’Keefe, director of economic research at J. H. Cohn and a deputy assistant secretary for employment and training in the Reagan administration.

While the slowdown in job growth seemed to reinforce Mr. Bernanke’s concern about the disjuncture between overall economic growth and job growth around the turn of the year, economists suggested long-term trends could also be behind the protracted sluggishness.

“There are definitely some structural headwinds,” said Michelle Girard, senior United States economist at the Royal Bank of Scotland. Many companies contend that they would hire more if only they could find more skilled workers. Other workers are unable to move for a new job because they are stuck in homes that are worth less than what they owe on their mortgages.

“I think that’s why it is going to take a while to get back to where we were,” Ms. Girard said. “It could take years to get back to the labor market that we saw in the years before the downturn.”

The usual precursors to hiring improvement were weak in March. Average weekly hours slipped to 34.5 from 34.6, and average weekly earnings were also down, to $806.96 from $807.56 a month earlier. Hiring by temporary firms declined by 7,500 jobs.

Jeffrey A. Joerres, chief executive of Manpower Group, said that companies were hitting the “slow motion button” in hiring. He characterized employers’ attitudes as “Hmm, if I can digest a little bit right now and see what’s out there, I’ll do that.”

But Janette Marx, a senior vice president at Adecco North America, another job placement firm, said that clients were beginning to convert temporary workers to permanent hires and that companies that had postponed projects were beginning to revive them for later in the year. “They are getting ready to ramp up their work force to staff projects that they had put on the back burner for a while,” Ms. Marx said.

Although the number of people out of work for six months or longer fell to 5.3 million, from 5.4 million in the February report, the number of people who said they were without a job for five weeks or less rose to 2.57 million.

The modest job growth in March seemed to favor men over women. Betsey Stevenson, an economist at the Wharton School at the University of Pennsylvania and former chief economist at the Labor Department, noted that women took only 38,000 of the 120,000 jobs added in March. What’s more, she said, “men got more than half the gains in health care and education, a traditionally female-dominated industry.”

Deborah Harrison, a former administrative assistant in Louisville, Ky., has managed to land only a few short contract assignments in the three years since she lost her job.

The longer she is out of work, she said, the more she is tarnished with the stigma of unemployment. “I think that raises a red flag,” said Ms. Harrison, who said she spent several hours a day searching for jobs online. “It’s not hopeless,” she added, “but it’s not real encouraging either.”

    After a Winter of Strong Gains, Job Growth Ebbs, NYT, 6.4.2012,






Investors Are Looking to Buy Homes by the Thousands


April 2, 2012
The New York Times


RIVERSIDE, Calif. — At least 20 times a day, Alan Hladik walks into a fixer-upper and tries to figure out if it is worth buying.

As an inspector for the Waypoint Real Estate Group, Mr. Hladik takes about 20 minutes to walk through each home, noting worn kitchen cabinets or missing roof tiles. The blistering pace is necessary to keep up with Waypoint’s appetite: the company, which has bought about 1,200 homes since 2008 — and is now buying five to seven a day — is an early entrant in a business that some deep-pocketed investors are betting is poised to explode.

With home prices down more than a third from their peak and the market swamped with foreclosures, large investors are salivating at the opportunity to buy perhaps thousands of homes at deep discounts and fill them with tenants. Nobody has ever tried this on such a large scale, and critics worry these new investors could face big challenges managing large portfolios of dispersed rental houses. Typically, landlords tend to be individuals or small firms that own just a handful of homes.

But the new investors believe the rental income can deliver returns well above those offered by Treasury securities or stock dividends. At the same time, economists say, they could help areas hardest hit by the housing crash reach a bottom of the market.

This year, Waypoint signed a $400 million deal with GI Partners, a private equity firm in Silicon Valley. Gary Beasley, Waypoint’s managing director, says the company plans to buy 10,000 to 15,000 more homes by the end of next year. Other large private equity investors — including Colony Capital, GTIS Partners and Oaktree Capital Management, in partnership with the Carrington Holding Company — have committed millions to this new market, and Lewis Ranieri, often called the inventor of the mortgage bond, is considering it, too.

In February, the Federal Housing Finance Agency, which oversees the government-backed mortgage companies Fannie Mae and Freddie Mac, announced that it would sell about 2,500 homes in a pilot program in eight metropolitan areas, including Atlanta, Chicago and Los Angeles.

And Bank of America said in late March that it would begin testing a plan to allow homeowners facing foreclosure the chance to rent back their homes and wipe out their mortgage debt. Eventually, the bank said, it could sell the houses to investors.

Waypoint executives say they can handle large volumes because they have developed computer systems that help them make quick buying decisions and manage renovations and rentals.

“We realized that there is a tremendous amount of brain damage around acquiring single-family homes, renovating them and renting them out,” said Colin Wiel, a Waypoint co-founder. “We think this is a huge opportunity and we are going to treat it like a factory and create a production line to do this.”

Mr. Hladik, who is one of seven inspectors working full time for Waypoint’s Southern California office, is one cog in that production line.

On a recent morning, he walked through a vacant three-bedroom home with a red tiled roof here about 60 miles east of Los Angeles, one of the areas flooded with foreclosures after the housing market bust. Scribbling on a clipboard, he noted the dated bathroom vanities, the tatty family room carpet and a hole in a bedroom wall. Twenty minutes later, he plugged these details into a program on his iPad, choosing from drop-down menus to indicate the house had dual pane windows and that the kitchen appliances needed replacing.

The software calculated that it would take $25,413.53 to get the home in rental shape. Mr. Hladik adjusted that estimate down to $18,400 because he deemed the landscaping in good shape. He uploaded his report to Waypoint’s database, where appraisers and executives would use the calculations to determine whether and how much to bid for the house.

With just three years of experience, Waypoint is one of the industry’s grizzled veterans. But critics say newcomers could stumble. “It’s a very inefficient way to run a rental business,” said Steven Ricchiuto, chief economist at Mizuho Securities USA. “You could wind up with an inexperienced group owning properties that just deteriorate.”

The big investors are wooed by what they see as a vast opportunity. There are close to 650,000 foreclosed properties sitting on the books of lenders, according to RealtyTrac, a data provider. An additional 710,000 are in the foreclosure process, and according to the Mortgage Bankers Association, about 3.25 million borrowers are delinquent on their loans and in danger of losing their homes.

With so many families displaced from their homes by foreclosure, rental demand is rising. Others who might previously have bought are now unable to qualify for loans. The homeownership rate has dropped from a peak of 69.2 percent in 2004 to 66 percent at the end of 2011, according to census data.

Economists say that these investors could help stabilize home prices. “If you have a lot of foreclosures in one community you will improve everybody’s home values if you take them off the market,” said Diane Swonk, the chief economist at Mesirow Financial. “If those homes are renovated and even rented, it is a lot better than having them stand empty.”

Until now, Waypoint, which focuses on the Bay Area and Southern California, has been buying foreclosed properties one by one in courthouse auctions or through traditional real estate agents.

The company, founded by Mr. Wiel, a former Boeing engineer and software entrepreneur, and Doug Brien, a one-time N.F.L. place-kicker who had invested in apartment buildings, evaluates each purchase using data from multiple listing services, Google maps and reports from its own inspectors and appraisers.

An algorithm calculates a maximum bid for each home, taking into account the cost of renovations, the potential rent and target investment returns — right now the company averages about 8 percent per property on rental income alone. By 5:30 on a recent morning, Joe Maehler, a regional director in Waypoint’s Southern California office, had logged onto his computer and pulled up a list of about 70 foreclosed properties that were being auctioned later that day in Riverside and San Bernardino Counties.

Looking at a three-bedroom bungalow in San Bernardino, he saw that Waypoint’s system had calculated a bid of $103,000. Mr. Maehler, who previously advised investors on commercial mortgage-backed securities deals, clicked on a map and saw that rents on comparable homes the company already owned could justify a higher offer. The house also had a pool, which warranted another price bump.

By the time the auctioneer opened the bidding on the lawn in front of the San Bernardino County Courthouse at $114,750, Mr. Maehler had authorized a maximum bid of just over $130,000.

As the auction proceeded, Waypoint’s bidder at the courthouse remained on the phone with Mr. Maehler in the company’s Irvine office about 50 miles away.

“Stay on it,” Mr. Maehler urged as the bidding went up in $100 increments. The bidder clinched it for $129,400.

The sting of the housing collapse, driven in part by investors who bought large bundles of securities backed by bad mortgages, makes some critics wary of the emerging market.

“I don’t have a lot of confidence that private market actors who now see another use for these houses as rentals, as opposed to owner-occupied, are necessarily going to be any more responsible financially or responsive to community needs,” said Michael Johnson, professor of public policy at the University of Massachusetts, Boston. Waypoint executives say they plan to be long-term landlords, and usually sign two-year leases. Once the company buys a property, it typically paints the house and installs new carpets, kitchen appliances and bathroom fixtures, spending an average of $20,000 to $25,000. It tries to keep existing occupants in the house — although only 10 percent have stayed so far — and offer tenants the chance to build toward a future down payment.

Waypoint’s inspectors are evaluating hundreds of properties that Fannie Mae and Freddie Mac are offering for sale. Because the inspectors are not allowed inside these homes, they are driving by 40 of them a day, estimating renovation costs by looking at eaves, windows and the conditions of lawns.

Rick Magnuson, executive managing director of GI Partners, Waypoint’s largest investment partner, said “the jury is still out” on whether Waypoint — or any other investor — can manage such a large portfolio. But, he said, “with the technology at Waypoint, we think they can get there.”

    Investors Are Looking to Buy Homes by the Thousands, NYT, 2.4.2012,






Why People Hate the Banks


April 2, 2012
The New York Times


A few months ago, I was standing in a crowded elevator when Jamie Dimon, the chief executive of JPMorgan Chase, stepped in. When he saw me, he said in a voice loud enough for everyone to hear: “Why does The New York Times hate the banks?”

It’s not The New York Times, Mr. Dimon. It really isn’t. It’s the country that hates the banks these days. If you want to understand why, I would direct your attention to the bible of your industry, The American Banker. On Monday, it published the third part in its depressing — and infuriating — series on credit card debt collection practices.

