History > 2009 > USA > Economy (I)
Julio Ponce, who is seeking work as a chef,
said he did not know how he would cover his rent
after his unemployment benefits
lapsed this week.
Ruby Washington/The New York Times
Adding to Recession’s Pain,
Thousands to Lose Jobless Benefits
12 January 2009
Assistance on Mortgages
January 31, 2009
Filed at 9:57 a.m. ET
The New York Times
By THE ASSOCIATED PRESS
WASHINGTON (AP) -- President Barack Obama on Saturday promised
to lower mortgage costs, offer job-creating loans for small businesses, get
credit flowing and rein in free-spending executives as he readies a new road map
for spending billions from the second installment of the financial rescue plan.
The White House is deciding how to structure the remaining half of the $700
billion that Congress approved last year to save financial institutions and
lenders. An announcement was possible as early as this coming week on an
approach that would use a range of tools to unfreeze credit, helping families
At the end of a week that saw hundreds of thousands of people lose their jobs,
Obama also used his Saturday radio and Internet address to tell that nation that
''no one bill, no matter how comprehensive, can cure what ails our economy.''
During the final three months of 2008, the economy recorded its worst downhill
slide in a quarter-century, stumbling backward at a 3.8 percent pace, the
government reported Friday. It could get worse.
Treasury Secretary Timothy Geithner is trying to finish a plan to overhaul the
bailout program begun in the Bush administration. Geithner has said the
administration is considering using a government-run ''bad bank'' to buy up
financial institutions' bad assets. But some officials now say that option is
gone because of potential costs.
Many ideas under consideration could end up costing hundreds of billions beyond
the original price tag. Aides would not rule out the possibility that the
administration would seek more than the $350 billion already set aside.
Obama said Geithner soon would announce a new strategy ''for reviving our
financial system that gets credit flowing to businesses and families. We'll help
lower mortgage costs and extend loans to small businesses so they can create
jobs. We'll ensure that CEOs are not draining funds that should be advancing our
His administration ''will insist on unprecedented transparency, rigorous
oversight and clear accountability so taxpayers know how their money is being
spent and whether it is achieving results.''
Obama's message, largely repackaged from a week of White House statements, was
as much for the country as it was for lawmakers: Pass the separate American
Recovery and Reinvestment Plan or things are going to get worse.
''Rarely in history has our country faced economic problems as devastating as
this crisis,'' the president said. ''Now is the time for those of us in
Washington to live up to our responsibilities.''
Obama last week won passage of a separate $825 billion economic stimulus plan in
the House without a single Republican vote. It now heads to the Senate, where
Vice President Joe Biden predicts the measure will fare better among GOP
Republicans pledged to work with Obama. But they cautioned against treating
government spending like a ''trillion-dollar Christmas list'' and renewed their
opposition to much in the bill.
''A problem that started on Wall Street is reaching deeper and deeper into Main
Street. And the president is counting on members of Congress to come together in
a spirit of bipartisanship to act,'' Senate Minority Leader Mitch McConnell,
R-Ky., said in the GOP radio address. ''Unfortunately, the plan that Democrats
in Congress put forward this week falls far short of the president's vision for
a bill that creates jobs and puts us on a path to long-term economic health.''
Obama has signaled his willingness to compromise. His chief spokesman said the
president hoped to ''strengthen'' the bill as it headed toward a Senate vote in
the week ahead.
Republicans said they hope the administration takes into account their wishes.
''Every day brings more news of layoffs, home foreclosures and shuttered
businesses,'' McConnell said. ''And across the country, employers are cutting to
the bone even at businesses that most Americans never thought were vulnerable.''
Republicans, however, kept putting forward their own plans. McConnell promoted a
mortgage program for creditworthy borrowers, offering fixed-rate 4 percent loans
designed to increase housing demands and lending.
On the Net:
White House: www.whitehouse.gov
Assistance on Mortgages, NYT, 31.1.2009,
Steep Slide in Economy
as Unsold Goods Pile Up
January 31, 2009
The New York Times
By LOUIS UCHITELLE
The economy shrank at an accelerating pace late last year, the
government reported on Friday, adding to the urgency of a stimulus package
capable of bringing the country back from a recession that appears to be
The actual decline in the gross domestic product — at a 3.8 percent annual rate
— fell short of the 5 to 6 percent that most economists had expected for the
fourth quarter. But that was because consumption collapsed so quickly that goods
piled up in inventory, unsold but counted as part of the nation’s output.
“The drop in spending was so fast, so rapid, that production could not be cut
fast enough,” said Nigel Gault, chief domestic economist at IHS Global Insight.
“That is happening now, and the contraction in the current quarter, as a result,
will probably exceed 5 percent.”
The dismal fourth quarter, and the likelihood of more of the same through the
spring, are fueling discussion among policy makers and politicians over the best
way to spend the soon-to-be-authorized federal money.
Some caution that President Obama’s proposals try to achieve too many objectives
— for example, broader health care coverage and energy efficiency — at the
expense of focusing tax dollars on the core issue of job creation. By this
argument, more should be spent on things like infrastructure repair, either
directly or by channeling money to the states for projects now delayed for lack
of adequate tax revenue.
Others argue that the best bang for the buck would come from a stimulus package
devoted mainly to tax cuts rather than public investment. The breakdown in the
$819 billion bill that the House approved on Wednesday and the Senate will take
up next week is two-thirds spending, one-third tax cuts.
The president took a different approach in a press conference on Friday. Seizing
on the damaging fourth-quarter figures and the prospect of an even weaker first
quarter, he called the contraction “a continuing disaster” for working families
and pushed Congress to act quickly to provide relief.
Even with the help of swelling inventories, the 3.8 percent contraction,
adjusted for inflation and representing all of the nation’s economic activity,
was the largest quarterly drop in the nation’s output since the 1982 recession.
Business investment, commercial construction, home building and exports all fell
steeply, most of them doing so for the first time since the recession began 13
months ago. Data released this week suggested that the decline had continued. As
for consumer spending, in only one other quarter since records were first kept
in 1947 have final sales of goods and services produced in America fallen so
“Consumer spending is often held up as the engine of growth, and we are now
experiencing the second-largest contraction on record,” said Ben Herzon, an
economist at Macroeconomic Advisers in St. Louis, referring to the 7.6 percent
drop in spending in the midst of the 1974-75 recession, and 5.1 percent now.
Christina D. Romer, chairwoman of the president’s Council of Economic Advisers,
said in a statement that “aggressive, well-designed fiscal stimulus is critical
to reversing this severe decline.” She did not describe the elements of a
well-designed fiscal stimulus, but the vast majority of the nation’s economists
agree that one is necessary, and soon.
Virtually none dispute that the usual route to recovery, cheap credit, has
failed to work this time — not when lenders are pulling back, despite prodding
from the Federal Reserve, and borrowers are focused more on paying down debt and
building up savings.
“I’m hoping the fiscal stimulus will be a catalyst to reignite the private
sector,” said Stuart Hoffman, chief economist at the PNC Bank Corporation in
Pittsburgh. “My hope is that as the fiscal stimulus kicks in, people will begin
to spend and invest more, modestly anyway, in the second half of the year.”
Absent a large stimulus package, most economists expect the nation’s output to
shrink not only in the first half of the year, but in the second half as well.
In April, the recession would become the longest since the 1930s. Until now, the
record, 16 months, was shared by the severe recessions of 1974-75 and 1981-82.
This one began in December 2007 as employment peaked and began to fall.
“We are in the thick of it now,” said Robert Barbera, chief economist for ITG
Investment Technology Group.
The Federal Reserve ended the mid-’70s and early ’80s recessions by cutting
interest rates sharply to encourage borrowing and spending in the private
sector. This time, the credit crisis, rising unemployment, plunging home prices
and bank failures have disrupted that mechanism, particularly since late summer.
Indeed, until the fourth quarter, the nation’s output had declined only in the
third quarter, falling by half a percent at an annual rate. The Fed, in response
to the accelerating decline, cut rates to nearly zero — a tactic that in the
past would have raised cries of loose money and rising inflation.
The concern now, however, is deflation, or falling prices, and Friday’s report
from the Bureau of Economic Analysis suggested that the fear had some
justification. Personal consumption expenditures, not counting food and energy,
rose at an annual rate of only 1.6 percent, the smallest quarterly increase in
years. If prices were to actually fall, consumers might respond by putting off
purchases until prices were even lower.
“My sense is that business is slashing hugely and across the board,” said Allen
Sinai, president and chief global economist of Decision Economics. “Everyone is
cutting prices, people, capital spending and all kinds of expenses. It is almost
a herd instinct.”
Steep Slide in
Economy as Unsold Goods Pile Up, NYT, 31.1.2009,
Weakness of Economy
January 30, 2009
The New York Times
By JACK HEALY
Thursday brought a hat-trick of grim economic news: New-home
sales fell to their slowest pace on record, businesses cut their orders and
jobless claims continued to rise.
Taken together, the three reports released by the government painted a picture
of an economy that continues to slide as falling consumer spending and rising
unemployment amplify the effects of a year-long recession.
The Commerce Department reported that American businesses ordered fewer goods
like computers, construction equipment and vehicles in December, cutting the
prospects for growth as companies braced for a difficult 2009.
Durable goods orders dropped 2.6 percent last month to $176.8 billion. It was
the fifth consecutive month of declines, after a 3.7 percent drop in November,
and came as the country slipped deeper into a nearly 13-month recession.
Excluding transportation, new durable-goods orders fell 3.6 percent. Excluding
military equipment orders, durable goods fell 4.9 percent.
For all of 2008, orders fell 5.7 percent, a decline topped only by a 10.7
percent drop in 2001.
“This is pretty much what you expect when the economy is in the process of
shrinking and businesses don’t seen any need to purchase any capital goods,”
said Bernard Baumohl, managing director of the Economic Outlook Group. “Even if
you did want increase your capital investments, it’s going to be difficult to
get the capital to purchase this.”
Orders for computers and electronic goods dropped by a stark 7.2 percent in
December, and factory orders for metals, machinery, transportation equipment and
communications equipment slumped as businesses cut their outlooks.
Shipment of goods also fell for a fifth month, declining 0.7 percent.
“The data show clear declines in sectors as diverse as cars, computers, metals,
and machinery,” Ian Shepherdson, chief United States economist at High Frequency
Economics, wrote in a note. “The industrial recession is deep and broad, and
there’s no prospect of any easing of the downward pressure anytime soon.”
As businesses struggled, the problems of the housing market continued to
multiply. The Commerce Department reported that new single-family home sales in
December fell 14.7 percent to an annual pace of 331,000, a record low.
In all, 482,000 new homes were sold last year as housing prices tumbled and
credit dried up. That figure was 37.8 percent lower than the 776,000 homes sold
a year earlier.
Also on Thursday, the Labor Department reported that first-time unemployment
claims rose to a seasonally adjusted 588,000 for the week ending Jan. 24, up
3,000 from a revised 585,000 the week before.
Employers had long resisted making mass layoffs as the economy cooled and sought
to cut costs through shorter work weeks, pay cuts and hiring freezes, but they
are now cutting jobs by the thousands. Recently, companies including Microsoft,
Caterpillar, Home Depot and Sprint Nextel have announced thousands of job cuts,
a grim sign for labor markets.
The national unemployment rate has risen to 7.2 percent since the economy
slipped into recession began last December, and the jobless rates in Michigan
and Rhode Island have already reached 10 percent. Some economists expect that
the national unemployment rate will rise to 9 percent before the economy gets
back on track.
Weakness of Economy, NYT, 30.1.2009,
on Fresh Worries About Economy
January 29, 2009
Filed at 11:42 a.m. ET
The New York Times
By THE ASSOCIATED PRESS
NEW YORK (AP) -- Caution has returned to Wall Street, as weak
earnings and record unemployment claims offered more evidence of the economy's
All the major indexes are down more than 1 percent Thursday, after soaring
Wednesday on hopes the government will develop a way to remove bad debt from
Investors' mood darkened after companies from Eastman Kodak Co. to chip maker
Qualcomm Inc. reported that profits tumbled the final three months of 2008. And
the government said Thursday the number of people drawing unemployment benefits
reached a record 4.78 million this month.
In midday trading, the Dow industrials are down about 120 points at the 8,255
level. The Standard & Poor's 500 is down 17 at 857, and the Nasdaq composite
index is off 29 at 1,528.
Stocks Fall on Fresh
Worries About Economy, NYT, 29.1.2009,
The Stimulus Advances
January 29, 2009
The New York Times
The signature achievement of the $819 billion stimulus and
recovery bill, passed on Wednesday by the House, is that it directs most of its
resources where they would do the most good to stimulate the economy.
The bill is large because this deep recession is getting deeper, and the
recovery, when it comes, is expected to be slow. President Obama and the
lawmakers who wrote the bill are to be commended for not letting size distort
the substance. Contrary to the claims of Republican opponents that the bill
indiscriminately rains money down, the amounts and categories of spending have,
for the most part, been calculated carefully and chosen well.
Nearly 30 percent is devoted to unemployment benefits, food stamps and fiscal
aid to states so that they don’t have to cut services, raise taxes and lay off
employees and contractors. Evidence is overwhelming that such spending yields
the biggest return for every dollar spent. The bill, however, takes into account
that these areas cannot absorb unlimited money. In calculating the expanded food
stamps, for instance, it provides a significant increase immediately that would
otherwise have occurred over time in line with inflation. That way, ample funds
are available when needed, but there is no sudden cut off down the road.
Aid to states also is well thought out. The single biggest chunk of spending —
$87 billion for states to shore up Medicaid programs — would allow them to
provide care to the neediest, whose ranks have been swelled by the deepening
recession. Equally important, by taking on more of the states’ Medicaid burden,
the federal government frees up states to continue providing other services that
would have had to have been cut.
One of those vulnerable areas, states’ education budgets, is the main target of
another $79 billion. The money would help to prevent lapses in early childhood
education, which often cannot be made up later. It would also prevent cuts in
the curriculum and in extracurricular activities in grade schools through
college — while averting big layoffs in a sector that is among the largest
employers in many states.
After jobless benefits, food stamps and aid to states, the most effective
stimulus is to get money directly to low- and middle-income Americans, who are
likely to spend it quickly, boosting demand. The package expands the Earned
Income Tax Credit temporarily to raise the pay of the working poor. There also
is money to allow low-income workers to qualify for a tax credit of up to $1,000
per child, a break currently denied them. These are good tax policy and good
The measure devotes $145 billion to Mr. Obama’s “Making Work Pay” tax credit for
the next two years. The credit, up to $500 per worker, would be more effective
as stimulus if the cutoff for eligibility were lower. The richer the recipient,
the more likely it is that the money would be saved, not spent.
Having maxed out on the most powerful forms of stimulus and facing an economic
downturn that requires still more government intervention to prevent a more
disastrous downward spiral, lawmakers sensibly expanded the package into other
areas. It contains $62 billion on infrastructure spending for highways, mass
transit and school buildings, and tens of billions more for other projects. It
also includes $40 billion to subsidize the cost of health coverage for the
Republicans’ objections are mostly ideological. They worry, in particular, that
subsidizing health insurance may be a step toward universal coverage. They may
be right. But that is an argument for another day. The government must act
urgently to protect the vulnerable from what is shaping up to be the worst
recession in modern history and to boost the economy at a time when consumer and
business spending is slack. Besides, a lamentably large amount of money goes to
business tax cuts dear to Republicans. That is folly as stimulus but more than
enough for political compromise.
A more thoughtful criticism is that the package is not more transformative in
scope. There is more money for fixing roads, but not for high-speed railroads;
for Head Start, but not for curriculum reform. That, too, is a discussion for
Indeed, even with an $819 billion package, the challenge for the Obama
administration is to lower expectations, not raise them. The hole the economy is
in is so deep that even the stimulus package will only dig us halfway out.
According to recent testimony by Douglas Elmendorf, the director of the
Congressional Budget Office, without the stimulus, the economy in 2010 could
underperform its potential by an amount equal to 6.3 percent of gross domestic
product. With the plan, the gap could be, at best, about half that.
It will be a long and unpleasant climb from the ruins of the economy. But the
House stimulus package is a good first step. The Senate, which takes up its
version next week, should follow suit.
Advances, NYT, 29.1.2009,
Ford Has Its Worst Year Ever
but Won’t Ask for Aid
January 30, 2009
The New York Times
By NICK BUNKLEY
DETROIT — The Ford Motor Company, the only Detroit automaker
not being propped up by billions of dollars in government loans, said on
Thursday that it lost $14.6 billion last year, making 2008 its worst year in
history as a result of the biggest sales slump in decades.
Still, the company said it had “sufficient liquidity to fund its business plan
and product investments.” It finished 2008 with $24 billion in cash on hand but
$25.8 billion in debt.
Ford, which says it is financially healthier than its cross-town rivals General
Motors and Chrysler, reiterated that it did not need federal aid unless the
economy worsened significantly or a competitor filed for bankruptcy protection.
It expects to break even or earn a profit, excluding one-time charges, by 2011.
“It’s a very volatile time for all of us,” Ford’s chief executive, Alan R.
Mulally, said on a conference call. But, he added, “It’s not our plan at all to
access the government’s money.”
Ford lost $5.9 billion, or $2.46 a share, in the fourth quarter alone, compared
with a loss of $2.8 billion, or $1.33 a share, in the final months of 2007. Auto
sales in the United States plummeted 35 percent in the fourth quarter to levels
last seen in 1982. Many would-be buyers were unable to obtain loans and the
recession, which began in December 2007, kept many more people from even setting
foot in a dealership.
And the months ahead do not look promising. Many economists expect that the
economy will continue to contract until July at the very least, but at a slowing
pace in the second quarter. That would make this the longest recession since the
1930s, outlasting the two record-holders, the mid-1970s and early 1980s
downturns. And the unemployment rate, which jumped to a 16-year-high of 7.2
percent in December, is expected to rise even more.
“We still feel that, with the amount of stimulus that’s going on in the U.S.
market, that we’ll see some improvement in the second half of this year,” Ford’s
chief financial officer, Lewis Booth, said.
Fourth-quarter revenue was $29.2 billion, 36 percent less than the $45.5 billion
it took in a year earlier. The company depleted its cash reserves at a rate of
$2.4 billion a month.
Excluding special charges, Ford’s loss in the quarter was $1.37 a share. On that
basis, analysts surveyed by Thomson Reuters expected a loss of $1.30.
Ford’s full-year loss of $14.6 billion, or $6.41 a share, was more than five
times larger than its 2007 loss of $2.7 billion, or $1.38 a share. It is the
equivalent of losing about $2,700 on every car and truck sold worldwide and more
than the 105-year-old company’s 2006 loss of $12.7 billion, the previous record.
“We faced nearly unprecedented challenges across our global markets,” Mr.
Mulally said. “The worldwide economic slowdown, driven by tight credit markets
and weak consumer confidence, has shaken the foundation of even the strongest
companies in the automotive sector and other industries. Clearly at Ford, the
severe economic challenges had a significant impact on our fourth-quarter
To give itself more of a financial cushion while trying to get its restructuring
back on track, the company said it planned to draw $10.1 billion more from its
available credit lines in the first quarter. This month, the company borrowed $2
billion from funds that are intended for a new retiree health care trust managed
by the union.
“Given the instability of the capital markets with the uncertain state of the
global economy,” Mr. Mulally said, “we believe it is prudent to draw these
credit facilities at this time.”
Ford also said Thursday that the United Automobile Workers union had agreed to
end its controversial jobs bank program, which pays factory workers after their
jobs have been eliminated. The company is still negotiating the terms of that
Chrysler eliminated its jobs bank this week, and G.M. will end its program on
Together, Chrysler and G.M. have borrowed $13.4 billion from the federal
government to avoid bankruptcy. Ford initially said it wanted a $9 billion
credit line to tap if needed but changed its position after Congress balked at
the companies’ requests. The Bush administration eventually approved taking
money from the Treasury Department’s Troubled Assets Relief Program.
In addition to the automaker, the Ford Motor Credit Company, the company’s
financial arm, reported a net loss of $1.5 billion in 2008, compared with net
income of $775 million in the quarter a year earlier. The lender said that it
would cut about 1,200 jobs or 20 percent of its work force.
Ford Has Its Worst
Year Ever but Won’t Ask for Aid, NYT, 30.1.2009,
New Home Sales
Post 14.7 Pct Drop in December
January 29, 2009
Filed at 11:34 a.m. ET
The New York Times
By THE ASSOCIATED PRESS
WASHINGTON (AP) -- Sales of new homes plunged to the slowest
pace on record last month as the hobbled homebuilding industry posted its worst
annual sales results in more than two decades.
The Commerce Department said Thursday that new home sales fell 14.7 percent in
December to a seasonally adjusted annual rate of 331,000, from a downwardly
revised November figure of 388,000.
''This is an awful report...Builders just can't cut back fast enough, so prices
remain under downward pressure,'' Ian Shepherdson, chief U.S. economist for High
Frequency Economics, wrote in a research note.
December's sales pace was the lowest on records dating back to 1963. Economists
surveyed by Thomson Reuters had expected sales would fall to a rate of 400,000
For 2008, builders sold 482,000 homes, the weakest results since 1982, when
412,000 homes were sold.
The median price of a new home sold in December was $206,500, a drop of 9.3
percent from a year ago. The median is the point where half the homes sold for
more and half for less.
Builders have been forced to slash production during a prolonged and severe
slump in housing that has seen sales and prices plummet. December's sales
activity was depressed by the worst financial crisis in seven decades, which has
made it harder for potential buyers to get mortgage loans.
The inventory of unsold new homes stood at a seasonally adjusted 357,000 in
December, down 10 percent from November. But at the current sales pace, it would
take a more than a year to exhaust the stock as houses are dumped onto a market
already glutted by a tide of foreclosures.
''The inventory of unsold new homes is still too high,'' wrote Joshua Shapiro,
chief U.S. economist at MFR Inc. ''Prices need to fall further to stimulate
sufficient demand to begin to balance the market.''
The sales weakness in December reflected a 28 percent drop in the Northeast and
a 20 percent drop in the West. The South and Midwest posted smaller declines of
12 percent and almost 6 percent, respectively.
Earlier this month, a key gauge of homebuilders' confidence sank to a new record
low, as the deepening U.S. recession and rising unemployment erode chances for a
Sales of existing homes, however, posted an unexpected increase last month, as
consumers snapped up bargain-basement foreclosures in California and Florida.
Sales of existing homes rose 6.5 percent from November's pace, the National
Association of Realtors said Monday.
New Home Sales Post
14.7 Pct Drop in December, NYT, 29.1.2009,
Oil Prices Fall
on Housing, Industry, Job Numbers
January 29, 2009
Filed at 11:21 a.m. ET
The New York Times
By THE ASSOCIATED PRESS
NEW YORK (AP) -- Oil prices dropped Thursday as layoffs
spread, orders for big-ticket manufactured goods evaporated and the U.S.
homebuilding industry posted its worst annual sales in more than two decades.
A worsening recession has cut severely into energy spending by businesses and
consumers, pushing prices near five year lows.
Light, sweet crude for March delivery fell $1.12 to $41.04 a barrel on the New
York Mercantile Exchange.
Oil traders are ''seeing a U.S. economic picture that shows no sign of getting
pleasant,'' said Tom Kloza, publisher and chief oil analyst at Oil Price
Information Service. ''The recession is deepening.''
The Commerce Department said orders to U.S. factories for big-ticket
manufactured goods fell for the fifth straight month in December.
The 5.7 percent drop for the year was the second largest in government records.
Manufacturers have cut hundreds of thousands of jobs and millions of jobs have
been lost across the entire economy since last year.
A record 4.78 million people claimed unemployment insurance for the week ending
Jan. 17, according to a new Labor Department report. A department analyst said
that as a proportion of the work force, the tally of unemployment recipients is
the highest since August 1983.
Sales of new homes plunged 14.7 percent in December to the slowest monthly pace
on record as the hobbled homebuilding industry posted its worst annual sales
results in more than two decades.
The Commerce Department said Thursday that new home sales fell in December to a
seasonally adjusted annual rate of 331,000, from a downwardly revised November
figure of 388,000.
The ailing economy has led to unprecedented declines in the energy consumption
habits on the consumer level. Billions fewer miles are being logged on the road.
Manufacturer are slashing production, cutting energy use, and people are flying
no where near as often as they have in recent years.
The mood is just as grim overseas, meaning that energy demand is falling
The International Monetary Fund predicted global economic growth will slow to
just 0.5 percent in 2009, down a sharp 1.7 percentage points from its November
prediction of 2.2 percent.
''The lower GDP growth will have a significant impact on global oil demand,''
JBC Energy said in its market report. ''We see global demand falling by as much
as 480,000 barrels a day.''
U.S. storage facilities are awash in surplus crude. Storage tanks in the United
States are housing more than 338.9 million barrels of crude oil, up from 15.7
percent from a year ago, according to the Energy Information Administration.
Natural gas storage levels in the U.S. dropped more than expected last week, but
remain slightly above year-ago levels and the five-year average, a government
report said Thursday.
The Energy Department's Energy Information Administration said in its weekly
report that natural gas inventories held in underground storage in the lower 48
states fell by 186 billion cubic feet to about 2.37 trillion cubic feet for the
week ended Jan. 23.
The U.S. House of Representatives' $819 billion plan passed Wednesday night aims
at spurring growth amid the worst recession in decades. The package, which
includes tax cuts for individuals and businesses, should create or save more
than 3 million jobs, President Barack Obama said after the vote. The Senate will
begin debate on the bill next week.
Meanwhile, the Organization of Petroleum Exporting Countries said it may slash
production again to siphon off expansive crude inventories around the world.
OPEC Secretary General Abdalla Salem El-Badri said Thursday at the World
Economic Forum in Davos, Switzerland that OPEC members will fulfill their pledge
to slash production by 4.2 million barrels a day by the end of January. He added
that global oil demand would pick up ''by the end of this year or beginning of
If needed, ''OPEC will not hesitate to take some quantity out of the market,''
Pledges of production cuts, however, have had little effect on oil prices, with
demand and not supply ruling the market.
Crude has plunged from a record $150 per barrel over the summer and has held
around $40 since the beginning of the year.
In other Nymex trading, gasoline futures rose 2.65 cents to $1.21 a gallon.
Heating oil dropped 1.2 cents to $1.4093 a gallon while natural gas for March
delivery rose 3 cents to $4.449 per 1,000 cubic feet.
In London, the March Brent contract rose 7 cents to $44.97 on the ICE Futures
Associated Press writers Jake Neubacher in Vienna and Alex Kennedy in Singapore
contributed to this report.
Oil Prices Fall on
Housing, Industry, Job Numbers, NYT, 29.1.2009,
Continental Posts Loss
as Fuel and Labor Costs Rise
January 30, 2009
The New York Times
By THE ASSOCIATED PRESS
Continental Airlines said Thursday that it lost $266 million
in the fourth quarter as the recession bit into traffic and fuel and labor costs
The airline lost $2.33 a share, compared with a loss of $32 million, or 33 cents
a share, in the period a year ago.
Excluding charges of $170 million, Continental’s loss would have been $96
million, or 84 cents a share. Analysts surveyed by Thomson Reuters expected a
loss of 89 cents a share.
Revenue slipped 1.5 percent to $3.47 billion, slightly below analysts’ forecast
of $3.49 billion.
Fuel and labor — Continental’s two biggest expenses — rose 4 percent and 5.1
Continental operations were hurt in December by bad weather at its hubs in
Houston, Newark, and Cleveland that caused flight delays and cancellations. The
company said it had improved its de-icing ability in Houston, which was hit by a
freak snow and freezing rain storm.
A Continental jet also skidded off the runway Dec. 20 at Denver International
Airport, leading to injuries but no deaths. The airline said it was cooperating
with the National Transportation Safety Board in finding the cause.
Continental cut capacity in the fall to save money on fuel. The reduction helped
when travel demand slumped.
Still, fourth-quarter traffic measured in miles flown by passengers fell 8.1
percent, a steeper drop than Continental’s 7.4 percent reduction in capacity. As
a result, flights on Continental and its regional carrier were slightly less
full than a year ago.
Higher fares and new fees pushed the company’s yield higher by 5.7 percent.
Yield — revenue divided by available seats times miles flown — is a closely
watched measure of revenue-making efficiency in the airline industry.
By region, passenger revenue rose on service to Europe and Latin America but
fell everywhere else, most notably a 6.9 percent decline in the United States.
Airlines caught a break from falling fuel prices during the second half of last
year. But their strategy for coping with fuel costs by locking in prices
backfired when oil prices slumped.
As it disclosed last week, Continental took a $125 million charge against
fourth-quarter earnings to cover losses on a fuel-hedging contract with a Lehman
Brothers unit that later filed for bankruptcy.
For all of 2008, Continental lost $585 million compared with a profit of $459
million in 2007. Revenue rose just over $1 billion, or 7.1 percent, to $15.24
billion, but that was swamped by a $1.9 billion increase in spending on fuel.
A rival airline, US Airways Group said that it lost $541 million in the fourth
quarter on a mix of sour fuel hedges and operating losses.
The airline lost $4.74 a share, compared with a loss of $79 million, or 87 cents
a share, in the period a year ago. Revenue was $2.76 billion, up 0.6 percent
from almost $2.78 billion in the fourth quarter of 2007.
Not counting special items such as $234 million in paper losses on fuel hedges,
US Airways says it would have lost $220 million, or $1.93 a share.
Analysts surveyed by Thomson Reuters, who generally exclude one-time charges,
were expecting a loss of $2.15 per share on revenue of $2.78 billion.
Loss as Fuel and Labor Costs Rise, NYT, 30.1.2009,
What Red Ink?
Wall Street Paid Hefty Bonuses
January 29, 2009
The New York Times
By BEN WHITE
By almost any measure, 2008 was a complete disaster for Wall
Street — except, that is, when the bonuses arrived.
Despite crippling losses, multibillion-dollar bailouts and the passing of some
of the most prominent names in the business, employees at financial companies in
New York, the now-diminished world capital of capital, collected an estimated
$18.4 billion in bonuses for the year.
That was the sixth-largest haul on record, according to a report released
Wednesday by the New York State comptroller.
While the payouts paled next to the riches of recent years, Wall Street workers
still took home about as much as they did in 2004, when the Dow Jones industrial
average was flying above 10,000, on its way to a record high.
Some bankers took home millions last year even as their employers lost billions.
The comptroller’s estimate, a closely watched guidepost of the annual
December-January bonus season, is based largely on personal income tax
collections. It excludes stock option awards that could push the figures even
The state comptroller, Thomas P. DiNapoli, said it was unclear if banks had used
taxpayer money for the bonuses, a possibility that strikes corporate governance
experts, and indeed many ordinary Americans, as outrageous. He urged the Obama
administration to examine the issue closely.
“The issue of transparency is a significant one, and there needs to be an
accounting about whether there was any taxpayer money used to pay bonuses or to
pay for corporate jets or dividends or anything else,” Mr. DiNapoli said in an
Granted, New York’s bankers and brokers are far poorer than they were in 2006,
when record deals, and the record profits they generated, ushered in an era of
Wall Street hyperwealth. All told, bonuses fell 44 percent last year, from $32.9
billion in 2007, the largest decline in dollar terms on record.
But the size of that downturn partly reflected the lofty heights to which
bonuses had soared during the bull market. At many banks, those payouts were
based on profits that turned out to be ephemeral. Throughout the financial
industry, years of earnings have vanished in the flames of the credit crisis.
According to Mr. DiNapoli, the brokerage units of New York financial companies
lost more than $35 billion in 2008, triple their losses in 2007. The pain is
unlikely to end there, and Wall Street is betting that the Obama administration
will move swiftly to buy some of banks’ troubled assets to encourage reluctant
banks to make loans.
Many corporate governance experts, investors and lawmakers question why
financial companies that have accepted taxpayer money paid any bonuses at all.
Financial industry executives argue that they need to pay their best workers
well in order to keep them, but with many banks cutting jobs, job options are
dwindling, even for stars.
Lucian A. Bebchuk, a professor at Harvard Law School and expert on executive
compensation, called the 2008 bonus figure “disconcerting.” Bonuses, he said,
are meant to reward good performance and retain employees. But Wall Street
disbursed billions despite staggering losses and a shrinking job market.
“This was neither the sixth-best year in terms of aggregate profits, nor was it
the sixth-most-difficult year in terms of retaining employees,” Professor
Echoing Mr. DiNapoli, Professor Bebchuk said he was concerned that banks might
be using taxpayer money to subsidize bonuses or dividends to stockholders. “What
the government has been trying to do is shore up capital, and any diversion of
capital out of banks, whether in the form of dividends or large payments to
employees, really undermines what we are trying to do,” he said.
Jesse M. Brill, a lawyer and expert on executive compensation, said government
bailout programs like the Troubled Asset Relief Program, or TARP, should be made
“We are all flying in the dark,” Mr. Brill said. “Companies can simply say they
are trying to do their best to comply with compensation limits without providing
any of the details that the public is entitled to.”
Bonuses paid by one troubled Wall Street firm, Merrill Lynch, have come under
particular scrutiny during the last week.
Andrew M. Cuomo, the New York attorney general, has issued subpoenas to John A.
Thain, Merrill’s former chief executive, and to an executive at Bank of America,
which recently acquired Merrill, asking for information about Merrill’s decision
to pay $4 billion to $5 billion in bonuses despite new, gaping losses that
forced Bank of America to seek a second financial lifeline from Washington.
A Treasury Department official said that in the coming weeks, the department
would take action to further ensure taxpayer money is not used to pay bonuses.
Even though Wall Street spent billions on bonuses, New York firms squeezed
rank-and-file executives harder than many companies in other fields. Outside the
financial industry, many corporate executives received fatter bonuses in 2008,
even as the economy lost 2.6 million jobs. According to data from Equilar, a
compensation research firm, the average performance-based bonuses for top
executives, other than the chief executive, at 132 companies with revenues of
more than $1 billion increased by 14 percent, to $265,594, in the 2008 fiscal
For New York State and New York City, however, the leaner times on Wall Street
will hurt, Mr. DiNapoli said.
Mr. DiNapoli said the average Wall Street bonus declined 36.7 percent, to
$112,000. That is smaller than the overall 44 percent decline because the money
was spread among a smaller pool following thousands of job losses.
The comptroller said the reduction in bonuses would cost New York State nearly
$1 billion in income tax revenue and cost New York City $275 million.
On Wall Street, where money is the ultimate measure, some employees apparently
feel slighted by their diminished bonuses. A poll of 900 financial industry
employees released on Wednesday by eFinancialCareers.com, a job search Web site,
found that while nearly eight out of 10 got bonuses, 46 percent thought they
Paul J. Sullivan contributed reporting.
What Red Ink? Wall
Street Paid Hefty Bonuses, NYT, 29.1.2009,
Components of Stimulus
Vary in Speed and Efficiency
January 29, 2009
The New York Times
By DAVID M. HERSZENHORN
WASHINGTON — At first, it will trickle into paychecks in
small, barely perceptible amounts: perhaps $12 or $13 a week for many American
workers, in the form of lower tax withholding.
For the growing ranks of the unemployed, it will be more noticeable: benefit
checks due to stop will keep coming, along with an extra $25 a week.
At the grocery store, a family of four on food stamps could find up to $79 more
a month on their government-issued debit card.
And far bigger sums will appear, courtesy of Washington, on budget ledgers in
state capitals nationwide: billions of dollars for health care, schools and
There is no doubt that the impact of the $819 billion economic stimulus package
advanced by President Obama and approved by the House on Wednesday will start to
be felt within weeks once the final version becomes law.
But estimating how effective the huge program of tax cuts and spending will be
in getting America’s economic engines humming again is a far more complex
calculation requiring almost line-by-line scrutiny of the 647-page bill,
lawmakers, economists and policy analysts say.
While it may be difficult to predict how well the overall plan will work, it is
easier to draw conclusions about its individual components, gauging them against
the basic goal of any stimulus: to promote economic activity and create jobs as
quickly and efficiently as possible.
Devising any economic stimulus plan is tricky: initiatives that can be carried
out relatively fast, like tax cuts, tend to provide less bang for the buck in
terms of generating jobs and economic growth, while initiatives likely to spur
more robust activity, like public works projects, can take so long to get under
way that they arrive too late.
The provisions intended to have the swiftest impact are the tax cuts, totaling
$275 billion, roughly a third of the package.
Republicans say the cuts are too small, some Democrats say they were ill
designed in a vain effort to appease House Republicans, and some economists say
both sides are right: that the plan should include more effective tax cuts and
more of them, and also address specific problems like the weak housing market.
Mr. Obama’s signature tax cut would provide a credit of up to $500 for
individuals and $1,000 for couples. It won praise in an analysis by the Tax
Policy Center, a nonpartisan research group, because it could be carried out
quickly, by reducing the amount of money withheld from paychecks.
But the same group also criticized it because it would help families earning as
much as $150,000 a year, who are more likely to save than spend. (Saving, or
paying off debt, might make sense for individual households, but what the
economy needs most is for people to spend money, helping stores to sell more,
factories to produce more and employers to avoid cutting additional jobs.)
Some experts say adjusting withholding rates could prove complicated, delaying
the money. But the White House says the plan would work even better than a
lump-sum rebate; some research suggests that rebate checks are more likely to be
saved than tax reductions spread out over a length of time.
Even some economists who generally support the stimulus think that the main tax
proposal would provide limited economic lift.
“People are going to spend 30, 40 cents on the dollar, so the multiplier is
going to be low,” said Adam S. Posen, deputy director of the Peterson Institute
of International Economics.
Aid to States
One area where analysts say the bill would be relatively effective is in
providing assistance to states, many of which, to comply with balanced-budget
requirements, are facing the prospect of steep cuts in jobs and services. Aid to
states does not expand economic activity, but it helps prevent cuts that would
make the downturn even worse.
An $87 billion provision increasing the federal contribution for Medicaid costs
is expected to go a long way to help states close their budget gaps.
But there has been little discussion so far on a proposal by the Senate
Republican leader, Mitch McConnell of Kentucky, that aid to states be provided
in the form of loans, encouraging them to spend the money wisely and, once the
economy rebounds, obligating them to help reduce the national debt.
The bill would also create a $79 billion state fiscal stabilization fund,
disbursing half the money in late 2009 and half in late 2010. The Congressional
Budget Office has estimated that little of that money would be spent this year.
The greatest prospect of delay in spending is on infrastructure. The bill
provides $30 billion for highway construction and tens of billions more for
other transportation projects, water projects, park renovation, military
construction, local housing projects and more.
A Congressional Budget Office analysis found that only 64 percent of the bill’s
spending would be completed within 19 months, and spending on construction
projects was among the slowest.
If the economic recovery is slow, that timing could work out perfectly, giving
the economy a jolt just when faster-acting components are wearing off. But if
there is a quicker-than-expected rebound, many of those projects could start
just in time to compete with renewed private spending.
Then there is the risk that the projects themselves have little or no long-term
economic value and simply drive up the budget deficit. Democrats bowed to
Republican pressure on Tuesday and stripped from the bill a $200 million
provision for National Mall restorations.
Education, Health Care
And Alternative Energy
A look at more than $140 billion in the bill’s spending on education finds some
that can move quickly — for instance, $13 billion each over two years for Title
I schools, which serve impoverished students, and for special education under
the Individuals With Disabilities Education Act.
