History > 2009 > USA > Economy (III)
have incorporated the recession into their plotlines,
including a recent episode of “The Simpsons.”
Times Are Tough on Wall Street and Wisteria Lane
Consumer Spending Up
for Second Straight Month
March 27, 2009
Filed at 9:22 a.m. ET
The New York Times
By THE ASSOCIATED PRESS
WASHINGTON (AP) -- The government says consumers increased
spending for a second straight month in February even though their incomes
slipped due to continuing massive layoffs.
The Commerce Department reported Friday that consumer spending edged up 0.2
percent in February, in line with expectations. That follows a huge 1 percent
jump in January that was even better than the 0.6 percent rise originally
But the report says incomes fell by 0.2 percent in February, the fourth drop in
the past five months, declines that reflected the sizable number of job layoffs
that have been occurring because of the recession.
After-tax incomes also fell in February, edging down by 0.1 percent. With
incomes down while spending rose, the personal savings rate dipped slightly to
4.2 percent in February, compared to 4.4 percent in January. Still, the latest
two-month performance marked the first time that the savings rate has been above
4 percent in more than a decade.
Economists believe that the deep recession, already the longest in a
quarter-century, will continue prompting consumers to do more to trim spending
and boost their savings. However, that development could make it more difficult
for the country to pull out of the recession since consumer spending accounts
for about 70 percent of economic activity.
The back-to-back increases in consumer spending in January and February had
followed six straight declines in spending that occurred from July through
December. Consumer spending in the fourth quarter fell at an annual rate of 4.3
percent, the biggest decline in 28 years, and was the major factor pushing
overall economic activity down by 6.3 percent during that period.
Many economists believe that the gross domestic product will drop by around that
amount in the current January-March period and will continue falling in the
spring although at a slower pace. Many analysts are not looking for the current
recession, which began in December 2007, to end until the second half of this
A price gauge tied to consumer spending rose by 0.3 percent in February and was
up 0.2 percent excluding food and energy, indicating that the recession has
contributed to a significant moderate in inflation pressures.
Consumer Spending Up
for Second Straight Month, NYT, 27.3.2009,
A Downturn Wraps a City in Hesitance
March 27, 2009
The New York Times
By PETER S. GOODMAN
PORTLAND, Ore. — Over the last four decades, Powell’s Books
has swelled into the largest bookstore in North America — a capacious monument
to reading that occupies a full square block of this often-drizzly city. But
this year, growth has given way to anxiety.
Michael Powell, the store’s owner, recently dropped plans for a $5 million
expansion. An architect had already prepared the drawings. His bankers had
signaled that financing was available. But the project no longer looked prudent,
Mr. Powell concluded — not with sales down nearly 5 percent, stock markets
extinguishing savings, home prices plunging and jobs disappearing.
“It’s going to take a period of time to recover,” Mr. Powell said. “Whether it’s
2 years or 10 years I don’t know, but I don’t think it’s going to be quick.
People are nervous.”
Throughout the American economy, retrenchment is begetting retrenchment. Falling
home prices, weak consumer spending, diminishing investment and a fresh
reappraisal of risk are combining to bring more of each. Grim expectations about
the future are becoming self-fulfilling prophesies, as nervous companies cancel
investments and households defer purchases.
This vengeful dynamic was the main problem that policy makers failed to tame
nearly 80 years ago, when a banking crisis swelled into the Great Depression. As
the Obama administration confronts what some economists describe as perhaps the
worst downturn since then, the same constellation of forces appears at play.
Even as stock markets have rallied in recent days on hopes that the latest
government plan to rescue the banks can finally restore order to the financial
system, this fundamental problem continues to constrict the economy. Credit
remains tight for troubled households and businesses, while even those able to
borrow often demur because they are afraid to invest and spend in the face of so
The needed ingredients to change this psychology are unclear, and history
underscores the difficulties. Economists suggest the same forces now pushing the
economy into a downward spiral must be reversed; housing prices must level off,
stock markets stabilize and consumers — now deferring purchases of items like
cars and appliances — must start to replace older models.