You can’t read the series without wondering whether banks have learned anything from the foreclosure crisis, which resulted in a $25 billion settlement with the federal government and the states. That crisis was the direct result of shoddy, often illegal practices on the part of the banks, which caused untold misery for millions of Americans. Part of the goal of the settlement was simply to force the banks to treat homeowners with some decency. You wouldn’t think that that would be too much to ask. But it was never going to happen without the threat of litigation.

As it turns out, this same kind of awful behavior has been taking place inside the credit card collections departments of the big banks. Records are a mess. Robo-signing has been commonplace. Collections practices hurt primarily the poor and the unsophisticated, just like foreclosure practices. (I sometimes wonder if banks would make any profits at all if they couldn’t take advantage of the poor and unsophisticated.)

At Dimon’s bank, JPMorgan Chase, according to Jeff Horwitz, the author of the American Banker series, the records used by outside law firms to sue people who had defaulted on credit card debt “sometimes differed from Chase’s own files at an alarming rate, according to a routine Chase presentation.” It sold debt to so-called “debt buyers” — who then went to court to try to collect — from one Chase portfolio, in particular, “that had long been considered unreliable and lacked documentation.”

At Bank of America, according to Horwitz, executives sold off its worst credit card receivables for pennies on the dollar. Its contracts with the debt buyers included disclaimers about the accuracy of the balances. Thus, if there were mistakes, it was up to the borrowers to point them out — after the debt buyer had sued for recovery. Most such contracts don’t even require a bank to provide documentation if it is requested of them. (Bank of America says that it will provide documentation.) Horwitz found a woman who had paid off her balance in full — and then spent three years trying to fend off a debt collector. Sounds just like some of the foreclosure horror stories, doesn’t it?

The practices exposed by The American Banker all took place in 2009 and 2010. In response to the problems, JPMorgan shut down its credit card collections, at least for now, and informed its regulator. (It also settled a whistle-blower lawsuit.) Bank of America says that its debt collection practices are not unique to it. Which is true enough.

But lawyers on the front lines say that credit card debt collection remains a horrific problem. “Most of the time, the borrower has no lawyer,” says Carolyn Coffey, of MFY Legal Services, who defends consumers being sued by debt collectors. “There are terrible problems with people not being served properly, so they don’t even know they have been sued. But if you do get to court and ask for documentation, the debt buyers drop the case. It is not worth it for them if they have to provide actual proof.”

Karen Petrou, the managing partner of Federal Financial Analytics, pointed out another reason these practices are so unseemly. In effect, the banks are outsourcing their dirty work — and then washing their hands as the debt collectors harass and sue and make people miserable, often without proof that the debt is owed. Banks, she said, should not be allowed to “avert their gaze” so easily.

“In my church, we pray for forgiveness for the ‘evil done on our behalf,’ ” she wrote in an e-mail. “Banks should do more than pray. They should be held responsible.”

When I was at the Consumer Financial Protection Bureau a few weeks ago, I heard a lot of emphasis placed on debt collection practices, which, up until now, have been unregulated. So I called the agency to ask if people there had read The American Banker series. The answer was yes. “We take seriously any reports that debt is being bought or sold for collection without adequate documentation that money is owed at all or in what amount,” the agency said in a short statement. “The C.F.P.B. is taking a close look at debt collection practices.”

Not a moment too soon.

    Why People Hate the Banks, NYT, 2.4.2012,






Big Oil’s Bogus Campaign


March 30, 2012
The New York Times


President Obama and the Senate Democrats have again fallen short in their quest to eliminate billions of dollars in unnecessary tax breaks for an oil industry that is rolling in enormous profits. A big reason for that failure is that some of those profits are being continuously recycled to win the support of pliable legislators, underwrite misleading advertising campaigns and advance an energy policy defined solely by more oil and gas production.

Despite pleading by Mr. Obama, the Senate on Thursday could not produce the 60 votes necessary to pass a bill eliminating $2.5 billion a year of these subsidies. This is a minuscule amount for an industry whose top three companies in the United States alone earned more than $80 billion in profits last year. Nevertheless, in the days leading up to the vote, the American Petroleum Institute spent several million dollars on an ad campaign calling the bill “another bad idea from Washington — higher taxes that could lead to higher prices.”

Studies by the Congressional Research Service, among others, say that ending these tax breaks would increase prices by a penny or two a gallon. Yet all but two Senate Republicans have been conditioned by years of industry largess to accept its propaganda. In the last year, the industry spent more than $146 million lobbying Congress. In Thursday’s vote, senators who voted to preserve the tax breaks received more than four times as much as those who voted against.

Money has always talked in Congress. Now industry allies are aiming at voters. The American Energy Alliance, a Washington-based group that does not disclose its financial sources, on Thursday began an ad campaign in eight states with competitive Congressional races.

Voters in Michigan, Virginia, Florida, Ohio, Iowa, Nevada, New Mexico and Colorado will hear a 30-second spot peddling the industry’s misleading arguments against the Obama administration’s energy policies — including the fiction that those policies have led to higher gas prices: “Since Obama became president,” it says in part, “gas prices have nearly doubled. Obama opposed exploring for energy in Alaska. He gave millions of dollars to Solyndra, which then went bankrupt. And he blocked the Keystone pipeline, so we will all pay more at the pump.”

Four sentences, four misrepresentations. Gas prices, tied to the world market, would have gone up no matter who was president. Mr. Obama has not ruled out further leasing in Alaskan waters. Solyndra, a solar panel maker, is the only big failure in a broader program aimed at encouraging nascent energy technologies. The Keystone XL oil pipeline has nothing to do with gas prices now and, even if built, would have only a marginal effect.

The message war has really just begun. The oil industry has the money, but Mr. Obama has a formidable megaphone. He must continue to use it.

    Big Oil’s Bogus Campaign, NYT, 30.3.2012,






Obama Finds Oil in Markets Is Sufficient to Sideline Iran


March 30, 2012
The New York Times


WASHINGTON — After careful analysis of oil prices and months of negotiations, President Obama on Friday determined that there was sufficient oil in world markets to allow countries to significantly reduce their Iranian imports, clearing the way for Washington to impose severe new sanctions intended to slash Iran’s oil revenue and press Tehran to abandon its nuclear ambitions.

The White House announcement comes after months of back-channel talks to prepare the global energy market to cut Iran out — but without raising the price of oil, which would benefit Iran and harm the economies of the United States and Europe.

Since the sanctions became law in December, administration officials have encouraged oil exporters with spare capacity, particularly Saudi Arabia, to increase their production. They have discussed with Britain and France releasing their oil reserves in the event of a supply disruption.

And they have conducted a high-level campaign of shuttle diplomacy to try to persuade other countries, like China, Japan and South Korea, to buy less oil and demand discounts from Iran, in compliance with the sanctions.

The goal is to sap the Iranian government of oil revenue that might go to finance the country’s nuclear program. Already, the pending sanctions have led to a decrease in oil exports and a sharp decline in the value of the country’s currency, the rial, against the dollar and euro.

Administration officials described the Saudis as willing and eager, at least since talks started last fall, to undercut the Iranians.

One senior official who had met with the Saudi leadership, said: “There was no resistance. They are more worried about a nuclear Iran than the Israelis are.”

Still officials said, the administration wanted to be sure that the Saudis were not talking a bigger game than they could deliver. The Saudis received a parade of visitors, including some from the Energy Department, to make the case that they had the technical capacity to pump out significantly more oil.

But some American officials remain skeptical. That is one reason Mr. Obama left open the option of reviewing this decision every few months. “We won’t know what the Saudis can do until we test it, and we’re about to,” the official said.

Worldwide demand for oil was another critical element of the equation that led to the White House decision on sanctions. Now, projections for demand are lower than expected because of the combination of rising oil prices, the European financial crisis and a modest slowdown in growth in China.

As one official said, “No one wants to wish for slowdown, but demand may be the most important factor.”

Nonetheless, the sanctions pose a serious challenge for the United States. Already, concerns over a confrontation with Iran and the loss of its oil — Iran was the third-biggest exporter of crude in 2010 — have driven oil prices up about 20 percent this year.

A gallon of gas currently costs $3.92, on average, up from about $3.20 a gallon in December. The rising prices have weighed on economic confidence and cut into household budgets, a concern for an Obama administration seeking re-election.

On Friday afternoon, oil prices on commodity markets closed at $103.02 a barrel, up 24 cents for the day.

Moreover, the new sanctions — which effectively force countries to choose between doing business with the United States and buying oil from Iran — threaten to fray diplomatic relationships with close allies that buy some of their crude from Tehran, like South Korea.

But in a conference call with reporters, senior administration officials said they were confident that they could put the sanctions in effect without damaging the global economy.

Iran currently exports about 2.2 million barrels of crude oil a day, according to the economic analysis company IHS Global Insight, and other oil producers will look to make up much of that capacity, as countries buy less and less oil from Iran. A number of countries are producing more petroleum, including the United States itself, which should help to make up the gap.

Most notably, Saudi Arabia, the world’s single biggest producer, has promised to pump more oil to bring prices down.

“There is no rational reason why oil prices are continuing to remain at these high levels,” the Saudi oil minister, Ali Naimi, wrote in an opinion article in The Financial Times this week. “I hope by speaking out on the issue that our intentions — and capabilities — are clear,” he said. “We want to see stronger European growth and realize that reasonable crude oil prices are key to this.”

By certifying that there is enough supply available, the administration is also trying to gain some leverage over Iran before a resumption of negotiations, expected on April 14.

The suggestion that Saudi Arabia is prepared to make up for any lost Iranian production is intended to remove Iran’s ability to threaten a major disruption in the world oil supply if it does not cede to Western and United Nations demands to halt uranium enrichment.

However, administration officials concede that it is unclear how the oil markets will react to Iranian threats even with the president’s latest certification that there is sufficient oil to fill the gap. “We just don’t know how much negotiating advantage we have gained,” said one senior administration official who has been involved in developing the policy.

In a statement, Jay Carney, the White House press secretary, said the administration acknowledged that the oil market had become increasingly tight, with output just besting demand.

“Nonetheless, there currently appears to be sufficient supply of non-Iranian oil to permit foreign countries” to cut imports, he said.