But also included are programs that even under the most optimistic timetable
will take longer to complete, like $20 billion for school renovations. These
would provide little near-term help for the economy.
Similar scrutiny could be trained on health care and especially on alternative
energy programs. Like some of the education spending, a large chunk of health
care spending would not start until 2012 or later, when, most experts think, the
recession will be over.
Unemployment benefits and food stamps are such useful stimulus tools that budget
analysts refer to them as “automatic stabilizers.”
They are built into the system, allowing money to flow quickly to people who
need it and are likely to spend it.
The House bill would spend $20 billion over five years on added food stamps. If
the recovery legislation is adopted by mid-February, officials say, the first
added food stamps will be delivered in April and nearly all of that aid used
The legislation would also devote roughly $43 billion over two years to extend
and increase unemployment benefits. The provision would add as much as 33 weeks
of benefits, for states with the highest unemployment rates.
Stimulus Vary in Speed and Efficiency, NYT, 29.1.2009,
Bring Mini-Madoffs to Light
January 28, 2009
The New York Times
By LESLIE WAYNE
Their names lack the Dickensian flair of Bernie Madoff, and
the money they apparently stole from investors was a small fraction of the $50
billion that Mr. Madoff allegedly lost of his clients’ savings.
But the number of other people who have been caught running Ponzi schemes in
recent weeks is adding up quickly, so much so that they have earned themselves a
Some of these schemes have been operating for years, and others are of more
recent vintage. But what is causing them to surface now appears to be a
combination of a deteriorating economy and heightened skepticism about outsize
returns after the revelations about Mr. Madoff. That can scare off new clients
and cause longtime investors to demand their money back, which brings the
charade tumbling down.
“There is no way for a Ponzi to survive given the large number of redemptions
and a lack of new investors,” said Stephen J. Obie, the head of enforcement at
the Commodity Futures Trading Commission. The agency has experienced a doubling
of reported leads to possible Ponzi schemes in the last year, and its
enforcement caseload has risen this year.
On Monday, at a suburban New York train station, Nicholas Cosmo surrendered to
federal authorities in connection with a suspected $380 million Ponzi scheme, in
which investors paid a minimum of $20,000 for high-yield “private bridge” loans
that he had arranged.
Mr. Cosmo promised returns of 48 percent to 80 percent a year, and none of his
investors apparently minded — or knew — that Mr. Cosmo had already been
imprisoned for securities fraud. In the end, 1,500 people gave him their money,
often through brokers who worked on his behalf.
And in Florida, not far from the Palm Beach clubs where Mr. Madoff wooed some of
his investors, George L. Theodule, a Haitian immigrant and professed “man of
God,” promised churchgoers in a Haitian-American community that he could double
their money within 90 days.
He accepted only cash, and despite the too-good-to-be-true sales pitch, he found
plenty of investors willing to turn over tens of thousands of dollars.
“The offices were beautiful, and I was told it was a limited liability
corporation,” said Reggie Roseme, a deliveryman in Wellington, Fla., who lost
his entire savings of $35,000 and now faces foreclosure on his home.
According to federal regulators who have accused him of operating a Ponzi
scheme, Mr. Theodule bilked thousands of investors of modest means, like Mr.
Roseme, out of $23 million in all, and put $4 million in his own pocket. This
money helped pay for two luxury vehicles for Mr. Theodule, a wedding, a lavish
house in Georgia and a recent trip to Zurich that federal authorities are now
investigating. The fate of the other $19 million is still unknown.
Investors in Idaho say they lost $100 million in a scheme that promised 25
percent to 40 percent annual returns. In Philadelphia, a failed computer
salesman tried his hand at trading nonexistent futures contracts for 80
investors and surrendered to federal authorities this month after losing $50
A Ponzi scheme in Atlanta that promised investor returns of 20 percent every
month through something called “30-day currency trading contracts” was shut down
this month after losing $25 million. And Tuesday, Arthur Nadel, a prominent
money manager in Sarasota, Fla., and philanthropist turned himself in to the
authorities. He had disappeared this month, just days before the Securities and
Exchange Commission charged him in a $300 million investment fraud that may be a
Investors in many of the schemes were told that their money would go into
stocks, foreign currencies and other investments and earn above-average returns
— a deception backed up with what appeared to be legitimate monthly statements
and fancy offices. Now, Ponzi-related losses are adding up to hundreds of
millions of dollars.
The S.E.C. does not keep statistics on Ponzi fraud, but it has brought cases
involving losses of over $200 million since the beginning of October last year,
including one against the disgraced Democratic donor Norman Hsu. Mr. Hsu was
accused of using money from a $60 million Ponzi scheme to make campaign
donations to leading candidates, including President Obama and Secretary of
State Hillary Clinton. (Mr. Obama and Mrs. Clinton later donated the money to
Regulators, chastened by failing to uncover the Madoff scandal, are focusing
more on such swindles. The Commodity Futures Trading Commission, for instance,
has established a new Forex Enforcement Task Force to prosecute Ponzi cases in
which investors were told their money was being invested in foreign currencies.
In 2008, the agency prosecuted 15 Ponzi schemes and expects that number to
increase this year.
Last Thursday, Senators Charles E. Schumer, Democrat of New York, and Richard
Shelby, Republican of Alabama, who are both influential members of the Senate
Banking Committee, introduced legislation to provide $110 million to hire 500
new F.B.I. agents, 50 new assistant United States attorneys and 100 new S.E.C.
enforcement officials to crack down on such crimes.
“Ponzi schemes are against the law,” Mr. Schumer said in an interview. “But we
have not had enough law enforcement officials. Madoff should have been stopped.
Our proposal would not just provide more resources, but it would work like a
posse to go after this fraud.”
Lawsuits brought by bilked investors and federal regulators are piling up in
One case brought by the federal government against a North Carolina company
called Biltmore Financial describes an apparent $25 million fraud going back for
17 years that drew in more than 500 investors, many of whom were members of a
Lutheran community in that state.
For an investment of as little as $1,000, investors were told they were buying
packages of mortgages with 10 to 20 percent annual returns. In reality, the
money went to buy an Aston Martin convertible, a $1 million recreational vehicle
and vacation and rental properties for the head of the company, J. V. Huffman,
who was charged by the S.E.C. last November.
Last week, the S.E.C. charged James G. Ossie of Atlanta with taking $25 million
from 120 investors — who had to invest a minimum of $100,000 with him. Mr. Ossie
even held periodic conference calls describing his trading strategy, which
promised 10 percent monthly returns.
In the South Florida Haitian-American community, Mr. Theodule turned to
churches. But his scheme fell apart in November when 40 investors showed up at
Mr. Theodule’s office to try to get their money back.
“Theodule had been the king and lived in the community, and then one day he
vanished,” said Mr. Roseme, the investor who lost $35,000 in savings.
He described Mr. Theodule as “friendly, someone you could trust, a real positive
Nerline Horace-Manasse, a 31-year-old Haitian immigrant with six children, saw
her life’s savings of $25,000 disappear.
Statements showed her money had grown to $90,000, but when Ms. Manasse asked
questions of Mr. Theodule, “he advised he could not tell me where he was putting
the money because there were a lot of copycats out there and he’d go out of
Now Ms. Manasse and Mr. Roseme are part of a class-action suit against Mr.
Mr. Theodule’s attorney, Matthew N. Thibaut, did not return a call for comment.
But in court papers, Mr. Theodule said, “Theodule admits he has told persons
that he wants to help build wealth in the Haitian community.”
Lynnley Browning contributed reporting.
Troubled Times Bring Mini-Madoffs to Light,
A Stimulus With Merit,
and Misses Too
January 28, 2009
The New York Times
By DAVID LEONHARDT
How much of a difference will the stimulus make?
Two weeks ago, a Congressional committee posted a table of numbers on its Web
site that gave an early answer. The numbers came from the Congressional Budget
Office and seemed to show that only 38 percent of the money in the bill would be
spent by September 2010. That didn’t sound very stimulating, and the numbers
soon caused a minor media sensation.
But anyone who looked closely would have seen something strange about the table.
It suggested that the bill would cost only $355 billion in all, rather than its
actual cost of about $800 billion.
Why? It turns out that the table was analyzing only certain parts of the bill,
like new spending on highways, education and energy. It ignored the tax cuts,
jobless benefits and Medicaid payments — the very money that will be spent the
On Monday evening, the Congressional Budget Office put out its analysis of the
full bill, and it gave a very different picture. It estimated that about 64
percent of the money, or $526 billion, would be spent by next September.
That timetable may still be slower than ideal, and short of the 75 percent
benchmark President Obama has promised, but it isn’t terrible. Spending hundreds
of billions of dollars takes time. In fact, for all the criticism the stimulus
package has been getting, it does pretty well by several important yardsticks.
First of all, the package really is stimulus. It will quickly give money to the
people who have been hardest hit by the recession and who, not coincidentally,
will be most likely to spend that money soon. The spending also has a chance to
do some long-term good, by paying for the computerization of medical records,
the weatherization of homes and other such investments.
By my count, the current package has just one major flaw. It could do a lot more
to change how the government spends its money. It doesn’t have nearly the amount
of the fresh, reformist thinking as Mr. Obama’s campaign speeches and proposals
did. Instead, the bill is mostly a stew of spending on existing programs,
whatever their warts may be.
I understand that this approach reflects the realities of political
negotiations. It even has some economic merits: it may help speed the flow of
money out the door. But it still is a missed opportunity in a few instances.
The biggest is infrastructure. Transportation experts had hoped the package
would be the start of not only more spending on infrastructure but also smarter
spending on highways, mass transit, sewer systems and other public works. So
far, the experts are disappointed.
In the current system, the federal government sends money to states without any
real effort to evaluate whether it will pay for worthy projects. States rarely
do serious analyses of their own. They build new roads before fixing old ones.
They don’t consider whether those new roads will lead to faster traffic or
simply more traffic. They spend millions of dollars on legislators’ pet projects
and hulking new sports stadiums. In the world of infrastructure, cost-benefit
analysis is still a science of the future.
A couple of weeks ago, Ed Rendell, the Democratic governor of Pennsylvania, came
to Washington to talk up infrastructure. He is a member of a tripartisan
threesome — along with Michael Bloomberg, New York’s independent mayor, and
Arnold Schwarzenegger, California’s Republican governor — trying to persuade the
country to get serious about infrastructure.
In his talk, Mr. Rendell said he understood that the stimulus bill couldn’t come
close to solving all these problems. But it could make some progress, and Mr.
Obama’s sky-high approval ratings gave him a wonderful chance to do so. “This is
the time to put down some markers — this is the time,” Mr. Rendell said.
And the bill does include a couple of markers. It will list on the Web the
projects that the federal government is financing — an idea that, amazingly
enough, is considered radical — and will require that mayors and governors sign
off on projects. That will make it harder for them to lobby for projects now and
criticize those same projects later, as Gov. Sarah Palin did with the Bridge to
Nowhere. At least one version of the bill also sets aside $5.5 billion to be
awarded by the transportation secretary, supposedly on the merits of a project.
But it’s not clear how that will work, and there is so much more that could be
done. The bill could create a small-scale version of an “infrastructure bank,” a
free-standing entity that could make more merit-based decisions than Congress
does (an idea that Mr. Obama supports). The bill could also finance the creation
of new state offices to conduct cost-benefit analyses. It could also help cover
the budget shortfalls of public transit systems, instead of simply allocating
another $30 billion for the construction of new highways.
Fifty-one transit systems have recently proposed service cuts or fare increases,
including those in Atlanta, Denver, New York, Phoenix, St. Louis, San Diego and
Washington. If these cuts go through, they will make it harder for people to get
to work (or look for work), and they will undermine one of the long-term goals
of the stimulus package: laying the groundwork for a greener economy.
It’s not just infrastructure, either. The bill includes big, admirable increases
in college financial aid — but appears likely to do little to use those
increases to improve higher education. The package will also sprinkle millions
of dollars on some debatable projects, like the renovation of the National Mall.
The standard that I’m setting here may seem a bit high. Even with its current
flaws, the bill has much to recommend it. It will indeed try to encourage
significant changes in health care and K-12 education, for example.
The bill is certainly superior to a huge package of tax cuts, which might be
politically popular but end up in people’s bank accounts rather than stimulating
the economy. By now, we should know that tax cuts are not a cure-all. The cuts
of 2001 and 2003 couldn’t keep the recent expansion from being one of the
weakest on record or the current recession from being so deep.
This bill should help the economy in both the near term and the long term. But
the government doesn’t go out and spend about $800 billion every day. The
A Stimulus With
Merit, and Misses Too, NYT, 28.1.2009,
43,000 Jobs Are Eliminated
in Latest Wave of Layoffs
January 27, 2009
The New York Times
By JACK HEALY
It was a bleak start to the workweek for thousands of American
Several corporations said Monday morning that they would cut a total of 43,000
jobs in an attempt to slash costs to survive a recession that has taken a toll
on new orders, profits and companies’ outlooks for growth.
The cuts announced Monday included 20,000 jobs at the heavy-equipment
manufacturer Caterpillar; 8,000 at the wireless provider Sprint Nextel, and
7,000 at Home Depot and 8,000 from the expected merger of the pharmaceutical
makers Pfizer and Wyeth. Some smaller layoffs were also announced.
President Obama cited the layoff announcements in remarks Monday morning urging
Congress to approve an $825 billion economic stimulus package of tax cuts,
emergency benefits and public spending projects.
“These are not just numbers on a page,” Mr. Obama said. “As with the millions of
jobs lost in 2008, these are working men and women whose families have been
disrupted and whose dreams have been put on hold. We owe it to each of them and
to every single American to act with a sense of urgency and common purpose. We
can’t afford distractions and we cannot afford delays.”
Monday’s announcements were only the latest in a grim parade of job cuts from
employers from Wall Street to wireless providers to computer companies to retail
The United States economy has shed some 2.59 million jobs since the recession
began in December 2007, and unemployment rose to 7.2 percent last month.
Economists worry that the economy could now be shedding as many as 600,000 jobs
a month, and they said Monday’s layoff announcements served to underline the
stricken state of the labor market. Last week, the government reported that
first-time unemployment claims had risen to 589,000 for the week ending Jan. 17,
tying an all-time high set in December.
“This is a big deal,” said Dean Baker, a director of the Center for Economic and
Policy Research. “We’re losing jobs at an incredibly rapid rate, and even with
that, I’m worried they’re accelerating. We’re seeing a much more rapid rate of
Caterpillar, which has been hurt by falling orders for construction and mining
machinery, said Monday morning that it would cull 20,000 workers through layoffs
and buyouts. It said it would make “sharp declines” in overtime and eliminate
scores of temporary and contract jobs.
The company said 2009 would be one of its weakest years since World War II.
“These are very uncertain times,” the chief executive, James W. Owens,, said in
a statement. “While it’s painful for our employees and suppliers, it’s
absolutely necessary given economic circumstances. We expect to have most of the
actions needed to lower employment and cost levels in place by the end of the
“We were whipsawed in the fourth quarter as key industries were hit by a rapidly
deteriorating global economy and plunging commodity prices,” Mr. Owens said.
The wireless provider Sprint Nextel said its 8,000 job cuts were part of a plan
to trim labor costs by $1.2 billion, and said most of the cuts would be
completed by March 31. About 850 of the job cuts are expected to come through
buyouts, which will cost the company $300 million in severance costs and related
“Labor reductions are always the most difficult action to take, but many
companies are finding it necessary in this environment," Sprint’s chief
executive, Daniel R. Hesse, said.
Home Depot, the country’s largest home-supply chain, said it would cut 7,000
jobs, about 2 percent of its work force, and close its high-end EXPO home design
43,000 Jobs Are
Eliminated in Latest Wave of Layoffs, NYT, 27.1.2009,
Caterpillar Moves to Cut 20,000 Jobs
January 27, 2009
The New York Times
The heavy equipment maker, Caterpillar, announced layoffs on
Monday and warned of a tough year ahead as a downturn that began in the United
States metastasized into a full-blown global recession, gutting orders for its
The world’s largest maker of construction and mining machines, which also
reported lower-than expected fourth-quarter earnings, said on Monday it was
laying off 17,000 workers, and buying out 2,500 others, to reduce costs in the
face of what it predicted would be the weakest year for business since the end
of WWII. The company said earlier that it was offering employees incentives to
leave voluntarily, the company said.
The company cut its outlook for 2009 and seemed to raise the possibility that it
would report a loss in the current quarter.
The news sent Caterpillar shares skidding 8 percent in premarket trading,
pulling the broader market lower.
In a statement, the chief executive, James W. Owens, said Caterpillar had been
“whipsawed” by a rapidly deteriorating global economy and plunging commodity
He said the company had responded by encouraging dealers to align their
inventory levels with falling volume and “they responded with significant order
cancellations, particularly in December.”
The layoffs and buyouts, which will hit one in every 10 of the company’s regular
workers and idle 8,000 contract workers, represent the biggest wave of job cuts
at Caterpillar since the early 1980s, when the company was losing about $1
million a day.
In addition, the company said it was freezing salaries of most employees and
significantly reducing the total compensation of executives and senior managers.
“It’s just a very pessimistic outlook in terms of the world economy,” said Tim
Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills,
N.Y.. “Clearly the building of global infrastructure has come to a grinding
The company reported a fourth-quarter profit of $661 million, or $1.08 a share,
compared with $975 million, or $1.50 a share, last year.
Sales rose 6 percent to $12.92 billion.
The company attributed the drop in profitability to significantly higher
operating costs in its manufacturing operations as capacity utilization plunged.
It also said a sharp decline in profit in its captive finance unit contributed
to the poor showing.
Analysts, on average, expected the company to report a profit of $1.28 a share
on sales of $11.97 billion.
After shrugging off the downturn in the housing market that sparked the
worldwide crisis, Caterpillar and other makers of bulldozers, dump trucks and
excavators have suddenly faced a world of challenges, including a drop in
spending by their well-heeled energy and mining customers.
Caterpillar Moves to
Cut 20,000 Jobs, NYT, 27.1.2009,
Plans to Cut 8,000 Jobs in Quarter
January 27, 2009
The New York Times
By THE ASSOCIATED PRESS
KANSAS CITY, Mo. — The Sprint Nextel Corporation, the wireless
provider, said Monday that it would eliminate about 8,000 jobs, or about 14
percent of its work force, in the first quarter as it seeks to cut annual costs
by $1.2 billion.
The company said Monday it will complete the layoffs largely by March 31. About
850 of the reductions are voluntary and the company said it expected a charge of
more than $300 million for severance and other costs.
The company is also suspending its 401(k) match for the year, extending a freeze
on salary increases and is suspending a tuition reimbursement program.
Sprint Nextel, based in Overland Park, Kan., has struggled since acquiring
Nextel Communications in 2005 as technical problems, poor efforts to consolidate
the two companies and stiff competition for feature-rich phones has led many
subscribers to switch to competing services.
A rival, AT&T, said last month that it would cut 12,000 jobs, or about 4 percent
of its staff.
Sprint Nextel Plans
to Cut 8,000 Jobs in Quarter, NYT, 27.1.2009,
See More Job Cuts Ahead
January 26, 2009
Filed at 11:52 a.m. ET
The New York Times
By THE ASSOCIATED PRESS
WASHINGTON (AP) -- It's already been a lousy year for workers
less than a month into 2009 and there's no relief in sight. Tens of thousands of
fresh layoffs were announced Monday and more companies are expected to cut
payrolls in the months ahead.
A new survey by the National Association for Business Economics depicts the
worst business conditions in the U.S. since the report's inception in 1982.
Thirty-nine percent of NABE's forecasters predicted job reductions through
attrition or ''significant'' layoffs over the next six months, up from 32
percent in the previous survey in October. Around 45 percent in the current
survey anticipated no change in hiring plans, while roughly 17 percent thought
hiring would increase.
The recession, which started in December 2007, and is expected to stretch into
this year, has been a job killer. The economy lost 2.6 million jobs last year,
the most since 1945. The unemployment rate jumped to 7.2 percent in December,
the highest in 16 years, and is expected to keep climbing.
''Job losses accelerated in the fourth quarter, and the employment outlook for
the next six months has weakened further,'' said Sara Johnson, NABE's lead
analyst on the survey and an economist at IHS Global Insight.
Thousands more jobs cuts were announced Monday. Pharmaceutical giant Pfizer
Inc., which is buying rival drugmaker Wyeth in a $68 billion deal, and Sprint
Nextel Corp., the country's third-largest wireless provider, said they each will
slash 8,000 jobs. Home Depot Inc., the biggest home improvement retailer in the
U.S., will get rid of 7,000 jobs, and General Motors Corp. said it will cut
2,000 jobs at plants in Michigan and Ohio due to slow sales.
Caterpillar Inc., the world's largest maker of mining and construction
equipment, announced 5,000 new layoffs on top of several earlier actions. The
latest cuts of support and management employees will be made globally by the end
of March. An additional 2,500 workers already have accepted buyout offers, and
ties have been severed with about 8,000 contract workers worldwide. In addition,
about 4,000 full-time factory workers already have been let go.
Just last week, Microsoft Corp. said it will slash up to 5,000 jobs over the
next 18 months. Intel Corp. said it will cut up to 6,000 manufacturing jobs and
United Airlines parent UAL Corp. said it would get rid of 1,000 jobs, on top of
1,500 axed late last year.
The NABE survey of 105 forecasters was taken Dec. 17 through Jan. 8.
Also in the survey, 52 percent said they expected gross domestic product to fall
by more than 1 percent this year. GDP measures the value of all goods and
services produced within the U.S. and is the best barometer of the country's
economic fitness. The last time GDP fell for a full year was in 1991, a tiny 0.2
percent dip. The economy shrank by 1.9 percent in 1982, when the country was
suffering through a severe recession.
Forecasters have grown more pessimistic about the outlook. In the October
survey, no forecaster thought GDP would fall by more than 1 percent.
In terms of business conditions, more reported customer demand dropping, capital
spending reductions and shrinking profit margins.
Peoria, Ill.-based Caterpillar also reported Monday that its fourth-quarter
profit plunged 32 percent. The company expects sharply lower results this year
as global economic problems cut into its business.
Altogether the NABE report ''depicts the worst business conditions since the
survey began in 1982, confirming that the U.S. recession deepened in the fourth
quarter of 2008,'' Johnson said.
Many analysts predict the economy will have contracted at a pace of 5.4 percent
in the fourth quarter when the government releases that report on Friday. If
they are correct, that would mark the worst performance since a 6.4 percent drop
in the first quarter of 1982. The economy is still contracting now -- at a pace
of around 4 percent, according to some projections.
See More Job Cuts Ahead, NYT, 26.1.2009,
Gets a New, Serious Look
January 26, 2009
The New York Times
By DAVID E. SANGER
WASHINGTON — Only five days into the Obama presidency, members
of the new administration and Democratic leaders in Congress are already dancing
around one of the most politically delicate questions about the financial
bailout: Is the president prepared to nationalize a huge swath of the nation’s
Privately, most members of the Obama economic team concede that the rapid
deterioration of the country’s biggest banks, notably Bank of America and
Citigroup, is bound to require far larger investments of taxpayer money, atop
the more than $300 billion of taxpayer money already poured into those two
financial institutions and hundreds of others.
But if hundreds of billions of dollars of new investment is needed to shore up
those banks, and perhaps their competitors, what do taxpayers get in return? And
how do the risks escalate as government’s role expands from a few bailouts to
control over a vast portion of the financial sector of the world’s largest
The Obama administration is making only glancing references to those questions.
In an interview Sunday on “This Week” on ABC, the House speaker, Nancy Pelosi,
alluded to internal debate when she was asked whether nationalization, or
partial nationalization, of the largest banks was a good idea.
“Well, whatever you want to call it,” said Ms. Pelosi, Democrat of California.
“If we are strengthening them, then the American people should get some of the
upside of that strengthening. Some people call that nationalization.
“I’m not talking about total ownership,” she quickly cautioned — stopping
herself by posing a question: “Would we have ever thought we would see the day
when we’d be using that terminology? ‘Nationalization of the banks?’ ”
So far, President Obama’s top aides have steered clear of the word entirely, and
they are still actively discussing other alternatives, including creating a “bad
bank” that would nationalize the worst nonperforming loans by taking them off
the hands of financial institutions without actually taking ownership of the
banks. Others talk of de facto nationalization, in which the government owns a
sizeable chunk of the banks but not a majority, with all that connotes.
That has already happened; taxpayers are now the biggest shareholders in Bank of
America, with about 6 percent of the stock, and in Citigroup, with 7.8 percent.
But the government’s influence is far larger than those numbers suggest, because
it has guaranteed to absorb the losses of some of the two banks’ most toxic
assets, a figure that could run into the hundreds of billions of dollars.
Many believe this form of hybrid ownership — part government, part private, with
the responsibilities of ownership unclear — will not prove workable.
“The case for full nationalization is far stronger now than it was a few months
ago,” said Adam S. Posen, the deputy director of the Peterson Institute for
International Economics. “If you don’t own the majority, you don’t get to fire
the management, to wipe out the shareholders, to declare that you are just going
to take the losses and start over. It’s the mistake the Japanese made in the
“I would guess that sometime in the next few weeks, President Obama and Tim
Geithner,” he said, referring to the nominee for Treasury secretary, “will have
to come out and say, ‘It’s much worse than we thought,’ and just bite the
So far the Obama administration has signaled that it is trying to avoid that
day, and members of its economic team — among them Mr. Geithner and the
president’s top economic adviser, Lawrence H. Summers — made the case during the
Asian financial crisis in the 1990s that governments make lousy bank managers.
Indeed, the risks of nationalization they warned about then apply equally to the
United States now. The first is that nationalization can prove contagious. If
the Obama administration took over Bank of America and Citigroup, two of the
largest banks in the United States, private investors could decide to flee from
the likes of JPMorgan Chase and Wells Fargo, or other major banks, fearing they
could be next.
Moreover, Mr. Obama’s advisers say they are acutely aware that if the government
is perceived as running the banks, the administration would come under enormous
political pressure to halt foreclosures or lend money to ailing projects in
cities or states with powerful constituencies, which could imperil the effort to
steer the banks away from the cliff.
“The nightmare scenarios are endless,” one of the administration’s senior
The argument in favor of nationalization, even a brief nationalization of a few
months or years, is straightforward: It might be the only way to pull America’s
largest financial institutions out of the downward spiral that makes it
enormously difficult to raise the capital they need to keep operating.
Right now, many banks are reluctant to write off their bad debts, and absorb
huge losses, unless they can first raise enough capital to cushion the blow. But
they cannot attract that capital without first purging their balance sheets of
the toxic assets. Japan’s experience proved the dangers of that downward swirl;
the economy stagnated, new lending ground to a halt and the country’s diplomatic
clout shrank with its balance sheets.
Nationalization could pull the banks out of that dive, at least temporarily, as
the government injected capital, hired new managers and ordered a restart to
lending. But some Republicans who bit their tongues when President George W.
Bush ordered huge interventions in the market would charge that Mr. Obama was
steering America toward socialism.
Nationalization, said Charles Geisst, a financial historian at Manhattan College
“is just not a term in the American vocabulary.”
“We think of it,” he continued, “as something foreigners do to us, not something
It is also something foreigners do to themselves: the British have recently
taken a majority stake in the Royal Bank of Scotland.
Some of Mr. Obama’s advisers have asked who the government would get to run the
banks. Many of the most experienced executives are tainted by the decisions they
made during the age of excess. And how would the government attract the best
talent if it demanded that they take minimal pay — a political reality in the
Another option is for the government to buy the banks’ most toxic assets either
through a giant fund, or, more likely, a federally supported bad bank designed
to buy up troubled investments. But in that case, taxpayers might well be the
losers: They would have all of the banks’ worst assets and none of their
performing loans. And unless a deal is worked out to take a larger share of the
banks whose bad loans are shuffled off to the government, the taxpayers would
not have the chance to benefit by selling the shares back to private investors.
Moreover, cleaning up the banks’ bad assets, without extracting a heavy price
for the bank managers, shareholders and their lenders, is exactly what Mr.
Summers and Mr. Geithner warned against during the Asian financial crisis.
“We told the Asians that they had to be willing to let banks and companies
fail,” said Jeffrey Garten, a professor at the Yale School of Management and a
top official in the Clinton administration. “We warned that there was great
moral hazard if governments just bailed them out.”
“And now,” he said, “we are doing the polar opposite of our advice.”
Eric Dash contributed reporting from New York.
a New, Serious Look, NYT, 26.1.2009,
Over Judges Redoing Mortgages
January 25, 2009
Filed at 9:59 a.m. ET
The New York Times
By THE ASSOCIATED PRESS
WASHINGTON (AP) -- Most congressional Democrats say the
quickest way to save homeowners like Troy Butler of Saginaw, Mich., is to let
them declare bankruptcy and allow judges to dictate new mortgage terms.
Easy, except the lenders that would absorb the pain -- and lose control of any
deals to ease the terms -- do not want to get dragged into bankruptcy court by
millions of overextended borrowers.
Butler, 40, is a laid-off General Motors worker who has filed for bankruptcy.
But the bankruptcy court has no authority to change the terms of his
$90,000-plus mortgage that is more than double the value of his home.
A bill to give judges authority to alter loan terms for primary residences may
be the quickest way to arrest the housing market's collapse. Most Democrats in
the House and Senate support that plan. President Barack Obama told Democratic
leaders Friday he also backs it, according to a Senate aide who was not
authorized to be quoted by name.
But 10 groups representing the lending industry and other businesses are
fighting back fiercely. Several have engaged portions of their lobbying machines
to stop the legislation. The groups spent $83 million in lobbying on multiple
issues in 2008, a figure that shows the power of the banking and investing
industry and their business supporters.
One Democratic backer of the bankruptcy proposal, Rep. Maxine Waters of
California, said the banking industry ''has owned this Congress far too long.''
Butler, the GM worker, and an industry lobbyist see things much differently.
''I'm living from day to day, hoping to make it through the day. I worry about
my family, where we're going to live, how we'll survive,'' said, Butler, who has
a disabled wife and two children, ages 15 and 11.
The chief lobbyist for the Mortgage Bankers Association, Steve O'Connor, said
new homebuyers would end up paying higher interest and bigger down payments if
lenders are saddled with the risk that a judge could change mortgage terms.
''We're going to defend the industry'' against ''bad public policy,'' O'Connor
The association's 23-member government affairs team is trying to persuade
lawmakers to kill the bankruptcy legislation. The team includes six lobbyists
and nine policy experts who double as lobbyists, said O'Connor, senior vice
president of government affairs.
The bankruptcy solution would not cost taxpayers money, as would mortgage
modification programs that could become part of the government's huge economic
bailout package. But it certainly would harm the bottom line for lenders and
investors holding mortgages.
The lending industry has voluntary programs in place to change mortgage terms.
But Butler's lawyer, Peter Bagley, said it was a nightmare trying to contact his
First, he was told the application for a loan modification would take at least
30 days to process. Bagley then called someone with authority to stop any sale
of the home, but only received voice messages that the mailbox was full. The
application never arrived.
The key to passage of the bankruptcy bill is the Senate, where Democrats need 60
votes to stop a possible filibuster. Ten Democrats -- all still in the Senate --
would not back the plan in a vote a year ago.
Sen. Dick Durbin, D-Ill., the chief Senate sponsor of the bill, said Obama
persuaded him in a White House meeting Friday to remove the bankruptcy proposal
from an economic recovery package -- to ensure it doesn't jeopardize the
stimulus bill. But Obama pledged his support for the bankruptcy solution, Durbin
Obama said he would work with Durbin to attach the proposal to other ''must
pass'' legislation -- with the hope that supporters of the overall bill would
not vote against it because of the bankruptcy provisions.
Of the 10 organizations that asked the House Judiciary Committee to oppose the
bill, the largest is the U.S. Chamber of Commerce. It spent $57.9 million on
lobbying in 2008, according to the Center For Responsive Politics, an
organization that tracks lobbying expenditures and political donations.
The Mortgage Bankers Association, which represents 2,400 member companies in the
real estate property industry, spent $3.8 million and the American Bankers
Association totaled $6.8 million.
Fight Building Over
Judges Redoing Mortgages, NYT, 25.1.2009,
For Growing Ranks
of the White-Collar Jobless,
a Touch of the Spur
January 25, 2009
The New York Times
By MICHAEL LUO
HOFFMAN ESTATES, Ill. — The meeting could have been at any
number of corporations across the country. Everyone present sat at tables around
an LCD projector with their laptops open.
But the setting was a church conference room, not a board room, and the
spreadsheets under discussion focused not on work but the lack of it. They
documented how many hours each person had devoted the previous week to looking
for a job.
“Total hours I spent last week was 68,” said Bob Roeder, 51, one of the group’s
co-leaders, going over his report on a recent Monday. “Number of letters sent
out was four. Total number of network contacts was 12.”
This was the weekly meeting of a job search “accountability” group, organized by
the Executive Network Group of Greater Chicago, an organization for executives
Membership in various networking organizations across the country for unemployed
executives and other professionals has ballooned in recent months, leaders of
several say, as the recession has continued its march, sparing not even the
highly educated and skilled.
And job search support groups like this one have become quasi families for
people like Mr. Roeder, who was laid off nearly two years ago from his job
earning almost six figures as an area sales manager for Electronic Data Systems.
Providing a spur as well as solace, the groups offer glimpses in miniature at
the travails of a swath of individuals in this recession whose lives had once
seemed, if not charmed, at least quite comfortable as they carved out places in
the middle and upper-middle class.
“A job loss in America is, psychologically, a real big hit,” said Cathy-Ann
Romero, 53, another co-leader, who lost her job as a human resources manager 10
Ms. Romero, who holds two master’s degrees, recently applied for a part-time job
as a packer on the overnight shift at an online grocery store to help make ends
The Monday morning meetings at a church in this Chicago suburb, she said, help
the members realize, “We’re not in it alone.”
Indeed, white-collar unemployment rose to 4.6 percent in December, up from 3
percent the year before. The figures still pale in comparison to the 11.3
percent unemployment rate for blue-collar workers. But Lawrence Mishel,
president of the liberal Economic Policy Institute, said white-collar
unemployment rose faster in the past year than in any other recession dating to
at least the 1970s, even the devastating downturn of the early 1980s.
Moreover, white-collar workers also tend to form a disproportionate share of the
long-term unemployed — those who have been out of work six months or longer.
In the Chicago group, which has been meeting since April 2008, seven of nine
members have been out of steady work for six months or longer; the other two are
approaching the six-month mark.
Several in the group are now considering part-time “survival jobs.” Many are
wrestling with whether, or how much, to draw down on their retirement accounts.
Holding onto health insurance, with its high cost without an employer, has been
a constant worry.
Mr. Roeder, who has two young children, took a part-time job this winter plowing
snow for his township to pay the bills. He was initially depressed at what he
considered the indignity, but then he discovered that several others in his crew
were unemployed professionals just like him.
He jumped actively into his job search last February but said he had gotten
fewer than 10 interviews in two years, despite averaging nearly 40 hours a week
looking for work.
“I’m not getting any face time, and that is extremely frustrating,” Mr. Roeder
With his family’s savings rapidly dwindling, he drove seven hours to Troy,
Mich., last weekend in a snowstorm for a job fair organized by BAE Systems, a
military contractor, standing in line for two-and-a-half hours to get an
“You can never turn down a job possibility in this economy,” he said.
Gregarious by nature, Mr. Roeder enjoys leading the group through its paces,
enabling him to function, albeit briefly, in a corporate environment again. And
he said he took special pleasure in compiling the members’ weekly reports, which
are due to him every Sunday.
“I feel like I’m working again,” he said.
Jim Moorman, who arranged for the group to meet at his church, lost his job 16
months ago as a senior engineer at Motorola, where he was making more than
$100,000 a year, after working there for 33 years.
After months of scrambling, Mr. Moorman missed his first mortgage payment last
“I have some alternatives,” said Mr. Moorman, who is also fretting about how to
pay for a daughter going to college next year. “But they’re not ideal ones.”
He said he had struggled to get interviews and wondered at the recent meeting
whether he was spending too much time applying to jobs online.
“I’m not doing something right yet,” he said later.
Nevertheless, the group’s sessions are intentionally businesslike and upbeat.
Griping and self-pity are discouraged. Meetings begin with members reporting two
highlights from their job search — even if they are hard to name — as well as
two activities they did besides looking for work.
Mr. Roeder said he “plowed snow for 15 hours on Saturday and slept afterwards.”
Tom Nolan, 54, who lost his job earning six figures as a chief financial officer
of a midsize manufacturing company six months ago, reported seeing the movie
“Slumdog Millionaire” with his wife.
But the urgency of their situations inevitably intrudes. Ms. Romero told others
in the group that “reality is checking in” and that she needed cash, so she had
applied for the part-time work.
The problem, she said, is that she was one of some 300 people applying for 15
jobs on the graveyard shift. So group members brainstormed ways she could gain
The group meets on Mondays to provide structure for the week. Members’ days are
filled with a revolving door of networking meetings, applications and chasing
down the all-important but elusive hiring “decision-maker” at their target
The stress has taken its toll on not just the members but also their families.
Ms. Romero’s husband, Joseph, who is retired from his job as a public works
supervisor, began seeing a psychiatrist for depression.
In an unheated workshop in the couple’s basement, Mr. Romero has been lighting
candles to the Virgin of Guadalupe, in front of a crucifix draped over one of
his son’s amplifiers.
“I heard she does miracles to a lot of people,” he said. “I figure she can give
us the miracle of Cathy finding a job.”
For Jack Elliott, 58, who was laid off nine months ago from a six-figure job as
director of franchise operations for Merlin 200,000 Mile Shops, a Chicago-area
automotive maintenance chain, this is his third job search.
“Nowadays, you work someplace, you work there three years,” Mr. Elliott said.
“Not only is this my third time, there will be a fourth time, more than likely.”
Many in the group are dialing back their expectations, conceding they will most
likely have to take a pay cut, or accept a step down in responsibilities. But
Matt Zimmerman, 28, who was laid off five months ago as director of new business
development for a home décor company and is the group’s most aggressive
networker, assured a new member at the meeting that this group was “beating the
Two former members of the group found jobs over the summer. And some have had
success getting interviews. But it is not lost on members that no one in the
group has landed a job since Lehman Brothers collapsed in September. Promising
leads suddenly dried up. And their lives remain stuck.
For Growing Ranks of
the White-Collar Jobless, Support With a Touch of the Spur, NYT, 25.12009,
David G. Klein
Six Errors on the Path to the Financial Crisis
on the Path to the Financial Crisis
January 25, 2009
The New York Times
By ALAN S. BLINDER
WHAT’S a nice economy like ours doing in a place like this? As
the country descends into what is likely to be its worst postwar recession,
Americans are distressed, bewildered and asking serious questions: Didn’t we
learn how to avoid such catastrophes decades ago? Has American-style capitalism
failed us so badly that it needs a radical overhaul?
The answers, I believe, are yes and no. Our capitalist system did not condemn us
to this fate. Instead, it was largely a series of avoidable — yes, avoidable —
human errors. Recognizing and understanding these errors will help us fix the
system so that it doesn’t malfunction so badly again. And we can do so without
ending capitalism as we know it.
My list of errors has six whoppers, in chronologically order. I omit mistakes
that became clear only in hindsight, limiting myself to those where prominent
voices advocated a different course at the time. Had these six choices been
different, I believe the inevitable bursting of the housing bubble would have
caused far less harm.