Banks now confront accusations of clinging to their money, depriving the economy
of growth, while the picture, as Mr. Powell attests, is more complicated. Even
banks that are eager to lend find some of their best customers reluctant to
“The problem is trying to get qualified people to borrow,” said Raymond P.
Davis, president and chief executive of Umpqua Bank, a regional lender based in
As goods pile up unsold, demand weakens and expectations of lean months ahead
cause businesses to cut production, the downward spiral is prompting nervous
comparisons with Japan’s so-called lost decade of the 1990s. Then, as now, a
collapse in real estate prices left banks in tatters. Even as Japan’s central
bank dropped interest rates to zero in a bid to spur growth, it had little
effect because companies and households were too fearful to borrow. These days,
the Fed’s target for interest rates is near zero, yet even healthy American
companies are hunkered down. Even wealthy households are cutting back.
The $787 billion stimulus spending bill signed by President Obama last month is
expected to generate fresh demand for goods and services. If the financial
system plan is successful at removing the detritus of the real estate bust from
bank balance sheets, this, too, could substantially alleviate the crisis. But
the ultimate question is whether these measures can crystallize confidence in
the future, so businesses and ordinary people resume transacting, generating
fresh opportunities throughout the economy.
“You could fix all the problems in the financial system and we’d still spiral
down because of the problem of expectations,” said Joe Cortright, an economist
at a Portland-based consulting group, Impresa Inc.
Portland, a metropolitan area of 2.2 million people, affords an ideal window
onto the spiral of fear and diminished expectations assailing the economy. The
area has long attracted investment and talented minds with its curbs on urban
sprawl, thriving culinary scene and life in proximity to the Pacific Coast and
the snow-capped peaks of the Cascades. In good times, Portland tends to grow
vigorously, elevated by companies like the computer chip maker Intel — which
employs 15,000 people in the area — and the athletic clothing giant Nike.
But in recent months, Portland has devolved into a symbol of much that is wrong.
Housing prices have fallen more than 14 percent since May 2007, according to the
S.& P./Case-Shiller index. Foreclosures more than tripled last year, according
to RealtyTrac. The unemployment rate for the metro area surged from 4.8 percent
at the end of 2007 to 9.8 percent in January 2009, according to the Labor
With a major deepwater port on the Columbia River, Portland has benefited from
the growth of global trade, gaining jobs for stevedores, truckers and warehouse
workers. But as the global recession tightens, Portland’s docks are a snapshot
of diminishing fortunes.
On a recent day, parking lots at the port were full of 30,000 automobiles that
had been shipped in from Japan and South Korea, yet sat unclaimed by dealerships
as sales plummeted. Volumes of so-called bulk minerals — including potash, a
fertilizer that arrives by rail from Canada and is then shipped to China — have
fallen off by more than 12 percent over the past year. Docks once jammed with
shipping containers showed gaps between the stacks, reflecting diminishing
demand for Asian-made furniture and clothing.
“We’re going to have to recalibrate to a new normal, and it will be lower,” said
Sam Ruda, the port’s director of marine and industrial development.
As trade slows, so does business for Greenbrier Companies, an Oregon-based
manufacturer of rail cars. General Electric is seeking to renegotiate a huge
order, an eight-year deal worth more than $1 billion.
Greenbrier relies upon a $100 million line of credit from Bank of America to buy
raw materials and pay workers while it waits to collect from its customers. But
with the potential loss of business from G.E., the company worries that the bank
will view its credit line as a risk and demand significantly higher interest
“If you had to go and renegotiate the terms of debt today, they’d rip your face
off,” said William A. Furman, Greenbrier’s president and chief executive.
With that fear in mind, Mr. Furman has aggressively cut costs. Last month,
Greenbrier laid off 150 workers at a local factory. It plans to lay off 150 more
soon, spreading the wave of forced austerity.
“I’m not really spending anything because I don’t know what’s going to happen,”
said Alrenzo Ferguson, who lost his job at the local Greenbrier plant last
Columbia Sportswear, a family-run business based in Portland that employs about
1,100 local people, seems immune to the credit crisis: It has zero long-term
debt and $253 million in cash. But the company is losing sales as its customers
sink into trouble. Columbia typically does not get paid for many months after it
begins producing its orders, making it loath to sell to credit-risky companies.