American officials have also discussed a coordinated release of oil from the national strategic reserves with French and British officials.

Some energy experts question whether Saudi Arabia really has enough spare capacity to make up for the loss of Iran’s oil. But the determination of the United States and Europe to combat high prices might be enough to quiet the markets.

The White House “can have a very limited material impact on the size of supplies,” said David J. Rothkopf, the president of Garten Rothkopf, a Washington-based consultancy. “But they can have a much larger impact on perceptions. In this case, it’s not so much the producers as the energy traders who are moving market prices — and that’s where the White House wants to play a role.”

Additionally, the White House has the ability under the law to waive the new sanctions if they threaten national security or if oil prices spurt, increasing the flow of money to Iran’s government.



Helene Cooper contributed reporting from Burlington, Vt.,

and David E. Sanger from Cambridge, Mass.

This article has been revised to reflect the following correction:

Correction: March 30, 2012

An earlier version of this article erroneously included Japan

in a list of European countries exempted from the sanctions against Iran.

    Obama Finds Oil in Markets Is Sufficient to Sideline Iran, NYT, 30.3.2012,






The Rich Get Even Richer


March 25, 2012
The New York Times


NEW statistics show an ever-more-startling divergence between the fortunes of the wealthy and everybody else — and the desperate need to address this wrenching problem. Even in a country that sometimes seems inured to income inequality, these takeaways are truly stunning.

In 2010, as the nation continued to recover from the recession, a dizzying 93 percent of the additional income created in the country that year, compared to 2009 — $288 billion — went to the top 1 percent of taxpayers, those with at least $352,000 in income. That delivered an average single-year pay increase of 11.6 percent to each of these households.

Still more astonishing was the extent to which the super rich got rich faster than the merely rich. In 2010, 37 percent of these additional earnings went to just the top 0.01 percent, a teaspoon-size collection of about 15,000 households with average incomes of $23.8 million. These fortunate few saw their incomes rise by 21.5 percent.

The bottom 99 percent received a microscopic $80 increase in pay per person in 2010, after adjusting for inflation. The top 1 percent, whose average income is $1,019,089, had an 11.6 percent increase in income.

This new data, derived by the French economists Thomas Piketty and Emmanuel Saez from American tax returns, also suggests that those at the top were more likely to earn than inherit their riches. That’s not completely surprising: the rapid growth of new American industries — from technology to financial services — has increased the need for highly educated and skilled workers. At the same time, old industries like manufacturing are employing fewer blue-collar workers.

The result? Pay for college graduates has risen by 15.7 percent over the past 32 years (after adjustment for inflation) while the income of a worker without a high school diploma has plummeted by 25.7 percent over the same period.

Government has also played a role, particularly the George W. Bush tax cuts, which, among other things, gave the wealthy a 15 percent tax on capital gains and dividends. That’s the provision that caused Warren E. Buffett’s secretary to have a higher tax rate than he does.

As a result, the top 1 percent has done progressively better in each economic recovery of the past two decades. In the Clinton era expansion, 45 percent of the total income gains went to the top 1 percent; in the Bush recovery, the figure was 65 percent; now it is 93 percent.

Just as the causes of the growing inequality are becoming better known, so have the contours of solving the problem: better education and training, a fairer tax system, more aid programs for the disadvantaged to encourage the social mobility needed for them escape the bottom rung, and so on.

Government, of course, can’t fully address some of the challenges, like globalization, but it can help.

By the end of the year, deadlines built into several pieces of complex legislation will force a gridlocked Congress’s hand. Most significantly, all of the Bush tax cuts will expire. If Congress does not act, tax rates will return to the higher, pre-2000, Clinton-era levels. In addition, $1.2 trillion of automatic spending cuts that were set in motion by the failure of the last attempt at a deficit reduction deal will take effect.

So far, the prospects for progress are at best worrisome, at worst terrifying. Earlier this week, House Republicans unveiled an unsavory stew of highly regressive tax cuts, large but unspecified reductions in discretionary spending (a category that importantly includes education, infrastructure and research and development), and an evisceration of programs devoted to lifting those at the bottom, including unemployment insurance, food stamps, earned income tax credits and many more.

Policies of this sort would exacerbate the very problem of income inequality that most needs fixing. Next week’s package from House Democrats will almost certainly be more appealing. And to his credit, President Obama has spoken eloquently about the need to address this problem. But with Democrats in the minority in the House and an election looming, passage is unlikely.

The only way to redress the income imbalance is by implementing policies that are oriented toward reversing the forces that caused it. That means letting the Bush tax cuts expire for the wealthy and adding money to some of the programs that House Republicans seek to cut. Allowing this disparity to continue is both bad economic policy and bad social policy. We owe those at the bottom a fairer shot at moving up.


Steven Rattner is a contributing writer for Op-Ed and a longtime Wall Street executive.

This article has been revised to reflect the following correction:

Correction: March 26, 2012

Due to a typo, an earlier version referred incorrectly to the distribution of income gains made during the Clinton expansion. Forty-five percent of the total income gains went to the top 1 percent, not to the top 11 percent.

    The Rich Get Even Richer, NYT, 25.3.2012,






U.S. Inches Toward Goal of Energy Independence


March 22, 2012
The New York Times


MIDLAND, Tex. — The desolate stretch of West Texas desert known as the Permian Basin is still the lonely domain of scurrying roadrunners by day and howling coyotes by night. But the roar of scores of new oil rigs and the distinctive acrid fumes of drilling equipment are unmistakable signs that crude is gushing again.

And not just here. Across the country, the oil and gas industry is vastly increasing production, reversing two decades of decline. Using new technology and spurred by rising oil prices since the mid-2000s, the industry is extracting millions of barrels more a week, from the deepest waters of the Gulf of Mexico to the prairies of North Dakota.

At the same time, Americans are pumping significantly less gasoline. While that is partly a result of the recession and higher gasoline prices, people are also driving fewer miles and replacing older cars with more fuel-efficient vehicles at a greater clip, federal data show.

Taken together, the increasing production and declining consumption have unexpectedly brought the United States markedly closer to a goal that has tantalized presidents since Richard Nixon: independence from foreign energy sources, a milestone that could reconfigure American foreign policy, the economy and more. In 2011, the country imported just 45 percent of the liquid fuels it used, down from a record high of 60 percent in 2005.

“There is no question that many national security policy makers will believe they have much more flexibility and will think about the world differently if the United States is importing a lot less oil,” said Michael A. Levi, an energy and environmental senior fellow at the Council on Foreign Relations. “For decades, consumption rose, production fell and imports increased, and now every one of those trends is going the other way.”

How the country made this turnabout is a story of industry-friendly policies started by President Bush and largely continued by President Obama — many over the objections of environmental advocates — as well as technological advances that have allowed the extraction of oil and gas once considered too difficult and too expensive to reach. But mainly it is a story of the complex economics of energy, which sometimes seems to operate by its own rules of supply and demand.

With gasoline prices now approaching record highs and politicians mud-wrestling about the causes and solutions, the effects of the longer-term rise in production can be difficult to see.

Simple economics suggests that if the nation is producing more energy, prices should be falling. But crude oil — and gasoline and diesel made from it — are global commodities whose prices are affected by factors around the world. Supply disruptions in Africa, the political standoff with Iran and rising demand from a recovering world economy all are contributing to the current spike in global oil prices, offsetting the impact of the increased domestic supply.

But the domestic trends are unmistakable. Not only has the United States reduced oil imports from members of the Organization of the Petroleum Exporting Countries by more than 20 percent in the last three years, it has become a net exporter of refined petroleum products like gasoline for the first time since the Truman presidency. The natural gas industry, which less than a decade ago feared running out of domestic gas, is suddenly dealing with a glut so vast that import facilities are applying for licenses to export gas to Europe and Asia.

National oil production, which declined steadily to 4.95 million barrels a day in 2008 from 9.6 million in 1970, has risen over the last four years to nearly 5.7 million barrels a day. The Energy Department projects that daily output could reach nearly seven million barrels by 2020. Some experts think it could eventually hit 10 million barrels — which would put the United States in the same league as Saudi Arabia.

This surge is hardly without consequences. Some areas of intense drilling activity, including northeastern Utah and central Wyoming, have experienced air quality problems. The drilling technique called hydraulic fracturing, or fracking, which uses highly pressurized water, sand and chemical lubricants that help force more oil and gas from rock formations, has also been blamed for wastewater problems. Wildlife experts also warn that expanded drilling is threatening habitats of rare or endangered species.

Greater energy independence is “a prize that has long been eyed by oil insiders and policy strategists that can bring many economic and national security benefits,” said Jay Hakes, a senior official at the Energy Department during the Clinton administration. “But we will have to work through the environmental issues, which are a definite challenge.”

The increased production of fossil fuels is a far cry from the energy plans President Obama articulated as a candidate in 2008. Then, he promoted policies to help combat global warming, including vast investments in renewable energy and a cap-and-trade system for carbon emissions that would have discouraged the use of fossil fuels.

More recently, with gasoline prices rising and another election looming, Mr. Obama has struck a different chord. He has opened new federal lands and waters to drilling, trumpeted increases in oil and gas production and de-emphasized the challenges of climate change. On Thursday, he said he supported expedited construction of the southern portion of the proposed Keystone XL oil pipeline from Canada.

Mr. Obama’s current policy has alarmed many environmental advocates who say he has failed to adequately address the environmental threats of expanded drilling and the use of fossil fuels. He also has not silenced critics, including Republicans and oil executives, who accuse him of preventing drilling on millions of acres off the Atlantic and Pacific Coasts and on federal land, unduly delaying the decision on the full Keystone project and diverting scarce federal resources to pie-in-the-sky alternative energy programs.

Just as the production increase was largely driven by rising oil prices, the trend could reverse if the global economy were to slow. Even so, much of the industry is thrilled at the prospects.

“To not be concerned with where our oil is going to come from is probably the biggest home run for the country in a hundred years,” said Scott D. Sheffield, chief executive of Pioneer Natural Resources, which is operating in West Texas. “It sort of reminds me of the industrial revolution in coal, which allowed us to have some of the cheapest energy in the world and drove our economy in the late 1800s and 1900s.”