WILD DERIVATIVES In 1998, when Brooksley E. Born, then chairwoman of the
Commodity Futures Trading Commission, sought to extend its regulatory reach into
the derivatives world, top officials of the Treasury Department, the Federal
Reserve and the Securities and Exchange Commission squelched the idea. While her
specific plan may not have been ideal, does anyone doubt that the financial
turmoil would have been less severe if derivatives trading had acquired a
zookeeper a decade ago?
SKY-HIGH LEVERAGE The second error came in 2004, when the S.E.C. let securities
firms raise their leverage sharply. Before then, leverage of 12 to 1 was
typical; afterward, it shot up to more like 33 to 1. What were the S.E.C. and
the heads of the firms thinking? Remember, under 33-to-1 leverage, a mere 3
percent decline in asset values wipes out a company. Had leverage stayed at 12
to 1, these firms wouldn’t have grown as big or been as fragile.
A SUBPRIME SURGE The next error came in stages, from 2004 to 2007, as subprime
lending grew from a small corner of the mortgage market into a large, dangerous
one. Lending standards fell disgracefully, and dubious transactions became
Why wasn’t this insanity stopped? There are two answers, and each holds a
lesson. One is that bank regulators were asleep at the switch. Entranced by
laissez faire-y tales, they ignored warnings from those like Edward M. Gramlich,
then a Fed governor, who saw the problem brewing years before the fall.
The other answer is that many of the worst subprime mortgages originated outside
the banking system, beyond the reach of any federal regulator. That regulatory
hole needs to be plugged.
FIDDLING ON FORECLOSURES The government’s continuing failure to do anything
large and serious to limit foreclosures is tragic. The broad contours of the
foreclosure tsunami were clear more than a year ago — and people like
Representative Barney Frank, Democrat of Massachusetts, and Sheila C. Bair,
chairwoman of the Federal Deposit Insurance Corporation, were sounding alarms.
Yet the Treasury and Congress fiddled while homes burned. Why? Free-market
ideology, denial and an unwillingness to commit taxpayer funds all played roles.
Sadly, the problem should now be much smaller than it is.
LETTING LEHMAN GO The next whopper came in September, when Lehman Brothers,
unlike Bear Stearns before it, was allowed to fail. Perhaps it was a case of
misjudgment by officials who deemed Lehman neither too big nor too entangled —
with other financial institutions — to fail. Or perhaps they wanted to make an
offering to the moral-hazard gods. Regardless, everything fell apart after
People in the market often say they can make money under any set of rules, as
long as they know what they are. Coming just six months after Bear’s rescue, the
Lehman decision tossed the presumed rule book out the window. If Bear was too
big to fail, how could Lehman, at twice its size, not be? If Bear was too
entangled to fail, why was Lehman not?
After Lehman went over the cliff, no financial institution seemed safe. So
lending froze, and the economy sank like a stone. It was a colossal error, and
many people said so at the time.
TARP’S DETOUR The final major error is mismanagement of the Troubled Asset
Relief Program, the $700 billion bailout fund. As I wrote here last month,
decisions of Henry M. Paulson Jr., the former Treasury secretary, about using
the TARP’s first $350 billion were an inconsistent mess. Instead of pursuing the
TARP’s intended purposes, he used most of the funds to inject capital into banks
— which he did poorly.
To illustrate what might have been, consider Fed programs to buy commercial
paper and mortgage-backed securities. These facilities do roughly what TARP was
supposed to do: buy troubled assets. And they have breathed some life into those
moribund markets. The lesson for the new Treasury secretary is clear: use TARP
money to buy troubled assets and to mitigate foreclosures.
Six fateful decisions — all made the wrong way. Imagine what the world would be
like now if the housing bubble burst but those six things were different: if
derivatives were traded on organized exchanges, if leverage were far lower, if
subprime lending were smaller and done responsibly, if strong actions to limit
foreclosures were taken right away, if Lehman were not allowed to fail, and if
the TARP funds were used as directed.
All of this was possible. And if history had gone that way, I believe that the
financial world and the economy would look far less grim than they do today.
For this litany of errors, many people in authority owe millions of Americans an
apology. Richard A. Clarke, former national security adviser, set a good example
when he told the commission investigating the 9/11 attacks that he wanted
victims’ families “to know why we failed and what I think we need to do to
ensure that nothing like that ever happens again.” I’m waiting for similar words
from our financial leaders, both public and private.
Alan S. Blinder is a professor of economics and public affairs at Princeton and
former vice chairman of the Federal Reserve. He has advised many Democratic
Six Errors on the
Path to the Financial Crisis, NYT, 25.1.2009,
Spur a Flight to Jobs Viewed as Safe
January 25, 2009
The New Yoirk Times
By LOUIS UCHITELLE
After years of struggling to get their wages up, the nation’s
workers are trying to find jobs that will simply last, at least through the deep
Fearing layoffs, investment bankers at a Merrill Lynch or a Morgan Stanley are
joining small Wall Street firms for less pay but with signed employment
guarantees. Academics are migrating to community colleges, which are adding
teachers as enrollment rises. And in Eastern Wisconsin, workers furloughed from
a paper mill they fear will not reopen are training as truck drivers and
“Looking online and in newspapers and talking to my instructors, I’ve decided
that trucking and welding stand out as jobs that are available and will continue
to be available, and a lot of my friends agree,” said Dan Geneen, who has picked
up a truck-driving certificate and is learning welding since he was let go by
the paper mill last fall.
Trucker and welder are hardly glamorous careers to most Americans. But there is
a new allure developing around jobs likely to keep a person employed, at
reasonable pay, through a prolonged downturn. Government employment once offered
that promise, certainly in the Great Depression. But government hiring is less
than robust now, at 181,000 additions over the last year, mostly at the state
and local level. That is far from offsetting the 2.5 million jobs lost in the 13
months of recession.
With his economic recovery package now before Congress, President Obama promises
to generate thousands of steady jobs, some of them in government. Until those
positions appear in abundance, however, the hunt for safe work is occurring
mainly in the private sector — and the hunting is not easy.
“The companies doing the least hiring right now are very often the companies
that offer the safest jobs,” said Susan Houseman, a senior economist and labor
expert at the Upjohn Institute, a research group in Michigan.
With employers shedding half a million jobs a month, some economists, like Nancy
Folbre of the University of Massachusetts in Amherst, liken safe jobs to high
ground amid the turbulent flood waters of lost employment.
“There is a danger in using the term ‘safe jobs’ for this perch,” Ms. Folbre
said. “That makes them sound like sinecures, and they are not.”
Such is certainly the case on Wall Street. The flow to the smaller boutique
firms often involves top people at big but shaky investment banks. Fearful they
will be laid off, they move on before the ax falls, said Cheryl Solit, a partner
at Solit Tessler & Company, a placement firm in Short Hills, N.J., that helps
such executives make the switch to jobs with less initial compensation but more
security, although in these hard times, not that much more.
“The no-layoff clauses in the contracts they sign are usually for one or two
years,” she said, “and usually in the form of guaranteed compensation. The new
employer is not likely to lay you off when he has to pay you anyway.”
Community colleges are turning out to be a similar mecca as enrollment rises
because of the recession. Laid-off workers are flocking to the schools to
retrain for other occupations, and young people are enrolling in greater numbers
to avoid the higher tuitions of a four-year college, said James Jacobs,
president of Macomb Community College in Warren, Mich.
At 41,000 students, Macomb’s enrollment is up 10 percent from last year, Mr.
Jacobs said. With the recession driving enrollment, he is adding to his staff of
220 full-time teachers and 750 adjuncts. Most of the new hires are adjuncts,
though the courses they teach there and at another community college often add
up to full-time work.
Since enrollment is rising, they are assured of work semester after semester,
Mr. Jacobs said. The annual pay is $40,000 or less — usually less — and no
benefits. Still, they are coming back.
“If you spent six or seven years and hundreds of thousands of dollars getting a
graduate degree and you end up doing this, that is not a happy thought,” Mr.
Jacobs said. “But it is steady work.”
That is precisely what Mr. Geneen, the displaced paper mill worker, seeks from
his course work at Fox Valley Technical College in Appleton, Wis., where he
earned a truck driver’s certificate in December and is now learning to be a
He was laid off in September as an operator of a coating machine when the
NewPage paper company in Kimberly, Wis., shut — a victim of plunging demand. Mr.
Geneen, 47, had worked at the mill since high school. He says he is not even
trying to match the $60,000, with overtime, he earned at NewPage.
Steady work, even in a recession, is his current goal, which makes him reluctant
to exercise his recall rights even if NewPage reopens. “I don’t want to have the
same thing happen to me again five years from now, when I’m older,” he said.
Taking advantage of a federal subsidy to train for what he considers a safer
occupation, he completed a 10-week course to become a commercial truck driver.
Even though truck shipments are off sharply and drivers’ employment has fallen,
Mr. Geneen sees a need for truck drivers, in good times and bad. So do 34 others
who were laid off at NewPage and took the same course.
“Two of my classmates just this week applied at a trucking company advertising
for tractor-trailer drivers,” Mr. Geneen said. “They were hired on the spot and
told to report for work on Feb. 1. They didn’t even meet with the personnel
Mr. Geneen says he plans to drive a truck, preferably within Wisconsin. But with
his wife, Kathy, earning $40,000 a year as a certified public accountant and
with enough severance from his mill job to help carry the family for a while,
Mr. Geneen has enrolled in a yearlong course to qualify as a welder. It is
another occupation chronically short of qualified people, even in a recession.
At $40,000 a year or so, welders’ work would not match his old pay but would
provide a backup plan for the future.
“I want options that will hold up in a failing economy,” he said.
As the recession deepens, the only industry in the private sector adding jobs in
significant numbers is health care, according to data from the Bureau of Labor
Statistics, and it is doing so across the board, from physician to bed pan
Government used to be a refuge, particularly postal work and public school
teaching. But the post office has been shrinking its payroll for several years.
Public school employment — mainly kindergarten through high school — rose
through August to nearly 8.1 million jobs, but it has fallen each month since as
declining tax revenue forces cutbacks.
Those cutbacks rarely apply to math and science teachers, who are often in short
supply. “Teaching math in a high school in an affluent suburb,” said Tom
Geoghegan, a labor lawyer in Chicago and a Democratic candidate for Congress,
“that is my idea of the ultimate safe job.”
Bad Times Spur a
Flight to Jobs Viewed as Safe, NYT, 25.1.2009,
Britain Is Officially in a Recession
January 24, 2009
The New York Times
By MATTHEW SALTMARSH
Britain officially entered a recession in the fourth quarter,
data released Friday indicated, while other reports from Europe demonstrated the
still feeble economy across region.
British gross domestic product fell 1.5 percent from the third quarter and was
down 1.8 percent on a year earlier, the Office for National Statistics said in a
preliminary estimate. Economists had predicted a 1.2 percent drop for the
The numbers confirmed what economists and consumers have known for some time:
that the economy is in a recession.
The conventional definition of a recession is for two consecutive quarterly
declines in the growth rate. The rate fell by 0.6 percent in the third quarter.
For all of 2008, growth domestic product rose 0.7 percent, the lowest rate since
1992, when it rose 0.1 percent. The increased rate of decline in output was the
result of weaker services and industrial output; all sectors except agriculture
contracted in the quarter.
The release is likely to add to the case for the central bank to enact
unconventional measures to restore inter-bank lending and bolster consumer
confidence, analysts said.
The report “adds some extra weight to the already compelling case for the Bank
of England bringing rates down to near zero and shifting to unconventional
policy measures with some considerable degree of alacrity,” a strategist at RBC
Capital Markets in London, Richard McGuire, said.
Alistair Darling, the chancellor of the Exchequer, told Sky News after the
release that the figure was “undoubtedly sharper than many people believed,
partly because you’ve seen industrial production go down because the export
markets have been badly affected.”
European shares fell after the report from Britain and other data from the
Continent, as investors continued to worry about the heath of the financial
sector. the FTSE in London was down 1.3 percent in early afternoon trading.
Prime Minister Gordon Brown of Britain announced a new bailout for the British
financial system earlier in the week that increases the government’s control
over lenders, saying it would offer banks insurance on troubled assets and take
other measures to restore credit and support the foundering economy. The
government also revised the terms of its bailout of Royal Bank of Scotland,
raising its stake in the bank to 70 percent from 58 percent.
Governments in Belgium, France, Germany, Spain and the Netherlands have also
announced new steps recently to bolster the capital of their lenders.
In Madrid, the government released gloomy economy data Friday. The National
Statistics Institute said the jobless rate there increased to 13.9 percent from
11.3 percent in the third quarter. The number of unemployed workers in Spain
rose by over 1.2 million in 2008 to end the year at 3.2 million, the highest
number since the first quarter of 1998.
There was, however, a slightly more positive note from a survey of purchasing
managers on euro-zone services and manufacturing activity. A composite index of
both industries was at 38.5 in January from 38.2 in December, which was the
lowest reading since the survey began in 1998.
Economists had forecast a decline to 37.4, according to a Bloomberg survey.
The index is based on a survey of purchasing managers by Markit Economics and a
reading below 50 indicates contraction.
“It’s important not to get carried away,” the Italian bank Unicredit said of the
data in a research note. It added the data suggested merely that the first
quarter “will probably be a bit less negative” than the fourth quarter.
It added that the recession is “bound to last at least through mid-year,” and
with the headline inflation rate heading toward zero, the case for further
interest rate cuts by the European Central Bank, probably in March and again in
June, remains strong.
There was also a more positive note from the British retail sector on Friday.
The statistics office said sales volumes between December 2007 and December 2008
grew by 1.8 percent, based on non-seasonally adjusted data.
The office noted, however, that difficulties relating to a cut value-added tax,
aggressive discounting and a longer than usual trading period challenge a
meaningful interpretation of the data on a seasonally adjusted basis.
Final G.D.P. figures in Britain will be released in late February.
Britain Is Officially
in a Recession, NYT, 24.1.2009,
As Bank Crisis Deepens,
Obama Has No Quick Fix
January 21, 2009
The New York Times
By EDMUND L. ANDREWS
WASHINGTON —Even before they have settled into their new jobs, President
Obama’s economic team faces an acute crisis in the nation’s banking system that
has no easy answers and that they are not yet prepared to address.
The president’s advisers watched most banking shares fall sharply on Tuesday,
reinforcing what Obama officials have known for weeks: that their most urgent
financial problem is an immense new wave of losses at banks and other lending
institutions that threatens to further cripple their ability to resume normal
But when Timothy F. Geithner, the president’s nominee to be the Treasury
secretary, appears before the Senate Finance Committee on Wednesday for his
confirmation hearing, he is not expected to have a detailed plan ready.
While Mr. Obama’s top advisers view the black hole in bank balance sheets as one
of their most pressing problems, they cautioned that they would not be pressured
into announcing a plan before they had carefully thought through all the
options. Instead, they are scrutinizing an array of solutions, each of which has
pitfalls and poses its own risks and dangers.
Obama officials are almost certain to intertwine help to the banks with Mr.
Obama’s goal of providing up to $100 billion for reducing home foreclosures. The
two goals are not necessarily in conflict. Subsidizing loan modifications so
that people can keep their homes could relieve banks of the steep losses
associated with foreclosures and also prevent further erosions in bank asset
values by putting a floor under home prices. “Mortgages are still the underlying
problem, and I really think we need to address that problem head-on,” said
Christopher Mayer, vice dean at the Columbia University School of Business. “The
foreclosure stuff is just trying not to have even bigger losses in mortgages
than we have so far.”
Administration officials said they were determined not to repeat the mistakes of
former President George W. Bush’s Treasury secretary, Henry M. Paulson Jr., who
sold Congress on an elaborate strategy for shoring up banks and then shifted to
an entirely different approach before he even got started.
Industry analysts said the Obama administration’s challenge would be to help
banks get rid of severely devalued mortgage assets on their balance sheets —
from nonperforming subprime mortgages to pools of mortgages and derivatives —
without wasting taxpayer money or rewarding banks for bad practices.
If policy makers were even remotely honest, analysts said, they would force
banks to take huge write-downs and insist on a high price in return for taking
bailout money. For practical purposes, that could mean nationalization or
partial nationalization for many banks.
One main difference between the options under consideration is how transparent
the government would be about the ultimate costs to taxpayers and whether banks
would be required to reveal the true magnitude of their likely losses.
The ultimate taxpayer cost could be very high. A new analysis from the
Congressional Budget Office suggests that the taxpayer costs are highest when
the government’s asset purchases involve opaque transactions that are difficult
When Mr. Paulson first pleaded with Congress to approve the $700 billion bailout
program, known officially as the Troubled Asset Relief Program, he argued that
the government might eventually recoup its entire investment because it would be
able to resell its holdings when financial markets recovered.
But the Congressional Budget Office, analyzing the program’s $247 billion in
bailout payments through December, estimated that taxpayers would end up
absorbing $64 billion or 26 percent of that bill.
The nonpartisan Congressional agency estimated that taxpayers had already lost
53 percent of the government’s $40 billion investment in American International
Group, the giant insurance company that had been insuring tens of billions of
dollars in junk mortgage-backed securities against default. As part of the
rescue, the government helped A.I.G. buy back billions in mortgage securities
that it had insured.
As the new Obama economic team pondered a new approach, one alternative, though
an unlikely one, would be to revive Mr. Paulson’s original idea of buying
troubled assets through an auction process. The potential virtue of auctions is
that they could get closer to establishing a true market value for the assets.
But the drawback is that many of the securities are so arcane and complex that
they are unlikely to generate the volume of bidding needed to establish a real
A second approach, which Mr. Paulson had already used in a second round of
bailouts for Citigroup and Bank of America, is to “ring-fence” the bad assets by
providing federal guarantees against losses, and separating the assets from the
rest of a bank’s balance sheet.
The virtue of that approach is that it costs relatively little money up front,
because the government is essentially providing insurance coverage.
The danger is that the potential cost to taxpayers of federal guarantees can be
even less transparent than other approaches. As a result, the final costs to
taxpayers could be huge. Indeed, the guarantees would put the government in the
same business that led to immense losses from mortgage-backed securities:
In its recent report, the Congressional Budget Office estimated the $20 billion
that the Treasury spent in November to guarantee $306 billion of toxic assets by
Citigroup will cost taxpayers $5 billion — a 26 percent subsidy.
William Seidman, a former chairman of the Federal Deposit Insurance Corporation
who was closely involved with the bailout of savings-and-loan institutions in
the 1990s, said the government should simply take control of the banks it tries
to rescue. “When we did things like this, we took the banks over,” Mr. Seidman.
“This is a huge, undeserved gift to the present shareholders.”
One big difference between today and the 1990s is that the government back then
was seizing entire failed institutions. On paper, at least, the banks in trouble
today are still viable.
That leaves the third and increasingly talked-about approach — have the
government buy up the toxic assets and put them into a government-financed “bad
bank” or an “aggregator bank.”
The immediate virtue of the bad bank is that the remaining “good bank” would
have a clean balance sheet, unburdened by the uncertainty of future losses from
bad loans and securities.
Richard Berner, chief economist at Morgan Stanley, described the “bad bank”
strategy as the “least bad” of available options. The main advantage, Mr. Berner
said, was that the government would have to decide how much it was willing to
pay for the toxic assets. In turn, that would make it easier for the public to
figure out whether the government was overpaying.
Banks may not want that kind of openness, because accurately valuing the toxic
assets could force many to book big losses, admit their insolvency and shut
Stephen Labaton contributed reporting.
As Bank Crisis Deepens,
Obama Has No Quick Fix, NYT, 21.1.2009,
on Builders With Perfect Records
January 20, 2009
The New York Times
By JOHN COLLINS RUDOLF
TEMPE, Ariz. — Dave Brown, one of this city’s best-known home
builders, had kept his head above water through the housing downturn, not
missing a single interest payment on his loans.
So he was confounded a few months back when one of his banks, spooked by the
decline in his company’s revenue, suddenly demanded millions of dollars in
additional collateral to continue carrying loans on his projects.
He was unable to come up with the money, and in October, JPMorgan Chase
foreclosed on five of his developments. Shortly thereafter, Brown Family
Communities, 33 years in the business, decided to shut its doors.
“They treated me like a deadbeat who missed his car payment,” said an embittered
Mr. Brown, 76. “They wanted their money now.”
After riding high on one of the greatest housing booms in American history, the
nation’s home builders today face a devastating reversal of fortune.
Although the housing crisis is nearly two years old, many banks had refrained
from cracking down on small home builders.
They are starting to do so, and a wide swath of the industry could be forced out
of business in the next few years. The trouble is concentrated especially in the
Sun Belt, the scene of so much overbuilding.
Not only have new-home sales stagnated, but builders confront a rising wave of
foreclosed properties coming to market at prices below the cost of building a
new home. To move houses, they have to mark them down to less than the cost of
The convergence of these problems is bringing many small and medium-size
builders — who account for about 70 percent of new-home construction in the
United States — to their knees.
“The reality is, we’re seeing conditions in home construction and home finance
that are the worst since the Depression,” said Steve Fritts, associate director
of risk management policy at the Federal Deposit Insurance Corporation, the
government agency that insures bank deposits.
Life has been difficult for large publicly traded home-building companies as
well, where stock prices have collapsed and construction sharply cut back. Yet
for now, many of the public companies can meet their obligations.
“They’re better capitalized and they have cash on hand,” said Ivy Zelman, a
housing analyst. “They’re in a much better position than the private builders.”
No hard count exists of precisely how many builders have gone out of business
since the downturn began. According to an estimate by the National Association
of Home Builders, at least 20,000 builders — about a fifth of the total
nationwide — have closed up shop in the last two years.
With the industry still owing hundreds of billions of dollars in loans made at
the market peak, many more face insolvency in the coming months and years.
“Probably north of 50 percent will fail,” Ms. Zelman said.
Much of that borrowed money went to finance land deals that now appear to have
been catastrophic miscalculations. In cities like Phoenix, where housing starts
are near record lows, demand for undeveloped land has plummeted, and prices have
As defaults and delinquencies rise, home builders, once prized banking
customers, have become pariahs. Even builders who are up to date on their
interest payments or still managing to sell houses are getting trampled, as in
the case of Mr. Brown.
“They’re not distinguishing the track records of one borrower against another,”
said John Fioramonti, a real estate consultant in Scottsdale, Ariz. “If you’re a
builder, you are a bad risk.”
With the pullback accelerating, complaints among builders of hardball tactics
and shoddy treatment by banks are mounting, as is a general sense of betrayal.
“The behavior of the banks is unprecedented,” said Mick Pattinson, a home
builder from Carlsbad, Calif. who has organized a national coalition of builders
to draw attention to what they regard as unreasonable treatment. “Yes, there was
overleveraging in the industry. But the aftermath doesn’t need to have been as
brutal as it has been.”
Some experts defend the banks, saying they are starting to do what is necessary
to come to grips with the turmoil in real estate. For months, they have been
under pressure from federal bank regulators and their own shareholders to
curtail lending to a faltering industry.
“The lenders are not operating irrationally or unfairly, generally speaking,”
Mr. Fritts said. “They have to protect themselves.”
Access to credit is essential to builders, who rely heavily on borrowed money to
finance land acquisitions and home construction.
More than 15 percent of loans for single-family home construction were in some
form of default by September 2008, up from 10 percent in January of that year,
according to figures from Foresight Analytics, a housing analysis firm. Still,
until recently, banks had largely chosen to keep past-due borrowers afloat, in
the hope that a housing recovery might pave the way for them to repay their
debts in full.
Only now, with the economic outlook darkening, are lenders stepping up
foreclosures of troubled loans. Zelman & Associates, a housing analysis firm,
estimates that losses on land and construction loans could eventually reach $165
billion, one reason federal regulators are pushing banks to come to grips with
“When we talk to regulators now, they say they’ve lost patience,” said Ms.
Zelman, who is chief executive of Zelman & Associates.
In this climate, keeping loan payments up to date — something many builders are
struggling mightily to do — is not necessarily any protection.
Many loans in the building industry are of short duration, coming up for renewal
at least once a year. This allows banks to take a fresh look at the financial
health of a borrower, as well as the assets securing their debt. A steep fall in
cash flow or a decline in the value of the collateral — usually building lots or
half-built houses — can mean an automatic default, whether a borrower has missed
payments or not.
It was a combination of these factors that put an end to Mr. Brown’s
home-building company, Brown Family Communities.
In 2005 and 2006, with loans from JPMorgan Chase and the big finance company
GMAC, Brown Family Communities bought hundreds of acres of land on the far
outskirts of Phoenix, in towns like Goodyear and Buckeye, where development was
rapidly transforming cotton and alfalfa fields into malls and upscale
The company was emerging from a record year in 2005, selling an average of 85
homes a month and booking revenues of $352 million.
Each succeeding year brought a decline in sales, and by 2008, the company was on
pace to sell fewer than 300 homes. A glut of foreclosures on the market drove
down prices, forcing Mr. Brown’s company to discount homes by as much as
In early 2008, GMAC, citing the depreciating worth of assets the company had
used as collateral, shut off construction loans for two subdivisions under
development. Though Brown Family Communities had yet to miss a payment,
renegotiating the debt proved impossible, and GMAC — struggling with huge
problems of its own because of the global credit crisis — foreclosed on the
“They were in chaos,” Mr. Brown said of GMAC. “We couldn’t even get them on the
In late July, JPMorgan Chase followed suit, freezing construction loans on five
subdivisions it had financed. Again, a workout proved elusive. And this time,
when the bank foreclosed, it delivered a fatal blow to Brown Family Communities.
Neither JPMorgan Chase nor GMAC would comment on their banking relationship with
Mr. Brown’s company. “We have been and continue to work with our clients to find
the best solution to manage risk for them and for us,” said Mary Jane Rogers, a
spokeswoman for JPMorgan Chase.
In one otherwise finished subdivision, a half-dozen of Mr. Brown’s partially
built homes stand amid weeds, their wooden frames slowly bleaching in the desert
sun. In another, chain-link fences surround houses that appear only days from
Buyers were lined up for several of the homes before the bank halted
construction, Mr. Brown said. But they are long gone.
“Now you talk about good business sense — the bank wouldn’t allow us to finish
them,” he said. “Did the bank get millions less than if they had handled it
With thousands of small and midsize builders facing similar circumstances, the
outlook for the industry is dire. “The downturn that we’re experiencing right
now is so unprecedented that there’s really no business model that works,” said
Joel Shine, a real estate investor.
Some builders are now demanding federal relief. They want a tax credit of up to
$22,000 for new-home purchases and they want the government to buy down interest
rates on new mortgages, to 3 to 4 percent.
Some analysts, however, believe such a bailout would artificially re-inflate
home prices and encourage further building in a saturated market. “What is the
public good for that?” asked Thomas Lawler, a housing analyst and former vice
president for risk analysis at Fannie Mae.
Meantime, new construction has collapsed, sending workers in search of
employment. Brown Family Communities had a full-time staff of 160 at its peak,
not including the thousands of subcontractors at work on hundreds of home sites.
Now, only a handful of employees are left.
Mr. Brown found it excruciating to fire the people who had helped him build his
“They’d come in and say goodbye and we’d have a good cry and then they’d go on
their way,” Mr. Brown said. “There’s nothing out there for them. The real estate
Banks Foreclose on
Builders With Perfect Records, NYT, 20.1.2009,
For the Jobless,
Hope and Fear for a New Day
January 20, 2009
The New York Times
By PETER S. GOODMAN
COLUMBIA, S.C. — Joe Lewis came to the local employment office on Friday in
the hope of buying a little more time.
Four months had passed since he lost his job as a maintenance worker at a chain
of convenience stores, trading a paycheck of $370 a week for an unemployment
check of $180 a week. With those benefits about to expire, Mr. Lewis arrived to
fill out the paperwork for an extension, weary and uncertain about the future.
A new president is about to take responsibility for the American economy — the
first black president, which has a particular resonance for Mr. Lewis, 52, an
African-American. That Barack Obama is promising to devote hundreds of billions
of dollars toward creating jobs is interesting, too. Yet none of this gave Mr.
“I haven’t seen the change,” Mr. Lewis said. “Until he does something, he’s just
like all the rest of them to me. He ain’t done nothing for me. Everybody’s
Mr. Lewis’s job search has amounted to an in-depth tour of shrinking prospects
in one of the worst economic downturns since the Depression. He has applied at
warehouses, at a moving company, at a concrete plant. So far, nothing. The next
stop: a poultry slaughterhouse on the outskirts of Columbia.
Variations on his story echoed through the employment office in downtown
Columbia, whose economic experience traces the national trajectory of the last
decade more than any other metropolitan area. The people who passed through on
this recent morning provided a snapshot of the extraordinary economic challenges
inherited by the new president, as well as the mixture of hope and skepticism
that greets his arrival.
Hope, because Mr. Obama represents a distinct break from the past, armed with a
mandate to unleash government largess toward putting millions of people back to
work. Skepticism, because Washington seems a long way from where most Americans
live, geographically and figuratively. At the employment office, sounds of
frustration created the running soundtrack. “This is the issue ...” “I never got
the call.” “The store has closed ...” “I just need this paper signed, showing
that I been here.”
A lot of people have been here. In December, 23,029 people passed through here
to arrange job training, seek a new job or arrange unemployment benefits, said
Keith Lucas, area director of the Midlands Workforce center, the official name
for the place. That was far more than the 13,698 who came in the final month of
Nationally, some 2.6 million jobs have disappeared since December 2007, when the
recession began. Last week, 524,000 more Americans filed for unemployment
benefits, amid forecasts that the number could spike as high as 750,000 by late
The economy that Mr. Obama is supposed to somehow fix is gripped by fear and the
deepening realization that, for many people, recovery will be an exercise in
making do with less than they had before.
A year ago, people let go by area factories that had paid as much as $18 and $20
an hour generally balked at the idea of retraining for a job installing heating
and air-conditioning gear at half that pay. Now, those training programs are
“There was a lot of resistance before,” said Abby Linden, who oversees such
programs. “People now seem to expect that they’re going to have to start over.”
Mr. Obama’s inauguration is like a palpable marker of a new beginning for many,
an inarguable sign of change, she said. “There’s a lot of excitement and hope,”
Ms. Linden said. “People have a lot of faith in him, and faith that he’s going
to be able to turn it around.”
And yet, out in the lobby, where dozens of people sat quietly in plastic-backed
chairs arrayed across the linoleum floor, waiting to apply for unemployment
benefits, weariness and resignation carried as much weight as faith and hope.
“It’s got to be better, it can’t be worse,” said Charles English, 62, who lost
his job at an asphalt plant two years ago and has not worked since, living on
the good graces of his grown son. “Just to listen to Obama talk and see those
kids of his, it just makes you stand up and feel proud.”
But the talk of big spending on public works projects to generate jobs seemed to
exclude him. “I ain’t able to go out and get this construction work,” he said.
“I’m too old for that. So what happens to me?”
As John Arnette sat beneath the pale glow of the fluorescent lights, waiting to
inquire why his check had suddenly stopped, he worried that Mr. Obama was
promising to spend money the country did not really have, adding to long-term
“You’ve got all the money that’s been given to the financial sector, plus all
the money that’s going to the Big Three auto companies,” he said. “Where’s the
money going to come from?”
It was the same question being asked with increasing frequency in his own
household: Despite his college degree, Mr. Arnette, 36, has been out of work
since May, when he lost his job as a midlevel manager at a convenience store
Looking for work has been a humiliating process of discovery. Fresh college
graduates are working as waiters or stocking the shelves at Lowe’s, the home
improvement store. Management positions there seem increasingly filled by people
with graduate degrees.
His wife still works, at a Verizon Wireless call center, but their household
income has dropped from $150,000 a year to about $65,000.
“I’m blessed that my wife has a good job,” Mr. Arnette said. “Without that, I’d
For the Jobless, Hope
and Fear for a New Day, NYT, 20.1.2009,
More Joining American Military
as Jobs Dwindle
January 19, 2009
The New York Times
By LIZETTE ALVAREZ
As the number of jobs across the nation dwindles, more Americans are joining
the military, lured by a steady paycheck, benefits and training.
The last fiscal year was a banner one for the military, with all active-duty and
reserve forces meeting or exceeding their recruitment goals for the first time
since 2004, the year that violence in Iraq intensified drastically, Pentagon
And the trend seems to be accelerating. The Army exceeded its targets each month
for October, November and December — the first quarter of the new fiscal year —
bringing in 21,443 new soldiers on active duty and in the reserves. December
figures were released last week.
Recruiters also report that more people are inquiring about joining the
military, a trend that could further bolster the ranks. Of the four armed
services, the Army has faced the toughest recruiting challenge in recent years
because of high casualty rates in Iraq and long deployments overseas.
Recruitment is also strong for the Army National Guard, according to Pentagon
figures. The Guard tends to draw older people.
“When the economy slackens and unemployment rises and jobs become more scarce in
civilian society, recruiting is less challenging,” said Curtis Gilroy, the
director of accession policy for the Department of Defense.
Still, the economy alone does not account for the military’s success in
attracting more recruits. The recent decline in violence in Iraq has “also had a
positive effect,” Dr. Gilroy said.
Another lure is the new G. I. Bill, which will significantly expand education
benefits. Beginning this August, service members who spend at least three years
on active duty can attend any public college at government expense or apply the
payment toward tuition at a private university. No data exist yet, but there has
traditionally been a strong link between increased education benefits and new
The Army and Marine Corps have also added more recruiters to offices around the
country in the past few years, increased bonuses and capitalized on an expensive
The Army has managed to meet its goals each year since 2006, but not without
As casualties in Iraq mounted, the Army began luring new soldiers by increasing
signing bonuses for recruits and accepting a greater number of people who had
medical and criminal histories, who scored low on entrance exams and who failed
to graduate from high school.
The recession has provided a jolt for the Army, which hopes to decrease its
roster of less qualified applicants in the coming year. It also has helped ease
the job of recruiters who face one of the most stressful assignments in the
military. Recruiters must typically talk to 150 people before finding one person
who meets military qualifications and is interested in enlisting. Dr. Gilroy
said the term “all-volunteer force” should really be “an all-recruited force.”
Now, at least, the pool has widened. Recruiting offices are reporting a jump in
the number of young men and women inquiring about joining the service in the
past three months.
As a rule, when unemployment rates climb so do military enlistments. In
November, the Army recruited 5,605 active-duty soldiers, 6 percent more than its
target, and the Army Reserve signed up 3,270 soldiers, 16 percent more than its
goal. December, when the jobless rate reached 7.2 percent, saw similar increases
“They are saying, ‘There are no jobs, no one is hiring,’ or if someone is hiring
they are not getting enough hours to support their families or themselves,” said
Sgt. First Class Phillip Lee, 41, the senior recruiter in the Army office in
The Bridgeport recruitment center is not exactly a hotbed for enlistments. But
Sergeant Lee said it had signed up more than a dozen people since October, which
is above average.
He said he had been struck by the number of unemployed construction workers and
older potential recruits — people in their 30s and beyond — who had contacted
him to explore the possibility. The Army age limit is 42, which was raised from
35 in 2006 to draw more applicants.
“Some are past the age limit, and they come in and say, ‘Will the military take
me now?’ ” Sergeant Lee said. “They are having trouble finding well-paying
Of the high school graduates, a few told him recently that they had to scratch
college plans because they could not get students loans or financial aid. The
new G. I. bill is an especially attractive incentive for that group.
The Army Reserve and the National Guard have also received a boost from people
eager to supplement their falling incomes.
Sean D. O’Neil, a 22-year-old who stood shivering outside an Army recruitment
office in St. Louis, said he was forgoing plans to become a guitar maker for
now, realizing that instruments are seen as a luxury during a recession. Mr.
O’Neil, a Texas native, ventured to St. Louis for an apprenticeship but found
himself $30,000 in debt. Joining the Army, his Plan B, was a purely financial
decision. With President-elect Barack Obama in office, he expects the troop
levels in Iraq to be lowered.
Going to war, although likely, feels safer to him. “I’m doing this for eight
years,” he said. “Hopefully, when I get out, I’ll have all my fingers and toes
and arms, and the economy will have turned around, and I’ll have a little egg to
start up my own guitar line.”
Ryen Trexler, 21, saw the recession barreling toward him as he was fixing truck
tires for Allegheny Trucks in Altoona, Pa. By last summer, his workload had
dropped from fixing 10 to 15 tires a day to mending two to four, or sometimes
none. As the new guy on the job, he knew he would be the first to go.
He quit and signed up for the Jobs Corps Center in Pittsburgh, a federal labor
program that would pay for two years of training, figuring he would learn to be
a heavy equipment operator. When a local Army recruiter walked into the center,
his pitch hit a nerve. Mr. Trexler figured he could earn more money and learn
leadership skills in the Army. Just as important, he could ride out the
recession for four years and walk out ready to work in civilian construction.
Although the other branches of the military have not struggled as much as the
Army to recruit, they, too, are attracting people who would not ordinarily
Just a few months ago, Guy Derenoncourt was working as an equity trader at a
boutique investment firm in New York. Then the equity market fell apart and he
Last week, he enlisted for a four-year stint in the Navy, a military branch he
chose because it would keep him out of Afghanistan and offer him a variety of
“I really had no intention to join if it weren’t for the financial turmoil,
because I was doing quite well,” Mr. Derenoncourt, 25, said, adding that a sense
of patriotism made it an easier choice.
The Army has struggled to attract the same caliber of enlistee that it did
before the war. In 2003, 94 percent of new active-duty recruits had high school
degrees. Last year, the number increased slightly from 2007, but it was still 82
percent. The percentage of new recruits who score poorly on the military
entrance exam also remains comparatively high. The same is true for enlistees
who need permission to enter the military for medical or “moral” reasons,
typically misdemeanor juvenile convictions. Last year, 21.5 percent of the
80,000 new recruits in the Army required a so-called medical or moral waiver, 2
percent higher than in 2006. Fewer recruits needed waivers for felony
convictions, though, compared with 2007.
Malcolm Gay and Sean Hamill contributed reporting.
More Joining American
Military as Jobs Dwindle, NYT, 19.1.2009,
Hedge Funds, Unhinged
January 18, 2009
The New York Times
By LOUISE STORY
LAST summer, Kenneth C. Griffin and his wife, Anne, hedge fund managers both,
were so rich that they did something most wealthy couples don’t do until much
later in life.
Still in their 30s, they hired a Ph.D. student in economics to help dole out
their money to charities.
Fast-forward six months, and Mr. Griffin, who built the Citadel Investment Group
into one of the largest hedge funds in the world, has seen the value of his
funds plunge by roughly $10 billion — one of the biggest amounts lost in the
hedge fund carnage last year.
He was down 55 percent while the average fund was down 18 percent. For Mr.
Griffin, it is a failing as personal as they come. Sitting back in his chair,
gazing uneasily at the skyline here, he points to a new patch of gray hair when
asked about the toll of his losses.
“Last year was a dramatic year for the world’s largest financial institutions,”
he says. “We were not immune.”
Mr. Griffin has basked in praise — whiz kid, wunderkind, the next Warren Buffett
— ever since he began trading from his Harvard dorm room 20 years ago and then
moved to Chicago to start his hedge fund. In recent years, his firm handily took
in more than $1 billion annually.
But now, the whiz kid has lost so much money that it is unclear whether he can
make it all back. That reality is playing out among thousands of troubled hedge
funds drowning in losses.