“We’ve got customers we won’t sell to because their credit is now no good,” said
the company’s president and chief executive, Timothy P. Boyle. “We’ve become
Columbia laid off more than 50 people in the area last year, contributing to a
rollback of local spending power. Daria Colner took a voluntary layoff from a
high-level marketing position at Columbia last May, gaining a severance package
through the end of the year. She figured she would quickly find another job, but
she remains without work.
Ms. Colner’s husband works at Oracle, the software giant. Together, they once
enjoyed an annual household income exceeding $250,000, making it easy to pay the
$3,000 monthly mortgage on their Arts and Crafts house with mahogany beams and
stone fireplaces. They grew accustomed to far-flung vacations — to New York,
Alaska, Hawaii and Europe.
They plan no vacation this year. When Ms. Colner’s BMW recently came due for its
90,000-mile service check, she deferred the work. When their front awning rotted
away, they decided not to replace it, merely painting over the gap.
“It’s not like people have any confidence that we’re on the cusp of turning
around,” Ms. Colner said.
That gnawing sense of not knowing the future is increasingly coloring the
“People are wondering, ‘Well, should I spend money on my house right now?’ ”
said Debbie Kitchin, co-owner of InterWorks, a Portland-based general
contractor. Her business has fallen by nearly half over the last year, prompting
her to trim her work force to 7 from 11. She has put off the purchase of a new,
$15,000 computer system.
With jobs, credit and confidence all tenuous, the problem is reverberating back
to the initial source of trouble: real estate. Even in older, historic
neighborhoods, sales are stalled.
“We’re off in terms of number of sales about 40 percent,” said Shannon Spence,
principal broker at Remax Equity Group in Portland. “Job fears are keeping
people from buying.”
Community Financial Corporation, a Portland-area mortgage lender owned by Banner
Bank of Walla Walla, Wash., recently began offering 30-year, fixed-rate
mortgages for less than 4 percent on new houses for which it extended a
construction loan, in a bid to overcome anxiety with easy money.
“The people that want the money don’t deserve it, and the people that deserve it
don’t want it,” said John B. Satterberg, president of Community Financial
Corporation. “Everybody’s sitting on the fence.”
The cheap loans have generated sales, he said. Yet one recent refinance
application could not be closed, because the bank could not verify the value of
the house: With no sales of similar properties in the area, there was nothing to
A Downturn Wraps a
City in Hesitance, NYT, 27.3.2009,
Cities Deal With a Surge in Shanty Towns
March 26, 2009
The New York Times
By JESSE McKINLEY
FRESNO, Calif. — As the operations manager of an outreach
center for the homeless here, Paul Stack is used to seeing people down on their
luck. What he had never seen before was people living in tents and lean-tos on
the railroad lot across from the center.
“They just popped up about 18 months ago,” Mr. Stack said. “One day it was
empty. The next day, there were people living there.”
Like a dozen or so other cities across the nation, Fresno is dealing with an
unhappy déjà vu: the arrival of modern-day Hoovervilles, illegal encampments of
homeless people that are reminiscent, on a far smaller scale, of Depression-era
shantytowns. At his news conference on Tuesday night, President Obama was asked
directly about the tent cities and responded by saying that it was “not
acceptable for children and families to be without a roof over their heads in a
country as wealthy as ours.”
While encampments and street living have always been a part of the landscape in
big cities like Los Angeles and New York, these new tent cities have taken root
— or grown from smaller enclaves of the homeless as more people lose jobs and
housing — in such disparate places as Nashville, Olympia, Wash., and St.
In Seattle, homeless residents in the city’s 100-person encampment call it
Nickelsville, an unflattering reference to the mayor, Greg Nickels. A tent city
in Sacramento prompted Gov. Arnold Schwarzenegger to announce a plan Wednesday
to shift the entire 125-person encampment to a nearby fairground. That came
after a recent visit by “The Oprah Winfrey Show” set off such a news media
stampede that some fed-up homeless people complained of overexposure and said
they just wanted to be left alone.