The Foundation Is Laid

For as long as roughnecks have worked the Permian Basin — made famous during World War II as the fuel pump that powered the Allies — they have mostly focused on relatively shallow zones of easily accessible, oil-soaked sandstone and silt. But after 80 years of pumping, those regions were running dry.

So in 2003, Jim Henry, a West Texas oilman, tried a bold experiment. Borrowing an idea from a fellow engineer, his team at Henry Petroleum drilled deep into a hard limestone formation using a refinement of fracking. By blasting millions of gallons of water into the limestone, they created tiny fissures that allowed oil to break free, a technique that had previously been successful in extracting gas from shale.

The test produced 150 barrels of oil a day, three times more than normal. “We knew we had the biggest discovery in over 50 years in the Permian Basin,” Mr. Henry recalled.

There was just one problem: At $30 a barrel, the price of oil was about half of what was needed to make drilling that deep really profitable.

So the renaissance of the Permian — and the domestic oil industry — would have to wait.

But the drillers in Texas had important allies in Washington. President Bush grew up in Midland and spent 11 years as a West Texas oilman, albeit without much success, before entering politics. Vice President Dick Cheney had been chief executive of the oil field contractor Halliburton. The Bush administration worked from the start on finding ways to unlock the nation’s energy reserves and reverse decades of declining output, with Mr. Cheney leading a White House energy task force that met in secret with top oil executives.

“Ramping up production was a high priority,” said Gale Norton, a member of the task force and the secretary of the Interior at the time. “We hated being at the mercy of other countries, and we were determined to change that.”

The task force’s work helped produce the Energy Policy Act of 2005, which set rules that contributed to the current surge. It prohibited the Environmental Protection Agency from regulating fracking under the Safe Drinking Water Act, eliminating a potential impediment to wide use of the technique. The legislation also offered the industry billions of dollars in new tax breaks to help independent producers recoup some drilling costs even when a well came up dry.

Separately, the Interior Department was granted the power to issue drilling permits on millions of acres of federal lands without extensive environmental impact studies for individual projects, addressing industry complaints about the glacial pace of approvals. That new power has been used at least 8,400 times, mostly in Wyoming, Utah and New Mexico, representing a quarter of all permits issued on federal land in the last six federal fiscal years.

The Bush administration also opened large swaths of the Gulf of Mexico and the waters off Alaska to exploration, granting lease deals that required companies to pay only a tiny share of their profits to the government.

These measures primed the pump for the burst in drilling that began once oil prices started rising sharply in 2005 and 2006. With the world economy humming — and China, India and other developing nations posting astonishing growth — demand for oil began outpacing the easily accessible supplies.

By 2008, daily global oil consumption surged to 86 million barrels, up nearly 20 percent from the decade before. In July of that year, the price of oil reached its highest level since World War II, topping $145 a barrel (equivalent to more than $151 a barrel in today’s dollars).

Oil reserves once too difficult and expensive to extract — including Mr. Henry’s limestone fields — had become more attractive.

If money was the motivation, fracking became the favored means of extraction.

While fracking itself had been around for years, natural gas drillers in the 1980s and 1990s began combining high-pressure fracking with drilling wells horizontally, not just vertically. They found it unlocked gas from layers of shale previously seen as near worthless.

By 2001, fracking took off around Fort Worth and Dallas, eventually reaching under schools, airports and inner-city neighborhoods. Companies began buying drilling rights across vast shale fields in a variety of states. By 2008, the country was awash in natural gas.

Fracking for oil, which is made of larger molecules than natural gas, took longer to develop. But eventually, it opened new oil fields in North Dakota, South Texas, Kansas, Wyoming, Colorado and, most recently, Ohio.

Meanwhile, technological advances were making deeper oil drilling possible in the Gulf of Mexico. New imaging and seismic technology allowed engineers to predict the location and size of reservoirs once obscured by thick layers of salt. And drill bits made of superstrong alloys were developed to withstand the hot temperatures and high pressures deep under the seabed.

As the industry’s confidence — and profits — grew, so did criticism. Amid concerns about global warming and gasoline prices that averaged a record $4.11 a gallon in July 2008 ($4.30 in today’s dollars), President Obama campaigned on a pledge to shift toward renewable energy and away from fossil fuels.

His administration initially canceled some oil and gas leases on federal land awarded during the Bush administration and required more environmental review. But in a world where crucial oil suppliers like Venezuela and Libya were unstable and high energy prices could be a drag on a weak economy, he soon acted to promote more drilling. Despite a drilling hiatus after the 2010 explosion of the Deepwater Horizon in the Gulf of Mexico, which killed 11 rig workers and spilled millions of barrels of crude oil into the ocean, he has proposed expansion of oil production both on land and offshore. He is now moving toward approving drilling off the coast of Alaska.

“Our dependence on foreign oil is down because of policies put in place by our administration, but also our predecessor’s administration,” Mr. Obama said during a campaign appearance in March, a few weeks after opening 38 million more acres in the gulf for oil and gas exploration. “And whoever succeeds me is going to have to keep it up.”


An American Oil Boom

The last time the Permian Basin oil fields enjoyed a boom — nearly three decades ago — Rolls-Royce opened a showroom in the desert, Champagne was poured from cowboy boots, and the local airport could not accommodate all the Learjets taking off for Las Vegas on weekends.

But when crude prices fell in the mid-1980s, oil companies pulled out and the Rolls dealership was replaced by a tortilla factory. The only thriving business was done by bankruptcy lawyers and auctioneers helping to unload used Ferraris, empty homes and useless rigs.

“One day we were rolling in oil,” recalled Jim Foreman, the general manager of the Midland BMW dealership, “and the next day geologists were flipping burgers at McDonald’s.”

The burger-flipping days are definitely over. Today, more than 475 rigs — roughly a quarter of all rigs operating in the United States — are smashing through tight rocks across the Permian in West Texas and southeastern New Mexico. Those areas are already producing nearly a million barrels a day, or 17 percent more than two years ago. By decade’s end, that daily total could easily double, oil executives say, roughly equaling the total output of Nigeria.

“We’re having a revolution,” said G. Steven Farris, chief executive of Apache Corporation, one of the basin’s most active producers. “And we’re just scratching the surface.”

It is a revolution that is returning investments to the United States. Over several decades, Pioneer Natural Resources had taken roughly $1 billion earned in Texas oil fields and drilled in Africa, South America and elsewhere. But in the last five years, the company sold $2 billion of overseas assets and reinvested in Texas shale fields.

“Political risk was increasing internationally,” said Mr. Sheffield, Pioneer’s chief executive, and domestically, he was encouraged to see “the shale technology progressing.”

Pioneer’s rising fortunes can be seen on a 10,000-acre field known as the Giddings Estate, a forsaken stretch inhabited by straggly coyotes, rabbits, rattlesnakes and cows that forage for grass between the sagebrush. When Pioneer bought it in 2005, the field’s hundred mostly broken-down wells were producing a total of 50 barrels a day. “It was a diamond in the rough,” said Robert Hillger, who manages it for Pioneer.

Mr. Hillger and his colleagues have brought an array of new tools to bear at Giddings. Computer programs simulate well designs, minimizing trial and error. Advanced fiber optics allow senior engineers and geologists at headquarters more than 300 miles away to monitor progress and remotely direct the drill bit. Subterranean microphones help identify fissures in the rock to plan subsequent drilling.

Today, the Giddings field is pumping 7,000 barrels a day, and Pioneer expects to hit 25,000 barrels a day by 2017.

The newfound wealth is spreading beyond the fields. In nearby towns, petroleum companies are buying so many pickup trucks that dealers are leasing parking lots the size of city blocks to stock their inventory. Housing is in such short supply that drillers are importing contractors from Houston and hotels are leased out before they are even built.

Two new office buildings are going up in Midland, a city of just over 110,000 people, the first in 30 years, while the total value of downtown real estate has jumped 50 percent since 2008. With virtually no unemployment, restaurants cannot find enough servers. Local truck drivers are making six-figure salaries.

“Anybody who comes in with a driver’s license and a Social Security card, I’ll give him a chance,” said Rusty Allred, owner of Rusty’s Oilfield Service Company.

If there is a loser in this boom, it is the environment. Water experts say aquifers in the desert area could run dry if fracking continues expanding, and oil executives concede they need to reduce water consumption. Yet environmental concerns, from polluted air to greenhouse gas emissions, have gained little traction in the Permian Basin or other outposts of the energy expansion.

On the front lines in opposition is Jay Lininger, a 36-year-old ecologist who drives through the Permian in an old Toyota Tacoma with a hard hat tilted on his head and a federal land map at the ready.

A former national park firefighter, he says he is now battling a wildfire of a different sort — the oil industry.

Nationally, environmentalists have challenged drilling with mixed results. Efforts to stop or slow fracking have succeeded in New York State and some localities in other states, but it is spreading across the country.

In the Permian, Mr. Lininger said, few people openly object to the foul-smelling air of the oil fields. Ranchers are more than happy to sell what water they have to the oil companies for fracking.

Mr. Lininger and his group are trying to slow the expansion of drilling by appealing to the United States Fish and Wildlife Service to protect several animal species, including the five-inch dunes sagebrush lizard.

“It’s a pathetic little lizard in an ugly desert, but life needs to be protected,” he said. “Every day we burn fossil fuel makes it harder for our planet to recover from our energy addiction.”

Mr. Lininger said the oil and ranching industries had already destroyed or fragmented 40 percent of the lizard’s habitat, and 60 percent of what is left is under lease for oil and gas development.

The wildlife agency proposed listing the lizard as endangered in 2010 and was expected to decide last December, but Congressional representatives from the oil patch won a delay. Oil companies are working on a voluntary program to locate new drilling so it will not disturb the lizard habitat.

But for Mr. Lininger’s group, the Center for Biological Diversity, that is far from sufficient.

Brendan Cummings, senior counsel of the center, said protecting the lizard was part of a broader effort to keep drilling from harming animals, including polar bears, walruses and bowhead whales in the Alaskan Arctic and dwarf sea horses and sea turtles in the Gulf of Mexico.

“When you are dealing with fossil fuels, things will always go wrong,” Mr. Cummings said. “There will always be spills, there will always be pollution. Those impacts compound the fragmentation that occurs and render these habitats into sacrifice areas.”