Two out of three hedge funds lost money last year, and according to agreements
with investors, their managers are supposed to recoup all losses before they
start skimming fees from their profits again. That could take years.
And it’s unclear whether these traders, so accustomed to flush times, will stick
it out long enough to make investors whole again.
Their decisions will reverberate beyond Greenwich, Conn., the New York suburb
that is a haven for hedge fund honchos. Pension funds, endowments and charities
— not just wealthy individuals — all invest in hedge funds.
Assets held by hedge funds surged to nearly $2 trillion as of the start of last
year, from $375 billion in 1998, according to estimates from Hedge Fund
Research, a Chicago firm. Along the way, hedge funds — once so few in number
that they represented a boutique industry populated by a rarefied group of
specialists — sprang up like kudzu.
Today, there are around 10,000 hedge funds, compared with around 3,000 a decade
ago and just a few hundred two decades ago.
Little other than money unites hedge funds, which invest in areas as varied as
bonds, aircraft and small-business loans. They even make bets on the weather.
What they have in common are lucrative fees: managers typically charge 20
percent of profits and 2 percent of total funds under management — the latter of
which they earn regardless of performance.
The wealth and power of hedge funds, and those handsome fees, were predicated on
what now sounds like a hollow promise: to make money year in and year out.
But the years of easy money are over.
Banks, pinioned by their own enormous mistakes and the economic slump, have cut
back on hedge fund lending — essentially turning off a financial spigot that the
funds relied upon to goose their returns.
Economic uncertainty makes it harder to predict market movements. And investors,
burned by big losses in 2008, are either questioning hedge fund fees or simply
avoiding putting more money into the funds.
The regulatory vise, meanwhile, is tightening around an industry that long
enjoyed the freedom to trade and operate without the constraints imposed on more
On Thursday, Mary L. Schapiro, Barack Obama’s nominee to head the Securities and
Exchange Commission, said during a confirmation hearing that she plans to more
tightly regulate hedge funds as part of an effort to “bring transparency and
accountability to all corners of the marketplace.”
Lawmakers are already considering new taxes and regulations that would require
hedge funds to disclose more information about their secretive trading
Add it all up, and managing a hedge fund looks much less attractive than it used
“The magnitude of this current crisis and its effect on their business was a
real shock for hedge fund managers,” said William N. Goetzmann, a professor who
studies hedge funds at the Yale School of Management. “It will be a long-lasting
effect because it’s caused customers to question the basic model.”
Mr. Griffin, fiercely competitive, says he is firmly in the camp of those trying
to stay open. But he acknowledges that for several years, he will be working
mostly for “psychic income.”
NOT everyone is rooting for Citadel. Call up nearly any hedge fund manager, and
you will hear the stories about Mr. Griffin, now 40, poaching workers, landing a
trade on the cheap and stalking wounded peers for deals. Mr. Griffin declined to
comment on such stories.
His aggression has earned him admirers but has also created enemies. In the
low-profile hedge fund industry, people shuddered at his brash claims that
Citadel would become as powerful as investment banks like Morgan Stanley and
His firm has become the fortress that many would love to see broken. Mr. Griffin
knows that, but he chalks it up to his success. “Over the last 10 years we have
been innovative and bold,” he says.
But in July, his magic touch deserted him. After reviewing the trading books at
Kensington and Wellington, the two largest funds that Citadel manages, he
decided to trim some holdings while bolstering an asset class he had traded
since his early days: convertible bonds.
But the value of convertibles plummeted as banks, large issuers of such shares,
went into a tailspin after the collapse of Lehman Brothers, the venerable
Citadel made another large bet that the gap between corporate bonds and
insurance bought on those bonds, known as credit-default swaps, would narrow. In
essence, Mr. Griffin was betting that the economy would strengthen and that the
price of insurance on debt would cheapen.
Others in the industry backed away from that particular gambit. Paul Touradji,
who runs a fund associated with the veteran trader Julian Robertson, said his
own digging indicated that more people would need to sell their bond positions
than the number that were likely to buy in.
Still, Mr. Griffin stuck to his guns, even as his funds fell 16 percent in
September. The loss put Citadel in the spotlight and generated speculation about
One day, the rumor was that Federal Reserve officials were trolling his Chicago
headquarters; the next, that his funds were selling off troubled assets, or that
banks were pulling credit. (Federal Reserve officials did in fact check up on
Citadel. But since last spring, such inquiries have become routine at all large
financial institutions. The other rumors were unfounded.)
Mr. Griffin says Citadel came under attack because it was a large and easy
target — not because it was about to collapse.
By late October, Citadel was fighting for its life. At the end of the month, its
funds were down an additional 20 percent and nearing 40 percent losses for the
year. Mr. Griffin met with all of his employees and held a public conference
call to reassure the world about Citadel’s financial footing.
Mr. Griffin calls that period “surreal” but says he never went to bed worried
that Lehman’s fate would become his own. The difference with Citadel, Mr.
Griffin says, is financing. He says he has arranged for credit lines at dozens
of banks with durations as long as a year, buying him time. “Any firm that is a
lasting, permanent institution goes through rough times,” he says. “In three
years, they’ll write the story about how we came back, much like Goldman Sachs
came back after 1929.”
Citadel, in fact, is different from many hedge funds that specialize only in
trading. Mr. Griffin reinvested profits over the years into new service-based
businesses. The management company, which is controlled solely by Mr. Griffin,
also owns a firm that provides administrative services to other hedge funds, as
well as the Citadel Derivatives Group, a major player in the options and stock
markets. And Citadel recently hired a former Merrill Lynch executive to build a
capital markets business, a mainstay of investment banking.
“Citadel is a diverse platform,” says Matt Andresen, who runs the Derivatives
Group. “Our clients do not interact with the asset management side of the firm,
and they’ve come to know us in an entirely different capacity.”
Mr. Griffin has full discretion over how much money he uses to subsidize his
struggling funds. Last year, Citadel shouldered some of the funds’ operating
costs, which are known to be among the largest in the industry.
At the same time, though, Citadel blocked investors in its two troubled hedge
funds from withdrawing money at the end of last year. The company has told
investors that they might be allowed to withdraw money at the end of March.
Mr. Griffin explains these decisions by saying that “it was the right thing to
do,” because withdrawals by some investors might have disadvantaged other
investors who remained in the funds. Citadel also canceled its holiday gathering
because it was not “right,” he says, to celebrate last year.
But right and wrong in hedge fund land is a matter of debate. Industry veterans
have been loudly criticizing fund managers who blocked investors from retrieving
money. Leon Cooperman, for instance, who runs Omega Advisors, is suing another
hedge fund, contending that it didn’t allow him to make withdrawals; he said his
own fund would never block redemptions.
“You’d have to lower me into the ground before I’d put up a gate,” Mr. Cooperman
says. “Clients deserve to be able to withdraw their money.”
Orin Kramer, another hedge fund manager, who also helps oversee the New Jersey
pension fund, says that what bothers him most is that managers who are freezing
their funds are still charging 2 percent management fees on money they have
“It’s like telling someone at a hotel that they can’t check out and then
charging them for the privilege of staying,” Mr. Kramer says.
IN November, five of the country’s richest hedge fund managers filed solemnly
into a Congressional hearing room to be grilled by lawmakers.
They made up a Who’s Who of their industry. In addition to Mr. Griffin, the
group included James Simons, of Renaissance Technologies; Philip A. Falcone, an
activist investor who has bought a large stake in The New York Times; John
Paulson, who earned billions of dollars betting against mortgages before the
crisis; and George Soros, the Hungarian trader who rode to fame on prescient
currency trades in the early 1990s.
Unlike banks or brokerages, hedge funds do not have to reveal information on
their financial condition to the government. That means the government has no
way to know the value of funds’ assets, how much money they borrow, or even how
many funds there are.
For years, the industry has argued that hedge funds should be allowed to operate
under the radar because they serve sophisticated investors.
But by November, it had become apparent that too many hedge funds, crammed into
too many of the same trades, had been forced to sell — and that they did not
operate in some distant universe. Like mutual funds, they can roil the markets.
At the hearing, four of the managers surprised lawmakers and their peers by
saying that more regulation of their business was needed.
Mr. Griffin was the lone holdout. He argued for private market solutions, but as
the hearing proceeded, he conceded that he would “not be averse” to greater
disclosure to the government, provided that it was not made public. He says now
that he is working on providing more transparency to his investors.
Lawmakers proclaimed the day a victory.
“I believe there’s been a near-consensus that hedge funds can cause systemic
risk,” said Representative Carolyn B. Maloney, a Democrat from New York and a
member of the House Financial Services Committee.
Even without government intervention, the days of working behind a curtain may
be ending. Investors are already demanding more information about hedge funds’
Eiichiro Kuwana, president of Cook Pine Capital, a firm in Greenwich, Conn.,
that helps wealthy people invest in hedge funds, says that investors once had so
much money to invest that they became less circumspect — with many of them
investing in hedge funds that refused to provide much information.
“Why would I trust a fund with my money if they won’t trust me with
information?” Mr. Kuwana says.
HEDGE FUNDS tend to close by choice; outright collapses are less common.
Sometimes banks pull funds’ credit lines and managers are forced to shut down.
But by and large, the end comes when a manager no longer sees a financial upside
for himself or herself.
Few funds have actually shut their doors. The number of funds peaked early last
year at 10,233, according to Hedge Fund Research, and fell just 4 percent during
the year. And they still manage $1.6 trillion.
Of the funds that lost money last year, the average loss was 29 percent,
according to estimates from HedgeFund.net, a research firm. It will take a few
years of fairly robust gains — no easy feat in these markets — for funds to
simply recoup those losses.
Until then, managers would earn only their 2 percent fee, chump change to most
hedge funds. Some managers are already paying talented employees out of their
own pockets to persuade them to stay, but it’s apparent that surviving this
turbulence isn’t in the cards for scores of funds.
Mr. Touradji of Touradji Capital was one of the few managers to make money last
year, up 13 percent. He says that most firms that call themselves hedge funds
never really deserved the title.
“There’s any number of good violinists, but how many people are good enough to
be considered to conduct the Philharmonic?” he says. “The whole concept of hedge
funds was always and still is this very high bar, that you were never allowed to
say it was a tough market. Come rain or shine, you were supposed to do well —
even in tough markets.”
But he predicts a slow death for the poseurs. Hedge fund managers, he says, may
behave like restaurateurs who keep the doors open long after losses mount,
largely because they don’t want to work in someone else’s kitchen.
For his part, Mr. Griffin is not likely to be job-hunting any time soon.
While there is no way to calculate his net worth, it is thought to be at least
hundreds of millions of dollars. In May, a monument to his riches will be
unveiled at the Art Institute of Chicago. He and his wife donated $19 million
for Griffin Court, part of a new modern wing that connects the museum to
Millennium Park. And they are hoping they will have plenty of money for their
Ph.D. graduate to give out by 2010.
As for Mr. Griffin’s troubled hedge funds, their survival will pivot on
successful trading — they are up 6 percent this year — and on his willingness to
use Citadel’s other units as a safety net.
Whatever happens, Mr. Griffin says he can handle the shakeout in the hedge fund
industry. “It’s going to be fairly significant, “ he says, then pauses and
grins. “It’s part of capitalism.”
Hedge Funds, Unhinged,
Bailout Is a Windfall to Banks,
if Not to Borrowers
January 18, 2009
The New York Times
By MIKE McINTIRE
At the Palm Beach Ritz-Carlton last November, John C. Hope III, the chairman
of Whitney National Bank in New Orleans, stood before a ballroom full of Wall
Street analysts and explained how his bank intended to use its $300 million in
federal bailout money.
“Make more loans?” Mr. Hope said. “We’re not going to change our business model
or our credit policies to accommodate the needs of the public sector as they see
it to have us make more loans.”
As the incoming Obama administration decides how to fix the economy, the
troubles of the banking system have become particularly vexing.
Congress approved the $700 billion rescue plan with the idea that banks would
help struggling borrowers and increase lending to stimulate the economy, and
many lawmakers want to know how the first half of that money has been spent
before approving the second half. But many banks that have received bailout
money so far are reluctant to lend, worrying that if new loans go bad, they will
be in worse shape if the economy deteriorates.
Indeed, as mounting losses at major banks like Citigroup and Bank of America in
the last week have underscored, regulators are still searching for ways to
stabilize the banking system. The Obama administration could be forced early on
to come up with a systemic solution, getting bad loans off balance sheets as a
way to encourage banks to begin lending, which most economists say is essential
to get businesses and consumers spending again.
Individually, banks that received some of the first $350 billion from the
Treasury’s Troubled Asset Relief Program, or TARP, have offered few public
details about how they plan to spend the money, and they are not required to
disclose what they do with it. But in conversations behind closed doors with
investment analysts, some bankers have been candid about their intentions.
Most of the banks that received the money are far smaller than behemoths like
Citigroup or Bank of America. A review of investor presentations and conference
calls by executives of some two dozen banks around the country found that few
cited lending as a priority. An overwhelming majority saw the bailout program as
a no-strings-attached windfall that could be used to pay down debt, acquire
other businesses or invest for the future.
Speaking at the FBR Capital Markets conference in New York in December, Walter
M. Pressey, president of Boston Private Wealth Management, a healthy bank with a
mostly affluent clientele, said there were no immediate plans to do much with
the $154 million it received from the Treasury.
“With that capital in hand, not only do we feel comfortable that we can ride out
the recession,” he said, “but we also feel that we’ll be in a position to take
advantage of opportunities that present themselves once this recession is sorted
The bankers’ comments, while representing only a random sampling of the more
than 200 financial institutions that have received TARP money so far, underscore
a growing gulf between public expectations for how the $700 billion should be
used and the decisions being made by many of the institutions that have taken
part. The program does not dictate what banks should do with the money.
The loose requirements in the original plan have contributed to confusion over
what the Treasury intended when it abruptly shelved its first proposal — to buy
up bad mortgages — in favor of making direct investments in individual banks in
return for preferred shares of stock.
The Treasury secretary, Henry M. Paulson Jr., said in October that banks should
“deploy, not hoard” the money to build confidence and increase lending. He
added: “We expect all participating banks to continue to strengthen their
efforts to help struggling homeowners who can afford their homes avoid
But a Congressional oversight panel reported on Jan. 9 that it found no evidence
the bailout program had been used to prevent foreclosures, raising questions
about whether the Treasury has complied with the law’s requirement that it
develop a “plan that seeks to maximize assistance for homeowners.”
The report concluded that the Treasury’s top priority seemed to be to “stabilize
financial markets” by simply giving healthy banks more money and letting them
decide how best to use it. The report also said it was not clear how giving
billions to banks “advances both the goal of financial stability and the
well-being of taxpayers, including homeowners threatened by foreclosure, people
losing their jobs, and families unable to pay their credit cards.”
For the banks, fearful that the economic downturn could deepen and wary of
risking additional losses, the question of what to do with the bailout money
comes down to self-preservation.
Mark Fitzgibbon, research director at Sandler O’Neill & Partners, which
sponsored the Palm Beach conference, said banks seemed to be allocating the
bailout money for four general purposes: increased lending, absorbing losses,
bolstering capital and “opportunistic acquisitions.” He said those approaches
made sense from a business perspective, even though they might not conform to
popular expectations that the money would be immediately lent to consumers.
“For the banking industry, this isn’t a sprint, this is a marathon,” Mr.
Fitzgibbon said. “I think over time there will be pressure to lend that capital
out and get a return for their shareholders. But they’re not going to rush out
and lend all that money tomorrow. If they did, they could lose it.”
For City National Bank in Los Angeles, the Treasury money “really doesn’t change
our perspective about doing things,” said Christopher J. Carey, the bank’s chief
financial officer, addressing the BancAnalysts Association of Boston Conference
in November. He said that his bank would like to use it for lending and
acquisitions but that the decision would depend on the economy.
“Adding $400 million in capital gives us a chance to really have a totally
fortressed balance sheet in case things get a lot worse than we think,” Mr.
Carey said. “And if they don’t, we may end up just paying it back a little bit
In addition to wanting more lending, members of Congress have said TARP should
not be used to fuel mergers and acquisitions, although Treasury officials say
the financial system would be strengthened if healthy banks absorbed weaker
ones. To that extent, bailout money has been useful for improving capital ratios
— the amount of money available to absorb losses — for banks that merge.
On Friday, Bank of America said it would receive $20 billion more from the
Treasury to help it digest losses it took on by acquiring Merrill Lynch, a
process begun in September.
At least seven banks that received TARP money have since bought other companies,
including one that had been encouraged to do so by federal regulators. That one,
PNC Financial Services, took $7.7 billion from the Treasury and promptly
acquired the struggling National City Bank for $5.2 billion in stock and $384
million in cash.
Among the others, PlainsCapital Bank of Dallas announced in November, not long
after the bailout program began, that it planned to merge with a healthy
investment bank, First Southwest. PlainsCapital received $88 million from the
Treasury on Dec. 19, and the all-stock merger was completed two weeks later.
PlainsCapital’s chairman, Alan B. White, insisted in an interview that the two
events were not connected.
He said the bank had not yet decided what to do with its bailout money, which he
called “opportunity capital.” Increased lending would be a priority, said Mr.
White, who did not rule out using it for other acquisitions, adding that when
regulators invited PlainsCapital to apply for federal dollars, there were no
“They didn’t tell me I had to do anything particular with it,” he said.
None of the bankers who appeared before recent investor conferences offered
specific details about their intentions, but recurring themes emerged in their
presentations. Two of the most often cited priorities were hanging on to the
money as insurance against a prolonged recession and using it for mergers.
At the Sandler O’Neill East Coast Financial Services Conference in Florida,
bankers mingled with investment analysts at an ocean-front luxury hotel, where
the agenda featured evening cocktails by the pool and a golf outing at a nearby
During his presentation, John R. Buran, the chief executive of Flushing
Financial in New York, said the government money was a way to up the “ante for
acquisitions” of other companies.
“We can get $70 million in capital,” he said. “So, I would say the price of
poker, so to speak, has gone up.”
For Mr. Hope, the Whitney National Bank chairman, “the main motivation for TARP”
was not more loans, but rather to safeguard against the “possibility things
could get a lot worse.” He said Whitney would continue making loans “that we
would have made with or without TARP.”
“We see TARP as an insurance policy,” he said. “That when all this stuff is
finally over, no matter how bad it gets, we’re going to be one of the remaining
Bailout Is a Windfall to
Banks, if Not to Borrowers, NYT, 18.1.2009,
The End of Banking as We Know It
January 18, 2009
The New York Times
By GRETCHEN MORGENSON
THE concept of the financial supermarket — the all-things-to-all-people,
intergalactic, behemoth banking institution — bit the dust last week.
The first death notice came on Tuesday, when Citigroup, Exhibit A for the
failure of the soup-to-nuts business model, said it was dismantling. Just over a
decade after the deal-maker Sanford I. Weill tried to meld insurance, investment
banking, mortgage lending, credit cards and stock brokerage services, the
Citigroup, it turned out, was too big to manage, too unwieldy to succeed and too
gigantic to sell to one buyer.
A few days later, Bank of America, another serial acquirer of troubled
institutions —Merrill Lynch and Countrywide Financial most recently — fessed up
that its deals now need taxpayer backing. The United States government invested
an additional $20 billion in Bank of America (after $25 billion last fall) and
agreed to guarantee more than $100 billion of imperiled assets.
Clearly, the entire financial industry is in the midst of a makeover. And while
no one wants to call it nationalization, perhaps we can agree on this much: The
money business as we have come to know it over the last two decades — with its
lush salaries, big-swinging risk-takers and ultrathin capital cushions — is a
Got that? Toast. Toe-tagged.
And that’s a good thing, because maybe we can go back to a banking model that is
designed to do more than simply enrich the folks at the top of the enterprise
while shareholders and taxpayers absorb all the hits.
Banking, because it oils the crucial wheels of commerce, has a special standing
in our world. That will always be the case.
But in exchange for that role, our country’s leading bankers might have
approached their jobs with a sense of prudence and duty. Instead, a handful of
arrogant greedmeisters blew up their institutions and took our economy off the
cliff along the way.
It’s too soon to say how much taxpayer money will be spent trying to rebuild
banks hollowed out by bad lending practices. Paul J. Miller, an analyst at
Friedman, Billings, Ramsey, thinks that the nation’s financial system needs an
additional $1 trillion in common equity to restore confidence and to get lending
— the lifeblood of a thriving and entrepreneurial free-market economy — moving
That $1 trillion would come on top of funds disbursed through the Troubled Asset
Relief Program, which has tapped $700 billion, and the president-elect’s
stimulus plan, clocking in at $825 billion.
Larger capital requirements, beefed up to serve as a proper buffer when lenders
misfire, will be one change facing banks when we emerge from this mess, Mr.
Miller said. He thinks regulators will require banks to hold tangible common
equity of 6 percent of assets. Now many institutions hold under 4 percent.
Such a requirement will cut into earnings, of course. Toning down the
risk-taking will also reduce the profitability — or the appearance of it — at
“This industry made a lot of money by taking a business line with 20 percent
return on assets and levering it up 30 times,” Mr. Miller said. “But no more.
Banks are going back to being the boring companies they should be, growing
roughly in line with gross domestic product.”
Clearly this means that the rip-roaring performance of financial services
companies and their stocks isn’t likely to return anytime soon. Because these
companies’ earnings fed both the economy and the stock market in recent years, a
more muted performance has considerable implications for investors, consumers
and the economy.
FOR example, since 1995, according to Standard & Poor’s, earnings of financial
concerns have accounted for 22 percent of profits, on average, among the S.& P.
500 companies. That performance is almost double that of the next largest
contributor — the energy industry. In 2003, earnings among financial companies
peaked at 30 percent of total profits generated by the S.& P. 500; back in 1995,
financial company earnings accounted for 18.4 percent of the total.
Of course, many of these earnings were ephemeral and have since turned to
losses. But while the companies were reporting the profits, their stocks roared.
Between 2003 and the peak in 2007, the American Stock Exchange financial
services index essentially doubled. At the peak, financial services companies
dominated the S.& P. 500 index, accounting for 22 percent of its market value in
2007. With many of these stocks in free fall, that figure is now just 12.5
Will valuations on financial services stocks bounce back soon? Not in Mr.
Miller’s view. “They are going to look more like the insurance industry, trading
at book value or 1.5 times book,” he said. “That is, if you are really good.”
For financial services workers, of course, the inevitable downsizing has already
begun. But there will be more. “The industry was way too big; too many people
were not producing anything,” Mr. Miller said. “Jobs will be lost and not
replaced. And financial industry salaries won’t be anywhere close to where they
The bright side is that all those displaced financial services professionals can
now set their sights on doing something, well, truly useful.
Still, this adjustment will be painful for all those who have to carve out new
careers, as well as for New York and other places these companies call home.
Finally, what will a humbled financial services industry mean for consumers?
Higher borrowing costs, Mr. Miller said.
“The leverage that these companies were using allowed them to lower their
rates,” he said. “Rates have to go higher for the banks to operate in a safe and
sound manner and make money.”
Credit is also likely to remain tight, in Mr. Miller’s opinion. A result is that
consumer spending won’t recover to bubble levels.
“It is going to be difficult to get credit, and that is something the system has
to adapt to,” Mr. Miller said. “That is where the government is going to have to
step in and replace that debt growth to make sure there is a smooth transition.”
In other words, Barack Obama’s first stimulus plan is not likely to be his last.
When a driving economic force takes a big dive, the ripples are far-reaching.
Change is painful, there is no doubt. But American business can be awfully good
at reinventing itself when it needs to.
And does it ever need to now.
The End of Banking as We
Know It, NYT, 18.1.2009,
Circuit City to Shut Down
January 17, 2009
The New York Times
By STEPHANIE ROSENBLOOM
Circuit City Stores, a bellwether American retailer, said Friday that it
would go out of business, stripping the nation of its second-largest consumer
The company, which filed for bankruptcy protection in November but had hoped to
emerge in a slimmed-down form, said instead that it would liquidate all its
stores and assets.
Most of the chain’s 34,000 store employees will be laid off. Closing sales will
begin as early as Saturday and will last until the merchandise is gone or about
the end of March.
Just last week, Circuit City, with 567 stores, was in talks with two potential
buyers, but it was unable to reach an agreement with its creditors and lenders.
“We are extremely disappointed by this outcome,” said James A. Marcum, acting
president and chief executive of Circuit City Stores. He called the liquidation
“the only possible path” for the 60-year-old company.
The demise of Circuit City, while not surprising given its declining sales, is
part of a radical shift taking place in retailing. Weak chains — unable to
weather the freeze-up in consumer spending and choked by tight credit markets —
The downturn comes after years of growth, when retailers — responding to a flood
of demand from consumers spending borrowed money — opened thousands of stores.
Now that the housing downturn and economic crisis have turned off the credit
spigot and sent frightened consumers into hiding, it is becoming evident that
many of those stores are not needed.
“We are incredibly over-stored in many sectors,” said Stacey Widlitz, an analyst
with Pali Research. “If you don’t have the balance sheet to really weather the
storm for a couple of years, then that’s it.”
Last year, a raft of retailers, including Boscov’s, Sharper Image, Mervyns,
Linens ’n Things, Whitehall Jewelers and Steve & Barry’s, filed for bankruptcy
protection. This week, Goody’s Family Clothing and Gottschalks also filed.
Many more retailers are expected to follow suit as they run out of working
capital or are unable to refinance their debt.
Emerging from bankruptcy is harder than ever because of changes in the
bankruptcy code and trouble in the credit markets, which are largely refusing to
put new money into troubled companies.
Wall Street analysts said in November that the prospects of long-term survival
for Circuit City were bleak. Months of declining sales sent the company over the
edge, although its problems go back a decade. They include buying cheap real
estate leases in inferior locations and laying off the company’s most
experienced sales staff. The latter saved money, but at the price of employee
morale and countless customers.
“They basically destroyed all their customer loyalty among all their best
customers in one fell swoop,” said Britt Beemer, chief executive and founder of
America’s Research Group.
“That was really the beginning of the end.”
The disappearance of the national chain means that in many markets consumers are
running out of places to buy electronics, though shoppers are not the only ones
being affected. The loss of Circuit City will probably be felt throughout the
supply line as electronics manufacturers find themselves less able to negotiate
The biggest electronics retailer left is Best Buy. Circuit City’s liquidation
sales are likely to put pressure on Best Buy in the short run, but retailing
analysts say the company will ultimately emerge with more market share.
“Even accounting for a softer economy,” said David A. Schick, an analyst at
Stifel Nicolaus, “the business will go to specialty players in the sector and it
will also go to mass merchant discounters.”
Analysts say they believe the biggest winner will not be Best Buy, but Wal-Mart.
Ms. Widlitz said consumers who shopped at Circuit City were more likely to
defect to Wal-Mart than to Best Buy, especially at a time when Wal-Mart has
aggressively built up its stable of name-brand electronics at low prices.
“This is perfect timing for them,” Ms. Widlitz said.
Circuit City to Shut
Down, NYT, 17.1.2009,
Outsourced Chores Come Back Home
January 17, 2009
The New York Times
By CATHERINE RAMPELL
A few months ago, as her family’s income fell, Laura French Spada, a real
estate agent in Glen Rock, N.J., began dyeing her hair at home and washing the
family cars herself. Her husband, Mark, started learning how to do electrical
Susan Todoroff, a personal trainer in Ann Arbor, Mich., has begun brewing
espressos at home and cutting her hair and cleaning her house herself. And Tamar
A. Zaidenweber, a health care market researcher in Astoria, Queens, is spending
more time walking her dog instead of taking it to day care each week.
All of these consumers could praise themselves for their newfound frugality in
the midst of an economic downturn. But every step they take toward self-reliance
— each shrub they prune themselves, each cupcake they bake from scratch — hurts
the people and small businesses that have long provided these services
These small, service-oriented businesses are run in storefronts on urban streets
and in suburban strip malls, or sometimes just out of pickup trucks. Responsible
for roughly 18 million jobs nationwide, according to 2006 Census Bureau data,
these companies have long been seen as engines of America’s economic growth. Yet
after years of explosive expansion, many beauty salons, dry cleaners,
landscapers, dog walkers, nanny services and restaurants experienced slower
sales growth or even decline in the final months of 2008.
Their services are suddenly, and painfully, being perceived as nonessential.
The question now for these businesses is whether demand will stabilize or,
eventually, drop enough to force them to close. And the answer may depend on
whether consumers’ new penchant for self-service is temporary or permanent.
After all, as incomes rose and gender roles changed over the last 50 years,
families have become accustomed to outsourcing more and more of their household
chores. No longer was it just the very rich who had “servants,” said Jan de
Vries, an economic historian at the University of California, Berkeley.
“Household members, particularly women, have been working more in the market,”
said Mr. de Vries. “They have had less time and higher money income, and they
have been spending a lot of that money income on services they once provided
Still, he said, even before the recession, some families had already cited moral
reasons for reverting to domestic self-sufficiency, to those good old days when
families grew their own food and burped their own babies.
“Families have been creating a discussion over the past decade about
value-driven concerns that are now being reinforced by forces in the economy,”
he said. As a result of this confluence of moral and financial incentives, “The
way households function 20 years from now will probably be sort of surprising to
Indeed, after decades of spendthrift subcontracting, many consumers now say they
view such specialist services as indulgences rather than necessities.
“A lot of the way we’d been living was all an illusion, a fantasy,” said Ms.
Spada, who has also been cooking more and bathing the family dog instead of
going to the groomer. “We’ve been asking ourselves: Can we replicate some of
those specialized services, which normally we would outsource, ourselves?”
Even as Americans cut back on restaurant dining, pet care services, professional
hair and nail services, house cleaners and landscapers, companies producing some
of the do-it-yourself products are seeing higher sales.
According to Information Resources Inc., a market research firm in Chicago,
sales of products used in home manicures, home cooking and home medical
treatments, among others, have experienced healthy growth in the last year.
Dollar sales of cold-allergy-sinus tablets, for example, increased 17.2 percent
in 2008. Meanwhile, according to Sageworks, a company that tracks sales at
privately held businesses, revenue at physicians’ offices fell by 0.06 percent.
“They’re reducing doctor visits, and trying to treat themselves at home,” says
Thom Blischok, president of global innovation and consulting at Information
Big-box stores that sell these products have been capitalizing on the return to
a self-service mentality. Target, for example, recently began its “New Day”
marketing campaign, which glorifies the family-friendly, do-it-yourself
alternatives to activities households used to outsource. Against upbeat lyrics
about how things are “getting better every single day,” the ads show dismal
economic headlines, followed by scenes of a father buzzing the hair of his
smiling sons (“the new barber shop”) and a child eagerly eyeing his mother’s
cookie-filled oven (“the new bakery”).
At the same time, the service providers have been hurting.
“From the moment that the stock market collapsed and the TARP was being talked
about, in September, it was like someone turned the switch off for nanny
demand,” said Steve Lampert, the president of eNannySource.com, making a
reference to the Troubled Asset Relief Program. Family subscriptions to
eNannySource.com, a national nanny placement company based in West Hills,
Calif., are down to 150,000, about a third of the site’s peak in 2007, he said.
James Erath, owner of Puppy Love & Kitty Kat in Manhattan, said, “Business is
definitely down, about 25 or 50 percent down.” He has been offering steep
discounts on grooming to attract customers who might bathe their pets at home.
Similarly, Rhonda Coop-Piraino, a hair stylist in Dallas, said about 10 percent
of her clients had started coloring their hair at home to save money. Many of
these clients, she said, return to her salon for color correction when their
home kits disappoint.
“They do come in sometimes with some pretty orange hair,” she said. “I have a
hard time charging the same amount I once charged for color correction, though.
I have clients who have been with me for so many years, and it’s hard for me to
charge them $200 in this economy.”
Like Ms. Coop-Piraino’s clients, some consumers say that doing things for
themselves has not been as easy as they thought.
After letting their maid go last October, Chris DeCarlo said he and his partner,
Chris Toland, realized they had a lot to learn about keeping their Manhattan
apartment tidy. Their biggest challenge has been laundry.
“No mishaps yet,” said Mr. DeCarlo, a Web site designer, “but my partner is
proud to report that somebody in our laundry room who was watching him struggle
felt the need to intervene and show him the proper way to fold a fitted sheet.”
And there are some services that consumers now have trouble duplicating
themselves because of technological advances.
When it comes to cars, for example, consumers might be able to refresh their
memories about how to change a car’s oil — and some mechanics report a rise in
such self-service. Faisal Akram, the owner of service stations in Irvington,
Tarrytown and Cortlandt Manor, all in New York, said that for the first time in
recent memory customers were bringing in waste oil from home.
But beyond oil changes, there is little most car owners can do themselves
because automobiles have become so sophisticated.
Aaron Clements, the owner of C & C Automotive and host of a car-repair radio
show in Augusta, Ga., said that in recent months twice as many customers had
been calling and asking for advice on how to service their cars themselves. But
usually, once they learn what equipment, training and effort would be necessary
for self-service, he said, they opt to take the car to a shop.
“Two cars ago, I was able to rebuild the entire engine,” said Vicki Robin, the
co-author of “Your Money or Your Life,” a book praising the financial virtues of
self-service. “But back then a car was a car. Now a car is a computer with
As their former nannies, stylists, landscapers, dry cleaners and maids languish,
consumers report mixed feelings. They say they sometimes feel guilty about the
ripple effects their penny-pinching is having on the livelihoods of others, but
at the same time they feel unexpectedly empowered by their rediscovered
Many say that even when their financial worries abate, they will probably remain
“After doing it yourself, it’s like, ‘Why was I ever spending $200 to pay
someone else to do it for me?’ ” said Ms. Zaidenweber, who recently dyed her
hair for the first time from an $8 home coloring kit. “It was kind of fun, even
if it didn’t turn out exactly as I expected, and even it took a couple tries to
get it done right.”
Caitlin Kelly contributed reporting.
Outsourced Chores Come
Back Home, NYT, 17.1.2009,
Economy on Track to Recovery
January 16, 2009
Filed at 12:52 p.m. ET
By THE ASSOCIATED PRESS
WASHINGTON (AP) -- President George W. Bush said Friday that while the
current economic crisis has sent shock waves around the world, he believes steps
taken by his administration have ''laid the groundwork for a return to economic
growth and job creation'' early in the administration of President-elect Barack
''The American economy has consistently proven its strength and resilience''
Bush wrote in his final economic report to the nation.
He said this resilience has continued despite multiple blows to the economy.
Bush's statement came at the beginning of the annual report of the White House
Council of Economic Advisers.
Those advisers predicted ''a strong economic recovery early in the term of the
Bush said that a combination of factors rose to ''threaten the entire financial
system and generated a shock so large that its effects have been felt throughout
the global economy.''
''Under ordinary circumstances, it would be preferable to allow the free market
to take its course and correct over time,'' he said. But, Bush added, the
potential financial damage to households and businesses was so severe that
''unprecedented government response was the only responsible policy option.''
''A measure of stability has returned to the financial system,'' Bush said.
He warned that ''temporary government programs'' established to deal with the
crisis ''must remain temporary and be unwound in an orderly manner as soon as
In the underlying economic report, Bush's economic advisers said that while the
economy had in fact proven itself '' remarkably resilient'' over Bush's two-term
presidency, there is a ''risk that recent events may overshadow the many
positive developments of the past eight years.''
The advisers suggested that the economic downturn, reflected in the
half-percentage-point contraction in the gross domestic product in the final
quarter of 2008, will likely continue in the first half of 2009. The White House
panel noted that ''most market forecasts'' suggested a recovery beginning in the
second half of 2009 ''that will gain momentum in 2010 and beyond.''
Looking ahead, the president's economic advisers said the global financial
crisis presents several remaining challenges for the U.S. government: the need
to modernize financial regulation, unwind temporary programs, and develop a
long-term solution for dealing with mortgage giants Fannie Mae and Freddie Mac,
now essentially under control of the government.
And Bush's advisers didn't miss an opportunity to put in a final political plug
for the president's unfinished agenda, just five days before he leaves office.
''There remains considerable opportunity to strengthen our economic position by
eliminating the uncertainty surrounding tax relief that is scheduled to
It was a pitch to make permanent the Bush tax cuts that expire at the end of
Bush Claims Economy on
Track to Recovery, NYT, 16.1.2009,
as Retail Sales Report
Shows Sharp Decline
January 15, 2009
The New York Times
By JACK HEALY
Retail sales fell in December for a sixth consecutive month, the government
reported on Wednesday, as Americans holstered their credit cards and cut back on
spending, even as stores offered discounts of 80 percent to entice shoppers.
Sales at department stores, restaurants, gas stations and a host of other retail
businesses fell 2.7 percent last month — nearly double what economists had been
expecting — and were 9.8 percent lower than sales last December, the Commerce
Wall Street fell sharply on the report with the Dow Jones industrial average
dropping more than 220 points after about an hour of trading. The broader
Standard & Poor’s 500 index was down 3 percent.
The new retail numbers offered an epitaph for what economists and retailers
called the worst holiday shopping season in decades: Electronics sales were down
1 percent in December from a month earlier; food and drinks fell by 1.4 percent,
and sales at clothing stores were 2.5 percent lower, the Commerce Department
“People hunkered down pretty dramatically,” said John Silvia, chief economist at
Wachovia. “Yes, everybody celebrated the holidays, but there was far less
spending than in prior years.”
Consumer spending, which accounts for more than two-thirds of the economy, has
virtually dried up since mid-September as the problems on Wall Street began to
spread. With the uncertainty of jobs weighing on consumers, economists do not
expect a turnaround anytime soon. The recession, which began in December 2007
and is already the longest on record, is expected to last into the second half
In help spur the economy and restore confidence, President-elect Barack Obama
has promised to push a stimulus package of about $800 billion, which he is
pressing Congress to pass in the weeks ahead.
According to the Commerce Department, retail sales for 2008 fell 0.1 percent
from 2007, with most of the losses coming from a 7.7 percent drop during the
last three months of the year.
Much of December’s drop in retail sales came from falling gasoline prices, which
have tumbled to a nationwide average of $1.79 a gallon from their peaks of $4.11
in July. Sales at gas stations fell 15.9 percent from November to December, and
were down more than 35 percent from December 2007.
But even excluding gasoline and automobiles, retail sales dropped by 1.5 percent
for the month, said James O’Sullivan, senior economist at UBS.
“It was a pretty broad-based decline,” he said.
The government’s figures were the latest confirmation of a bleak holiday
Sales for retailers during the holidays were particularly weak, reflected in the
wave of retail bankruptcies in the last few weeks.
Last week, an industry group reported that retail sales had fallen 2.2 percent
in November and December from a year earlier, and that some of the most widely
known brands in America had suffered even worse declines.
Department stores including Nordstrom, Sak’s and Nieman Marcus reported
double-digit percentage drops since last year. Abercrombie and Fitch was down by
24 percent and J.C. Penney by 8.1 percent, and even Wal-Mart missed analysts’
expectations and cut its outlook for the months ahead.
And the months ahead will be difficult. January is typically a slow month for
retailers, and the significance of a December sales decline is far greater than
a drop-off in January because sales in November and December account for 25 to
40 percent of many retailers’ annual sales, according to the National Retail
Federation, an industry group.