The problem in Fresno is different in that it is both chronic and largely
outside the national limelight. Homelessness here has long been fed by the ups
and downs in seasonal and subsistence jobs in agriculture, but now the recession
has cast a wider net and drawn in hundreds of the newly homeless — from
hitchhikers to truck drivers to electricians.
“These are able-bodied folks that did day labor, at minimum wage or better, who
were previously able to house themselves based on their income,” said Michael
Stoops, the executive director of the National Coalition for the Homeless, an
advocacy group based in Washington.
The surging number of homeless people in Fresno, a city of 500,000 people, has
been a surprise. City officials say they have three major encampments near
downtown and smaller settlements along two highways. All told, as many 2,000
people are homeless here, according to Gregory Barfield, the city’s homeless
prevention and policy manager, who said that drug use, prostitution and violence
were all too common in the encampments.
“That’s all part of that underground economy,” Mr. Barfield said. “It’s what
happens when a person is trying to survive.”
He said the city planned to begin “triage” on the encampments in the next
several weeks, to determine how many people needed services and permanent
housing. “We’re treating it like any other disaster area,” Mr. Barfield said.
Mr. Barfield took over his newly created position in January, after the county
and city adopted a 10-year plan to address homelessness. A class-action lawsuit
brought on behalf of homeless people against the city and the California
Department of Transportation led to a $2.35 million settlement in 2008, making
money available to about 350 residents who had had their belongings discarded in
sweeps by the city.
The growing encampments led the city to place portable toilets and security
guards near one area known as New Jack City, named after a dark and drug-filled
1991 movie. But that just attracted more homeless people.
“It was just kind of an invitation to move in,” said Mr. Stack, the outreach
On a recent afternoon, nobody seemed thrilled to be living in New Jack City, a
filthy collection of rain- and wind-battered tents in a garbage-strewn lot.
Several weary-looking residents sat on decaying sofas as a pair of pit bulls
chained to a fence howled.
Northwest of New Jack City sits a somewhat less grim encampment. It is sometimes
called Taco Flats or Little Tijuana because of the large number of Latino
residents, many of whom were drawn to Fresno on the promise of agricultural
jobs, which have dried up in the face of the poor economy and a three-year
Guillermo Flores, 32, said he had looked for work in the fields and in fast
food, but had found nothing. For the last eight months, he has collected cans,
recycling them for $5 to $10 a day, and lived in a hand-built, three-room shack,
a home that he takes pride in, with a door, clean sheets on his bed and a bowl
full of fresh apples in his propane-powered kitchen area.
“I just built it because I need it,” said Mr. Flores, as he cooked a dinner of
chili peppers, eggs and onions over a fire. “The only problem I have is the
Dozens of homeless men and women here have found more organized shelter at the
Village of Hope, a collection of 8-by-10-foot storage sheds built by the
nonprofit group Poverello House and overseen by Mr. Stack. Planted in a former
junkyard behind a chain-link fence, each unit contains two cots, sleeping bags
and a solar-powered light.
Doug Brown, a freelance electrical engineer, said he had discovered the Village
of Hope while unemployed a few years back and had returned after losing his job
in October. Mr. Stoops, of the homeless coalition, predicted that the population
at such new Hoovervilles could grow as those without places to live slowly
burned through their options and joined the ranks of the chronically homeless,
many of whom are indigent as a result of illiteracy, alcoholism, mental illness
and drug abuse.
That mix is already evident in a walk around Taco Flats, where Sean Langer, 42,
who lost a trucking job in December and could pass for a soccer dad, lives in
his car in front of a sturdy shanty that is home to Barbara Smith, 41, a crack
addict with a wild cackle for a laugh.
“This is a one-bedroom house,” said Ms. Smith, proudly taking a visitor through
her home built with scrap wood and scavenged two-by-fours. “We got a roof, and
it does not leak.”