A Turn Toward Efficiency

If the Permian Basin exemplifies the rise in production, car-obsessed San Diego is a prime example of the other big factor in the decline in the nation’s reliance on foreign oil.

Just since 2007, consumption of all liquid fuels in the United States, including diesel, jet fuel and heating oil, has dropped by about 9 percent, according to the Energy Department. Gasoline use fell 6 to 12 percent, estimated Tom Kloza, chief oil analyst at the Oil Price Information Service.

Although Southern California’s love affair with muscle cars and the open road persists, driving habits have changed in subtle but important ways.

Take Tory Girten, who works as an emergency medical technician and part-time lifeguard in the San Diego area. He switched from driving a Ford minivan to a decidedly smaller and more fuel-efficient Dodge Caliber. Fed up with high gasoline prices, he also moved twice recently to be closer to the city center, cutting his daily commute considerably — a hint of the shift taking place in certain metropolitan areas as city centers become more popular while growth in far-out suburbs slows.

“I would rather pay a little more monthly for rent than for just filling up my tank with gas,” he said, after pulling into a local gas station to fill up.

Mr. Girten is one of millions of Americans who have downsized. S.U.V.’s accounted for 18 percent of new-car sales in 2002, but only 7 percent in 2010.

The surge in gasoline prices nationwide — they are already at a record level for this time of year — has contributed to the shift toward more fuel-efficient cars. But a bigger factor is rising federal fuel economy standards. After a long freeze, the miles-per-gallon mandate has been increased several times in recent years, with the Obama administration now pushing automakers to hit 54.5 m.p.g. by 2025.

As Americans replace their older cars — they have bought an average of 1.25 million new cars and light trucks a month this year — new technologies mean they usually end up with a more efficient vehicle, even if they buy a model of similar size and power.

California has long pushed further and faster toward efficiency than the rest of the country. It has combated often severe air pollution by mandating cleaner-burning cars, including all-electric vehicles, and prodded Washington to increase the fuel efficiency standards.

Thousands of school buses, trash trucks, tractor-trailers and street sweepers and public transit buses in the state run on natural gas, which is cheaper than gasoline and burns more cleanly. That switch cuts the consumption of foreign oil, as does the corn-based ethanol that is now mixed into gasoline as a result of federal mandates.

Longer-term social and economic factors are also reducing miles driven — like the rise in Internet shopping and telecommuting and the tendency of baby boomers to drive less as they age. The recession has also contributed, as job losses have meant fewer daily commutes and falling home prices have allowed some people to afford to move closer to work.

The trend of lower consumption, when combined with higher energy production, has profound implications, said Bill White, former deputy energy secretary in the Clinton administration and former mayor of Houston.

“Energy independence has always been a race between depletion and technologies to produce more and use energy more efficiently,” he said. “Depletion was winning for decades, and now technology is starting to overtake its lead.”


Clifford Krauss reported from Midland, Tex., and Houston and Eric Lipton

reported from Washington and San Diego.

John M. Broder contributed reporting from Washington.

    U.S. Inches Toward Goal of Energy Independence, NYT, 23.3.2012,






Inequality Undermines Democracy


March 20, 2012
The New York Times


Americans have never been too worried about the income gap. The gap between the rich and the rest has been much wider in the United States than in other developed nations for decades. Still, polls show we are much less concerned about it than people in those other nations are.

Policy makers haven’t cared much either. The United States does less than other rich countries to transfer income from the affluent to the less fortunate. Even as the income gap has grown enormously over the last 30 years, government has done little to curb the trend.

Our tolerance for a widening income gap may be ebbing, however. Since Occupy Wall Street and kindred movements highlighted the issue, the chasm between the rich and ordinary workers has become a crucial talking point in the Democratic Party’s arsenal. In a speech in Osawatomie, Kan., last December, President Obama underscored how “the rungs of the ladder of opportunity had grown farther and farther apart, and the middle class has shrunk.”

There are signs that the political strategy has traction. Inequality isn’t quite the top priority of voters: only 17 percent of Americans think it is extremely important for the government to try to reduce income and wealth inequality, according to a Gallup survey last November. That is about half the share that said reigniting economic growth was crucial.

But a slightly different question indicates views have changed: 29 percent said it was extremely important for the government to increase equality of opportunity. More significant, 41 percent said that there was not much opportunity in America, up from 17 percent in 1998.

Americans have been less willing to take from the rich and give to the poor in part because of a belief that each of us has a decent shot at prosperity. In 1952, 87 percent of Americans thought there was plenty of opportunity for progress; only 8 percent disagreed. As income inequality has grown, though, many have changed their minds.

From 1993 to 2010, the incomes of the richest 1 percent of Americans grew 58 percent while the rest had a 6.4 percent bump. There is little reason to think the trend will go into reverse any time soon, given globalization and technological change, which have weighed heavily on the wages of less educated workers who compete against machines and cheap foreign labor while increasing the returns of top executives and financiers.

The income gap narrowed briefly during the Great Recession, as plummeting stock prices shrunk the portfolios of the rich. But in 2010, the first year of recovery, the top 1 percent of Americans captured 93 percent of the income gains.

Under these conditions, perhaps it is unsurprising that a growing share of Americans have lost faith in their ability to get ahead.

We have accepted income inequality in the past partly because of the belief that capitalism can’t work without it. If entrepreneurs invest and workers improve their skills to improve their lot in life, a government that heavily taxed the rich to give to the poor could destroy that incentive and stymie economic growth that benefits everybody.

The nation’s relatively fast growth over the last three decades appeared to support this view. The United States grew faster than advanced economies with a more egalitarian distribution of income, like the European Union and Japan, so keeping redistribution to a minimum while allowing markets to function unimpeded was considered the best fuel.

Meanwhile, skeptics of income redistribution pointed out that inequality doesn’t look so dire when it is viewed over a lifetime rather than at a single point in time. One study found that about half the households in the poorest fifth of the population moved to a higher quintile within a decade.

Even though the wealthy reaped most of growth’s rewards, critics of redistribution noted that incomes grew over the last 30 years for all but the poorest American families. And in the 1990s, a decade of soaring inequality, even families in the bottom fifth saw their incomes rise.

Some economists have argued that inequality is not the right social ill to focus on. “What matters is how the poor and middle class are doing and how much opportunity they have,” said Scott Winship, an economist at the Brookings Institution. “Until there is stronger evidence that inequality has a negative effect on the life of the average person, I’m inclined to accept it.”

Perhaps Americans’ newfound concerns about their lack of opportunity are a reaction to our economic doldrums, with high unemployment and stagnant incomes, and have little to do with inequality. Perhaps these concerns will dissipate when jobs become more plentiful.

Perhaps. Evidence is mounting, however, that inequality itself is obstructing Americans’ shot at a better life.

Alan Krueger, Mr. Obama’s top economic adviser, offers a telling illustration of the changing views on income inequality. In the 1990s he preferred to call it “dispersion,” which stripped it of a negative connotation.

In 2003, in an essay called “Inequality, Too Much of a Good Thing” Mr. Krueger proposed that “societies must strike a balance between the beneficial incentive effects of inequality and the harmful welfare-decreasing effects of inequality.” Last January he took another step: “the rise in income dispersion — along so many dimensions — has gotten to be so high, that I now think that inequality is a more appropriate term.”

Progress still happens, but there is less of it. Two-thirds of American families — including four of five in the poorest fifth of the population — earn more than their parents did 30 years earlier. But they don’t advance much. Four out of 10 children whose family is in the bottom fifth will end up there as adults. Only 6 percent of them will rise to the top fifth.

It is difficult to measure changes in income mobility over time. But some studies suggest it is declining: the share of families that manage to rise out of the bottom fifth of earnings has fallen since the early 1980s. So has the share of people that fall from the top.

And on this count too, the United States seems to be trailing other developed nations. Comparisons across countries suggest a fairly strong, negative link between the level of inequality and the odds of advancement across the generations. And the United States appears at extreme ends along both of these dimensions — with some of the highest inequality and lowest mobility in the industrial world.

The link makes sense: a big income gap is likely to open up other social breaches that make it tougher for those lower down the rungs to get ahead. And that is exactly what appears to be happening in the United States, where a narrow elite is peeling off from the rest of society by a chasm of wealth, power and experience.

The sharp rise in the cost of college is making it harder for lower-income and middle-class families to progress, feeding education inequality.

Inequality is also fueling geographical segregation — pushing the homes of the rich and poor further apart. Brides and grooms increasingly seek out mates with similar levels of income and education. Marriages among less-educated people have become much more likely to fail.

And a growing income gap has bred a gap in political clout that could entrench inequality for a very long time. One study found that public spending on education was lower in countries like Britain and the United States where the rich participate more in the political process than the poor, and higher in countries like Sweden and Denmark, where levels of political participation are approximately similar across the income scale. If the very rich can use the political system to slow or stop the ascent of the rest, the United States could become a hereditary plutocracy under the trappings of liberal democracy.

One doesn’t have to believe in equality to be concerned about these trends. Once inequality becomes very acute, it breeds resentment and political instability, eroding the legitimacy of democratic institutions. It can produce political polarization and gridlock, splitting the political system between haves and have-nots, making it more difficult for governments to address imbalances and respond to brewing crises. That too can undermine economic growth, let alone democracy.

    Inequality Undermines Democracy, NYT, 20.3.2012,






Behind the Blood Money


March 19, 2012
The New York Times


WASHINGTON — An iPhone can do a lot of things. But can it arm Congolese rebels?

That is the question being debated by a battalion of lobbyists from electronics makers, mining companies and international aid organizations that has descended on the Securities and Exchange Commission in recent months seeking to influence the drafting of a Dodd-Frank regulation that has nothing to do with the financial crisis.

Tacked onto the end of that encyclopedic digest of financial reform is an odd provision. It requires publicly traded companies whose products use certain minerals commonly mined in strife-torn areas of Central Africa to report to shareholders and the S.E.C. whether their mineral supply comes from the Democratic Republic of Congo.

The measure is aimed at cutting off the brutal militia groups that have often taken over the mining and sale of so-called conflict minerals to finance their military aims. Just about every company affected by the law says they support it, but many business groups have also been pushing aggressively to put wiggle room in the restrictions, calling for lengthy phase-in periods, exemptions for minimal use of the minerals and loose definitions of what types of uses are covered.