Stocks Tumble as Retail
Sales Report Shows Sharp Decline, NYT, 15.1.2009,
Plummet 2.7 Percent in December
January 14, 2009
Filed at 9:08 a.m. ET
The New York Times
By THE ASSOCIATED PRESS
WASHINGTON (AP) -- Retail sales plunged far more than expected in December, a
record sixth straight monthly decline as consumers were battered by a recession,
a severe credit crisis and soaring job losses, none of which are likely to ease
The Commerce Department reported Wednesday that retail sales dropped 2.7 percent
last month, more than double the 1.2 percent decline that Wall Street expected.
For the entire year, retail sales were down 0.1 percent, a sharp turnaround
after a 4.1 percent gain in 2007. It was the first time the annual retail sales
figure has fallen on government records going back to 1992. Before 2008, the
weakest year for retail sales had been an increase of 2.4 percent in 2002, the
year after the 2001 recession.
The weakness in consumer spending has been a prime contributing factor to the
economy's current swoon and analysts say they don't see that turning around
soon. They predict the current recession, already the longest in a
quarter-century, will continue at least until the second half of this year.
The 2.7 percent December plunge in sales, which followed a November drop revised
upward to 2.1 percent, confirmed private sector reports that retailers had
suffered their worst holiday shopping season since at least 1969.
Since consumer spending accounts for about two-thirds of total economic
activity, the weakness is a major factor depressing overall economic activity.
The country fell into a recession in December 2007, reflecting a severe slump in
The economy's weakness intensified in the fall when the financial system was
engulfed in its biggest crisis since the 1930s as billions of dollars of losses
on mortgages and other types of loans forced the government to put together a
massive rescue effort to try to get banks to resume more normal lending.
President-elect Barack Obama has promised to push a sweeping economic stimulus
program of around $800 billion through Congress in the next few weeks, but even
with that assistance, economists say the country is facing a prolonged period of
Many analysts believe the overall economy, as measured by the gross domestic
product, plunged at an annual rate of 6 percent in the just-completed fourth
quarter after dropping by 0.5 percent in the third quarter.
For December, virtually all areas of retail sales showed declines. Auto sales
fell by 0.7 percent and are down a huge 22.4 percent from a year ago.
Excluding autos, retail sales were down a record 3.1 percent. This reflected
declines at department stores, specialty clothing stores, furniture stores,
hardware stores, restaurants and service stations. The 15.9 percent drop at
service stations was heavily influenced by the steep decline in gasoline prices
during the month.
Automakers closed out a dismal 2008 with General Motors Corp. having its worst
year in nearly a half-century and both GM and Chrysler LLC having to take
emergency loans from the government's bailout fund.
Last week, the nation's major chain stores reported dismal sales results for
December. Even Wal-Mart Stores Inc. reported smaller gains than economists
expected. Among the retailers reporting big declines were Sears Holdings Corp.,
which operates Sears and Kmart stores, luxury retailer Saks Inc. and Gap Inc.
Departing Wal-Mart Chief Executive Lee Scott on Monday told the annual National
Retail Federation convention that while a new economic stimulus package from the
government will have ''some impact'' on the economy, he doesn't expect a quick
rebound since ''fundamental changes'' in consumer behavior -- an increased focus
on saving and less buying -- will likely linger.
Scott, who was making his last public speech as CEO and president of the world's
largest retailer, predicted that the first half of 2009 will be ''extremely
challenging,'' and said he hopes the second half would be a little easier.
Retail Sales Plummet 2.7
Percent in December, NYT, 14.1.2009,
Banks Are in Need
of Even More Bailout Money
January 14, 2009
The New York Times
By EDMUND L. ANDREWS and ERIC DASH
WASHINGTON — Even before word came on Tuesday that Citigroup might split into
pieces to shore up its finances, an unpleasant message was moving through
Congress and President-elect Barack Obama’s transition team: the banks need more
In all likelihood, a lot more money.
Mr. Obama seems to know it; a week before his swearing-in, he is lobbying
Congress to release the other half of the financial industry bailout fund.
Democratic leaders in Congress seem to know it, too; they are urging their rank
and file to act quickly to release the rescue money. And Ben S. Bernanke, the
chairman of the Federal Reserve, certainly knows it.
On Tuesday, Mr. Bernanke publicly made the case that one of the most unpopular
and most scorned programs in Washington — the $700 billion bailout program —
needs to pour hundreds of billions more into the very banks and financial
institutions that already received federal money and caused much of the credit
crisis in the first place.
The most glaring example that the banking system needs even more help is
Citigroup. Though it already has received $45 billion from the Treasury, it is
in such dire straits that it is breaking itself into parts.
Like many banks, Citi is finding that its finances keep deteriorating as the
economy continues to weaken.
Even some of the bailout program’s harshest critics acknowledge that things most
likely would be even worse without it, and that the bailout had accomplished its
most important goal, which was to prevent a complete collapse of the financial
Since last September, no major banks have failed and the credit markets have
But analysts said the problems are still acute, if less apparent on the surface.
Banks have received $200 billion in fresh capital from the Treasury since last
fall and have borrowed hundreds of billions of dollars more from the Fed. But in
the meantime, the economy fell into a severe downturn last fall that is likely
to continue until at least this summer.
Industry analysts estimate rising unemployment and business failures will lead
to another $500 billion to $750 billion of losses in coming months. That could
bring total losses from the credit crisis to $1.5 trillion to $1.8 trillion,
twice as high as earlier estimates.
Citigroup is not alone. JPMorgan Chase, Bank of America, Wells Fargo and most
other big banks all expect enormous losses as millions of consumers default on
their mortgages, credit cards and automobile loans. Other losses are expected on
loans made to commercial real estate developers, small businesses and for highly
leveraged corporate buyout deals.
Mr. Bernanke bluntly warned on Tuesday that the government would probably have
to infuse more money into financial institutions in the months ahead.
“More capital injections and guarantees may become necessary to ensure stability
and the normalization of credit markets,” Mr. Bernanke said in a speech to the
London School of Economics.
Mr. Bernanke, tacitly acknowledging the unpopularity of the bailout program,
said the public was “understandably concerned” about pouring hundreds of
billions of taxpayer dollars into financial companies — especially when other
industries were getting the cold shoulder.
But, he insisted, there was no escape. “This disparate treatment, unappealing as
it is, appears unavoidable,” Mr. Bernanke said. “Our economic system is
critically dependent on the free flow of credit.”
Mr. Obama and his economic team have assured Congress that they would use a
sizable chunk of the new money from the Troubled Asset Relief Program to help
distressed homeowners refinance mortgages and escape foreclosure. That would be
a big shift from the Bush administration, which refused to use TARP for reducing
Lawrence H. Summers, Mr. Obama’s choice to head the White House National
Economic Council, assured Democratic lawmakers in writing on Monday that the
administration would use some of the money to help reduce foreclosures.
But Mr. Bernanke appears to be warning Mr. Obama and Congressional Democrats
that most of the remaining $350 billion — and possibly more — has to go to
shoring up banks if they are to resume lending at normal levels.
During the first three quarters of 2008, banks were able to raise enough capital
to offset more than their hundreds of billions in losses by tapping the giant
government bailout fund as well as some early private investors.
But that was only a stopgap.
“The capital raises finally caught up with the losses,” said Michael Zeltkevic,
a partner at Oliver Wyman, a consulting firm specializing in the finance
industry. “It doesn’t make the situation better, but at least we caught up.”
The new tidal wave of losses stems from the worsening economy and rising
unemployment, and analysts say it will take several quarters before it peaks.
Regulators require banks to keep a healthy cushion of capital. But this time
around, the banks are struggling to plug their deepening holes. Private
investors are scarce. For all but a small group of healthy banks, bankers and
analysts say, the government may be the only investor left.
“Most banks are going to be in a defensive posture,” said Christopher Whalen, a
managing partner with Institutional Risk Analytics. “You are probably not going
to see the industry expand its overall balance sheet until 2010 or 2011.”
Mr. Obama’s economic team is planning a broad overhaul of the program to impose
more accountability and more restrictions on executives at companies that
receive government money.
Policy makers are also looking at reviving the original idea of TARP — have
Treasury buy up unsalable mortgage-backed securities from financial entities.
Henry M. Paulson Jr., the Treasury secretary, had dropped the idea, concluding
it would be more efficient to inject capital directly into banks by buying
Mr. Bernanke revived the idea, along with several other approaches, in his
speech in London. So did Donald L. Kohn, vice chairman of the Federal Reserve,
in a hearing on Tuesday before the House Financial Services Committee. He
suggested the Treasury could buy the unwanted securities directly, or set up
special banks to buy them.
Some analysts, even those who agree that the government needs to prop up the
banking system with more taxpayer money, were skeptical about TARP.
Adam S. Posen, deputy director of the Peterson Institute for International
Economics, said that the Bush administration had been right to inject capital
into banks but wrong in not pushing banks hard enough to fix their problems or
“The problem isn’t that we’ve wasted money,” Mr. Posen said. “The problem is
that we’ve put too few conditions on the banks.”
Eric Dash reported from New York.
Banks Are in Need of
Even More Bailout Money, NYT, 14.1.2009,
Bank Lends Little of Its Bailout Funds
January 14, 2009
The New York Times
By ERIC LIPTON and RON NIXON
TROY, Mich. — The bad bets made by executives at Independent Bank of Michigan
are on display in spots across the state: a defunct bowling alley, a new but
never occupied shopping center and the luxurious Whispering Woods Estates, which
offers prime lots for never-constructed dream homes.
Now it is the federal government making the big bet here.
The Treasury Department has invested $72 million out of the $700 billion in
federal bailout funds to help prop up this community bank, which traces its
roots back 144 years in Michigan. It is a small chunk of the giant rescue fund
being wagered by Washington to encourage banks like Independent to resume
lending and jump-start the frozen economy.
But Independent, hard put to find good borrowers in a suffering economy, and
fearful of making the kind of mistakes that got it into trouble in the first
place, is not doing much lending these days. So far it is using all of the
government’s money to shore up its own weak finances by repaying short-term
loans from the Federal Reserve. “It is like if you are in an airplane and the
oxygen mask comes down,” said Stefanie Kimball, the bank’s chief lending
officer. “First thing you do is put your own mask on, stabilize yourself.”
This is not what the Treasury Department had in mind when it started this
program, saying it would give the nation’s “healthy banks” enough money to start
lending again, so that people could buy homes and businesses could invest and
create jobs, thereby invigorating a disintegrating economy.
A close look at Independent Bank’s handling of its government money demonstrates
just how much harder this has turned out to be, and the conflicting challenges
that banks across the United States are confronting in the new bailout era. Like
hundreds of other banks, it is caught between the government’s push to increase
lending and its own caution.
As of Tuesday, 257 financial institutions in 42 states had received $192 billion
in capital injections from the Treasury’s Troubled Asset Relief Program, or
TARP, out of $250 billion set aside for this purpose. Seven giant banks — like
JPMorgan Chase and Citigroup — have received more than 62 percent of the total
so far, and have gotten most of the attention.
But it is the smaller community banks like Independent that are seeing the
largest number of investments, with 186 banks so far getting allocations of less
than $100 million. With little public attention, this money in recent weeks has
been streaming out to community banks across the nation, in dollops as small as
$1 million — the amount set aside for Independent Bank of East Greenwich, R.I.
Ultimately, more than 1,000 banks are expected to take part in the program.
While most of the banks that have received money appear to be relatively
healthy, dozens of other banks that received federal funds are, like Independent
Bank of Michigan, financially stressed by a high volume of delinquent loans.
Bailout Is Questioned
Economists say the decision by banks like Independent to use the federal money
for purposes other than lending, while perhaps disappointing, is not surprising,
given that the Treasury Department did not honor its plan to give the money only
to healthy banks.
“It’s a matter of logic — when you are in a perilous position, like many of them
are, you try to bolster your balance sheet,” said Alan S. Blinder, a monetary
policy economics professor at Princeton. “But this is a real flaw in the
Some banking experts are even questioning if the bailout may be doing more harm
than good, in some cases, by giving banks like Independent a cushion as they
struggle to fix their problems, rather than forcing them to sink or swim on
their own. It could also delay mergers of weaker banks with healthier ones.
“You are keeping a lot of troubled institutions in kind of a status quo state,”
said Eric D. Hovde, the chief executive of a Washington-based hedge fund that
invests in the banking industry. “They can continue on their merry ways.” In
Congress, anger over the management of the TARP program runs deep. Many
lawmakers say that there is little oversight, and that they can see no evidence
that the taxpayer money is making its way from the coffers of banks to
businesses and consumers. The program is likely to be fundamentally changed
under the administration of Barack Obama, who on Monday asked President Bush to
request that Congress release the remaining $350 billion.
Some lawmakers have criticized the Treasury for allowing banks to use the
government’s bailout money to acquire rival banks.
As additional evidence of the growing anxiety, bank regulators on Monday sent a
notice to banks receiving federal money ordering them to disclose how they are
using it. It also pushed them to emphasize new loans. “A lot of the money is
already out there and the inspector general needs to get up to speed on how
banks are using it,” said Senator Claire McCaskill, Democrat of Missouri. “We
need to make sure we get this money back and the only way we can do that is with
strong oversight on how this money is spent.”
Neel Kashkari, the interim assistant secretary at Treasury running the bailout
program, said he was convinced that it was delivering the promised results by
stabilizing banks while also encouraging them to help out their communities.
Even if overall lending is not up, it is higher than it would have been without
the program, he said.
“We’re still in a period of fairly low confidence,” he said. “So, banks are
understandably nervous about extending a lot of new credit. And consumers are
nervous about taking on new credit.”
Independent, which has 106 branches and $3.1 billion in assets, illustrates all
of these complexities.
By no means is Independent the worst off among the country’s community banks.
Some banks that sought TARP funds were considered so weak that Washington
officials discouraged them from even applying. Other banks were rated slightly
stronger but still were required to raise private capital before they were
approved for federal help.
When it applied, Independent was considered “well capitalized” by federal
standards. It had not been subject to any recent regulatory orders to change
management or lending practices, for example.
But it was struggling nonetheless. Indeed, of all the banks that received
bailout money as of Jan. 6, it had the second-highest ratio of bad loans, when
compared with its capital and its cushion of reserves in case of further loan
losses. Its assets are shrinking and it lost money in the third quarter. It
began cutting its dividend last year, when it stood at 21 cents a share. It is
now a penny a share. And it had lost millions of dollars from bad stock market
But Independent is hardly a high roller plagued by gold-plated executive perks,
and it was not a big subprime lender, as many banks were.
Based in Ionia, Mich., 30 miles east of Grand Rapids, it is the kind of local
institution that foots the bill so the state’s high school bands can march in
the annual Grand Rapids Santa Claus Parade. This month it has George Foreman
grills stacked up in its lobbies to reward customers who bring in friends and
neighbors to open new accounts. Independent is one of the biggest employers in
Ionia, a city of 10,000 with classic, turn-of-the-century storefronts dominating
its main street. Driving across suburban Detroit in his black Mercedes sedan,
Keith Lightbody, a senior vice president at Independent Bank, said it was easy,
in retrospect, to see how banks like his ended up where they are today.
Mr. Lightbody, a former JPMorgan Chase bank executive hired almost two years ago
by Independent, tours the sites of the bank’s many broken dreams, like the
Whispering Woods residential subdivision in Farmington Hills. The bank financed
the construction of roads and utilities for the subdivision, only to see the
developer go belly up before most of the lots were sold. Snowdrifts now nearly
cover the “for sale” signs.
Perhaps even more distressing are the empty storefronts in Shelby Township,
Mich., where a developer backed by the bank built what was supposed to be a
vibrant streetscape, bustling with shops and shoppers.
Instead, other than a restaurant at the front of the complex, there is only a
row of darkened windows, with the work halted on the would-be stores even before
their floors were built, leaving the insides looking like a sandbox filled with
random construction debris.
As of the end of September, the bank was burdened by $115 million in bad debts,
or nearly 5 percent of its overall loan portfolio, compared with less than 1
percent in 2005. Each of these failed projects has something essential in
common, Mr. Lightbody said.
“We didn’t step back and look at the big picture, asking ourselves, are we
really doing the right thing with this loan?” he said. “Everyone was making a
lot of money.”
Independent is publicly traded and under pressure from investors to shrink its
troubled loan portfolio before lending anew. Yet it still very much wants to
make loans, said Robert N. Shuster, Independent’s chief financial officer.
In normal times, Independent would lend up to $8 for every $1 in bank capital.
The $72 million in federal money, therefore, could generate up to $576 million
in loans — a powerful leveraging effect that was the goal of the TARP program.
“Our whole business is predicated on making loans — that is what we do, that is
the mission of the bank,” he said. But the bank cannot afford to simply pass out
money, Mr. Shuster said, or everyone involved will lose — the borrower, who
would probably default on the loan; the bank, which would experience bigger
losses; and the federal government, which is counting on Independent to pay back
the $72 million, along with 5 percent dividend payments.
“That is what got us where we are today,” Mr. Shuster said, of the bank’s past
easy-lending practices. “You can’t put consumers in a position where they aren’t
going to be successful.”
Making Loan Decisions
Ms. Kimball, the chief lending officer, comes face to face with this debate each
She has continued to tighten lending standards, generally turning away
applications, for example, for single-use commercial buildings, like
restaurants, because of the difficulty in selling the properties if the bank
needed to foreclose on the loan, she said. Independent is also taking a more
critical look at appraisals submitted to justify housing loans, which is
considered a necessity now, because national companies that buy up mortgages
from banks like Independent are demanding such scrutiny.
“We are not going to lower our credit standards at this point to make a whole
bunch of extra loans just to deploy the money,” Ms. Kimball said. “We need to
make loans that are reasonable in this day and age.”
Working from the Troy office, Ms. Kimball, who has a cool, stern tone, and a
self-confidence that comes from 25 years in the financial services business, is
overseeing this effort as the bank moves, in particular, to cut the size of its
real estate loan portfolio.
“It is not something that changes overnight,” she said from her corner office
overlooking Troy. “It is like turning a ship around in the ocean.”
She knows many of the bank’s big commercial borrowers personally — taking the
time to go out on the road and visit their factories or businesses to get a
better sense of just how well positioned they are to repay their loans.
One manufacturer from western Michigan, a customer of another bank, came to
Independent looking for a business loan. Her examination of the company’s books
showed that its sales were slipping and, worse, that it was having a hard time
collecting on bills it had sent to its remaining customers, who also were
suffering from the economic downturn.
So the bank had to make the hard choice of turning the company down.
“That is just not something we can do,” Mr. Shuster said, declining to name the
company. “We just can’t lend there.”
With the tighter lending standards and the damage the miserable Michigan economy
has done to so many of its businesses, the pool of eligible borrowers has shrunk
considerably. The net result is that the overall balance of outstanding
commercial loans the bank carries — which was about $1 billion as of last June —
has shrunk by $50 million and will most likely continue to shrink through much
of the first half of this year, Ms. Kimball said.
There are, of course, exceptions.
Ultimate Hydroforming of Sterling Heights, Mich., which makes prototypes for the
aviation and automobile industry, like the battery casing for the new Chevrolet
Volt, a planned electric car, has been able to obtain new credit recently and
will probably get even more from Independent.
A Growing Business
The company’s manufacturing plant is only a few miles from a half-dozen giant
automobile assembly plants. But Ultimate Hydroforming had started several years
ago to look for ways to diversify, so its business is still growing, even as the
automobile industry goes into a deep slump.
Ms. Kimball, on a recent visit, was greeted by the plant operations manager,
Shane Klyn, and then given a tour of the factory, which is installing towering
new hydraulic presses — thanks to loans from Independent — as part of an
expansion that it hopes will lead the company into profitable work making parts
for solar energy devices.
“This will allow us to move into new projects and markets,” Mr. Klyn said as he
walked through the plant with Ms. Kimball, who by then had a big smile on her
face, despite the freezing winds and piles of snow just outside. “The bank is
giving us the opportunity to expand.”
But companies like Ultimate Hydroforming are extremely hard to find,
particularly in Michigan, where the unemployment rate is far above the national
With no surge in lending taking place right away — and the bank very much
looking for a way to improve its own balance sheet — Independent took the $72
million check that arrived from Treasury in mid-December and immediately
transferred it to the Federal Reserve to pay down short-term loans it had taken
This month, the bank is planning to leverage that bailout money to buy about
$160 million in mortgage-backed securities from institutions like Fannie Mae, an
investment that it hopes will produce enough interest income to pay the dividend
it owes the federal government. Again, this will bring little immediate benefit
to Michigan businesses and residents. In essence, the $72 million has been
stuffed into Treasury’s own mattress.
Mr. Hovde, the hedge fund investor who says he believes the bailout program is
putting off judgment day for many banks, said his fear was that many of the
banks would burn through their federal money only to face a squeeze again. And
they will never have made the extra loans that the Treasury had hoped would
jump-start the economy.
Treasury officials remain confident that the investments are wise ones.
“There’s going to be more lending than had we not done this,” Mr. Kashkari said.
“Even if the overall numbers are down year-over-year, it’s going to be a lot
more than if we had not put the capital in the system.”
And Mr. Shuster, back in Michigan, said he was determined to prove that Mr.
Kashkari — whom he has never spoken to or met — is right.
“Even if things get tougher, I am confident we can work our way through this and
pay every dime back to the U.S. Treasury,” he said. “There is no stone we won’t
turn over to make sure we are good stewards of this money. We feel an enormous
responsibility to this Treasury. I am a taxpayer too.”
Eric Lipton reported from Troy, Mich., and Washington, and Ron Nixon from
In Michigan, Bank Lends
Little of Its Bailout Funds, NYT, 14.1.2009,
Bernanke Says Stimulus Alone
Won’t End the Credit Crunch
January 14, 2009
The New York Times
By JULIA WERDIGIER
LONDON — The chairman of the Federal Reserve, Ben S. Bernanke, said Tuesday
in London that a fiscal stimulus package being discussed by the incoming
administration would help revive the economy but would not be enough to lead to
a lasting recovery.
“The incoming administration and the Congress are currently discussing a
substantial fiscal package that, if enacted, could provide a significant boost
to economic activity,” Mr. Bernanke said.
But “Fiscal actions are unlikely to promote a lasting recovery unless they are
accompanied by strong measures to further stabilize and strengthen the financial
system,” Mr. Bernanke said in a speech at the London School of Economics on
Tuesday. “A modern economy cannot grow if its financial system is not operating
President-elect Barack Obama is developing an $800 billion recovery plan that is
a mixture of increased government spending, including infrastructure projects,
as well as tax cuts.
While Mr. Bernanke said the Federal Reserve has already done a great deal to
help stimulate the economy — like lowering its benchmark interest rate to
virtually zero in December — it still has “powerful tools” at its disposal.
As the economic outlook continues to worsen even after the Treasury’s injection
of about $250 billion into the banking sector, Mr. Bernanke said more capital
injections and guarantees might become necessary.
He outlined several options to help financial institutions with their troubled
and hard-to-value assets that continue to be a barrier to private investment in
He mentioned public purchase of troubled assets, providing asset guarantees and
the creation of a so-called bad bank among the options.
Mr. Bernanke reiterated the need for “stronger supervisory and regulatory
systems” while being careful not to introduce rules that would “forfeit economic
benefits of financial innovation and market discipline.”
“Even as we strive to stabilize financial markets and institutions worldwide,
however, we also owe the public near-term, concrete actions to limit the
probability and severity of future crises,” he said.
Among those, he said, were stronger supervisory and regulatory systems with
clear lines of responsibility, as well as oversight powers to curb excessive
leverage and risk-taking.
“Particularly pressing is the need to address the problem of financial
institutions that are deemed ‘too big to fail,’ ” Mr. Bernanke said. “It is
unacceptable that large firms that the government is now compelled to support to
preserve financial stability were among the greatest risk-takers during the boom
“In the future,” he said, “financial firms of any type whose failure would pose
a systemic risk must accept especially close regulatory scrutiny of their
In addition, he said, “We should revisit capital regulations, accounting rules,
and other aspects of the regulatory regime to ensure that they do not induce
excessive procyclicality in the financial system and the economy.” The Fed
chairman also called for a renewed effort to cooperate across borders, saying
“the world is too interconnected for nations to go it alone in their economic,
financial, and regulatory policies.”
His comments came a day after President Bush formally requested, at the urging
of Mr. Obama — that Congress release the second half of the $700 billion
financial system bailout fund that it passed earlier. Republican and Democratic
Senate leaders have signaled that they would support the release of the $350
billion, despite anger among many rank-and-file lawmakers over the Bush
administration’s management of the program.
Bernanke Says Stimulus
Alone Won’t End the Credit Crunch, NYT, 14.1.2009,
Oil Falls to Near $37
on Gloomy Demand Outlook
January 13, 2009
Filed at 1:02 a.m. ET
By THE ASSOCIATED PRESS
The New York Times
SINGAPORE (AP) -- Oil prices fell to near $37 a barrel Tuesday in Asia on
expectations crude demand will weaken amid a severe global economic slowdown.
Light, sweet crude for February delivery was down 45 cents at $37.14 a barrel by
midday in Singapore in electronic trading on the New York Mercantile Exchange.
Crude prices have fallen more than 25 percent since reaching just above $50 a
barrel last week as traders returned from the holiday break to find evidence of
falling manufacturing and consumer spending across the globe.
The February contract fell 8 percent on Monday, or $3.24, to settle at $37.59
after Alcoa Inc., the world's third-largest aluminum company, reported a
quarterly loss of $1.19 billion.
Alcoa, the first component of the Dow Jones industrial average to post results,
said last week it plans to lay off about 13 percent of its global work force by
the end of 2009 amid sinking prices and demand for the metal.
The Dow fell 1.5 percent Monday and has dropped 3.5 percent this year.
''The negative sentiment we're seeing reflects the broad international
macroeconomic outlook, which is considerably weaker, and what that means for
energy consumption,'' said David Moore, commodity strategist at Commonwealth
Bank of Australia in Sydney.
Prices have fallen despite continued fighting between Israel and Hamas in Gaza.
Israeli troops advanced into Gaza suburbs for the first time Tuesday, after
Prime Minister Ehud Olmert warned Islamic militants of an ''iron fist'' unless
they agree to Israel's terms to end the fighting.
About 900 Palestinians and 13 Israelis have died since the conflict started on
After initially spurring a jump in oil prices, the Gaza conflict has been
largely ignored by traders because it hasn't affected major supplies and no
oil-rich Middle East neighbors have become directly involved.
''The impact on oil supply is obviously limited,'' Moore said.
Prices of futures contracts for later this year are higher than the February
contract on investor expectations that announced production cuts of 4.2 million
barrels a day since September by the Organization of Petroleum Exporting
Countries will begin to reduce global supply.
The May contract trades at $49.50 a barrel.
''There's some wariness that the OPEC actions may cause markets to tighten up,''
said Moore, who expects oil to average $55 a barrel this year.
In other Nymex trading, gasoline futures were steady at $1.08 a gallon. Heating
oil gained 0.51 cent to $1.48 a gallon while natural gas for February delivery
was steady at $5.54 per 1,000 cubic feet.
In London, February Brent crude rose 4 cents to $42.95 a barrel on the ICE
Oil Falls to Near $37 on
Gloomy Demand Outlook, NYT, 13.1.2009,
Where the Money Is
January 13, 2009
The New York Times
By BOB HERBERT
A trillion here, a trillion there ...
President-elect Barack Obama is warning us to expect trillion-dollar budget
deficits “for years to come.”
The economy is in a precipitous downturn and no one, on the left or right, is
advocating tax increases that would jeopardize a recovery.
In the meantime, we’re spending money as fast as we can: the Troubled Asset
Relief Program ($700 billion and counting); Mr. Obama’s proposed stimulus
program ($800 billion and counting); and important initiatives still to come,
like an overhaul of the way we pay for health care.
China, which has purchased more than $1 trillion of American debt, is getting
antsy. As Keith Bradsher of The Times has reported, the global downturn has
prompted Beijing “to keep more of its money at home, a move that could have
painful effects for U.S. borrowers.”
Mr. Obama has tried to assure the public that his administration will be as
careful as possible with its monumental spending, promising to invest wisely and
manage the expenditures well. And he has made it clear that he is aware of the
minefields that accompany mammoth long-term deficits.
At some point, however, someone is going to have to talk about raising revenue.
The dreaded T-word is going to come up: taxes.
Well, there’s a good idea floating around that takes its cue from the legendary
Willie Sutton. Why not go where the money is?
The economist Dean Baker is a strong advocate of a financial transactions tax.
This would impose a small fee — ranging up to, say, 0.25 percent — on the sale
or transfer of stocks, bonds and other financial assets, including the seemingly
endless variety of exotic financial instruments that have been in the news so
According to Mr. Baker, the co-director of the Center for Economic and Policy
Research in Washington, the fees would raise a ton of money, perhaps $100
billion or more annually — money that the government sorely needs.
But there’s another intriguing element to the proposal. While the fees would be
a trivial expense for what the general public tends to think of as ordinary
traders — people investing in stocks, bonds or other assets for some reasonable
period of time — they would amount to a much heavier lift for speculators, the
folks who bring a manic quality to the markets, who treat it like a casino.
“It raises money in a way that comes primarily at the expense of speculation,”
said Mr. Baker. “The fees would be a considerable expense for someone who is
buying futures, or a stock, or any asset at 2 o’clock and then selling it at 3.
The more you trade, the more you pay.
“For the typical person holding stock, who is planning to hold it for a long
period of time, paying the quarter of one percent on a trade is just not that
big a deal.”
The fees, though small, could amount to a big deal for speculators because in
addition to the volume of their trades they often make their money on very small
margins. Someone who buys an asset and then sells it an hour later at a one
percent appreciation might feel quite pleased. He or she would be less pleased
at having to pay a quarter-percent fee to purchase the asset in the first place
and then another quarter percent to sell it.
This, according to Mr. Baker, is part of the beauty of the transfer tax; it
tends to curb at least some speculation. “It’s a very progressive tax,” he said,
“that discourages nonproductive activity.”
A hallmark of the Bush years has been the rampant irresponsibility — by the
White House, Congress and the general public — when it comes to matters of
finance. The costs of the wars in Iraq and Afghanistan were placed on credit
cards and off the books. Their ultimate overall costs will be in the trillions.
Incredibly, President Bush and Congress cut taxes in wartime, which is insane.
Budget deficits and the national debt are streaking toward the moon. And the
only remedy anyone has come up with for fending off Great Depression II has been
deficit spending on a scale reminiscent of World War II.
Excuse me, but did somebody say the baby boomers are about to start retiring?
Maybe the piper will never have to be paid. Maybe the deficits will someday
magically right themselves. Maybe some prosperous future generation will be more
than happy to clean up the mess we left behind.
If none of that is true, we should start looking now for some real money
somewhere. A stock transfer tax is not a bad place to start.
Where the Money Is, NYT,
to Recession’s Pain,
Thousands to Lose Jobless Benefits
January 12, 2009
The New York Times
By PATRICK McGEEHAN
and MATHEW R. WARREN
Just as the recession is throwing people out of work at an alarming rate, the
unemployment insurance system in New York and many other states will start
cutting off benefits this week for thousands of people who have been unable to
find jobs since early last year.
About 50,000 New Yorkers who had been collecting unemployment checks for 11
months — the longest stretch that benefits have been available since the last
recession eight years ago — will stop receiving weekly payments this week,
according to the State Labor Department.
In normal circumstances, people laid off from full-time jobs can collect
benefits for up to 26 weeks, after which they fall off the rolls. But some of
the people who will lose benefits this week have been on unemployment for 46
weeks because Congress approved extensions of jobless benefits twice last year.
This will be the first time since the early 1990s that workers are exhausting
benefits that have been extended twice because of an economic downturn. The
inability of those people to find work after so many months provides a stark
reminder of the weakness of the job market, officials and experts say.
For many of those facing the loss of that lifeline, the next step may be
welfare, experts say.
Julio Ponce, a 55-year-old chef, has been using his weekly $352 unemployment
check to pay the rent on his apartment in the Bushwick section of Brooklyn since
he lost his job at a center for the elderly more than a year ago. But he said he
did not know how he would cover the $800 monthly rent after his unemployment
benefits lapsed this week.
“No one is helping me,” said Mr. Ponce, who was faxing his résumé to hotels and
restaurants from an employment office in Downtown Brooklyn on Thursday. “I’ve
applied for public assistance, but I don’t think I’m going to get it.”
Extended benefits are also about to expire over the next week or two in
Massachusetts, Texas, Virginia, Pennsylvania and at least 20 other states,
according to the National Employment Law Project, a nonprofit organization that
advocates for lower-wage workers. No official estimates exist for how many
people would lose their benefits in those states, but experts said it was likely
to exceed 200,000.
In Philadelphia, Tony Green, 38, said he was due to collect the last of his
checks by Jan. 25. His twice-extended benefits have amounted to $470 a month
after taxes, forcing him to give up a rented house in the Fox Chase section of
the city and move with his two teenage children to a place in North Philadelphia
that he described as “drug-infested and dirty.”
Mr. Green said he had sold his car and borrowed more than $10,000, mostly on
“maxed-out” credit cards. He has been taking construction jobs to supplement his
benefits, but said he feared the extra income would dry up as the economy
“People are really tapped out,” he said.
Unemployment insurance, a federal system that is administered by the states, was
intended as a stopgap, half-year source of relief, not a long-term source of
income. But last year, as the economy slumped and the unemployment rate rose,
Congress approved two extensions of jobless benefits, one for 13 weeks and the
second for up to 20 additional weeks. The national unemployment rate rose again
in December to 7.2 percent, a 16-year high, the government reported Friday.
However, New York and about two dozen other states have not yet qualified for
the full 20 weeks of the second extension, because their jobless rates have been
lower than other states. The latest extension was limited to seven weeks in
states where the unemployment rate had not averaged at least 6 percent for three
consecutive months. New Jersey and Connecticut have already qualified for the
New York’s unemployment rate has been rising in recent months, surpassing 6
percent in November. But the rate will have to jump again this month for workers
in the state to qualify for the full 13-week extension.
The formula for triggering the availability of more emergency benefits has left
New York’s commissioner of labor, M. Patricia Smith, in the odd position of
rooting for a higher jobless rate.
“We’ve seen over the last year a large jump in the number of people who do
exhaust benefits because, as the economic climate gets worse and worse, it
becomes harder to become re-employed,” Ms. Smith said Thursday.
The program providing the additional 33 weeks of benefits is scheduled to expire
March 31, meaning no extended benefits would be available after that date. But
Congress is considering legislation supported by President-elect Barack Obama
that would continue the program until the end of the year.
Each month, about 18,000 state residents use the last of their regular benefits,
and most of them immediately seek to start collecting extended benefits,
according to the Labor Department. About 116,000 New Yorkers are collecting
extended benefits now, including those who will receive their final checks this
Unemployed workers in New York not only receive fewer weeks of extended benefits
than jobless residents of neighboring states, they also receive smaller checks.
The maximum weekly benefit in New York is $405, a limit that has not changed in
more than eight years because state lawmakers have been unwilling to raise the
payroll tax that finances unemployment benefits. In New Jersey, the top rate for
unemployment benefits is $584; Connecticut’s is $576.
Paulette Walker, 45, said she had depleted almost all of her savings since she
lost a job as an employee-benefits representative for Cigna Healthcare, where
she had worked for 17 years. She has been renting a room from her ex-husband’s
family in Crown Heights, Brooklyn, but fears she will not be able to afford even
those humble lodgings if her $331 weekly benefits run out in three weeks, as
“I worked all my life and there’s nothing wrong with me,” Ms. Walker, a Jamaican
immigrant, said, as she broke down crying. “I’m living with my ex-in-laws
because I don’t have any family here. When my benefits finish, I don’t know how
I’m going to pay for that room.”
Emanuel During, 55, whose extended benefits expired last week, said he had
resorted to substituting a bottle of soda for a meal at dinnertime. Mr. During,
who lives alone in Flatbush, Brooklyn, and does not qualify for food stamps,
said he had been searching for work since he was dismissed a year ago by the
school-bus company he drove for.
“I feel hopeless. I’ve been applying for all different types of jobs,” said Mr.
During, who said he applied for more than 20 jobs in the last few months and was
considering training to drive a tractor-trailer. “What I was doing, there’s
nothing. It’s dead, it’s dead.”
Running out of unemployment benefits “can become a real breaking point for
families,” said Andrew Stettner, deputy director of the National Employment Law
Project. “You’ll see a big increase in poverty among these families. Some people
will have to go on welfare. It’s very destabilizing. In less than a year,
they’ve gone from working class to poor.”
The first step for many people whose benefits lapse is to take “survival jobs,”
low-paying positions that do not make use of their skills, Mr. Stettner said.
Several New Yorkers who were at or near the end of their unemployment benefits
said that they might have to resort to menial jobs rather than continue pursuing
the sort of work they were trained for.
Eric Mio, 40, who has been working sporadically as a driver for a moving
company, said his benefits would run out in a few weeks. He is receiving
assistance from the state to study to become an electrician, but he said he
might have to settle for a lower-paying job in the meantime.
“I’ve been lucky, things come through,” said Mr. Mio, who lives alone in the
Williamsbridge section of the Bronx. “It’s just enough. I’m keeping a roof over
my head and food in my belly. But I don’t go out anymore.”
If he can no longer collect unemployment, he said, “I guess I’ll go to the
supermarket and bag groceries.”
Jon Hurdle contributed reporting from Philadelphia.
Adding to Recession’s Pain, Thousands to Lose
Jobless Benefits, NYT, 12.1.2009,
more calls to suicide hotlines
11 January 2009
By Marilyn Elias
Many mental-health crisis and suicide hotlines are reporting a surge in calls
from Americans feeling despair over financial losses.
It's unknown if the economic meltdown will lead to more suicides, says Lanny
Berman, executive director of the Washington-based American Association of
Suicidology. "Maybe the fact that so many are calling is a positive sign.
They're seeking help."
Although suicides spiked during the Great Depression, they didn't increase in
subsequent recessions, which lasted an average of 10 months, according to the
suicidology group's website. The current recession is 13 months long and
Concern centers on rising unemployment, Berman says, because the unemployed
have two to four times the suicide rate of employed adults.
Also, there's a strong link between humiliating losses and committing suicide.
"Losing your job, losing your home — these are such major losses," Berman says.
Although the majority can cope, adults who already have mental health problems
or lack supportive relationships are most vulnerable, he says.
Calls to the National Suicide Prevention Lifeline jumped 36% from 2007 to 2008,
totaling 545,000 last year, says director John Draper. But callers were
increasing before the economic collapse, and about half of the added calls in
2008 came from taking over a veterans' suicide line, Draper says.
He is worried because a lot of adults phoning a hotline with resources for those
facing foreclosure (888-995-HOPE ) say they feel isolated, as if they're the
only one facing this problem.
"This sense of aloneness is part of suicidal thinking," Draper says.
Among areas with suicide hotlines reporting increases in callers since the
economy slid: Dallas; Pittsburgh; suburban San Francisco; Hyattsville, Md.;
Georgia; Delaware; Detroit.
In Boston, more hotline callers with mental health problems mention job losses,
evictions or fear that they'll lose their homes, says Roberta Hurtig, executive
director at Samaritans Inc.
In Kalamazoo, Mich., and other locales, callers with mental illnesses such as
bipolar disorder say loss of insurance and cutbacks in public health programs
are preventing them from getting medications.