During the day, the camp can seem peaceful. American flags fly over some
shanties, and neighbors greet one another. Some feed pets, while others build
fires and chat.
Daniel Kent, a clean-shaven 27-year-old from Oregon, has been living in Taco
Flats for three months after running out of money on a planned hitchhiking trip
to Florida. He did manage to earn $35 a day holding up a going-out-of-business
sign for Mervyn’s until the department store actually went of out business.
Mr. Kent planned to attend a job fair soon, but said he did not completely mind
“We got veterans out here; we got people with heart, proud to be who they are,”
Mr. Kent said. “Regardless of living situations, it doesn’t change the heart.
There’s some good people out here, really good people.”
But the danger after dark is real. Ms. Smith, who lost an eye after being shot
in the face years ago, said she had seen two people killed in New Jack City,
prompting her to move to Taco Flats and try to quit drugs. Her companion, Willie
Mac, 53, a self-described youth minister, said he was “waiting on her to get
herself right with the Lord.”
Ms. Smith said her dream was simple: “To get out of here, get off the street,
have our own home.”
Cities Deal With a
Surge in Shanty Towns, NYT, 26.3.2009,
Latest Glimmer of Economic Hope:
Rise in Factory Orders
March 26, 2009
The New York Times
By JACK HEALY
In a glimmer of surprisingly upbeat economic data,
manufacturing orders for goods like metals, machines and military equipment rose
last month for the first time after six months of declines, the government
reported on Wednesday.
The Commerce Department reported that orders for durable goods rose 3.4 percent
in February following a downwardly revised 7.3 percent drop in January. Orders
for machinery, transportation equipment and computers and electronics rose.
The monthly gain was better than economists’ expectations of a 2.5 percent
decline, and represented the latest in a series of less-than-terrible reports
that have offered a break from months of relentlessly bad economic news.
On Monday, an industry group reported that sales of previously owned homes rose
5 percent in February, and the government reported on Tuesday that its barometer
of home prices rose in January after 10 months of declines. Earlier this month,
the government reported that consumer prices were stabilizing slightly, cooling
fears of deflation and that retail sales in February had fallen by less than
The recent spate of “bad but not terrible” economic reports — along with more
optimistic profit outlooks from the country’s biggest banks — has kindled hopes
in some investors that the economy may be searching for a bottom. And although
the recession is still spreading, hopeful investors have lifted stock markets
some 20 percent over the last two weeks.
“You don’t want to make a trend out of any one month,” said Adam York, an
economist at Wachovia Economics. “But we’ll take the good news where we can get
it, and here and there we’re seeing some smatterings of less-bad economic data.”
But details of the data on durable goods gave economists some pause, and Mr.
York said the positive headline number was basically a head fake.
The bounce in durable-goods orders followed large downward revisions to January
data, and that orders were rebounding from extremely depressed levels. And even
with the 3.4 percent gain in February, orders for durable goods were down 28.4
percent from a year earlier, the government said.
And economists said that forward-looking indexes of manufacturing activity are
still bracing for months more declines as businesses cut jobs and capital
spending in an effort to survive the broad global downturn.
“The underlying state of industry is still deteriorating,” Ian Shepherdson,
chief United States economist at High Frequency Economics, said in a note.
Excluding the military, new orders increased 1.7 percent last month.
Still, some economists say that depressed industrial activity will probably pick
up later this year and into 2010 as projects from the government’s $787 billion
stimulus package hit the ground.
“The February report on durable goods demand is the latest in a recent series of
data releases which suggest that the recession-battered U.S. economy may be
close to, or at, a business cycle bottom,” Cliff Waldman, economist for the
Manufacturers Alliance, wrote in a note.
In another report, the government said that new single-family home sales rose
4.7 percent in February, but that it was still the second-worst month on record,
and was down more than 40 percent from February a year ago. The median price of
a new home fell to $200,900, down from a peak of $262,600 in March 2006.