Nearly every consumer product that includes electronic parts uses a derivative of one of the four minerals: columbite-tantalite, which when refined is used in palm-size cellphones and giant turbines; cassiterite, an important source of the tin used in coffee cans and circuit boards; wolframite, used to produce tungsten for light bulbs and machine tools; and gold, commonly used as an electronic conductor (and, of course, jewelry).

Given their broad application, the minerals have been a primary target of humanitarian groups concerned about genocide, sexual violence, child soldiers and other issues that have been common outgrowths of conflicts in Central Africa.

“We don’t think you need to have people being killed in order to have these metals in our cellphones,” said Corinna Gilfillan, who heads the United States office of Global Witness, which has worked on the issue for several years.

But manufacturers question the effectiveness — not to mention the practicality and expense — of tracing every scrap of refined metal back to its original hole in the ground.

“The challenge is that conflict minerals are a symptom,” said Rick Goss, vice president for environment and sustainability at the Information Technology Industry Council, a trade group. “The entrenched powers in these countries have plenty of other means to raise money. Simply cutting off one source of revenue to a warlord or military rulers is not going to stop the genocide.”

The Dodd-Frank law on conflict minerals is already having an effect in Eastern Congo, damping or halting production at many mines even before the disclosure regulations for companies are in place.

“It is causing, I would say, a sort of embargo on traders and diggers in Eastern Congo,” Serge Tshamala, an official at the Embassy of the Democratic Republic of Congo. “The longer it takes the S.E.C. to come up with guidelines, the worse it is for our people.” Mr. Tshamala and other Congo government officials met with the agency’s staff members in June, urging them to speed completion of the regulations.

The agency is moving slowly, however. The Dodd-Frank law set an April 2011 deadline for completion of the rules. After proposing regulations in December 2010, the agency took comments for 30 days, and received so many suggestions that it extended the period by a month.

After missing the April deadline, the agency in October conducted a roundtable for its commissioners to hear directly from manufacturers, mining companies, advocacy groups and institutional investors. This month, Mary L. Schapiro, the agency’s chairwoman, said the agency hoped to complete the process “in the next couple of months.”

The commission already has decided to include a phase-in period to allow companies time to build networks to trace their mineral supply. But an exemption for use of trace amounts of the metals is unlikely, Ms. Shapiro said.

As Bennett Freeman, a senior vice president for sustainability research and policy at Calvert Investments put it during the roundtable last year, a very small amount of gold is used as a conductor in a cellphone, “but when one takes into account the fact that there were 1.6 billion cellphones sold globally last year, that adds up to be a very significant volume of that particular metal.”

Still undecided — and the subject of more than 100 meetings between lobbyists and S.E.C. officials since the rule was proposed — is just how the commission will decide who is covered by the conflict minerals requirement. The law says that the minerals must be “necessary to the functionality or production of a product manufactured by” a company.

Simple as it seems, that definition gives rise to a tangle of questions. Is mining “manufacturing”? Is a coffee can made with tin “necessary to the functionality” of the coffee being sold?

The hair-splitting answers to those questions will be the basis on which the law could be challenged in court, and it is that prospect that accounts for much of the agency’s deliberate progress in fashioning the rules.

Administrative law requires an agency like the S.E.C. to conduct a cost-benefit analysis of rules. Last year, a federal appeals court cited insufficient cost-benefit research in striking down one of the agency’s new regulations, and S.E.C. insiders say that decision has the agency operating in perpetual fear of a repeat occurrence.

There is little agreement on what it will cost companies to comply. The agency estimates companies will have to spend $71 million to comply with its regulations. The National Association of Manufacturers estimates the regulations will cost $9 billion to $16 billion.

Whatever the answer, part of the burden would fall on a given company’s supply chain — companies, that is, that are very likely not to be covered by the regulation’s reporting requirements, which cover only publicly traded companies.

Irma Villarreal, chief securities counsel for Kraft Foods, said during the S.E.C. roundtable that Kraft produced 40,000 distinct products and used 100,000 suppliers, creating a Herculean task of auditing supply chains for conflict minerals.

Nonprofit groups that support the new regulation say a growing number of companies — Intel, Motorola and Hewlett-Packard among them, according to the Enough Project, a nongovernmental organization that works against genocide and crimes against humanity — have already made significant steps to inspect and adjust their supply lines to avoid tainted sources of conflict minerals.

“Our hope,” said Darren Fenwick, a senior manager of government affairs for the Enough Project, “is that the rule is strong enough that companies in industries that aren’t doing anything will start to feel the pressure in their supply chains.”

    Behind the Blood Money, NYT, 19.3.2012,






The Banks Win, Again


March 17, 2012
The New York Times


Last week was a big one for the banks. On Monday, the foreclosure settlement between the big banks and federal and state officials was filed in federal court, and it is now awaiting a judge’s all-but-certain approval. On Tuesday, the Federal Reserve announced the much-anticipated results of the latest round of bank stress tests.

How did the banks do on both? Pretty well, thank you — and better than homeowners and American taxpayers.

That is not only unfair, given banks’ huge culpability in the mortgage bubble and financial meltdown. It also means that homeowners and the economy still need more relief, and that the banks, without more meaningful punishment, will not be deterred from the next round of misbehavior.

Under the terms of the settlement, the banks will provide $26 billion worth of relief to borrowers and aid to states for antiforeclosure efforts. In exchange, they will get immunity from government civil lawsuits for a litany of alleged abuses, including wrongful denial of loan modifications and wrongful foreclosures. That $26 billion is paltry compared with the scale of wrongdoing and ensuing damage, including 4 million homeowners who have lost their homes, 3.3 million others who are in or near foreclosure, and more than 11 million borrowers who are underwater by $700 billion.

The settlement could also end up doing more to clean up the banks’ books than to help homeowners. Banks will be required to provide at least $17 billion worth of principal-reduction loan modifications and other relief, like forbearance for unemployed homeowners. Compelling the banks to do principal write-downs is an undeniable accomplishment of the settlement. But the amount of relief is still tiny compared with the problem. And the banks also get credit toward their share of the settlement for other actions that should be required, not rewarded.

For instance, they will receive 50 cents in credit for every dollar they write down on second liens that are 90 to 179 days past due, and 10 cents in credit for every dollar they write down on second liens that are 180 days or more overdue. At those stages of delinquency, the write-downs bring no relief to borrowers who have long since defaulted. Rather than subsidizing the banks’ costs to write down hopelessly delinquent loans, regulators should be demanding that banks write them off and take the loss — and bring some much needed transparency to the question of whether the banks properly value their assets.

The settlement’s complex formulas for delivering relief also give the banks too much discretion to decide who gets help, what kind of help, and how much. The result could be that fewer borrowers get help, because banks will be able to structure the relief in ways that are more advantageous for them than for borrowers. The Obama administration has said the settlement will provide about one million borrowers with loan write-downs, but private analysts have put the number at 500,000 to 700,000 over the next three years.

The settlement’s go-easy-on-the-banks approach might be understandable if the banks were still hunkered down. But most of the banks — which still benefit from crisis-era support in the form of federally backed debt and near zero interest rates — passed the recent stress tests, paving the way for Fed approval to increase dividends and share buybacks, if not immediately, then as soon as possible.

When it comes to helping homeowners, banks are treated as if they still need to be protected from drains on their capital. But when it comes to rewarding executives and other bank shareholders, paying out capital is the name of the game. And at a time of economic weakness, using bank capital for investor payouts leaves the banks more exposed to shocks. So homeowners are still bearing the brunt of the mortgage debacle. Taxpayers are still supporting too-big-to-fail banks. And banks are still not being held accountable.

    The Banks Win, Again, NYT, 17.3.2012,






Unemployed Is Bad Enough; ‘Unbanked’ Can Be Worse


March 17, 2012
The New York Times


Joey Macias has lived without a bank or credit union account for more than a year. To pay his bills, Mr. Macias, a 45-year-old San Francisco resident, waits for his unemployment check to arrive in the mail and then cashes it at a Market Street branch of Money Mart, the international money-lending and check-cashing chain. He keeps any leftover cash at home or in his wallet.

Mr. Macias did not always handle his finances this way.

“I had a dispute with BofA, so now I come here,” he said outside Money Mart on a recent afternoon, referring to Bank of America.

Mr. Macias stopped banking after losing his job and incurring debt, which in turn led to bad credit. For now, fringe financial companies — businesses like check cashers, payday lenders and pawnshops that lack conventional checking or savings accounts and frequently charge huge fees and high interest for their services — are the only places Mr. Macias can cash his paychecks and borrow money.

Mr. Macias is not alone in his difficulty in maintaining or getting a bank account: 5.7 percent of San Francisco households lack conventional accounts, according to a 2009 survey by the Federal Deposit Insurance Corporation.

Over the past few years, the issue of “unbanked” people has come under increasing scrutiny. In response, Bay Area governments have created a number of programs to increase options for those without accounts.

Lacking a bank account imposes limitations on a person’s financial options, said Greg Kato, policy and legislative manager of the Office of the Treasurer-Tax Collector in San Francisco. He said that check-cashing fees at the fringe institutions could total $1,000 a year and interest rates for loans are as high as 425 percent. And there are related issues: those without a bank account cannot rent a car, buy plane tickets online, mortgage a house or make any purchase that requires a credit card.

“Without a checking or savings account, you’re basically shut out of most affordable financial services,” said Anne Stuhldreher, a senior policy fellow at New America Foundation, a nonprofit public policy organization.

According to surveys conducted by the San Francisco treasurer’s office in collaboration with nonprofit groups, there are a number of reasons people do not have bank or credit union accounts. These include an inability to afford bank fees, bad credit histories that bar people from opening accounts and being misinformed about the need for government-issued identification to open an account.

Not surprisingly, low-income people are disproportionately unbanked: the national F.D.I.C. survey from 2009 found that about 40 percent of unbanked people in the Bay Area earn below $30,000 a year, and Latino and black residents are most at risk of not having an account. This echoed research from 2008 from the Brookings Institution, a public policy think tank, finding that most of San Francisco’s estimated 36 payday loan stores and 104 check cashers are concentrated in low-income, Latino neighborhoods.