At the Gary, Ind., Crisis Center, suicidal callers with economic worries are
increasing, and their depression is more severe, says Willie Perry, program
coordinator for the hotline.
"There's more hopelessness. They don't see a way out," she says. "We try to help
pull them up by the bootstraps, but the bootstraps are a lot lower than they
used to be."
Economy prompts more
calls to suicide hotlines, UT, 11.1.2009,
Off the Charts, in the Wrong Direction
January 11, 2009
The New York Times
By CONRAD DE AENLLE
THE devastating declines in most investments last year were relentless and
persistent and set off by no single trigger, so it seems wrong to call what
happened a crash. It may be fair to say, though, that these worst markets in at
least two generations succumbed to the effects of a financial crash diet.
Credit is the nourishment that keeps markets and economies functioning. Too much
of it created bloated, unhealthy expansions in preceding years, and the sharp
reduction in its availability in 2008 resulted in plunges in domestic and
foreign stocks, real estate, commodities and corporate bonds — almost any asset
not considered free of risk.
No stock market escaped. The research firm MSCI Barra compiles indexes for 67
markets around the world, and not even one showed a gain last year. Tunisia,
with a loss of 8.7 percent, came closest to breaking even.
It may seem hard to believe — and small consolation when fund shareholders open
their year-end statements and survey the damage — but American stocks were among
the standouts. The Standard & Poor’s 500-stock index lost 38.5 percent, compared
with a decline of 45.2 percent for an MSCI index of global stocks that excludes
the United States.
Most of the year’s decline here was in the fourth quarter, as investors
concluded that government efforts to rescue the financial system and economy
were insufficient, and insufficiently thought out, to get the job done and
prevent a severe recession. The S.& P. 500 fell 22.5 percent in the quarter.
That sent the domestic equity funds in Morningstar’s database to an average loss
of 22.6 percent for the quarter and brought the full-year decline to 36.7
percent. The average foreign stock fund fell 21.1 percent during the final
quarter and 42.9 percent for the year, dragged down especially by the
performance of emerging markets.
There was at least one place to hide last year, and it became awfully crowded.
Treasury securities soared in an overbooked flight to safety as yields descended
to their lowest levels in more than a half-century.
Funds specializing in long-term government bonds had an average gain of 17.5
percent in the fourth quarter and 20.4 percent for all of 2008. It was the best
performance by far among the 50 or so asset classes that Morningstar follows,
other than funds that bet on a declining stock market, and one of the few that
ended ahead for the year.
The extreme market action and the uncertainties hanging over the economy and the
financial system have made strategists and portfolio managers more circumspect
than usual when issuing forecasts. Getting a handle on 2009 is tricky because
they are still trying to make sense of 2008.
“No one has ever seen these kinds of readings,” said James Swanson, chief
investment strategist for MFS, the Boston fund manager.
He and other advisers highlighted one reading that would be encouraging under
normal conditions: the waves of urgent selling have left stocks remarkably cheap
by longtime benchmarks.
“Every single traditional measure shows that the stock market is ridiculously
undervalued,” said Jonathan Golub, who runs an investment strategy firm, Golub
Mr. Golub is reluctant to proclaim the market a bargain, however, because
growing concern about the most insidious economic plague — deflation — could
keep the public from investing, borrowing or spending.
“The deflationary psychology hasn’t played through yet,” he said. “Once you get
into that negative spiral, it’s extraordinarily difficult to break it.”
Investors often bank on the future as soon as they see a glimmer of clarity and
hope, so stocks may rally when the economic backdrop offers little reason for
it. James Margard, chief investment officer of Rainier Investment Management,
expects another expedition up the wall of worry this year.
“Unemployment will get worse, we will continue to see more bankruptcies, and the
consumer will continue to be stressed,” he said, but he predicted that the
market would be increasingly upbeat nonetheless.
Mr. Margard highlighted “certain signs of encouragement” already, including the
improved affordability of housing and the savings for motorists now buying
gasoline for a fraction of its summer 2008 cost. The impact of near-zero
interest rates after Federal Reserve cuts should help, too, he said, along with
the hundreds of billions the Treasury has spent or will spend to stimulate the
“There hasn’t been a recession in modern history where the markets didn’t bottom
in the middle of it,” he said.
The middle of a recession is where Mr. Margard expects certain stocks to come
into their own, including the Apollo Group, a provider of adult education, and a
consultancy — Watson Wyatt Worldwide — whose services should be in demand among
nervous, befuddled employers.
Two companies in the railroad industry, Norfolk Southern and Westinghouse Air
Brake Technologies, or Wabtec, should do well “if we’re within a year of the end
of the recession,” he said.
As it turns out, we’re no longer within a year of the start of the recession.
The National Bureau of Economic Research determined only last month that the
economy was in recession — and that it began in December 2007.
Bob Turner, chief investment officer of Turner Investment Partners, is willing
to bet that times have been hard enough for long enough to make it worthwhile to
return to stocks. He thinks the market has already hit bottom and that, if the
historical pattern holds, it will bounce about 40 percent from the low.
HE recommends “high-quality growth companies at bargain-basement prices,” like
the tech blue chips Apple, Qualcomm and Google. He also likes several industries
— retailing, homebuilding, financial services and semiconductor manufacturing —
that are highly sensitive to economic conditions and are thus potentially big
beneficiaries of a recovery.
Robert Arnott, chairman of the asset management firm Research Affiliates, is far
less confident about the stock market’s prospects. He warns of a further decline
and sees a better buying opportunity in 6 to 12 months.
While he is avoiding stocks, he finds investment-grade corporate bonds a
worthwhile middle ground for investors looking to assume a bit of risk. With
recent yields roughly six percentage points above those of Treasury bonds, he
wondered, “How on earth could they have defaults large enough to make that 6
percent spread reasonable?”
For his part, Mr. Swanson at MFS suggests taking the long view. With the outlook
for the economy and corporate earnings so iffy, he says that he doesn’t know if
stocks are a short-term bargain, but that they look cheap to him for anyone who
can hold on for, say, a decade. He called stocks and high-quality corporate
bonds “two glaring opportunities to ride out the storm.”
The short-term outlook for some investors is so up in the air in this perilous
economy that they don’t have the luxury of considering the long term, Mr. Golub
“If you have a cyclical job, you don’t have the ability to take on a lot of
stock market and economic risk, and you should be much more conservative,” he
Patient investors with more secure circumstances and an appetite for risk,
meanwhile, stand a good chance of getting fat again after such a lean year.
“If you’re a tenured professor, a physician at a hospital or a fireman, you
should be looking at these opportunities in the market and think: ‘This is
fantastic, I can buy cheap inventory. Time is on my side.’ ” Mr. Golub said.
“Your goal should be taking the most risk you can as long as you can survive the
worst possible outcome.”
Off the Charts, in the
Wrong Direction, NYT, 11.1.2009,
A Plan to Jump-Start Economy
With No Instruction Manual
January 10, 2009
The New York Times
By EDMUND L. ANDREWS
and DAVID M. HERSZENHORN
WASHINGTON — The fresh evidence on Friday of the economy’s downward spiral
focused even more attention on two questions: Is the stimulus package being
pushed by President-elect Barack Obama big enough? And will the component parts
being assembled by Congress provide the most bang for the buck?
With the Federal Reserve having just about reached the limit of how much it can
help the economy with cuts in the interest rate, Washington’s ability to end or
at least limit the recession depends in large part on the effectiveness of the
big package of additional spending and tax cuts that Mr. Obama has made the
centerpiece of his agenda.
And with the economy facing what now seems sure to be the sharpest downturn
since the 1930s, the financial system balky and the government facing towering
budget deficits, economists and policy makers acknowledge that there is no
“We have very few good examples to guide us,” said William G. Gale, a senior
fellow at the Brookings Institution, the liberal-leaning research organization.
“I don’t know of any convincing evidence that what has been proposed is going to
In part because Mr. Obama wants and needs bipartisan support, the package is
being shaped by political as well as economic imperatives, complicating the
process by putting competing ideological approaches into the mix.
It includes $300 billion in temporary tax cuts for individuals and businesses,
in part to attract Republican support. It includes a big expansion of safety-net
programs like unemployment insurance, which Democrats say makes both economic
and social sense. It includes more money for highways, schools and other public
infrastructure; more money for “green” energy projects; and more money to help
state governments pay for health care and education.
Republicans, as always, are advocating for more and broader tax cuts. But the
evidence is ambiguous about whether tax cuts will really spur economic activity
at a time when consumers and businesses alike are frozen in fear and reluctant
to let go of their money.
The risk is that Mr. Obama and the Congress will weigh down their effort with
measures that cost many billions of dollars but may not have much impact on
Tax breaks, for example, usually produce less than $1 of stimulus for every
dollar they cost, economists say. Spending on public construction projects, like
highways and bridges, produces the most economic activity — but there is a limit
to how many projects are “shovel-ready,” and even those take time to generate
jobs and ripple through the economy.
Christina Romer, whom Mr. Obama has designated to be his chief economist,
concluded in research she helped write in 1994 that interest-rate policy is the
most powerful force in economic recoveries and that fiscal stimulus generally
acts too slowly to be of much help in pulling the economy out of recessions,
though associates said she now supports a big stimulus package if policy makers
roll it out early enough in the recession.
The goal behind all those ideas is to jump-start economic activity by getting as
much money as possible as quickly as possible into the hands of consumers and
businesses, trying to make up for the falling demand in the private sector that
is leading to higher unemployment. And although the package includes a big dose
of tax cuts, it represents a big departure from President Bush’s playbook by
relying heavily on direct government spending.
“This is not an intellectual exercise, and there’s no pride of authorship,” Mr.
Obama told a news conference in Washington on Friday. “If members of Congress
have good ideas, if they can identify a project for me that will create jobs in
an efficient way — that does not hamper our ability to, over the long term, get
control of our deficit; that is good for the economy — then I’m going to accept
Mr. Obama’s aides said he did not intend to unveil a detailed formal proposal
but rather to allow Congress to fill in the outline that he has proposed.
Given the recent scale of the downturn — the nation lost 1.5 million jobs in the
last three months of 2008, and economic output during those months shrank by 6
percent compared with same period in 2007 — economists were highly uncertain
about whether the economic plan would provide enough firepower.
Adam Posen, the deputy director of the Peterson Institute for International
Economics in Washington, said Mr. Obama’s plan could provide just the right
boost — if it was carried out properly.
But as the Federal Reserve has been learning for months now, the biggest
obstacle to economic activity right now is not a shortage of money. The real
obstacle is pervasive fear, which has made banks reluctant to lend and companies
reluctant to invest in expansion.
Alan J. Auerbach, an economist at the University of California, Berkeley, said
the overall scale of the program looked “reasonable” at $800 billion over two
“It’s much bigger than anything that’s been tried in my lifetime, but this is
scarier than anything we’ve seen in my lifetime,” Professor Auerbach said.
Left to their own devices, many Congressional Democrats would prefer to focus
almost entirely on spending projects and avoid tax incentives.
“One thing we learned from the Depression is marginal, incentive changes don’t
work very well when the economy is falling away from you very rapidly,” said
Senator Kent Conrad, Democrat of North Dakota and chairman of the Senate Budget
Committee. “And that’s what’s occurring here.”
But Republicans have been adamant about the need for tax breaks, and Mr. Obama
has made it clear he would like to bring as many members on board as possible.
Representative Paul D. Ryan, Republican of Wisconsin, said in an interview, “I
really do believe that if you combine the evidence of history along with the
psychological concerns about making investments in the economy today, the better
bang for your buck is lower taxes that are certain and permanent and lasting.”
The Democratic plan would direct much of the stimulus money to low-income and
middle-income families. That reflects both traditional Democratic concerns about
helping lower-income households, as well as the view of economists who say that
people with lower incomes are more likely to spend rather than save any money
they receive from the government.
Mark M. Zandi, chief economist at Moody’s Economy.com, a forecasting firm, told
a forum of House Democrats this week that the “bang for the buck” — the
additional economic activity generated by each dollar of fiscal stimulus — was
highest for increases in food and unemployment benefits. Each dollar of
additional money for food stamps yields $1.73 in additional economic activity,
Mr. Zandi estimated, and each extra dollar in unemployment benefits yields about
By contrast, Mr. Zandi estimated, most tax cuts produce less than a dollar for
each dollar of stimulus, especially if the tax cuts are temporary, because
people save at least some of their extra money.
One of the few tax cuts that economists say can generate a positive bang for the
buck is a reduction in payroll taxes for Social Security and Medicare.
Mr. Obama wants to offer a tax credit of $500 for individuals, and up to $1,000
for families, which they would receive through a temporary reduction in payroll
tax withholdings. The idea, known as the Making Work Pay credit, was part of Mr.
Obama’s economic platform during the presidential campaign. As originally
envisioned, it would have been available to households with annual incomes as
high as $200,000.
But economists said the tax credit could have drawbacks as an economic stimulus
measure, mainly because people usually save part of the money or use it to pay
down debt. That makes good sense from an individual’s standpoint but does
nothing to increase economic activity.
Joel Slemrod, a professor of tax policy at the University of Michigan, said,
“The research I’ve done on the 2001 and 2008 tax rebates suggests that the
proportion of the rebates that went to spending was rather small, about
After Congress approved Mr. Bush’s tax rebate to individuals and families last
spring, economic activity jumped fleetingly during the summer, and then stalled
out again in the fall.
Some Democratic officials were also skeptical.
“It’s not that rebates don’t work under normal conditions,” said one senior
Democratic aide in the Senate. “It’s that current conditions are not normal and
are not favorable to rebates or broad tax relief.”
Jackie Calmes contributed reporting.
A Plan to Jump-Start Economy With No
Instruction Manual, NYT, 10.1.2009,
China Losing Taste
for Debt From the U.S.
January 8, 2009
The New York Times
By KEITH BRADSHER
HONG KONG — China has bought more than $1 trillion of American debt, but as
the global downturn has intensified, Beijing is starting to keep more of its
money at home, a move that could have painful effects for American borrowers.
The declining Chinese appetite for United States debt, apparent in a series of
hints from Chinese policy makers over the last two weeks, with official
statistics due for release in the next few days, comes at an inconvenient time.
On Tuesday, President-elect Barack Obama predicted the possibility of
trillion-dollar deficits “for years to come,” even after an $800 billion
stimulus package. Normally, China would be the most avid taker of the debt
required to pay for those deficits, mainly short-term Treasuries, which are
In the last five years, China has spent as much as one-seventh of its entire
economic output buying foreign debt, mostly American. In September, it surpassed
Japan as the largest overseas holder of Treasuries.
But now Beijing is seeking to pay for its own $600 billion stimulus — just as
tax revenue is falling sharply as the Chinese economy slows. Regulators have
ordered banks to lend more money to small and medium-size enterprises, many of
which are struggling with lower exports, and to local governments to build new
roads and other projects.
“All the key drivers of China’s Treasury purchases are disappearing — there’s a
waning appetite for dollars and a waning appetite for Treasuries, and that
complicates the outlook for interest rates,” said Ben Simpfendorfer, an
economist in the Hong Kong office of the Royal Bank of Scotland.
Fitch Ratings, the credit rating agency, forecasts that China’s foreign reserves
will increase by $177 billion this year — a large number, but down sharply from
an estimated $415 billion last year.
China’s voracious demand for American bonds has helped keep interest rates low
for borrowers ranging from the federal government to home buyers. Reduced
Chinese enthusiasm for buying American bonds will reduce this dampening effect.
For now, of course, there seems to be no shortage of buyers for Treasury bonds
and other debt instruments as investors flee global economic uncertainty for the
stability of United States government debt. This is why Treasury yields have
plummeted to record lows. (The more investors want notes and bonds, the lower
the yield, and short-term rates are close to zero.) The long-term effects of
China’s using its money to increase its people’s standard of living, and the
United States’ becoming less dependent on one lender, could even be positive.
But that rebalancing must happen gradually to not hurt the value of American
bonds or of China’s huge holdings.
Another danger is that investors will demand higher returns for holding Treasury
securities, which will put pressure on the United States government to increase
the interest rates those securities pay. As those interest rates increase, they
will put pressure on the interest rates that other borrowers pay.
When and how all that will happen is unknowable. What is clear now is that the
impact of the global downturn on China’s finances has been striking, and it is
having an effect on what the Chinese government does with its money.
The central government’s tax revenue soared 32 percent in 2007, as factories
across China ran at full speed. But by November, government revenue had dropped
3 percent from a year earlier. That prompted Finance Minister Xie Xuren to warn
on Monday that 2009 would be “a difficult fiscal year.”
A senior central bank official, Cai Qiusheng, mentioned just before Christmas
that China’s $1.9 trillion foreign exchange reserves had actually begun to
shrink. The reserves — mainly bonds issued by the Treasury, Fannie Mae and
Freddie Mac — had for the most part been rising quickly ever since the Asian
financial crisis in 1998.
The strength of the dollar against the euro in the fourth quarter of last year
contributed to slower growth in China’s foreign reserves, said Fan Gang, an
academic adviser to China’s central bank, at a conference in Beijing on Tuesday.
The central bank keeps track of the total value of its reserves in dollars, so a
weaker euro means that euro-denominated assets are worth less in dollars,
decreasing the total value of the reserves.
But the pace of China’s accumulation of reserves began slowing in the third
quarter along with the slowing of the Chinese economy, and appeared to reflect
much broader shifts.
China manages its reserves with considerable secrecy. But economists believe
about 70 percent is denominated in dollars and most of the rest in euros.
China has bankrolled its huge reserves by effectively requiring the country’s
entire banking sector, which is state-controlled, to take nearly one-fifth of
its deposits and hand them to the central bank. The central bank, in turn, has
used the money to buy foreign bonds.
Now the central bank is rapidly reducing this requirement and pushing banks to
lend more money in China instead.
At the same time, three new trends mean that fewer dollars are pouring into
China — so the government has fewer dollars to buy American bonds.
The first, little-noticed trend is that the monthly pace of foreign direct
investment in China has fallen by more than a third since the summer.
Multinationals are hoarding their cash and cutting back on construction of new
The second trend is that the combination of a housing bust and a two-thirds fall
in the Chinese stock market over the last year has led many overseas investors —
and even some Chinese — to begin quietly to move money out of the country,
despite stringent currency controls.
So much Chinese money has poured into Hong Kong, which has its own
internationally convertible currency, that the territory announced Wednesday
that it had issued a record $16.6 billion worth of extra currency last month to
A third trend that may further slow the flow of dollars into China is the
reduction of its huge trade surpluses.
China’s trade surplus set another record in November, $40.1 billion. But because
prices of Chinese imports like oil are starting to recover while demand remains
weak for Chinese exports like consumer electronics, most economists expect China
to run average trade surpluses this year of less than $20 billion a month.
That would give China considerably less to spend abroad than the $50 billion a
month that it poured into international financial markets — mainly American bond
markets — during the first half of 2008.
“The pace of foreign currency flows into China has to slow,” and therefore the
pace of China’s reinvestment of that foreign currency in overseas bonds will
also slow, said Dariusz Kowalczyk, the chief investment officer at SJS Markets
Ltd., a Hong Kong securities firm.
Two officials of the People’s Bank of China, the nation’s central bank, said in
separate interviews that the government still had enough money available to buy
dollars to prevent China’s currency, the yuan, from rising. A stronger yuan
would make Chinese exports less competitive.
For a combination of financial and political reasons, the decline in China’s
purchases of dollar-denominated assets may be less steep than the overall
decline in its purchases of foreign assets.
Many Chinese companies are keeping more of their dollar revenue overseas instead
of bringing it home and converting it into yuan to deposit in Chinese banks.
Treasury data from Washington also suggests the Chinese government might be
allocating a higher proportion of its foreign currency reserves to the dollar in
recent weeks and less to the euro. The Treasury data suggests China is buying
more Treasuries and fewer bonds from Fannie Mae or Freddie Mac, with a sharp
increase in Treasuries in October.
But specialists in international money flows caution against relying too heavily
on these statistics. The statistics mostly count bonds that the Chinese
government has bought directly, and exclude purchases made through banks in
London and Hong Kong; with the financial crisis weakening many banks, the
Chinese government has a strong incentive to buy more of its bonds directly than
in the past.
The overall pace of foreign reserve accumulation in China seems to have slowed
so much that even if all the remaining purchases were Treasuries, the Chinese
government’s overall purchases of dollar-denominated assets will have fallen,
China’s leadership is likely to avoid any complete halt to purchases of
Treasuries for fear of appearing to be torpedoing American chances for an
economic recovery at a vulnerable time, said Paul Tang, the chief economist at
the Bank of East Asia here.
“This is a political decision,” he said. “This is not purely an investment
China Losing Taste for
Debt From the U.S., NYT, 8.1.2009,
Bank of America Raises $2.8 Billion
January 8, 2009
The New York Times
HONG KONG — The Bank of America raised $2.83 billion from selling part of its
holding in China Construction Bank, and Hong Kong’s richest tycoon followed by
selling a $500 million stake in its rival, Bank of China.
Shares in China’s big banks skidded on Wednesday after Bank of America’s
early-morning sale, with investors expecting further sell-downs in the face of
slowing earnings growth at mainland lenders and the lapse of lock-up provisions
on stake holdings.
China’s three largest banks attracted big strategic investments from western
financial giants at the time of their initial offerings. Some investors,
including Royal Bank of Scotland, are under pressure to sell as the global
financial crisis ravages the banking industry.
Bank of America sold more than 5.62 billion Construction Bank shares at 3.92
Hong Kong dollars each, according to a term sheet obtained by Reuters, in a deal
that had been widely anticipated by the market.
Bank of America realizes a profit of about $1.13 billion on the stake sale,
based on Construction Bank’s initial offering price. It sold the stake at a 12
percent discount to the stock’s Tuesday close.
“The news has been expected but investors will still take it hard because BoA
will most definitely sell more,” said Francis Lun, general manager with
Fulbright Securities in Hong Kong. “They need the money. ”
The stake sold represents about 2.5 percent in Construction Bank, and will leave
Bank of America with a 16.6 percent holding in the Beijing-controlled lender.
Bank of America bought its initial stake in Construction Bank ahead of the
mainland lender’s 2005 offering and built its holding up to just over 19
Later Wednesday, an investor identified as a foundation controlled by the tycoon
Li Ka-shing sold Bank of China shares worth up to $524 million.
Mr. Li, who is chairman of Hutchison Whampoa and the property developer Cheung
Kong (Holdings), was selling two billion shares, according to a term sheet.
The shares were being sold at a discount of 5 to 7.5 percent to Wednesday
closing price in Hong Kong.
A spokeswoman for Mr. Li was not immediately available to comment.
In another Chinese sell-down by a western bank, Switzerland’s embattled UBS
recently sold its holding in Bank of China.
Citigroup said Bank of China might see further stake sales this year by Royal
Bank of Scotland, which holds 8.3 percent, and Singapore’s state investment
agency, Temasek Holdings, which owns 4.1 percent. Lockups on those stakes lapsed
last month, it said.
Industrial and Commercial Bank of China could also come under sale pressure this
Goldman Sachs, Allianz and American Express Company own a combined 7.3 percent
in Industrial and Commercial Bank of China, with lockups that will lapse in
April and October, Citigroup said in a note.
Bank of America Raises
$2.8 Billion, NYT, 8.1.2009,
$1.2 Trillion Deficit Forecast
as Obama Weighs Options
January 8, 2009
The New York Times
By DAVID STOUT
and EDMUND L. ANDREWS
WASHINGTON — Changes in Social Security and Medicare will be central to
efforts to bring federal spending in line, President-elect Barack Obama said
Wednesday, as the Congressional Budget Office projected a $1.2 trillion budget
deficit for the fiscal year.
“We expect that discussion around entitlements will be a part, a central part”
of efforts to curb federal spending, Mr. Obama said at a news conference. By
February, he said, “we will have more to say about how we’re going to approach
Alluding to the projected deficit, which was accompanied by grim unemployment
predictions, Mr. Obama said: “And we know that our recovery and reinvestment
plan will necessarily add more. My own economic and budget team projects that,
unless we take decisive action, even after our economy pulls out of its slide,
trillion-dollar deficits will be a reality for years to come.”
Mr. Obama did not offer specifics on how he would address Social Security and
Medicare, nor was there any hint that he anticipates asking Congress to approve
draconian cuts in benefits. The programs are vital to millions of Americans, and
talk of cutting benefits has long been considered politically explosive. On the
other hand, both programs face long-range problems, given the growing legions of
baby-boomers and, in the case of Medicare, the ever-rising cost of health care.
The demographic problems have been recognized for years. Social Security was
adjusted in the early 1980s, with people born later having to wait longer to
begin collecting all of their benefits. (Social Security is financed through
payroll taxes, as is Medicare, although the latter program also depends on
general tax revenues and premiums from beneficiaries.) Mr. Obama faces a
confluence of bad economic news and problems. Tax revenues are declining, public
confidence in the financial system is shaky and the president-elect has called
for spending close to $800 billion to stimulate the economy and create some
three million jobs. The budget office predicted that the unemployment rate,
which was 6.7 percent in November, would climb above 9 percent by the end of
2009. “If we do nothing,” Mr. Obama said, “then we will continue to see red ink
as far as the eye can see.” And the underlying problem, he said, “is not just a
deficit of dollars, it’s a deficit of accountability and a deficit of trust.”
Part of his approach, the president-elect pledged, would be to eliminate
wasteful spending. As expected, he announced the appointment of Nancy Killefer
to the post of chief performance officer to head a “line by line” scrutiny of
“For nearly 30 years — as a leader at McKinsey & Company and as assistant
secretary for management, chief financial officer, and chief operating officer
at Treasury under President Clinton — Nancy has built a career out of making
major American corporations and public institutions more effective, more
efficient and more transparent,” Mr. Obama said.
Ms. Killefer said she would “do my best to create a government that works better
for its citizens,” and that government employees “will be central to this
As for the startling estimate from the nonpartisan Congressional Budget Office,
if it proves accurate, the budget deficit would be nearly two and a half times
bigger than the previous record shortfall of $455 billion reached in 2008.
The estimate was far higher than most other analysts have predicted. If combined
with the gigantic stimulus package of tax cuts and new spending that Mr. Obama
is preparing, which could amount to nearly $800 billion over two years, the
shortfall this year could hit $1.6 trillion.
But Mr. Obama and Democratic leaders in Congress said they were more determined
than ever to pass a stimulus package by Feb. 16.
“This is one of the worst budget forecasts I have seen in my lifetime,” said
Senator Kent Conrad, Democrat of North Dakota and chairman of the Senate Budget
But Mr. Conrad said the forecast merely highlighted the urgency of enacting a
stimulus program to prevent the recession from getting worse.
“We must act quickly to pass an economic recovery package that will create jobs
and jump-start economic growth,” he said. “While it is understandable that this
package will worsen our near-term budget picture, we should not enact provisions
that will exacerbate our long-term deficits and debt.”
The House Republican leader, Representative John A. Boehner of Ohio, said the
budget office estimate “makes it clearer than ever that we cannot borrow and
spend our way back to prosperity,” and that he hoped Republicans and Democrats
could join in cutting wasteful spending.
The budget office said its grim budget projection stemmed from the severe plunge
of the economy, which it predicted would contract 2.2 percent in 2009 and
register anemic growth in 2010.
The agency warned the budget would be pummeled by both falling tax revenues and
rising costs for unemployment benefits, food stamps and other social programs
that kick in as shock absorbers during a recession.
It estimated that tax revenues will sink by $166 billion, or 6.6 percent.
But one reason that the agency’s deficit estimate was higher than those of
outside analysts was that it added in hundreds of billions of dollars in
spending tied to the government’s existing bailout programs, which the Bush
administration has thus fare treated as “investments” it would recoup rather
than “spending” or “costs” that are down the drain.
For example, the budget office estimated that the present-value cost of the
Treasury Department’s $700 billion bailout program for financial institutions —
known as the Troubled Assets Relief Program — would be $180 billion in 2009. The
agency said that estimate was based on its judgment of the program’s risks and
probable losses over time.
In addition, the budget office said it included all the money used in propping
up Fannie Mae and Freddie Mac, the government-sponsored mortgage finance
companies that the Treasury seized in September and put into a conservatorship.
Those costs would add $240 billion to the deficit in 2009.
If the forecasts are remotely accurate, the deficit would obliterate all
previous postwar deficit records not only in nominal dollar amounts but also in
the way economists consider most accurate: the deficit as a share of the
nation’s economic output.
The agency said the deficit would equal 8.3 percent of gross domestic product,
obliterating previous postwar record of 6 percent, reached in 1983 under
President Ronald Reagan.
$1.2 Trillion Deficit
Forecast as Obama Weighs Options, NYT, 8.1.2009,
How Do We Fix the Financial Mess?
January 7, 2009
The New York Times
To the Editor:
Re “The End of the
Financial World as We Know It” and “How to Repair a Broken Financial World,”
by Michael Lewis and David Einhorn (Op-Ed, Jan. 4):
We may, as a country, feel that we are partly to blame for this national
financial crisis, but much of this is misplaced guilt.
Sure, many of us borrowed money against our houses, but not just to buy big TVs.
Many families were working two or more jobs with stagnant salaries that couldn’t
keep up with inflation.
As a nation, we have virtually no savings, not only because we consumed too
much, but also because we were just getting by. This, despite the fact that we
work longer hours than our parents did.
We needed money wherever we could get it just to keep up with the rising cost of
living. The banks, led by the government, offered to step in with loans, and we
took them. What were we supposed to do?
Mr. Lewis and Mr. Einhorn make an excellent, common-sense argument for some
simple but radical reforms in Washington. What I would add is the outrage.
Bellport, N.Y., Jan. 6, 2009
To the Editor:
It is unfortunate that so many fiduciaries (including managers of foundations,
endowments and funds) could invest so much money with Bernard L. Madoff
apparently without performing fundamental, common-sense due diligence. The red
flags were numerous, including a serious lack of transparency, a tiny storefront
auditor and uncannily smooth and consistent returns.
The whole affair confirms what Stephen J. Brown, Bing Liang and I conclude in a
paper published recently in The Journal of Investment Management: basic due
diligence on the operations of a money manager is a fundamental part of a
fiduciary’s duties and can have a direct impact on investment return.
Thomas L. Fraser
New York, Jan. 6, 2009
The writer is a lawyer.
To the Editor:
I find the proposal by Michael Lewis and David Einhorn on foreclosures to be
irresponsible. After suggesting that making payments on mortgages greater than
the current values of homes “doesn’t make sense,” they propose a universal plan
for requiring banks to accept the current value in the form of a new
taxpayer-provided loan to the homeowner.
They would also void second mortgages, subordinate home equity loans and allow
this to apply to all, wealthy speculators included, by not requiring bankruptcy
of the recipient of this taxpayer largess.
“Moral hazard” is not an empty phrase. Its avoidance preserves the values of
fairness that a government and economic system rest upon. What we really need is
a serious discussion of housing policy, now and in the future.
Encinitas, Calif., Jan. 5, 2009
To the Editor:
The fact that the current appraised value of a home is less than its mortgage
isn’t reason to default. A homeowner will default if he took out a teaser rate
mortgage that reset or speculated by buying various “investment” properties.
Shouldn’t he suffer the consequences of his poor decisions?
If someone was misled into taking a teaser loan but did so in good faith,
intending to make payments, and was then unable to do so because of an
unexpected jump in monthly payments, maybe that person should be eligible for a
loan modification. But are there really 20 million such families out there?
House prices will stop declining when you can buy a house, rent it and carry it
for free. When that price is reached, capitalists will rush in and start buying
properties again, creating a bottom. Why shouldn’t the market be allowed to
Marcelo P. Lima
Miami, Jan. 5, 2009
To the Editor:
Michael Lewis and David Einhorn write that the Securities and Exchange
Commission has proposed “measures that fail to address the central problem: that
the raters are paid by the issuers.” They say, “There should be a rule against
issuers paying for ratings.”
It would be a great mistake for the S.E.C., in its enthusiasm for taking
corrective action, to end the official status of certain rating agencies, for
such an action would result in the elimination of any standards for rating
agencies, thereby encouraging the proliferation of unregulated rating agencies
and contributing to the problem of credit ratings quality.
Egan-Jones is a nationally recognized statistical rating organization (the
official status that the authors would like to end) that rates a wide range of
corporate and other issuers of debt obligations. Our revenues are entirely
derived from institutional investors, rather than issuers, and thus avoid
irreconcilable conflicts of interest.
Sean J. Egan
Egan-Jones Ratings Company
Haverford, Pa., Jan. 5, 2009
To the Editor:
I disagree that employees of the Securities and Exchange Commission should be
barred from accepting jobs at Wall Street firms. Such a prohibition would deeply
harm the S.E.C.’s ability to attract top legal talent. Any law student who can
secure an S.E.C. position undoubtedly had offers to make three times as much
from a large law firm.
I worked as a legal intern for a summer at the Federal Trade Commission, a
federal agency where young lawyers left almost weekly to go to large law firms
through a similar revolving door. They did so not because they were greedy, but
because their law school debt was so high — often $200,000 — that staying in the
job meant choosing between paying only interest on their debt or living in their
If the government is serious about retaining talent at its agencies, it should
use the carrot, not the stick. For starters, employees should be able to make no
student loan payments for the first few years of service (interest free) and
receive complete loan forgiveness after a set period (say, five years). This
would enable idealistic regulators to stay.
Timothy J. DeLizza
Brooklyn, Jan. 5, 2009
To the Editor:
I hope President-elect Barack Obama pays heed to the thoughtful advice of
Michael Lewis and David Einhorn. How can we recover economically if the
government keeps trying to treat the symptoms and not the disease itself?
Whitehouse Station, N.J., Jan. 4, 2009
How Do We Fix the
Financial Mess?, NYT, 7.1.2009,
Obama Warns of Prospect
for Trillion-Dollar Deficits
January 7, 2009
The New York Times
By JEFF ZELENY
and EDMUND L. ANDREWS
WASHINGTON — President-elect Barack Obama on Tuesday braced Americans for the
unparalleled prospect of “trillion-dollar deficits for years to come,” a stark
assessment of the budgetary outlook that he said would force his administration
to impose tighter fiscal discipline on the government.
Mr. Obama sought to distinguish between the need to run what is likely to be
record-setting deficits for several years and the necessity to begin bringing
them down markedly in subsequent years. Even as he prepares a stimulus plan that
is expected to total nearly $800 billion in new spending and tax cuts over the
next two years, he said he would make sure the money was wisely spent, and he
pledged to work with Congress to enact spending controls and efficiency measures
throughout the federal budget.
“We’re not going to be able to expect the American people to support this
critical effort unless we take extraordinary steps to ensure that the
investments are made wisely and managed well,” Mr. Obama said, speaking about
the dire fiscal outlook after meeting with his economic team for a second
In his most explicit language on the subject since winning the election, Mr.
Obama sought to reassure lawmakers and the financial markets that he was aware
of the long-term dangers of running huge deficits and would take steps to limit
and eventually reduce them.
Big deficits force the government to borrow more money, saddling future
generations with large financial burdens and leaving the nation reliant on
foreign governments and other big investors to lend cash. The problem is even
more acute now because credit markets, which in recent months have made it much
harder and more expensive for businesses and individuals to borrow, could be
further strained by financing a huge government deficit.
On Wednesday, Mr. Obama plans to name a chief performance officer with the task
of finding government efficiencies. He has chosen Nancy Killefer, who is
director of McKinsey & Company, a management consulting firm, and was an
assistant secretary of the Treasury in the Clinton administration. The
Congressional Budget Office will also release its latest budget estimates,
providing the first official predictions of the shortfalls tied to the economic
slowdown and the fallen financial markets.
Mr. Obama has made the economy virtually the sole public focus of his first full
week in Washington since winning the election. He called on Tuesday for the
creation of an economic recovery oversight board that would include outside
advisers to monitor spending — and find abuses — of the economic stimulus plan.
He also said earmarks for lawmakers’ special projects would be banned from the
“When the American people spoke last November, they were demanding change —
change in policies that helped deliver the worst economic crisis that we’ve see
since the Great Depression,” Mr. Obama told reporters at his transition offices.
He added, “They were demanding that we restore a sense of responsibility and
prudence to how we run our government.”
But Republicans and some fiscally conservative Democrats have expressed concern
that the need for a substantial economic stimulus plan could sweep away for
years any serious effort to bring government spending into line with its
While economists almost universally support running large deficits to combat the
kind of steep recession the country is grappling with now, they are increasingly
expressing alarm at the prospect of sustained fiscal imbalances heading into a
period in which the aging of the population will create huge budgetary strains
because of the growing costs of the Medicare and Social Security programs.
Still, the deficit now seems likely to be so large that it will inevitably
constrain Mr. Obama’s administration to some degree. At a minimum, it seems sure
to force him to walk a line between maintaining the confidence of the financial
markets, which could drive interest rates up sharply if they doubt his will or
ability to improve the government’s financial condition in the long run, and
various constituencies that will be pressing him to make good on his campaign
Mr. Obama has so far not backed away from any of the big initiatives he ran on,
including his plan to expand health insurance. On that issue, as on others, he
has begun making a case that the economically prudent course is to invest now in
addressing the nation’s big challenges rather than avoiding them in the name of
saving money in the short run.
Mr. Obama was not specific about the size of the deficit he expects, beyond his
reference to “a trillion-dollar deficit or close to a trillion-dollar deficit”
for the fiscal year that ends Sept. 30. Aides said later that the estimate — in
line with what economists have been anticipating given the economy’s rapid
deterioration — did not include the costs of the proposed stimulus package,
which could add hundreds of billions of dollars more to the red ink.
At $1 trillion, the deficit would not only shatter the largest previous
shortfall in dollar terms — $455 billion last year — but it could also exceed
the post-World War II-era record by the measure more meaningful in economic
terms, the deficit as a percentage of total economic activity.
Diane Rogers, chief economist at the Concord Coalition, a nonpartisan
organization that supports fiscal discipline, estimated that the deficit this
year would hit 7 percent of the gross domestic product. The largest previous
record in those terms was in 1983, when it hit 6 percent.
Mr. Obama declined to say on Tuesday whether the budget that his administration
submits to Congress in February would be larger than the $3.1 trillion budget
that President Bush submitted for the current fiscal year. He also did not offer
any specific examples of how spending could be controlled, saying only that his
advisers had been scouring the budget looking for programs that could be
“I’m going to be willing to make some very difficult choices in how we get a
handle on his deficit,” Mr. Obama said. “That’s what the American people are
looking for and, you know, what we intended to do this year.”
But the short-term budget shortfalls are big enough to pose serious headaches in
themselves, especially if bond investors start demanding higher interest rates.
In just the first three months of the 2009 fiscal year, which began on Oct. 1,
the government spent $408 billion more than it took in. About one-third of that
shortfall stemmed from the Treasury Department’s rescue program of injecting
capital into banks, which the government will book as an “investment” rather
The recession itself will add hundreds of billions of dollars to the deficit.
Even before Congress adds any new stimulus measures, higher outlays will climb
for existing unemployment benefits, food stamps and other social programs. Tax
revenues will fall because of rising unemployment, falling corporate profits and
huge investment losses in the stock and bond markets. Mr. Obama’s stimulus
program could add another $400 billion in each of the next two years.
“One thing investors have to be thinking is, what’s the exit strategy? How do we
unwind this stuff?” said Robert Bixby, director of the Concord Coalition. “I
would analogize it to what the government is doing with the auto companies.