Home builders have cut back significantly on new residential developments as
they struggle with lower demand for housing, tighter credit and a flood of cheap
Latest Glimmer of
Economic Hope: Rise in Factory Orders, NYT, 26.3.2009,
U.S. February Durable Goods
Seen Falling 2 Percent
March 25, 2009
Filed at 6:12 a.m. ET
The New York Times
WASHINGTON (Reuters) - New orders for U.S.-made durable goods
likely fell in February aided by a sharp decline in civilian aircraft orders,
according to a Reuters poll
The median forecast of 73 economists showed orders for durables, goods lasting
three years or more, dropped for the seventh straight month, to 2.0 percent in
February after a 4.5 percent January fall.
Stripping out transportation orders -- which are heavily skewed by aircraft --
new orders for durables are expected to fall 2.0 percent after a 3.0 percent
decline in January.
In a sign investment growth slowed further, nondefense capital goods excluding
aircraft -- a key component of the monthly report seen as a gauge of business
spending -- likely fell 2.3 percent in February after a 5.7 percent January
The expected decline in aircraft orders comes as U.S. plane maker Boeing Co
<BA.N> reported that it won orders for four aircraft during February -- down
from 18 orders for January.
And industry analysts say there are no signs the planemaker will soon return to
the record number of orders it enjoyed before the economic downturn as the
number of cancellations exceeded orders, so far this year.
The Commerce Department will release the report at 8:30 a.m. EDT on Wednesday.
The following is a selection of comments from economists:
Forecast: -2.5 percent
"Companies across industries continue to scale back on costs and production,
waiting for any sign of a sustainable recovery. We have seen a virtual collapse
in demand, both in the US and overseas. As a result, output has not been slashed
quickly enough. The decline in production and inventories has not been able to
keep up with the decline in sales."
Forecast: -0.5 percent
"We expect orders and shipments of nondefense excluding aircraft (core) capital
goods will have fallen further in February. A weighted index of capital spending
plans from regional Fed surveys hit a new cycle low in the month, and the
continued rise in jobless claims show business retrenchment remains fierce
despite evidence that household spending has firmed."
RBS GREENWICH CAPITAL
Forecast: -0.5 percent
"The fall in durable goods orders in February could have been limited by a
rebound in automotive bookings (corresponding with the sharp pickup in motor
vehicle production in the month, following extended plant shutdowns in January).
Forecast: -4.1 percent
"Driven by slowing business and consumer demand, orders for durable goods could
fall 4.1 percent in February. Vehicles and parts will likely continue to post
significant declines. With corporate profits weakening and credit conditions
exceptionally tight, business fixed investments will likely decline in the
coming quarters. We do not expect business spending to add to GDP until late
(Polling by Bangalore Polling Unit)
(Reporting by Nancy Waitz. Editing by Walker Simon)
U.S. February Durable
Goods Seen Falling 2 Percent, NYT, 25.3.2009,
Top Hedge Fund Managers
Do Well in a Down Year
March 25, 2009
The New York Times
By LOUISE STORY
The financial crisis may have turned much of Wall Street’s
wealth into dross, but a select group of hedge fund managers has managed to
maintain a golden touch that might make King Midas blush.
As major markets and economies careened downward last year, 25 top managers
reaped a total of $11.6 billion in pay by trading above the pain in the markets,
according to an annual ranking of top hedge fund earners by Institutional
Investor’s Alpha magazine, which comes out Wednesday.
James H. Simons, a former math professor who has made billions year after year
for the hedge fund Renaissance Technologies, earned $2.5 billion running
computer-driven trading strategies. John A. Paulson, who rode to riches by
betting against the housing market, came in second with reported gains of $2
billion. And George Soros, also a perennial name on the rich list of secretive
moneymakers, pulled in $1.1 billion.
Of course, their earnings were not unscathed by the extensive shakeout in the
markets. In a year when losses were recorded at two of every three hedge funds,
pay for many of these managers was down by several million, and the overall pool
of earnings was about half the $22.5 billion the top 25 earned in 2007.
The managers’ compensation, which was breathtaking in the best of times, is
eye-popping after a year when hedge funds lost 18 percent on average, and
investors withdrew money en masse.