The City of San Francisco has two programs meant to help more people open traditional bank accounts. Last year, it started CurrenC SF, a program aimed at getting businesses and employees to use direct deposit. Bank On, a program developed in San Francisco in 2006 and now used nationally, gets partner banks and credit unions to offer low-risk starter accounts with no minimum balance requirements.

But efforts at curtailing the growth of fringe banking have been met with a strange paradox: national banks like Wells Fargo are also financing fringe institutions. The San Francisco-based Wells Fargo, for instance, headed a group of banks giving DFC Global Corp., the owner of Money Mart, $200 million in revolving credit, according to federal filings.

In an e-mail, a Wells Fargo spokesman defended its actions: “Wells Fargo provides credit to responsible companies in a variety of financial services industries.”

But even with the exorbitant fees and sky-high interest rates, the fringe financial shops do provide much-needed services. Outside Money Mart, Mr. Macias said that he wished banks gave him products similar to the check-cashing operation.

Ms. Stuhldreher agreed.

“There’s a lot financial institutions can learn from check cashers,” she said. “They’re convenient. Some are open 24 hours. Their fees are too high, but they are transparent.”

    Unemployed Is Bad Enough; ‘Unbanked’ Can Be Worse, NYT, 17.3.2012,






The Good, Bad and Ugly of Capitalism


March 16, 2012
The New York Times


On Wednesday, Howard Schultz, the chairman and chief executive of Starbucks, will take the podium at his company’s annual meeting and talk about the importance of morality in business.

Yes, morality. I don’t know that he’ll use that exact word. But there can be little doubt that in recent years, especially, Schultz has been practicing a kind of moral capitalism. Profitability is important, he believes, but so is treating customers, employees and coffee growers fairly. Recently, Schultz has defined Starbucks’s mission even more broadly, creating programs that have nothing at all to do with selling coffee but are aimed at helping the country recover from the Great Recession.

In the speech, Schultz plans to make a direct link between Starbucks’s record profits and this larger societal role the company has embraced. He will make the case that companies that earn the country’s trust will ultimately be rewarded with a higher stock price. “The value of your company is driven by your company’s values,” he plans to say.

I bring up Schultz and Starbucks because this week we saw a different kind of American capitalism on display — the “rip your eyeballs out” capitalism of Goldman Sachs. In the corporate equivalent of the shot heard round the world, Greg Smith, a former Goldman executive, wrote an Op-Ed article in The Times as he was walking out the door in which he described a corporate culture that values only one thing: making as much money as possible, by whatever means necessary. According to Smith, Goldman views clients as pigeons to be plucked rather than customers to be valued. Goldman traders vie to see how much profit they can make at the expense of their clients, even if it means selling them products that are sure to “blow up” eventually. “It makes me ill how callously people talk about ripping their clients off,” Smith wrote.

In the wake of Smith’s article, plenty of people raced to Goldman’s defense. Michael Bloomberg, New York’s billionaire mayor, whose company sells Goldman expensive computer terminals, went to Goldman Sachs’s headquarters in a show of support. The editors of his eponymous firm published an editorial that mercilessly mocked Smith. They and others pointed out that Goldman clients are big boys who can take care of themselves. Even some clients agreed. “You better not turn your back on them,” one Goldman customer told The Financial Times. Yet, he added, “They are also highly competent.”

But there’s a reason Smith’s article has struck such a chord. It is the same reason that Goldman Sachs, despite having come through the financial crisis largely unscathed, has become the target of such astonishing venom, described as a vampire squid and the like. The reason is that the kind of amoral, eat-what-you-kill capitalism that Goldman represents is one that most Americans instinctively find repugnant. It confirms the suspicions many people have that Wall Street has become a place where sleazy practices are the norm, and where generating profits in ways that are detrimental to society is the ticket to a successful career and a multimillion-dollar bonus.

Goldman bundled terrible subprime mortgages that helped bring about the financial crisis. Smelling trouble, it unloaded its worst mortgage bonds by cramming them down the throats of its clients. It secretly allowed a short-seller, John Paulson, to pick some especially toxic mortgage bonds that were bundled and sold to Goldman clients — with Paulson profiting by taking the “short” side of the trade. Just recently, Goldman had to admit that one of its investment bankers had acted as a merger adviser to the El Paso Corporation while holding stock in Kinder Morgan, which was trying to acquire El Paso. It would be hard to imagine a more blatant conflict — yet no one at Goldman bothered to tell El Paso.

These practices may not be illegal, but can you really say they represent the values that we want to see on Wall Street or in our corporations? I can’t.

And Goldman shouldn’t either. What has been amazing is that, despite three years of nonstop criticism — including Congressional hearings and settlements with the government — Goldman has not changed one iota. That is another reason Smith’s article resonated. It confirmed that suspicion as well. Goldman’s response to every controversy these past three years has been to bury them in a blizzard of public relations. And this has been its response to the Smith article, releasing, for instance, a companywide e-mail from Lloyd Blankfein, its chief executive, insisting that Goldman does, too, care about clients. Consistently, Goldman’s attitude has been: This, too, shall pass.

So far, though, it hasn’t. And maybe, just maybe, it won’t. Maybe the time has come for Blankfein to watch what Howard Schultz is doing at Starbucks. Sometimes, the best way to do well really is to do good.

    The Good, Bad and Ugly of Capitalism, NYT, 16.3.2012,






Why I Am Leaving Goldman Sachs


March 14, 2012
The New York Times


TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.

When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.

My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.


Greg Smith is resigning today as a Goldman Sachs executive director

and head of the firm’s United States equity derivatives business

in Europe, the Middle East and Africa.

    Why I Am Leaving Goldman Sachs, NYT, 14.3.2012,






Capitalism, Version 2012


March 13, 2012
The New York Times


David Rothkopf, the chief executive and editor-at-large of Foreign Policy magazine, has a smart new book out, entitled “Power, Inc.,” about the epic rivalry between big business and government that captures, in many ways, what the 2012 election should be about — and it’s not “contraception,” although the word does begin with a “C.” It’s the future of “capitalism” and whether it will be shaped in America or somewhere else.

Rothkopf argues that while for much of the 20th century the great struggle on the world stage was between capitalism and communism, which capitalism won, the great struggle in the 21st century will be about which version of capitalism will win, which one will prove the most effective at generating growth and become the most emulated.

“Will it be Beijing’s capitalism with Chinese characteristics?” asks Rothkopf. “Will it be the democratic development capitalism of India and Brazil? Will it be entrepreneurial small-state capitalism of Singapore and Israel? Will it be European safety-net capitalism? Or will it be American capitalism?” It is an intriguing question, which raises another: What is American capitalism today, and what will enable it to thrive in the 21st century?

Rothkopf’s view, which I share, is that the thing others have most admired and tried to emulate about American capitalism is precisely what we’ve been ignoring: America’s success for over 200 years was largely due to its healthy, balanced public-private partnership — where government provided the institutions, rules, safety nets, education, research and infrastructure to empower the private sector to innovate, invest and take the risks that promote growth and jobs.

When the private sector overwhelms the public, you get the 2008 subprime crisis. When the public overwhelms the private, you get choking regulations. You need a balance, which is why we have to get past this cartoonish “argument that the choice is either all government or all the market,” argues Rothkopf. The lesson of history, he adds, is that capitalism thrives best when you have this balance, and “when you lose the balance, you get in trouble.”

For that reason, the ideal 2012 election would be one that offered the public competing conservative and liberal versions of the key grand bargains, the key balances, that America needs to forge to adapt its capitalism to this century.

The first is a grand bargain to fix our long-term structural deficit by phasing in $1 in tax increases, via tax reform, for every $3 to $4 in cuts to entitlements and defense over the next decade. If the Republican Party continues to take the view that there must be no tax increases, we’re stuck. Capitalism can’t work without safety nets or fiscal prudence, and we need both in a sustainable balance.

As part of this, we will need an intergenerational grand bargain so we don’t end up in an intergenerational civil war. We need a proper balance between government spending on nursing homes and nursery schools — on the last six months of life and the first six months of life.

Another grand bargain we need is between the environmental community and the oil and gas industry over how to do two things at once: safely exploit America’s newfound riches in natural gas, while simultaneously building a bridge to a low-carbon energy economy, with greater emphasis on energy efficiency.

Another grand bargain we need is on infrastructure. We have more than a $2 trillion deficit in bridges, roads, airports, ports and bandwidth, and the government doesn’t have the money to make it up. We need a bargain that enables the government to both enlist and partner with the private sector to unleash private investments in infrastructure that will serve the public and offer investors appropriate returns.

Within both education and health care, we need grand bargains that better allocate resources between remediation and prevention. In both health and education, we spend more than anyone else in the world — without better outcomes. We waste too much money treating people for preventable diseases and reteaching students in college what they should have learned in high school. Modern capitalism requires skilled workers and workers with portable health care that allows them to move for any job.

We also need a grand bargain between employers, employees and government — à la Germany — where government provides the incentives for employers to hire, train and retrain labor.

We can’t have any of these bargains, though, without a more informed public debate. The “big thing that’s missing” in U.S. politics today, Bill Gates said to me in a recent interview, “is this technocratic understanding of the facts and where things are working and where they’re not working,” so the debate can be driven by data, not ideology.

Capitalism and political systems — like companies — must constantly evolve to stay vital. People are watching how we evolve and whether our version of democratic capitalism can continue to thrive. A lot is at stake here. But if “we continue to treat politics as a reality show played for cheap theatrics,” argues Rothkopf, “we increase the likelihood that the next chapter in the ongoing story of capitalism is going to be written somewhere else.”

    Capitalism, Version 2012, NYT, 13.3.2012,






15 of 19 Big Banks Pass Fed’s Latest Stress Test


March 13, 2012
The New York Times


The Federal Reserve had a key take-away from the latest round of stress tests: most big banks are in good shape.

On Tuesday, the central bank said that 15 of the 19 largest financial firms had enough capital to withstand a severe recession. The results, announced two days ahead of schedule, paved the way for JPMorgan Chase and other banks to bolster dividends and buy back shares.