Congress said, we’ll give you the money but you have to show us a plan for
Mr. Bixby added, “Now the government is in the same position of the auto
companies, but they haven’t come up with any plan for sustainability.”
As the latest budget estimates are released on Wednesday, the good news, at
least for the moment, is that the Treasury’s borrowing costs are as almost as
low as they have ever been. Short-term Treasury rates are hovering just above
zero, but the rates on 10-year Treasury bonds are about 2.5 percent.
Obama Warns of Prospect for Trillion-Dollar
Deficits, NYT, 7.1.2009,
Drop More Than Expected in Nov.
January 6, 2009
Filed at 11:12 a.m. ET
The New York Times
By THE ASSOCIATED PRESS
WASHINGTON (AP) -- Orders to factories fell for a record fourth straight
month in November, and analysts believe manufacturing will continue to suffer in
coming months as the country slogs through a recession entering its second year.
The Commerce Department said Tuesday that orders declined by 4.6 percent in
November, nearly double the 2.5 percent drop economists expected. Orders have
been falling since August, including a 6 percent plunge in October, the biggest
setback in eight years.
The weakness in November reflected a big drop in demand for commercial aircraft.
Weakness also was seen in autos, primary metals such as steel, and defense
Separately, the Institute for Supply Management reported Tuesday that a closely
watched gauge of activity in the services sector rose slightly in December but
still remained at recessionary levels. The services sector index rose to 40.6
from 36.3 in November. Any reading below 50 signals contraction.
The factory orders report showed that demand for durable goods, items expected
to last three or more years, fell by 1.5 percent in November, even worse than
the government's initial estimate two weeks ago that durable goods had fallen 1
Demand for nondurable goods, items such as food, paper and petroleum products,
dropped by 7.4 percent in November following a 3.8 percent decline in October.
The declines for nondurable goods reflect falling demand and a big drop in
prices, particularly for energy products.
The declines in November were led by a 37.7 percent plunge in demand for
commercial aircraft, an extremely volatile series. Boeing Co. has been seeking
to resume normal operations following the interruptions caused by a strike last
Demand for autos slipped by 0.1 percent following an even larger 4.1 percent
fall in October as automakers continue to struggle with the economic downturn.
The Bush administration last month announced that it would lend $17.4 billion to
General Motors Corp. and Chrysler LLC from the government's $700 billion rescue
fund in an effort to buy them time to reorganize and avoid having to file for
Excluding transportation, orders would have posted a 4.2 percent decline in
November. Demand for primary metals such as steel fell by 2.7 percent, while
orders for defense communications equipment were down 12.1 percent.
Demand for heating and air conditioning products fell by 11.6 percent in
November, reflecting in part the hard times the nation's homebuilders are
The National Association of Realtors said Tuesday that pending home sales in
November fell to the lowest level in the eight-year history of its index. The
trade group said its seasonally adjusted index of pending sales for existing
homes fell to 82.3 from a downwardly revised October reading of 85.7. That was
far worse than the reading of 88 that economists expected, according to a survey
by Thomson Reuters.
Economists are concerned that the manufacturing sector is being hit not only by
a recession in the United States but spreading weakness overseas which has
pushed many of America's major trading partners into downturns and cut into
domestic export sales.
Factory Orders Drop More
Than Expected in Nov., NYT, 6.1.2009,
How to Repair a Broken Financial World
January 4, 2009
The New York Times
By MICHAEL LEWIS and DAVID EINHORN
Continued from "The
End of the Financial World As We Know It"
Mr. Paulson must have had some reason for doing what he did. No doubt he still
believes that without all this frantic activity we’d be far worse off than we
are now. All we know for sure, however, is that the Treasury’s heroic
deal-making has had little effect on what it claims is the problem at hand: the
collapse of confidence in the companies atop our financial system.
Weeks after receiving its first $25 billion taxpayer investment, Citigroup
returned to the Treasury to confess that — lo! — the markets still didn’t trust
Citigroup to survive. In response, on Nov. 24, the Treasury handed Citigroup
another $20 billion from the Troubled Assets Relief Program, and then simply
guaranteed $306 billion of Citigroup’s assets. The Treasury didn’t ask for its
fair share of the action, or management changes, or for that matter anything
much at all beyond a teaspoon of warrants and a sliver of preferred stock. The
$306 billion guarantee was an undisguised gift. The Treasury didn’t even bother
to explain what the crisis was, just that the action was taken in response to
Citigroup’s “declining stock price.”
Three hundred billion dollars is still a lot of money. It’s almost 2 percent of
gross domestic product, and about what we spend annually on the departments of
Agriculture, Education, Energy, Homeland Security, Housing and Urban Development
and Transportation combined. Had Mr. Paulson executed his initial plan, and
bought Citigroup’s pile of troubled assets at market prices, there would have
been a limit to our exposure, as the money would have counted against the $700
billion Mr. Paulson had been given to dispense. Instead, he in effect granted
himself the power to dispense unlimited sums of money without Congressional
oversight. Now we don’t even know the nature of the assets that the Treasury is
standing behind. Under TARP, these would have been disclosed.
THERE are other things the Treasury might do when a major financial firm assumed
to be “too big to fail” comes knocking, asking for free money. Here’s one: Let
Not as chaotically as Lehman Brothers was allowed to fail. If a failing firm is
deemed “too big” for that honor, then it should be explicitly nationalized, both
to limit its effect on other firms and to protect the guts of the system. Its
shareholders should be wiped out, and its management replaced. Its valuable
parts should be sold off as functioning businesses to the highest bidders —
perhaps to some bank that was not swept up in the credit bubble. The rest should
be liquidated, in calm markets. Do this and, for everyone except the firms that
invented the mess, the pain will likely subside.
This is more plausible than it may sound. Sweden, of all places, did it
successfully in 1992. And remember, the Federal Reserve and the Treasury have
already accepted, on behalf of the taxpayer, just about all of the downside risk
of owning the bigger financial firms. The Treasury and the Federal Reserve would
both no doubt argue that if you don’t prop up these banks you risk an enormous
credit contraction — if they aren’t in business who will be left to lend money?
But something like the reverse seems more true: propping up failed banks and
extending them huge amounts of credit has made business more difficult for the
people and companies that had nothing to do with creating the mess. Perfectly
solvent companies are being squeezed out of business by their creditors
precisely because they are not in the Treasury’s fold. With so much lending
effectively federally guaranteed, lenders are fleeing anything that is not.
Rather than tackle the source of the problem, the people running the bailout
desperately want to reinflate the credit bubble, prop up the stock market and
head off a recession. Their efforts are clearly failing: 2008 was a historically
bad year for the stock market, and we’ll be in recession for some time to come.
Our leaders have framed the problem as a “crisis of confidence” but what they
actually seem to mean is “please pay no attention to the problems we are failing
In its latest push to compel confidence, for instance, the authorities are
placing enormous pressure on the Financial Accounting Standards Board to suspend
“mark-to-market” accounting. Basically, this means that the banks will not have
to account for the actual value of the assets on their books but can claim
instead that they are worth whatever they paid for them.
This will have the double effect of reducing transparency and increasing
self-delusion (gorge yourself for months, but refuse to step on a scale, and
maybe no one will realize you gained weight). And it will fool no one. When you
shout at people “be confident,” you shouldn’t expect them to be anything but
If we are going to spend trillions of dollars of taxpayer money, it makes more
sense to focus less on the failed institutions at the top of the financial
system and more on the individuals at the bottom. Instead of buying dodgy assets
and guaranteeing deals that should never have been made in the first place, we
should use our money to A) repair the social safety net, now badly rent in ways
that cause perfectly rational people to be terrified; and B) transform the
bailout of the banks into a rescue of homeowners.
We should begin by breaking the cycle of deteriorating housing values and
resulting foreclosures. Many homeowners realize that it doesn’t make sense to
make payments on a mortgage that exceeds the value of their house. As many as 20
million families face the decision of whether to make the payments or turn in
the keys. Congress seems to have understood this problem, which is why last year
it created a program under the Federal Housing Authority to issue homeowners new
government loans based on the current appraised value of their homes.
And yet the program, called Hope Now, seems to have become one more excellent
example of the unhappy political influence of Wall Street. As it now stands,
banks must initiate any new loan; and they are loath to do so because it
requires them to recognize an immediate loss. They prefer to “work with
borrowers” through loan modifications and payment plans that present fewer
accounting and earnings problems but fail to resolve and, thereby, prolong the
underlying issues. It appears that the banking lobby also somehow inserted into
the law the dubious requirement that troubled homeowners repay all home equity
loans before qualifying. The result: very few loans will be issued through this
THIS could be fixed. Congress might grant qualifying homeowners the ability to
get new government loans based on the current appraised values without requiring
their bank’s consent. When a corporation gets into trouble, its lenders often
accept a partial payment in return for some share in any future recovery.
Similarly, homeowners should be permitted to satisfy current first mortgages
with a combination of the proceeds of the new government loan and a share in any
future recovery from the future sale or refinancing of their homes. Lenders who
issued second mortgages should be forced to release their claims on property.
The important point is that homeowners, not lenders, be granted the right to
obtain new government loans. To work, the program needs to be universal and
should not require homeowners to file for bankruptcy.
There are also a handful of other perfectly obvious changes in the financial
system to be made, to prevent some version of what has happened from happening
all over again. A short list:
Stop making big regulatory decisions with long-term consequences based on their
short-term effect on stock prices. Stock prices go up and down: let them. An
absurd number of the official crises have been negotiated and resolved over
weekends so that they may be presented as a fait accompli “before the Asian
markets open.” The hasty crisis-to-crisis policy decision-making lacks coherence
for the obvious reason that it is more or less driven by a desire to please the
stock market. The Treasury, the Federal Reserve and the S.E.C. all seem to view
propping up stock prices as a critical part of their mission — indeed, the
Federal Reserve sometimes seems more concerned than the average Wall Street
trader with the market’s day-to-day movements. If the policies are sound, the
stock market will eventually learn to take care of itself.
End the official status of the rating agencies. Given their performance it’s
hard to believe credit rating agencies are still around. There’s no question
that the world is worse off for the existence of companies like Moody’s and
Standard & Poor’s. There should be a rule against issuers paying for ratings.
Either investors should pay for them privately or, if public ratings are deemed
essential, they should be publicly provided.
Regulate credit-default swaps. There are now tens of trillions of dollars in
these contracts between big financial firms. An awful lot of the bad stuff that
has happened to our financial system has happened because it was never explained
in plain, simple language. Financial innovators were able to create new products
and markets without anyone thinking too much about their broader financial
consequences — and without regulators knowing very much about them at all. It
doesn’t matter how transparent financial markets are if no one can understand
what’s inside them. Until very recently, companies haven’t had to provide even
cursory disclosure of credit-default swaps in their financial statements.
Credit-default swaps may not be Exhibit No. 1 in the case against financial
complexity, but they are useful evidence. Whatever credit defaults are in
theory, in practice they have become mainly side bets on whether some company,
or some subprime mortgage-backed bond, some municipality, or even the United
States government will go bust. In the extreme case, subprime mortgage bonds
were created so that smart investors, using credit-default swaps, could bet
against them. Call it insurance if you like, but it’s not the insurance most
people know. It’s more like buying fire insurance on your neighbor’s house,
possibly for many times the value of that house — from a company that probably
doesn’t have any real ability to pay you if someone sets fire to the whole
neighborhood. The most critical role for regulation is to make sure that the
sellers of risk have the capital to support their bets.
Impose new capital requirements on banks. The new international standard now
being adopted by American banks is known in the trade as Basel II. Basel II is
premised on the belief that banks do a better job than regulators of measuring
their own risks — because the banks have the greater interest in not failing.
Back in 2004, the S.E.C. put in place its own version of this standard for
investment banks. We know how that turned out. A better idea would be to require
banks to hold less capital in bad times and more capital in good times. Now that
we have seen how too-big-to-fail financial institutions behave, it is clear that
relieving them of stringent requirements is not the way to go.
Another good solution to the too-big-to-fail problem is to break up any
institution that becomes too big to fail.
Close the revolving door between the S.E.C. and Wall Street. At every turn we
keep coming back to an enormous barrier to reform: Wall Street’s political
influence. Its influence over the S.E.C. is further compromised by its ability
to enrich the people who work for it. Realistically, there is only so much that
can be done to fix the problem, but one measure is obvious: forbid regulators,
for some meaningful amount of time after they have left the S.E.C., from
accepting high-paying jobs with Wall Street firms.
But keep the door open the other way. If the S.E.C. is to restore its
credibility as an investor protection agency, it should have some experienced,
respected investors (which is not the same thing as investment bankers) as
commissioners. President-elect Barack Obama should nominate at least one with a
notable career investing capital, and another with experience uncovering
corporate misconduct. As it happens, the most critical job, chief of
enforcement, now has a perfect candidate, a civic-minded former investor with
firsthand experience of the S.E.C.’s ineptitude: Harry Markopolos.
The funny thing is, there’s nothing all that radical about most of these
changes. A disinterested person would probably wonder why many of them had not
been made long ago. A committee of people whose financial interests are somehow
bound up with Wall Street is a different matter.
How to Repair a Broken
Financial World, NYT, 4.1.2009,
End of the Financial World
as We Know It
January 4, 2009
The New York Times
By MICHAEL LEWIS
and DAVID EINHORN
AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve
been viewed by the wider world with mistrust and suspicion on other matters, but
on the subject of money even our harshest critics have been inclined to believe
that we knew what we were doing. They watched our investment bankers and
emulated them: for a long time now half the planet’s college graduates seemed to
want nothing more out of life than a job on Wall Street.
This is one reason the collapse of our financial system has inspired not merely
a national but a global crisis of confidence. Good God, the world seems to be
saying, if they don’t know what they are doing with money, who does?
Incredibly, intelligent people the world over remain willing to lend us money
and even listen to our advice; they appear not to have realized the full extent
of our madness. We have at least a brief chance to cure ourselves. But first we
need to ask: of what?
To that end consider the strange story of Harry Markopolos. Mr. Markopolos is
the former investment officer with Rampart Investment Management in Boston who,
for nine years, tried to explain to the Securities and Exchange Commission that
Bernard L. Madoff couldn’t be anything other than a fraud. Mr. Madoff’s
investment performance, given his stated strategy, was not merely improbable but
mathematically impossible. And so, Mr. Markopolos reasoned, Bernard Madoff must
be doing something other than what he said he was doing.
In his devastatingly persuasive 17-page letter to the S.E.C., Mr. Markopolos saw
two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a
broker as well as an investor, was “front-running” his brokerage customers. A
customer might submit an order to Madoff Securities to buy shares in I.B.M. at a
certain price, for example, and Madoff Securities instantly would buy I.B.M.
shares for its own portfolio ahead of the customer order. If I.B.M.’s shares
rose, Mr. Madoff kept them; if they fell he fobbed them off onto the poor
In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the
world’s largest Ponzi Scheme.” Which, as we now know, it was.
Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three
years before Mr. Madoff was finally exposed — but he had been trying to explain
the fraud to them since 1999. He had no direct financial interest in exposing
Mr. Madoff — he wasn’t an unhappy investor or a disgruntled employee. There was
no way to short shares in Madoff Securities, and so Mr. Markopolos could not
have made money directly from Mr. Madoff’s failure. To judge from his letter,
Harry Markopolos anticipated mainly downsides for himself: he declined to put
his name on it for fear of what might happen to him and his family if anyone
found out he had written it. And yet the S.E.C.’s cursory investigation of Mr.
Madoff pronounced him free of fraud.
What’s interesting about the Madoff scandal, in retrospect, is how little
interest anyone inside the financial system had in exposing it. It wasn’t just
Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter,
Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted
Mr. Madoff’s profits or assumed he was front-running his customers and steered
clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr.
Madoff’s investors may have suspected that they were the beneficiaries of a
scam. After all, it wasn’t all that hard to see that the profits were too good
to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that
could happen to them, if the authorities put a stop to the front-running, was
that a good thing would come to an end.
The Madoff scandal echoes a deeper absence inside our financial system, which
has been undermined not merely by bad behavior but by the lack of checks and
balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation
for the current financial crisis. Greed was necessary but insufficient; in any
case, we are as likely to eliminate greed from our national character as we are
lust and envy. The fixable problem isn’t the greed of the few but the misaligned
interests of the many.
A lot has been said and written, for instance, about the corrupting effects on
Wall Street of gigantic bonuses. What happened inside the major Wall Street
firms, though, was more deeply unsettling than greedy people lusting for big
checks: leaders of public corporations, especially financial corporations, are
as good as required to lead for the short term.
Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal,
the former chief executive of Merrill Lynch, and Charles O. Prince III,
Citigroup’s chief executive, may have paid themselves humongous sums of money at
the end of each year, as a result of the bond market bonanza. But if any one of
them had set himself up as a whistleblower — had stood up and said “this
business is irresponsible and we are not going to participate in it” — he would
probably have been fired. Not immediately, perhaps. But a few quarters of
earnings that lagged behind those of every other Wall Street firm would invite
outrage from subordinates, who would flee for other, less responsible firms, and
from shareholders, who would call for his resignation. Eventually he’d be
replaced by someone willing to make money from the credit bubble.
OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all
sorts of important, plugged-in people to sacrifice our collective long-term
interests for short-term gain. The pressure to do this in today’s financial
markets is immense. Obviously the greater the market pressure to excel in the
short term, the greater the need for pressure from outside the market to
consider the longer term. But that’s the problem: there is no longer any serious
pressure from outside the market. The tyranny of the short term has extended
itself with frightening ease into the entities that were meant to, one way or
another, discipline Wall Street, and force it to consider its enlightened
The credit-rating agencies, for instance.
Everyone now knows that Moody’s and Standard & Poor’s botched their analyses of
bonds backed by home mortgages. But their most costly mistake — one that
deserves a lot more attention than it has received — lies in their area of
putative expertise: measuring corporate risk.
Over the last 20 years American financial institutions have taken on more and
more risk, with the blessing of regulators, with hardly a word from the rating
agencies, which, incidentally, are paid by the issuers of the bonds they rate.
Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky
asset on your balance sheet, you will face a serious downgrade.”
The American International Group, Fannie Mae, Freddie Mac, General Electric and
the municipal bond guarantors Ambac Financial and MBIA all had triple-A ratings.
(G.E. still does!) Large investment banks like Lehman and Merrill Lynch all had
solid investment grade ratings. It’s almost as if the higher the rating of a
financial institution, the more likely it was to contribute to financial
catastrophe. But of course all these big financial companies fueled the creation
of the credit products that in turn fueled the revenues of Moody’s and Standard
These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do
their jobs badly. They didn’t simply miss a few calls here and there. In pursuit
of their own short-term earnings, they did exactly the opposite of what they
were meant to do: rather than expose financial risk they systematically
This is a subject that might be profitably explored in Washington. There are
many questions an enterprising United States senator might want to ask the
credit-rating agencies. Here is one: Why did you allow MBIA to keep its triple-A
rating for so long? In 1990 MBIA was in the relatively simple business of
insuring municipal bonds. It had $931 million in equity and only $200 million of
debt — and a plausible triple-A rating.
By 2006 MBIA had plunged into the much riskier business of guaranteeing
collateralized debt obligations, or C.D.O.’s. But by then it had $7.2 billion in
equity against an astounding $26.2 billion in debt. That is, even as it insured
ever-greater risks in its business, it also took greater risks on its balance
Yet the rating agencies didn’t so much as blink. On Wall Street the problem was
hardly a secret: many people understood that MBIA didn’t deserve to be rated
triple-A. As far back as 2002, a hedge fund called Gotham Partners published a
persuasive report, widely circulated, entitled: “Is MBIA Triple A?” (The answer
was obviously no.)
At the same time, almost everyone believed that the rating agencies would never
downgrade MBIA, because doing so was not in their short-term financial interest.
A downgrade of MBIA would force the rating agencies to go through the costly and
cumbersome process of re-rating tens of thousands of credits that bore triple-A
ratings simply by virtue of MBIA’s guarantee. It would stick a wrench in the
machine that enriched them. (In June, finally, the rating agencies downgraded
MBIA, after MBIA’s failure became such an open secret that nobody any longer
cared about its formal credit rating.)
The S.E.C. now promises modest new measures to contain the damage that the
rating agencies can do — measures that fail to address the central problem: that
the raters are paid by the issuers.
But this should come as no surprise, for the S.E.C. itself is plagued by
similarly wacky incentives. Indeed, one of the great social benefits of the
Madoff scandal may be to finally reveal the S.E.C. for what it has become.
Created to protect investors from financial predators, the commission has
somehow evolved into a mechanism for protecting financial predators with
political clout from investors. (The task it has performed most diligently
during this crisis has been to question, intimidate and impose rules on
short-sellers — the only market players who have a financial incentive to expose
fraud and abuse.)
The instinct to avoid short-term political heat is part of the problem; anything
the S.E.C. does to roil the markets, or reduce the share price of any given
company, also roils the careers of the people who run the S.E.C. Thus it seldom
penalizes serious corporate and management malfeasance — out of some misguided
notion that to do so would cause stock prices to fall, shareholders to suffer
and confidence to be undermined. Preserving confidence, even when that
confidence is false, has been near the top of the S.E.C.’s agenda.
IT’S not hard to see why the S.E.C. behaves as it does. If you work for the
enforcement division of the S.E.C. you probably know in the back of your mind,
and in the front too, that if you maintain good relations with Wall Street you
might soon be paid huge sums of money to be employed by it.
The commission’s most recent director of enforcement is the general counsel at
JPMorgan Chase; the enforcement chief before him became general counsel at
Deutsche Bank; and one of his predecessors became a managing director for Credit
Suisse before moving on to Morgan Stanley. A casual observer could be forgiven
for thinking that the whole point of landing the job as the S.E.C.’s director of
enforcement is to position oneself for the better paying one on Wall Street.
At the back of the version of Harry Markopolos’s brave paper currently making
the rounds is a copy of an e-mail message, dated April 2, 2008, from Mr.
Markopolos to Jonathan S. Sokobin. Mr. Sokobin was then the new head of the
commission’s office of risk assessment, a job that had been vacant for more than
a year after its previous occupant had left to — you guessed it — take a
higher-paying job on Wall Street.
At any rate, Mr. Markopolos clearly hoped that a new face might mean a new ear —
one that might be receptive to the truth. He phoned Mr. Sokobin and then sent
him his paper. “Attached is a submission I’ve made to the S.E.C. three times in
Boston,” he wrote. “Each time Boston sent this to New York. Meagan Cheung,
branch chief, in New York actually investigated this but with no result that I
am aware of. In my conversations with her, I did not believe that she had the
derivatives or mathematical background to understand the violations.”
How does this happen? How can the person in charge of assessing Wall Street
firms not have the tools to understand them? Is the S.E.C. that inept? Perhaps,
but the problem inside the commission is far worse — because inept people can be
replaced. The problem is systemic. The new director of risk assessment was no
more likely to grasp the risk of Bernard Madoff than the old director of risk
assessment because the new guy’s thoughts and beliefs were guided by the same
incentives: the need to curry favor with the politically influential and the
desire to keep sweet the Wall Street elite.
And here’s the most incredible thing of all: 18 months into the most spectacular
man-made financial calamity in modern experience, nothing has been done to
change that, or any of the other bad incentives that led us here in the first
SAY what you will about our government’s approach to the financial crisis, you
cannot accuse it of wasting its energy being consistent or trying to win over
the masses. In the past year there have been at least seven different bailouts,
and six different strategies. And none of them seem to have pleased anyone
except a handful of financiers.
When Bear Stearns failed, the government induced JPMorgan Chase to buy it by
offering a knockdown price and guaranteeing Bear Stearns’s shakiest assets. Bear
Stearns bondholders were made whole and its stockholders lost most of their
Then came the collapse of the government-sponsored entities, Fannie Mae and
Freddie Mac, both promptly nationalized. Management was replaced, shareholders
badly diluted, creditors left intact but with some uncertainty. Next came Lehman
Brothers, which was, of course, allowed to go bankrupt. At first, the Treasury
and the Federal Reserve claimed they had allowed Lehman to fail in order to
signal that recklessly managed Wall Street firms did not all come with
government guarantees; but then, when chaos ensued, and people started saying
that letting Lehman fail was a dumb thing to have done, they changed their story
and claimed they lacked the legal authority to rescue the firm.
But then a few days later A.I.G. failed, or tried to, yet was given the gift of
life with enormous government loans. Washington Mutual and Wachovia promptly
followed: the first was unceremoniously seized by the Treasury, wiping out both
its creditors and shareholders; the second was batted around for a bit.
Initially, the Treasury tried to persuade Citigroup to buy it — again at a
knockdown price and with a guarantee of the bad assets. (The Bear Stearns
model.) Eventually, Wachovia went to Wells Fargo, after the Internal Revenue
Service jumped in and sweetened the pot with a tax subsidy.
In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded
Congress that he needed $700 billion to buy distressed assets from banks —
telling the senators and representatives that if they didn’t give him the money
the stock market would collapse. Once handed the money, he abandoned his
promised strategy, and instead of buying assets at market prices, began to
overpay for preferred stocks in the banks themselves. Which is to say that he
essentially began giving away billions of dollars to Citigroup, Morgan Stanley,
Goldman Sachs and a few others unnaturally selected for survival. The stock
market fell anyway.
It’s hard to know what Mr. Paulson was thinking as he never really had to
explain himself, at least not in public. But the general idea appears to be that
if you give the banks capital they will in turn use it to make loans in order to
stimulate the economy. Never mind that if you want banks to make smart, prudent
loans, you probably shouldn’t give money to bankers who sunk themselves by
making a lot of stupid, imprudent ones. If you want banks to re-lend the money,
you need to provide them not with preferred stock, which is essentially a loan,
but with tangible common equity — so that they might write off their losses,
resolve their troubled assets and then begin to make new loans, something they
won’t be able to do until they’re confident in their own balance sheets. But as
it happened, the banks took the taxpayer money and just sat on it.
Continued at "How to Repair a Broken Financial World."
Michael Lewis, a contributing editor at Vanity Fair and the author of “Liar’s
Poker,” is writing a book about the collapse of Wall Street. David Einhorn is
the president of Greenlight Capital, a hedge fund, and the author of “Fooling
Some of the People All of the Time.” Investment accounts managed by Greenlight
may have a position (long or short) in the securities discussed in this article.
The End of the Financial World as We
Know It, NYT, 4.1.2009,
Try Frantic Discounts and Giveaways
January 3, 2009
The New York Times
By JACK HEALY
At a dealership on the outskirts of Miami, people who agree to buy one Dodge
Ram truck can get a second truck or car — free. In 415 supermarkets across the
East, customers who bring in a prescription can walk out with free antibiotics.
And one clothing chain, not to be outdone, has started offering three suits for
the price of one.
An era of desperation marketing is at hand, with stores and automobile
dealerships adopting virtually any tactic that might grab the attention of
After one of the worst holiday seasons in decades, businesses are doing whatever
they can to clear their shelves and make way for spring merchandise. Sales of 50
percent off stopped capturing the attention of customers weeks ago, so stores
are layering discounts on top of discounts, and trying to lure shoppers with
promises of giveaways, bulk bargains and other gimmicks.
“Retailers are trying everything in the book,” said C. Britt Beemer, chairman of
America’s Research Group, a consumer research firm. “You’re seeing things like,
‘Buy one, get two free.’ That’s just unheard of, and the item you’re buying
isn’t even full price.”
He added, “When you’re advertising those sorts of price points, you’re just
trading trash for cash. There’s no strategy. You’re just trying to get rid of
For stores, offers like free antibiotics, three-for-one sweaters and
90-percent-off Sony PlayStations are usually “loss leaders,” a retailing term
for sweet deals meant to drive traffic. The stores hope not only to clear out
merchandise that is not moving, but also to draw in customers who will spend
money on other items.
With sales of clothing, electronics, luxury goods and more down by double digits
in the dismal economy, these loss leaders are more important than ever, analysts
said. Stores began discounting long before the holiday season and slashed prices
even more as Christmas approached, but the sales alone were not enough to clear
away winter inventory.
“Fear is very high right now,” said Dan de Grandpre, editor of the Web site
DealNews. “What you’re going to see is retailers do as much as they can to be as
creative as possible. You’re going to see more of this aggressive and sometimes
panicky discounting from apparel stores and electronics stores.”
At the Samsonite outlet in Castle Rock, Colo., two free pairs of boots come with
the purchase of one pair; similarly, at the home furnishings store
Domestications, three throw rugs go for the price of one. Toys “R” Us had
three-for-one Crayola products, and there were three-for-one cashmere sweaters
at Off Fifth, the Saks outlet chain, according to news reports.
“They had so many freebies,” said Carrie Koors, who lives in Cincinnati and
writes a blog about bargain-hunting. “It was really a great holiday season to
shop and get stuff for next season.”
Of course, selling items at two- or three-for-the-price-of-one is effectively
just a fat discount on each item.
But Dan Ariely, a professor of behavioral economics at Duke University, says the
word “free” can work psychological magic on reluctant consumers.
“When you offer something for free it’s more exciting,” said Mr. Ariely, the
author of “Predictably Irrational.” “We don’t think of it in the same way. We
just get tempted, because we think of it as only having pluses and no negatives.
Free is like a whole new category.”
And so the deals keep multiplying. The clothing company PacSun is offering a $10
discount coupon that allows customers to buy $9.99 T-shirts and slippers for
only the cost of shipping. A Ford dealership in San Mateo, Calif., is offering a
free scooter with the purchase of every 2009 Ford F-150. And shoppers at Jos. A.
Bank can buy three suits for the price of one, while customers at Stop & Shop
and Giant Food supermarkets can get free antibiotics to treat their winter
ailments — with a doctor’s prescription, of course.
“We’re going to take a leadership role in the industry, and we’re going to be
different,” said Faith Weiner, Stop & Shop’s director of public affairs.
In Davie, Fla., University Dodge dreamed up a “Buy 1 ... Get 2!” deal to attract
the attention of potential customers and whittle excess inventory, which had
spilled onto the lot next door. So far, the dealership has sold 40 vehicles
under the promotion, which promises customers a free Dodge Ram, Dodge Caliber or
PT Cruiser if they buy a 2008 Ram.
“Most people think we’re crazy,” said Ali Ahmed, the sales manager. “More than
anything, it’s a way to catch the customer’s interest than to just offer a
percentage or dollar amount off. They’ve heard that before.”
The dealership has advertised its two-for-one car sale online and in newspapers,
Mr. Ahmed said, and customers have been calling and showing up to see whether
the sale is a gag. But it is no joke from Mr. Ahmed’s point of view: an
estimated 900 auto dealerships out of 20,770 nationwide went out of business in
2008, according to industry estimates, and Mr. Ahmed said he did not want to
join the thousands likely to close this year.
“It’s a tough environment,” he said. “Of the dealers around you now, you know
some of them aren’t going to be on the map next year. If you can steal a little
bit of market share now, you’re not going to be one of those.”
Desperate Retailers Try
Frantic Discounts and Giveaways, NYT, 3.1.2009,
Credit Card Companies
Willing to Deal Over Debt
January 3, 2009
The New York Times
By ERIC DASH
Hard times are usually good times for debt collectors, who make their money
morning and night with the incessant ring of a phone.
But in this recession, perhaps the deepest in decades, the unthinkable is
happening: collectors, who usually do the squeezing, are getting squeezed a bit
After helping to foster the explosive growth of consumer debt in recent years,
credit card companies are realizing that some hard-pressed Americans will not be
able to pay their bills as the economy deteriorates.
So lenders and their collectors are rushing to round up what money they can
before things get worse, even if that means forgiving part of some borrowers’
debts. Increasingly, they are stretching out payments and accepting dimes, if
not pennies, on the dollar as payment in full.
“You can’t squeeze blood out of a turnip,” said Don Siler, the chief marketing
officer at MRS Associates, a big collection company that works with seven of the
10 largest credit card companies. “The big settlements just aren’t there
Lenders are not being charitable. They are simply trying to protect themselves.
Banks and card companies are bracing for a wave of defaults on credit card debt
in early 2009, and they are vying with each other to get paid first. Besides,
the sooner people get their financial houses in order, the sooner they can start
So even as many banks cut consumers’ credit lines, raise card fees and generally
pull back on lending, some lenders are trying to give customers a little wiggle
room. Bank of America, for instance, says it has waived late fees, lowered
interest charges and, in some cases, reduced loan balances for more than 700,000
credit card holders in 2008.
American Express and Chase Card Services say they are taking similar actions as
more customers fall behind on their bills. Every major credit card lender is
giving its collection agents more leeway to make adjustments for consumers in
Debt collectors, who are typically paid based on the amount of money they
recover, report that the number of troubled borrowers getting payment extensions
has at least doubled in the last six months. In other cases, borrowers who
appear to be pushed to the brink are being offered deals that forgive 20 to 70
percent of credit card debt.
“Consumers have never been in a better position to negotiate a partial payment,”
said Robert D. Manning, the author of “Credit Card Nation” and a longtime critic
of the credit card industry. “It’s like that old movie ‘Rosalie Goes Shopping.’
When it’s $100,000 of debt, it’s your problem. When it’s a million dollars of
debt, it’s the bank’s problem.”
The recent wave of debt concessions is a reversal from only a few years ago,
when consumers usually lost battles with their credit card companies. Now, as
bad debts soar, it is the lenders who are crying mercy.
Credit card lenders expect to write off an unprecedented $395 billion of soured
loans over the next five years, according to projections from The Nilson Report,
an industry newsletter. That compares with a total of about $275 billion in the
last five years.
All that bad debt is getting harder to collect. In the past, troubled borrowers
might have been able to pay down card loans by tapping the equity in their
homes, drawing on retirement savings, taking out a debt consolidation loan, or
even calling a relative for help. But with credit tight, consumers are maxed
“Knowing that the sources of funding have dried up, having someone pay the
balance in full isn’t a viable strategy,” said Tim Smith, a senior executive at
Firstsource, one of the biggest debt collection companies.
Lenders are reluctant to admit they will accept less than full payment, lest
they encourage good customers to stop paying what they can. Industrywide data is
Unlike the huge mortgage loan modification programs that are taking place, which
address thousands of mortgages at once, workouts for credit card customers are
still being handled on a case-by-case basis.
In addition to debt forgiveness, debt collectors are allowing many delinquent
borrowers to pay down their debt over the course of a year rather than the
standard six months.
Paul Hunziker, the chairman of Capital Management Services, said that before
this downturn, his firm put only about a quarter of all borrowers into
longer-term repayment plans. Now, it puts about half on such plans.
Some lenders are also reaching out to borrowers shortly after they fall behind
on their payments to try to avoid having to write off the account. Others are
reaching out to customers who seem likely to fall behind. Just as lenders
competed for years to be the first card to be taken out of the wallet, they are
now competing to be the first ones paid back.
And realizing that millions more consumers are likely to default on their credit
card bills in the coming months, the banking industry has started lobbying
regulators to make it more advantageous to lenders to extend payment terms or
In an unusual alliance, the Financial Services Roundtable, one of the industry’s
biggest lobbyists, and the Consumer Federation of America recently proposed a
credit card loan modification program, which was rejected by regulators.
Under the plan, lenders would have forgiven about 40 percent of what was owed by
individual borrowers over five years. Lenders could report the loss once
whatever part of the debt was repaid, instead of shortly after default, as
current accounting rules require. That would allow them to write off less later.
Borrowers would have been allowed to defer any tax payments owed on the forgiven
Landmark changes to bankruptcy legislation passed in 2005, for which the
industry aggressively lobbied, seem to have hurt card debt collections. Credit
card industry data indicate the average debt discharged in Chapter 7 bankruptcy
has nearly tripled since 2004. And in Chapter 13 bankruptcies, secured lenders
like auto finance companies routinely elbow out unsecured lenders like card
companies, trends that have contributed to the card lenders’ willingness to
Borrowers should not expect sweetheart deals. Card companies will offer loan
modifications only to people who meet certain criteria. Most customers must be
delinquent for 90 days or longer. Other considerations include the borrower’s
income, existing bank relationships and a credit record that suggests missing a
payment is an exception rather than the rule.
While a deal may help avoid credit card cancellation or bankruptcy, it will also
lead to a sharp drop in the borrower’s credit score for as long as seven years,
making it far more difficult and expensive to obtain new loans. The average
consumer’s score will fall 70 to 130 points, on a scale where the strongest
borrowers register 700 or more.
For the moment, it may be easier for troubled borrowers to start negotiating a
modification by contacting the card company or collection agency directly.
Credit counselors can help borrowers consolidate their debts and get card
companies to lower their interest payments and other fees, but they currently
cannot get the loan principal reduced.
Another option is for a borrower to sign up a debt settlement company to
negotiate on her behalf. But regulation of this business is loose, and consumer
advocacy groups warn that some firms prey on troubled borrowers with aggressive
marketing tactics and exorbitant upfront fees.
Credit Card Companies
Willing to Deal Over Debt, NYT, 3.1.2009,
Seeks Wide Power to Subpoena
January 3, 2009
The New York Times
By DIANA B. HENRIQUES
The trustee overseeing the bankruptcy of Bernard L. Madoff’s trading firm has
made an urgent request to the court for unusually broad authority to subpoena
witnesses and documents, citing the vast scale of what is alleged to be a
$50-billion Ponzi scheme.
While not unprecedented, the request from the trustee, Irving H. Picard, is far
from routine, and it illustrates how much Mr. Picard’s burdens have expanded
beyond a trustee’s traditional tasks of identifying assets and selling them to
Noting that “the debtor’s operations were allegedly a massive fraudulent
enterprise,” Mr. Picard said he needed the authority to issue expedited
subpoenas to investigate those allegations — and that his need was “most
The request was filed Wednesday amid new allegations that Mr. Madoff had been
pulling in fresh investors — and at least $10 million in cash — within a week of
his arrest on Dec. 11 on federal fraud charges.
The trustee is just one of several investigators trying to determine what Mr.
Madoff did with investors’ money. Federal prosecutors are conducting a criminal
investigation, while the Securities and Exchange Commission continues its
The S.E.C. is also conducting an internal examination of why it failed to
respond aggressively to previous warnings about Mr. Madoff, going back several
years. And the House Financial Services Committee will hold a hearing on Monday
to explore the regulatory implications of the Madoff case, with a witness list
that includes the S.E.C.’s inspector general.
According to his lawyers, Mr. Madoff — free on a $10 million bond but confined
to his Manhattan apartment — is cooperating with federal authorities.
Few details have emerged about the case beyond those included in the earliest
complaints: That Mr. Madoff’s sons questioned him on Dec. 10 about his plan to
distribute several hundred million dollars in bonuses two months ahead of
schedule; when confronted, he confessed that his business was a fraud whose
losses could run as high as $50 billion. His sons promptly reported the
confession to federal authorities, and their father was arrested the next day.
In a case where so much remains unknown, the new complaint filed this week by
one of Mr. Madoff’s final investors offers a small glimpse into his dealings
with his customers in the days just before he was arrested.
The accusation was made by a family corporation set up by Martin Rosenman, a
resident of Great Neck, N.Y., and the president of Stuyvesant Fuel Service, a
heating oil distributor in the New York area.
According to his lawyer, Howard Kleinhendler of Wachtel & Masyr, Mr. Rosenman
had been referred to Mr. Madoff by a friend who invested successfully with him
over many years — “the usual story, unfortunately,” he added.
Around Dec. 3 — about the time Mr. Madoff was expressing some concern to
colleagues about getting $7 billion in redemption demands, according to other
court filings — Mr. Rosenman called Mr. Madoff at his office, Bernard L. Madoff
Mr. Rosenman wanted to invest $10 million with Mr. Madoff, according to the
complaint, filed in federal bankruptcy court on Wednesday.
“Mr. Madoff stated that the fund was closed until Jan. 1, 2009, but that Mr.
Rosenman could wire money to a BMIS account where it would be held until the
fund opened after the New Year,” the complaint continued. The money was wired to
a Madoff bank account at JPMorgan Chase on Dec. 5.
On Dec. 9 — the day Mr. Madoff proposed the early bonus payments and two days
before he was arrested — Mr. Rosenman was notified by the Madoff firm that his
money had been received and invested.
No record of that transaction has been found, Mr. Kleinhendler said. “We don’t
think it happened — we don’t think any securities were bought or sold,” he
“To the contrary, we think he was deliberately collecting money,” he continued.
“He was trying to get more money in the door for this final distribution he
wanted to make.”
Although Mr. Madoff reportedly told his sons he had $100 million and $200
million to distribute, it is up to Mr. Picard, the bankruptcy trustee, to
determine what assets can be recovered for the benefit of customers of the firm.
Besides his investigative efforts, Mr. Picard is seeking a buyer for the
separate proprietary and wholesale stock-trading operations that, before this
scandal, were the foundation of Mr. Madoff’s reputation. Those operations have
been suspended since the scandal broke, and Lazard Frères & Company has been
hired by the trustee to help find a buyer for them.
In an exclusive interview on Friday, Mr. Picard said he was hopeful that those
stock-trading businesses would be sold quickly, “perhaps by the end of next
It is not clear what the businesses will fetch. Greg LaRoche of LaRoche Research
in Providence, R.I., said that one rule of thumb would value them at about three
times their net income, which would yield a price of about $200 million based on
an audit from late 2007 — a substantial discount from the firm’s reported net
worth of roughly $670 million at that time.
Other investment bankers were reluctant to put a price on the Madoff operations,
citing the uncertain market environment and the cloud the firm is now under,
although one said the range could be $200 million to $400 million.
Mr. Picard was named bankruptcy trustee at the request of the Securities
Investor Protection Corporation, the federal agency that oversees the
liquidation of failed brokerage firms. On Friday, he sent SIPC claims
applications to every customer who had an open account at Madoff within 12
months of the bankruptcy filing, regardless of when the customer last made a
deposit or withdrawal.
Even an investor who closed a Madoff account during the last year should be on
the mailing list, he said.
People who believe they had a Madoff account but who do not get a claims package
can print out the documents from the trustee’s Web site, madofftrustee.com, or
from the SIPC site, sipc.org.
Madoff Trustee Seeks
Wide Power to Subpoena, NYT, 3.1.2009,
See a Fast Economic Recovery
January 3, 2009
The New York Times
By LOUIS UCHITELLE
Economics as the dismal science? Not in some quarters.
In the midst of the deepest recession in the experience of most Americans, many
professional forecasters are optimistically heading into the new year declaring
that the worst may soon be over.
For this rosy picture to play out, they are counting on the Obama administration
and Congress to come through with a substantial stimulus package, at least $675
billion over two years.
They say that will get the economy moving again in the face of persistently weak
spending by consumers and businesses, not to mention banks that are reluctant to
If the dominoes fall the right way, the economy should bottom out and start
growing again in small steps by July, according to the December survey of 50
professional forecasters by Blue Chip Economic Indicators. Investors seemed to
be in a similarly optimistic mood on Friday, bidding up stocks by about 3
But in the absence of that government stimulus, the grim economic headlines of
2008 will probably continue for some time, these forecasters acknowledge.
“Without this federal largess, the consensus forecast for 2009 is for the
recession to continue through most of the year,” said Randell E. Moore,
executive editor of Blue Chip Economic Indicators, which conducts the monthly
survey of forecasters.
Many economists are more pessimistic, of course. Nouriel Roubini at New York
University, who called the 2008 market disaster correctly, wrote in a recent
commentary on Bloomberg News that he foresees “a deep and protracted contraction
lasting at least through the end of 2009.”
Even in 2010, he added, the recovery may be so weak “that it will feel terrible
even if the recession is technically over.”
But Mr. Roubini is not among the economists surveyed by Blue Chip Economic
Indicators. These professional forecasters are typically employed by investment
banks, trade associations and big corporations.
They base their forecasts on computer models that tend to see the American
economy as basically sound, even in the worst of times. That makes these
forecasters generally a more optimistic lot than the likes of Mr. Roubini.
Their credibility suffered for it last year. They did not see a recession until
late summer. One reason they were blindsided: their computer models do not
easily account for emotional factors like the shock from the credit crisis and
falling housing prices that have so hindered borrowing and spending.
Those models also take as a given that the natural state of a market economy
like America’s is a high level of economic activity, and that it will rebound
almost reflexively to that high level from a recession.
But that assumes that banks and other lenders are not holding back on loans, as
they are today, depriving the nation of the credit necessary for a vigorous
“Most of our models are structured in a way that the economy is self-righting,”
said Nigel Gault, chief domestic economist for IHS Global Insight, a consulting
and forecasting firm in Lexington, Mass.
Even if the economy begins to right itself by this summer, the recession would
still be the longest since the 1930s, which was the last time the government
engaged in widespread public spending to overcome the persistent inertia in
consumer and business spending.
“The consensus says we are in the deepest part of the recession now,” Mr. Moore
said. “But the stimulus package and much lower gasoline prices are expected to
somewhat restore consumer confidence and personal spending and that will put us
on the road back.”
There is a psychological factor that Robert Shiller, a Yale economist, hopes
will come into play.
“If we have massive infrastructure spending and people feel that it is working,
it could create a sense that we are O.K. and people will go back to normal,” he
said. “The real problem is that we are on hold. Everyone is.”
The expectation of most forecasters, several report, is that most of the Obama
administration’s stimulus will go for public works projects and tax cuts.
With this sort of stimulus, the gross domestic product, the chief measure of the
nation’s output, should begin to rise — if not in the third quarter, then
certainly in the fourth, the forecasters say, and the unemployment rate will
finally peak at 8 to 9 percent by early next year.
“The job insecurity is very serious; that is the worst aspect of all this,” said
Albert Wojnilower, a consulting forecaster at Craig Drill Capital. “But most
upturns in the economy have begun with upturns in consumption, when people who
still have jobs stop worrying about losing them.”
Like other forecasters, Mr. Wojnilower expects the just-ended fourth quarter to
be the recession’s worst, with the G.D.P. having contracted at a 4 or 5 or even
6 percent annual rate. Also like the others, he expects the economy to be
growing again by the end of the year, although at an annual rate of 1 percent or
less, which feels like a recession and is not enough to generate new jobs.
But the economy will no longer be contracting, and the recession that started in
December 2007 will end at 18 or 21 months of age. The previous record holders,
severe recessions in the mid-1970s and early 1980s, each lasted 16 months.
“I think that consumers are certainly in a state of shock right now, but their
behavior is fundamentally rational,” said Martin Regalia, chief economist at the
United States Chamber of Commerce. “They want to work, they want to make money
and they want to spend that money. Above all they are resilient. They lick their
wounds and with some help from government, they start back again and we come out
of this quickly.”
A key to the revival, in every forecast, is home construction and home prices.
The latter are still falling, at an even faster pace, adjusted for inflation,
than in the Great Depression, according to the S.& P./Case-Shiller Home Price
That has the knock-on effect of multiplying foreclosures and trapping millions
of people in homes that are worth less than their outstanding mortgages. Such
circumstances inevitably depress spending and business investment.
But housing will probably bottom out by spring, many forecasters now argue. The
Federal Reserve will play a role in making this happen by buying mortgage-backed
securities and, in doing so, lowering the rate on 30-year mortgages to less than
5 percent, which is roughly the present level. That will encourage not only home
buying, but also refinancing.
“In the midst of recession, with very sour moods, housing activity begins to
improve because we get a big decline in mortgage rates,” said Robert Barbera,
chief economist for ITT Investment Technology Group.
Then, too, the basic demographic demand for new homes, the forecasters say, is
1.7 million units a year. That many are not being built today, but with
inventories shrinking and prices stabilizing, home construction will revive,
many forecasters argue, contributing once again to economic growth.
“It is not fun to be a portent of doom,” Mr. Barbera said. “And even now in
these doomlike times, we in the forecasting profession say it won’t last.”
Some Forecasters See a
Fast Economic Recovery, NYT, 3.1.2009,
A Nevada Town Escapes the Slump,
Thanks to Gold
January 2, 2009
The New York Times
By STEVE FRIESS
BATTLE MOUNTAIN, Nev. — Hundreds of revelers crammed into this small town’s
community center on a recent Saturday night to celebrate the marriage of Bianca
Hernandez and Jose Lomeli.
Throngs danced to Spanish folk music well into the wee hours. Beer, wine and
laughter were abundant, and several tables were piled high with gifts. “It’s not
just the wedding,” said a friend of the newlyweds, Jesse Dias, 34. “Times are
good around here. People are happy.”
Good times? Happy people? Hasn’t word of the national economic anxiety and
resultant austerity made it to this remote high-desert capital of Lander County,
215 miles east of Reno?
Yes, it has, but the economic meltdown in much of the country has been a boon to
the county and its 5,000 residents, 4,000 of whom live in the Battle Mountain
The reason: They mine gold in Lander County, a mineral-rich area that is a major
reason Nevada, nicknamed the Silver State, is also the world’s fourth biggest
producer of gold.
And when the broader economy declines and the value of the dollar fluctuates,
people buy gold. At current prices — gold hit $892 an ounce on Monday, its
highest price in three months and not that far off its record high of more than
$1,000 an ounce in March — places like Battle Mountain hum with good-paying jobs
and rising home values, making the financial woes of the rest of the country a
“I don’t know of anybody who is getting foreclosed on; it’s just not something
that’s an issue out here,” Charlotte Thompson, 56, said, shrugging as she seated
diners on a frigid, wind-swept evening at the Owl Club Casino and Restaurant,
the main attraction of Battle Mountain’s four-block main thoroughfare, Front
Street. “That’s the way it usually goes, though. We’re always opposite of the
rest of the country.”
To grasp how anomalous Battle Mountain is now, consider the data. Home
foreclosures, as Ms. Thompson noted, are unheard of here, even though November
was the 23rd consecutive month that Nevada had the nation’s highest foreclosure
Unemployment in Lander County was 4.8 percent in November, while the statewide
rate of 8 percent was the state’s highest since 1984. Two goldless counties
bordering Lander, Nye and Pershing, had unemployment rates in November of 10.5
percent and 8 percent, respectively.
Even with annual salaries for average mining jobs starting at more than $60,000,
the two largest mining companies in the area, Barrick and Newmont, cannot find
enough qualified workers to fully staff their operations round-the-clock. Mr.
Dias, the friend of the newlyweds, is working six days a week.
Robert Perry, a shift supervisor at Barrick’s Pipeline Mine, a 12-year-old
facility near Battle Mountain that yields about a million ounces of gold a year
and is expected to continue to produce until 2014, said the mine was always
interviewing and hiring people.
“Our housing market, I would say, is better than most, just because there are
jobs around here,” Mr. Perry said. “My house I bought five years ago for
$134,000, and right now it’s worth about $300,000.”
The gold-mining business is doing so well that industry lobbyists did not
complain when the Nevada Legislature passed a measure in early December
requiring mining companies to pay $28 million in 2009 taxes early to help the
state patch a $340-million shortfall in revenue.
And Barrick is set to spend nearly $500 million to open a new mine near
Pipeline, provided it wins a legal challenge by the Western Shoshone Indians,
who assert that the mine would disturb the tribe’s most sacred religious site.
“In tough times, people need a backup for their money, and that backup is gold,”
said Omar Jabara, a spokesman for the Newmont Mining Corporation, which operates
eight Nevada mines that yielded 2.3 million ounces of gold in 2007.
Battle Mountain residents are clearly enjoying the upswing, just as they clearly
suffered through the high-tech boom of the late 1990s that brought prosperity to
much of the rest of the nation. During that time, gold fell to about $215 an
ounce, the local economy was moribund and several mines laid off workers. The
Owl closed for four years, during which Ms. Thompson worked as a truck driver.
“We went 11 years without a new business really opening up here, but now we’re
getting a new furniture store, and there are some new commercial businesses
opening that are mining-related,” said Sarah Burkhart, director of the Battle
Mountain Chamber of Commerce. “We’re getting a Family Dollar, and that’s kind of
a biggie for us because it’s like a mini-Wal-Mart.” (The nearest Wal-Mart is
about 50 miles away in Winnemucca.)
These signs of prosperity are especially gratifying to residents who took
umbrage at a 7,000-word cover article in The Washington Post Magazine in
December 2001 in which the writer, Gene Weingarten, went searching for the
“armpit of America,” and found it in Battle Mountain. Some town boosters, like
Ms. Burkhart, used the national notoriety to organize three annual Armpit
Festivals, sponsored by the deodorant-maker Old Spice, but others were insulted
by the article and glad when the festivals were abandoned.
“I think we ought to have a little more pride than that,” said Kimberlie Davis,
owner of Sage Homes, a company here that builds about 25 homes a year in Lander
and neighboring counties. “If that’s all we have to market, then don’t market
There is so little to see in Battle Mountain that the state’s promotional map,
Nevada Wide Open, designed to generate interest in tourism in the sparser,
less-known regions of the state, does not highlight it. The town has no traffic
lights. Besides two small casinos and one legal brothel that caters almost
exclusively to truckers who crisscross the nation on Interstate 80, there is a
pizza place, a coffee shop, a McDonald’s and a Super 8 motel.
“Oh, we’ll drive 75 miles to go get Chinese food,” said Ms. Davis, 39, who moved
here from Portland, Ore., in 1989 after visiting a childhood friend who had come
here to be with her miner boyfriend. “If you’re going to the movies, that’s 55
miles. It’s an event. You make a big deal out of it. You give up conveniences of
the big urban areas for a great deal of safety and comfort and a really nice
place to raise your families.”
The town’s isolation and its dominant, blue-collar industry propel many of its
disaffected young people to pursue college degrees.
“It’s too small — there’s not enough opportunity as there is in a big city,”
said Ed Figueroa, 20, home for a holiday visit from the University of Nevada at
Reno, where he is studying international business administration. “There’s
nothing to do here. All our parents work at mines. I like to come back and see
friends, but the town itself is ... whatever, you know?”
Both Ms. Davis and Ms. Burkhart shrugged off such statements, citing numerous
examples of Battle Mountain natives who do return, as Ms. Davis noted, “after
they swear they never will.”
Most everyone here is concerned that a national economic recovery could drive
gold prices down again. A Barrick spokesman, Louis A. Schack, agreed that it was
a danger, but he noted that in the decade since the last major slump, gold had
become a staple as an electrical conductor in things like cellphones and most
high-tech wiring, boosting its value considerably.
Yet Mr. Schack acknowledged that commodity markets were unpredictable, so Ms.
Davis and the rest of Battle Mountain know that slow times could return and are
determined to enjoy their good fortune while it lasts.
“It’s a very unique economy that exists out here,” Ms. Davis said. “I don’t want
the national economy to be awful by any stretch. I like a happy medium. There is
a point when everything’s even, when it’s good here and good everywhere else,
too, but it’s very short lived.
“More than likely, gold’s going to devalue and the cycle will start all over
A Nevada Town Escapes
the Slump, Thanks to Gold, NYT, 2.1.2009,
Steel Industry, in Slump,
Looks to U.S. Stimulus
January 2, 2009
The New York Times
By LOUIS UCHITELLE
The steel industry, having entered the recession in the best of health, is
emerging as a leading indicator of what lies ahead. As steel production goes —
and it is now in collapse — so will go the national economy.
That maxim once applied to Detroit’s Big Three car companies, when they
dominated American manufacturing. Now they are losing ground in good times and
bad, and steel has replaced autos as the industry to watch for an early sign
that a severe recession is beginning to lift.
The industry itself is turning to government for orders that, until the
September collapse, had come from manufacturers and builders. Its executives are
waiting anxiously for details of President-elect Barack Obama’s stimulus plan,
and adding their voices to pleas for a huge public investment program — up to $1
trillion over two years — intended to lift demand for steel to build highways,
bridges, electric power grids, schools, hospitals, water treatment plants and
“What we are asking,” said Daniel R. DiMicco, chairman and chief executive of
the Nucor Corporation, a giant steel maker, “is that our government deal with
the worst economic slowdown in our lifetime through a recovery program that has
in every provision a ‘buy America’ clause.”
Economists in the Obama camp said the president-elect’s proposals to Congress
will include significant infrastructure spending that draws on heavy industry.
New spending should provide an immediate jolt to the steel business, which has
already gone through the painful makeover now demanded of automakers. Steel
mills were closed, companies were consolidated, hundreds of thousands lost their
jobs and the survivors agreed to concessions. As a result, productivity shot up
and so did profits, to record levels in the first nine months of this year. Even
as the economy wobbled, steel held its own.
But then the recession hit in force. Steel goes into nearly everything made in
America, from homes and office buildings to cars, appliances and light bulb
sockets, and as construction and manufacturing wound down, so did the output of
steel, plunging 50 percent since September.
The steel industry’s collapse closely tracks the alarming late-autumn swoon in
the national economy, as the housing bust and the credit crisis converted a mild
downturn into “a severe one that has much further to run,” says Nigel Gault,
chief domestic economist at IHS Global Insight, offering a view increasingly
shared by forecasters.
Through August, steel production was actually up slightly for the year. The
decline came slowly at first, and then with a rush in November and December. By
late December, output was down to 1.02 million tons a week from 2.1 million tons
on Aug. 30, the American Iron and Steel Institute reported. The price of a ton
of steel is also down by half since late summer.
“We are making our steel at four mills instead of six,” said John Armstrong, a
spokesman for the United States Steel Corporation, adding that two mills were
recently idled and the four still operating are running at less than full
“The third quarter was one of the best in U.S. Steel’s history,” Mr. Armstrong
added. “And it has been a very precipitous drop from there.”
The cutback has been particularly hard on workers at the big integrated mills
like those at U.S. Steel and Arcelor Mittal USA, with their blast furnaces and
coke ovens converting iron ore and other materials into steel. Operated at less
than full capacity, these mills are less efficient than the equally large
“minimills,” like Nucor, whose electric arc furnaces can be operated efficiently
at lower speeds.
So the plant closings have been mostly at the integrated mills, whose 50,000
workers — roughly 40 percent of the nation’s steelworkers — are represented by
the United Steelworkers. The union says that early this year it expects 20,000
workers to be on furlough.
Ten thousand already have been. Kathleen Loepker, a millwright and mechanic, is
among the most recent to join their ranks. She was laid off on Dec. 19 from the
U.S. Steel plant in Granite City, Ill., which shut, putting more than 2,000
employees out of work. With nearly 30 years seniority, Ms. Loepker, 48, has
worked through bankruptcies, union concessions and consolidations during which
her mill was acquired by U.S. Steel in 2003.
Her income today is tied more to incentive bonuses than in the past. On layoff,
she is collecting $20 an hour, which is 80 percent of her base pay of $25.12 an
hour. That base pay, rather than rising significantly, is fattened by incentive
bonuses tied to amounts of steel produced and to profits. It had been averaging
an additional $7 an hour — money now gone until the mill reopens.
“No one knows when that will happen,” said Ms. Loepker, who lives by herself in
a four-bedroom home she bought in nearby Belleville, three blocks from a married
sister. “The company tells us the end of March, but they don’t know either,” Ms.
Loepker said. “The uncertainty has everyone fearful.”
Not since the 1980s has American steel production been as low as it is today.
Those were the Rust Belt years when many steel companies were failing and
imports of better quality, lower cost steel were rising.
Foreign producers no longer have an advantage over the refurbished American
companies. Indeed, imports, which represent about 30 percent of all steel sales
in the United States, also are hurting as customers disappear.
The industry, in response, is lobbying the Obama transition team for
infrastructure projects that would require big amounts of steel. Mass transit
systems are high on the list, and so is bridge repair.
“We are sharing with the president-elect’s transition team our thoughts in terms
of the industry’s policy priorities,” said Nancy Gravatt, a spokeswoman for the
American Iron and Steel Institute.
The Obama team has not yet revealed details of the president-elect’s
soon-to-be-announced recovery plan other than to indicate that most of the
package will probably go into infrastructure spending rather than tax breaks.
“If the president-elect really follows through, he’ll fund a lot of mass transit
projects,” said Wilbur L. Ross Jr., the Wall Street deal maker who put together
the steel conglomerate known as Arcelor Mittal USA. “All the big cities have
these projects ready to go.”
The sharp slide in steel production has several causes. Construction and auto
production have fallen sharply; between them, they account for 57 percent of the
steel bought each year in the United States, according to the Iron and Steel
Institute. Appliances, machinery and other electrical equipment account for an
additional 13 percent, and the fall-off in production of these goods has also
reduced steel orders.
Then there are the wholesalers, known in the steel industry as service centers.
They buy in huge quantities from the mills, building up inventories and selling
to customers like a construction company that needs I-beams to build a shopping
center, or a manufacturer of auto parts in need of steel tubing.
Until recently, the inventories were bought on credit, and the service centers
constantly replenished these stockpiles as steel was sold to end users. But now
the service centers, unable to borrow money easily and reluctant to borrow
anyway in these hard times, have stopped buying from the steel mills. They are
selling off their inventories instead, raising cash in the process. It is a
tactic that annoys Mr. DiMicco, the Nucor chief, no end.
“They don’t want to be without cash when they go into whatever the black hole is
that is being created by the financial crisis,” he said, and faulted the
nation’s lenders for collecting billions in government bailout money and then,
in his view, refusing to lend it to the service centers on reasonable terms.
“Credit completely dried up,” Mr. DiMicco said, “and it is still hard to get.”
Steel Industry, in
Slump, Looks to U.S. Stimulus, NYT, 2.1.2009,
In the Cold
January 1, 2009
The New York Times
This winter day begins a new year of the mortgage crisis. Nothing is certain
about the miseries ahead except that they are growing. It is, for example, a
freezing morning on Long Island — a national symbol of the single-family suburb.
Its two counties, Nassau and Suffolk, boast well-run governments, an educated
work force and a long history of stability and affluence. Comfort and
consumption are the twin strands of their DNA. But the struggle there is acute.
In Nassau County, New York State’s richest one, the foreclosure whirlwind hit
hard. Shelters are filling up and food pantries are emptying. More than 500
people sought emergency housing from the county in a recent December week. Most
were families with children.
Connie Lassandro, Nassau’s director of housing and homeless services, said the
need had risen 30 percent to 40 percent over 2007, as the face of poverty
changed. More overburdened homeowners and the elderly are coming forward now —
often bewildered and ashamed.
Private outreach organizations, too, are buried under an avalanche of need.
Alric Kennedy, director of community resources for the Long Island Council of
Churches, said the council used to be able to help some clients with a month’s
rent or mortgage but the money ran out last October. It referred people to other
agencies until those funds dried up, too. More people than ever are coming to
its emergency food centers — 40 to 60 on a typical day in Freeport, in Nassau;
100 or more seek help in Riverhead, in eastern Suffolk. They are desperate for
food, diapers, cooking oil and baby formula.
These are not the chronic homeless. “Our donors are now our clients,” Mr.
Kennedy said. “People who gave us food are now asking us to help them.”
As people lose not only homes but also jobs, pain is cascading to the bottom
rungs of the economy. The Workplace Project, a longstanding defender of
immigrant workers’ rights in Hempstead, has seen an alarming rise in reports of
unpaid wages, said Nadia Marin-Molina, its executive director. Contractors are
cutting costs by missing payrolls and are counting on an undocumented work force
not to complain.
Domestic workers are seeing wages cut in half, Ms. Marin-Molina said, as their
bosses tell them to come back to clean house every other week.
When the undocumented lose their jobs and homes, there is no government agency
they can turn to. Some of that need is being met by charitable organizations.
The Huntington Interfaith Homeless Initiative is a network of church volunteers
who give homeless men, mostly Latino immigrants, an alternative to sleeping —
and freezing — in the woods. In cold months, they take them into church halls
and basements, offering meals, winter coats and hot showers. They do this into
the spring. But this economic chill won’t be gone by then.
Nassau County’s comptroller announced this week that sales taxes — a mainstay of
county revenue — could fall for the first time in nearly 20 years, which would
blow a $24 million hole in the 2008 budget. Other local governments and
nonprofits are looking to the federal government for help and for billions that
might refill empty coffers and loosen tightened belts. But there are no
assurances that the aid will be enough — only uncertainty in a place that has
been shaken to the core.
“I’ve been doing this for over 30 years, and I’ve never seen it like this,” Ms.
Lassandro of Nassau County said. “Nobody’s exempt from it.”
Ms. Marin-Molina was astounded by the turnout for The Workplace Project’s annual
Christmas party. “An incredible number of people came,” she said. “At least a
hundred.” Most were men who needed help and were grateful to go home after a hot
meal with donated sweatshirts, hats and gloves.
In the Cold, NYT,
Markets Limp Into 2009
After a Bruising Year
January 1, 2009
The New York Times
By VIKAS BAJAJ
There was almost no place to hide from the crash of 2008.
When the New York Stock Exchange bell rang out the year on Wednesday, it tolled
for virtually anyone with money in the stock market.
The final, grim tally only confirmed what investors had known for months: it was
a very bad year to own stocks, any stocks — indeed, one of the worst ever.
In a mere 12 months, the Dow Jones industrial average plunged 4,488.43 points,
or 33.8 percent, its most punishing loss since 1931. Blue chips like Bank of
America, Citigroup and Alcoa lost more than 65 percent of their value. The
broader Standard & Poor’s 500-stock index sank 39.5 percent, almost exactly
matching its decline in 1937.
All told, about $7 trillion of shareholders’ wealth — the gains of the last six
years — was wiped out in a year of violent market swings.
But what is striking is not just the magnitude of the declines, staggering as
they are, but also their breadth. All but two of the 30 Dow industrials,
Wal-Mart and McDonald’s, fell by more than 10 percent. Almost no industry was
spared as the crisis that first emerged in the subprime mortgage market
metastasized and the economy sank into what could be a long recession.
As the new year dawns, Wall Street is looking to Washington, where the balance
of financial power has tipped in recent months. Analysts and investors are
focusing on what the incoming Obama administration and the Federal Reserve will
do to revive the economy and the financial system.
It is a remarkable turnabout from the mid-1990s, when Wall Street traders helped
drive economic policy. Back then, bond investors flexed their financial muscle
and urged the Clinton administration and a Republican Congress to reduce the
federal budget deficit.
These days, the market in ultra-safe United States Treasury securities seems
like a refuge, even as the deficit balloons from the cost of bailing out banks,
insurers and the Detroit auto companies. Many investors, having lost stocks and
other investments, are buying up Treasuries that offer little or no return. They
are content simply to get their money back.
“The only willing risk taker is the government,” said William H. Gross, the
chief investment officer of the Pacific Investment Management Company, or Pimco,
the giant bond trading firm. Speaking of the epicenter of the financial world,
he added: “It is no longer New York, it’s Washington.”
Like many money managers, Mr. Gross is a conservative — he describes himself as
a “Reagan fan from way back” — who generally prefers limited government
involvement in the markets. But he and others say that the government’s sweeping
intervention into private industry and in the markets, though sometimes flawed,
is necessary to prevent a collapse of the financial system. They are hoping that
policy makers do even more to stimulate the economy and revive moribund
Given the damage in the markets, however, policy makers face daunting
“When we have bear markets, they usually take twice as long to get down this
far,” said Robert C. Doll, vice chairman of BlackRock, the big investment firm.
The markets have become incredibly volatile, especially since Lehman Brothers
sank into bankruptcy in September. Since then, the S.& P. has moved more than 5
percent in either direction on 18 days. There were only 17 such days in the
previous 53 years, according to calculations by Howard Silverblatt, an index
analyst at S.& P.
Diversification — the idea that it is unwise to put all your eggs in one basket
— did not pay off for investors in 2008, casting doubt over this cornerstone of
modern investing. The American market was far from the worst hit in 2008. Stocks
fell 55 to 72 percent in the so-called BRIC economies — Brazil, Russia, India
and China — that were darlings of the late, great boom. Stocks in developed
European and Asian markets also fell sharply, though less than their emerging
counterparts. Many commodities like oil and copper crashed.
Losses in the credit markets, which are at the heart of this financial crisis,
appear small relative to the devastation in other markets. The International
Monetary Fund estimated in October that banks and other investors would suffer
$1.4 trillion in losses on loans and securities, a loss of just 6 percent.
Financial institutions globally have already reported $1 trillion in
write-downs, according to Bloomberg.
The I.M.F.’s estimate, however, does not count losses on derivatives, those
complex instruments that derive their value from other assets. Losses on these
instruments could outstrip those in the so-called cash markets because they are
much bigger than their underlying assets.
A spokeswoman for the I.M.F. said the fund’s estimates did not include those
losses because they were transfers of wealth from one party of a transaction to
another. For example, when the insurer American International Group loses $1
billion on a credit-default swap, a type of derivative, it makes payments to
customers like investment banks.
These complex financial instruments will pose one of the biggest challenges to
policy makers in the year ahead. Many investors have lost confidence in banks,
insurers and other financial intermediaries, in part because they do not know
whether these companies are valuing opaque instruments properly. Some firms may
be carrying enough toxic sludge to sink them, while others may be relatively
“Until those assets can be removed from the balance sheets of the bank, or until
the owners get a better understanding of what these assets are worth, we will
have uncertainty,” said Douglas M. Peta, an independent market analyst.
A broader focus for policy makers will be reviving the economy. Most financial
and political analysts expect the Obama administration to enact a stimulus
package that could approach $1 trillion. The effort will aim to create three
million jobs by spending money on infrastructure, green energy technology, aid
to states and other initiatives.
Many analysts say such an effort will help revive the economy, but not
immediately. Infrastructure spending, for instance, can have a powerful impact
by stimulating demand and creating jobs but, like much else in the economy, it
often takes years to work.
Some are looking to efforts by the Treasury and Fed to jump-start lending by
lowering mortgage rates and improving the market for bonds backed by
small-business, auto and credit card loans. A recent drop in mortgage rates has
already set off a refinance boom, but analysts say home prices in many parts of
the country are still too high for many would-be buyers. Furthermore, employment
and household savings will most likely have to climb for some time before
consumers have enough confidence to buy homes and enough money for down
“Across the board, they can potentially prevent a further slide, and they
deserve a lot of credit if they achieve that,” Martin S. Fridson, chief
executive of Fridson Investment Advisors, a bond trading firm, said about policy
makers. “I just don’t think that they can push a button and have the economy and
the stock market turn around.”
Thomas J. Lee, the chief equity strategist at JPMorgan Chase, said a recovery
early in the year could give way to another sell-off before the stock market
finally bottoms later in the year. Mr. Lee said his forecast reflected “how
unconventional the current recession is.” Unlike in the past, policy makers
cannot rely on consumers to push the economy ahead by borrowing and spending, he
“This is a recession where households are net debtors,” he said. “They have lost
money on houses and equities. That has rarely happened, at least since the
Mr. Doll of BlackRock agreed that consumers would not “run back and power the
economy ahead.” But he nonetheless contends that several important markets,
including stocks, may be close to their bottom. The Fed, he argued, has taken on
a more activist role in the markets and the new administration is likely to push
through a huge stimulus.
Such sentiments have probably helped drive the S.& P. 500 index up by 20 percent
since Nov. 20 and investment-grade corporate bonds up by nearly 10 percent since
“Perhaps we have seen a bottom,” Mr. Doll said. But he added that like the
economy, “the stock market recovery will be more muted as well.”
Markets Limp Into 2009
After a Bruising Year, NYT, 1.1.2009,
The Debt Trap
Between Credit Cards and Colleges
January 1, 2009
The New York Times
By JONATHAN D. GLATER
EAST LANSING, Mich. — When Ryan T. Muneio was tailgating with his parents at
a Michigan State football game this fall, he noticed a big tent emblazoned with
a Bank of America logo. Inside, bank representatives were offering free T-shirts
and other merchandise to those who applied for credit cards and other banking
“They did a good job,” Mr. Muneio, 21 and a junior at Michigan State, said of
the tactic. “It was good advertising.”
Bank of America’s relationship with the university extends well beyond marketing
at sports events. The bank has an $8.4 million, seven-year contract with
Michigan State giving it access to students’ names and addresses and use of the
university’s logo. The more students who take the banks’ credit cards, the more
money the university gets. Under certain circumstances, Michigan State even
stands to receive more money if students carry a balance on these cards.
Hundreds of colleges have contracts with lenders. But at a time of rising
concern about student debt — and overall consumer debt — the arrangements have
sounded alarm bells, and some student groups are starting to push back.
The relationships are reminiscent of those uncovered two years ago between
student loan companies and universities. In those, some lenders offered
universities an incentive to steer potential borrowers their way.
Here at Michigan State, the editors of the student newspaper wrote this fall
that “it doesn’t take a giant leap for someone to ask why the university should
encourage responsible spending when it receives a cut of every purchase.”
At Arizona State University, students set up a table on campus last spring to
warn of the danger of debt and urge students to support limits on on-campus
The contracts, whose terms vary but usually involve payments to colleges or
alumni associations that agree to provide lists of students’ names, have come
under harsh criticism in Washington.
“That is absolutely outrageous, the sharing of students’ information with the
banks,” Representative Carolyn B. Maloney, Democrat of New York, who oversaw a
June hearing on campus credit card marketing, said in a recent interview. “That
should be outlawed.”
College campuses are one place that young Americans are introduced to credit and
the possibility of spending beyond their means, a problem now confronting the
nation as a whole. For banks, the relationships are a golden marketing
opportunity. For colleges, they are a revenue source at a time of declining
public funding. And for students, they help pay the bills and allow more
But debt incurred in college becomes a serious burden at graduation, especially
in a recession in which jobs are scarce. A survey of more than 1,500 college
students by US PIRG in Washington found that two-thirds had at least one credit
card. Seniors with balances had an average debt of $2,623 on their cards.
University officials say that their agreements with card issuers comply with the
law and bring in valuable revenue.
“It provides money for scholarships and other programs,” said Terry R.
Livermore, manager of licensing programs at Michigan State. He said that the
program was aimed primarily at alumni and the university would not include
sharing student information in future credit card contracts. “The students are
such a minuscule portion of this program.”
Jennifer Holsman, executive director of the alumni association at Arizona State,
said the association tried to teach students about responsible uses of credit.
“We work closely with Bank of America to provide educational seminars to
students in terms of being able to get information about how to pay off credit
cards, how not to keep balances,” she said.
Credit card issuers say that they try to educate students to use cards
responsibly and that the cards they offer on campus have more restrictive terms
than cards offered to alumni.
“The available credit for undergraduates is capped at $2,500,” said Betty Riess,
a spokeswoman for Bank of America. “We want to take a fair and responsible
approach to lending because we want to build the foundation for a longer-term
Ms. Riess said the bank had agreements with about 700 colleges and alumni
associations, making it one of the biggest, if not the biggest, card issuer on
campuses. She said that only 2 percent of the open accounts under those
agreements belonged to students, but also said it was not possible to determine
what percentage of program revenue resulted from fees and charges on those
Stephanie Jacobson, a spokeswoman for JPMorgan Chase, wrote in an e-mail message
that the bank had fewer than 25 contracts with colleges or alumni associations
and that while some of the contracts gave it the right to ask for and use lists
of student names and addresses, the bank had not done so since 2007.
That may be because football games present a marketing opportunity that requires
no address information. Abigail D. Molina, a second-year law student at the
University of Oregon, applied in 2007 for a Chase Visa offered at a tent outside
a football game. In exchange, she received a blanket.
“I mostly wanted the blanket,” Ms. Molina said. She added that this was her
second university credit card. In 1994, when she was an undergraduate at the
university, she applied for a card at a booth on campus and then accumulated
about $30,000 in debt, almost all of it on the card. In 2001 she filed for
bankruptcy. Looking back, she said it was “shockingly easy” to get the card,
even as a first-year student.
Mr. Muneio, the Michigan State student, said he did not apply for a Bank of
America card because he already had two Visa cards. “The last thing I need is
another account to keep track of.”
Many students are unaware of the contracts that universities have with credit
card issuers and do not question the presence of marketers on campus or
applications in their mailboxes, despite recent protests on a few campuses.
Sometimes, the contracts have confidentiality provisions. Universities may try
to distance themselves, stating that the contracts are only between alumni
associations and banks. But the universities provide alumni groups with lists of
current students’ names, addresses and telephone numbers, which the groups pass
on to banks.
The New York Times obtained information about and, in some cases, copies of
contracts between lenders, public colleges and their alumni associations using
open records requests. Because private colleges are not subject to open records
laws, they are not included.
While most universities contacted for this article did not provide detailed
financial information on the contracts — the University of Pittsburgh, for
example, confirmed only that it had an agreement — two did share numbers.
The alumni association of the University of Michigan is guaranteed $25.5 million
over the term of its 11-year agreement with Bank of America. Under the
agreement, the association agreed to provide lists of names and addresses of
students, alumni, faculty, staff, donors and holders of season tickets to
Much of the money goes toward scholarships, said Jerry Sigler, vice president
and chief financial officer of the alumni association. He was unsure what
students were told about the program.
“Students are generally told how they can opt out of having their information
publicly displayed in directories or provided in response to requests like
this,” Mr. Sigler added. “But it’s not to my knowledge specific to the credit
Michigan State University gets $1.2 million a year but is guaranteed at least
$8.4 million over seven years, according to its agreement. The contract calls
for a $1 royalty to the university for every new card account that remains open
for at least 90 days, $3 for every card whose holder pays an annual fee, and a
payment of a half percent of the amount of all retail purchases using the cards.
For cards that do not have an annual fee, the bank pays $3 if the holder has a
balance at the end of the 12th month after opening an account, a provision that
appears to give the university an incentive to get cardholders into debt.
A few schools have adopted policies that prohibit sharing student contact
Ball State University’s alumni association, which has a contract with JPMorgan
Chase, does not provide information on students, said Ed Shipley, executive
director of the association. “Who we market to is our alumni because that’s our
purpose,” he said. However, the bank is permitted to set up marketing tables at
The University of Oregon, whose alumni association also has a marketing
agreement with Chase, stopped providing student addresses as concern grew about
student debt, according to Julie Brown, a university spokeswoman. The university
still permits marketing booths at athletic events.
Some research suggests that students may be using credit cards less frequently,
in favor of debit cards linked to their bank accounts. A survey last spring by
Student Monitor, a Ridgewood, N.J., company that tracks trends on campus, found
that 59 percent of undergraduate students had debit cards, up from 51 percent in
But universities have arrangements with banks that offer debit cards too,
perhaps raising some of the same issues that the credit card deals do.
At New Mexico State University, for example, students are given the option of
opening a bank account with Wells Fargo if they want to convert their campus
identification into a debit card.
The accounts are not mandatory, said Angela Throneberry, assistant vice
president for auxiliary services at the university. But, she said, “There’s some
revenue sharing that happens as part of this.”
Unspoken Link Between
Credit Cards and Colleges, NYT, 1.1.2009,