“When you put banks under the kind of dramatic scenarios that the Fed did — and they are still doing well — it tells you how well capitalized the majority of the banks are coming out of this downturn,” said Michael Scanlon, a senior equity analyst with Manulife Asset Management in Boston.

But the stress tests also underscored the uneven nature of the industry’s recovery. Firms like JPMorgan and Wells Fargo are proving resilient, as they clean up their books and the economy improves. Still others, including Citigroup and Ally Financial, remain on shaky ground, grappling with soured mortgages and other troubled businesses.

Banks are completing their third round of stress tests. Developed in the wake of the financial crisis, the examination is intended to assess how banks will fare under weak economic conditions. The Fed looked at whether banks would have enough capital to weather a peak unemployment rate of 13 percent, a 21 percent drop in housing prices and severe market shocks, as well as economic slowdowns in Europe and Asia.

The Fed’s stress tests assumed that the 19 banks would be slammed with $534 billion of losses in just over two years. Even after such hits, most banks would emerge with adequate capital, the central bank said Tuesday. One measure of capital for the banks, which currently stands at 10.1 percent of assets, would fall to 6.3 percent in the Fed’s ugly projection.

As fragmentary results of the tests circulated before the end of trading, the news buoyed shares of some banks.

JPMorgan shares were up 7 percent. Stock in both Bank of America and Goldman Sachs jumped by 6 percent.

The individual results are likely to intensify questions about a bank’s health. In the stress tests, the Fed projected that a crucial measure of Citigroup’s capital cushion would drop to a low of 4.9 percent of its assets.

Only Ally Financial and SunTrust Banks fared worse. A spokeswoman for Ally Financial said that the Fed’s stress test “dramatically overstates potential contingent mortgage risk.” SunTrust did not return calls for comment.

When banks don’t pass muster, the central bank can force them to raise more capital or postpone their dividend plans. On Tuesday, Citigroup said the Fed had rejected its proposal to return capital to shareholders. The firm intends to submit a revised plan to the central bank this year and “to engage further with the Federal Reserve to understand their new stress loss models,” it said in a statement.

Banks with a clean bill of health can get the green light to increase dividend payments. Such moves could help appease shareholders whose bank stocks have been battered since the financial crisis.

With strong results in hand, JPMorgan Chase announced that it would raise its quarterly dividend by 5 cents, to 30 cents, and buy back at least $15 billion of its stock through 2013.

The bank disclosed its dividend plans two days earlier than when the Fed was scheduled to announce the stress tests. In a conference call, a senior Fed official said JPMorgan’s early move was the result of miscommunication. JPMorgan’s chief executive, Jamie Dimon, has frequently criticized certain measures aimed at increasing capital since the financial crisis.

JPMorgan’s move was a bold show of optimism. The share repurchases alone — roughly $12 billion this year — would amount to roughly two-thirds of analysts’ expected earnings for the bank for the year.

Despite the apparent severity of the tests, some analysts say they think it is too early for the Fed to allow large banks to take actions that could reduce capital. “It’s irresponsible,” said Anat Admati, a professor of finance and economics at Stanford University. Professor Admati says that depleting capital can expose the wider economy to risks because it leaves banks more exposed to shocks.

Another potential shortcoming in the tests is that they don’t focus on one of the main problems the industry faced during the financial crisis, the difficulties banks had borrowing money in the markets.

The big question now is whether the latest stress tests will improve confidence in the banking system. Shares in banks languished after the last stress tests, indicating that investors still had big doubts about banks’ balance sheets.

The strength of banks’ loan books varied greatly. Under extreme stress, the Fed said, Citigroup would lose 9.7 percent of its first mortgage loans, more than any other bank. Both Wells Fargo and PNC would suffer losses of at least 9 percent.

In business loans — called commercial and industrial loans by bankers — Citi and U.S. Bancorp had the worst portfolios, while Wells Fargo and Fifth Third had the shakiest credit card portfolios. In commercial real estate, regional banks appear to be the most vulnerable. Under the Fed’s test, Fifth Third would suffer losses of 11.3 percent of its loans, with Regions Financial the only other bank expected to lose at least 7 percent of its loans.

Bank of America could serve as an important litmus test for whether the market has confidence in these results. In most troubled outlooks, the firm’s capital levels remained above the Fed benchmarks. But the bank has large holdings of home loans, which could still expose it to further losses.

“The tests showed that those who didn’t fare as well have a lot of vulnerability to the residential mortgage market,” said Mr. Scanlon of Manulife.


Floyd Norris contributed reporting.

    15 of 19 Big Banks Pass Fed’s Latest Stress Test, NYT, 13.3.2012,






The Fed Stays the Course


March 13, 2012
The New York Times

The Federal Reserve acknowledged on Tuesday that it is not certain which way the economy is going. It saw signs of improvement, but its outlook is cautious. It plans to continue near-zero interest rates through 2014 and bond purchases through June to keep borrowing costs low. The stock market responded enthusiastically. Without more help — from Congress, the White House and the Fed — it is hard to see how the fledgling recovery will take off.

While the jobless rate has declined swiftly, from 9.1 percent last summer to 8.3 percent in February, the slow pace of economic growth suggests those job gains are not sustainable. Similarly, the strong retail sales report for February largely reflects higher spending for gasoline, suggesting that consumers are more stressed than free-spending.

Here are some of the pressure points to watch:

JOBS VS. GOOD JOBS At least 40 percent of the new private sector jobs fall into low-paying categories. Health care has contributed 15 percent of job growth in the private sector since February 2010, but many of those jobs were in home health care and nursing homes. Leisure and hospitality contributed 16 percent of new private sector jobs, but most were in bars and restaurants. Ditto business trades and professional services, where a large chunk of growth has been in retail sales and temporary jobs.

Over the last two years, governments at the federal, state and local levels have lost nearly 500,000 generally better-paying and more secure jobs — teachers, librarians, road workers. Worse, even with recent private-sector job growth, labor supply still far outstrips demand, depressing wages — with no turnaround in sight. Currently, the ratio of job seekers to job openings is nearly 4 to 1. In a healthy market, the ratio is closer to 1 to 1.

EXPORTS FALTER Hope for a trade-led recovery has also taken a hit, with the United States trade deficit surging in January to its widest imbalance in more than three years. Part of the reason is rising oil prices. Another reason is a fall in exports to Europe’s faltering market. The depth of the European downturn is not yet clear, nor is the extent to which weakness in Europe will weaken China and other nations that also rely on exports, with knock-on effects for U.S. growth. What is known is that a widening trade deficit translates into slower economic growth.

WASHINGTON’S FOLLIES Federal budget cuts have already shaved about half-a-percentage point from recent growth; calls by some House Republicans to make even deeper cuts than those agreed to in last year’s budget agreement would slow growth even further. The Fed chairman, Ben Bernanke, deserves credit for trying to talk sense to lawmakers, telling them repeatedly that near-term policies to support jobs, housing and the broader economy should be coupled with long-term plans to control the budget deficit. The message, unfortunately, has not gotten through. The Fed, so far, has correctly resisted calls from its hawkish members to tighten its policies. Barring a dramatic, and unlikely, upsurge in the economy, it must be prepared to loosen policy further.

The Fed should not be the only one doing battle for the economy, but given lawmakers’ inability to agree with President Obama, or each other, on even basic stimulative policies, its economic leadership is essential.

    The Fed Stays the Course, NYT, 13.3.2012,






How Good Is the Housing News?


March 7, 2012
The New York Times


The housing market has shown signs of life recently. Home sales have beat expectations and pending sales neared a two-year high. But prices — the crucial measure of housing-market health — are still falling, driven down by increasing levels of distressed sales of foreclosed properties. That means the market, and the broader economy, which derives much of its strength from housing, are not out of the woods — not by a long shot.

For too long, President Obama and his team have relied on the banks to voluntarily modify troubled loans. Those efforts were focused on reducing monthly payments, not principal — a more powerful form of relief.

Now President Obama is trying again. On Tuesday, he announced a new policy of easier refinancings for loans that are backed by the Federal Housing Administration. As part of the settlement announced in February, the major banks will be required to promote loan modifications for troubled borrowers, including principal reductions for underwater homeowners.

Mr. Obama has also promised a far-reaching investigation into mortgage abuses that is supposed to yield more accountability from the banks and more money for foreclosure prevention. He must deliver.

One thing is sure: Waiting for the situation to self-correct, as Mitt Romney has recommended, won’t fix the problem. The recent good news on sales has been driven by pent-up demand and warm winter weather that lured buyers. But more sales won’t translate into higher prices until foreclosures abate.

In the last quarter of 2011, national home prices fell 4 percent, putting prices back to levels last seen in mid-2002, according to the Standard & Poor’s/Case-Shiller price index. Moody’s Analytics estimates that 3.3 million homes are in or near foreclosure and another 11.5 million underwater homeowners are at risk of foreclosure if the economy or their finances weaken.

Is help really on the way?

The main component of the administration’s new efforts is the recent foreclosure settlement between the big banks and state and federal officials. In exchange for immunity from government civil lawsuits over most foreclosure abuses, the banks will provide $26 billion worth of relief, including principal write-downs, to an estimated 1.75 million borrowers. That is a pittance compared with the losses in the housing bust. But by preventing a chunk of additional foreclosures, it could help ensure that prices do not fall much further before bottoming out.

The settlement was announced nearly a month ago, but the specific terms have yet to be released. One concern is that banks may have leeway to tailor loan modifications in ways that help them clean up their balance sheets, while leaving many homeowners deeply underwater. Another is that states may be able to use money from the settlement for purposes other than foreclosure relief.

The investigation that is supposed to be the powerful follow-up to the settlement has also gotten off to a worryingly slow start. Announced in January by Mr. Obama, it still has no executive director, raising questions about the administration’s commitment to truly holding the banks accountable. The longer it takes to do an investigation, the longer it will take to secure verdicts or settlements that would include money for further antiforeclosure efforts.

Because the banks held off on foreclosure while the settlement was being negotiated, reclosure filings are set to rise in the coming year to more than two million. That means more pain for struggling homeowners — and the economy. By this point, homeowners should be inundated with relief, not still anxiously awaiting help.

    How Good Is the Housing News?, NYT, 7.3.2012,




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