Government scrutiny, over Wall Street pay and the role all kinds of institutions
play in the financial markets, is also mounting. Hedge funds are facing
proposals for new taxes on their gains, and on Tuesday, Treasury Secretary
Timothy F. Geithner said he would seek greater power to regulate hedge funds.
Some people on the list disputed Alpha’s calculations, which are estimates that
include the increase in value of personal investments the managers made in their
funds. But none offered different values for their bonuses or the soaring wealth
in their funds.
To make the cut this year, a hedge fund hotshot needed to earn $75 million, down
sharply from the $360 million cutoff for 2007’s top 25. Still, amid the
financial shakeout, the combined pay of the top 25 hedge fund managers beat
every year before 2006.
“The golden age for hedge funds is gone, but it’s still three times more
lucrative than working at a mutual fund and most other places on Wall Street,”
said Robert Sloan, managing partner of S3 Partners, a hedge fund risk management
firm. “But this shouldn’t pop up on the greed meter. They made money. That’s
what they’re supposed to.”
In an interview, Mr. Paulson — whose lofty 2008 earnings were down from the $3.7
billion that Alpha estimated he earned in 2007 — said his pay was high in large
part because he is the biggest investor in his fund. In fact, he said he
receives no bonus. The pensions, endowments and other institutions that invest
in his fund do not mind the hefty cut of profits he and his team take, he said.
“In a year when all their other investments lost money, we’re like an oasis,”
Mr. Paulson said.
“We have investors who were invested with Madoff, and they can’t thank me
enough,” he added, referring to the disgraced financier Bernard L. Madoff.
Even as the spotlight intensifies, these hedge fund managers and others who made
it through last year with cash on hand are the sort of investors the federal
government hopes will step in and buy troubled assets from banks. The richest
managers are also in the best position to take advantage of the distressed
environment to build their wealth.
“The guys who own the future are the guys like John Paulson and the others on
the Alpha list,” said Keith R. McCullough, the chief executive of Research Edge,
a firm in New Haven that provides trading analysis for hedge funds. “Ironically
enough, we’re going to go beg for capital from the very people we’ve been trying
to vilify.” Mr. Paulson, though, said he did not plan to participate in the new
public-private investment program.
One hedge fund manager on the list, Paul Touradji, said he understood the public
outcry against people who are paid regardless of whether they earned money for
their clients. “Wall Street should get paid only when they reward their
clients,” he said. “For every dollar we made, our clients earned multiples.”
Mr. Touradji, $140 million richer than in 2007, according to Alpha, said he gave
his investors advice by sharing strategies — something rare in the black-box
hedge fund world. Last year, for instance, he spotted the commodities bubble
early and warned his investors, which include pension funds and endowments, to
reshuffle their other holdings, saving them from losses.
Some hedge funds made so much that they had two people on the list. While Mr.
Simons of Renaissance Technologies landed the No. 1 spot, one of his partners,
Henry B. Laufer, is also on the list with earnings of $125 million.
A spokesman for Mr. Simons declined to comment.
John D. Arnold, an energy trader in his early 30s who was third on the list,
with $1.5 billion, did not respond to a request for comment. A spokesman for
George Soros, Michael Vachon, said his boss gave away more than half his
earnings in 2008. A spokesman for Raymond T. Dalio, who is said to have earned
$780 million, said his boss had made so much money because he anticipated the
Two of the three managers who tied for ninth, at $250 million, are based in
Britain: David Harding of Winton Capital and Alan Howard of Brevan Howard Asset
Management. A second employee of Brevan Howard, Christopher Rokos, also made the
Mr. Harding, who runs Winton, said his success last year was part luck, part
knowledge from 25 years of hard work in which he often struck a solitary path in
a type of trading that had many naysayers. “It is nice to have a golden life and
a purpose to engage in, a reason to go to work,” said Mr. Harding, who doubted
that many people would be willing or able to do his job. “Obviously I wouldn’t
have set out to be a futures trader if I hadn’t wanted to make a lot of money.”
John R. Taylor, the third hedge fund manager who tied as ninth on the list, said
even winning hedge funds should acknowledge that they had benefited from the
government’s bailout of the banking system. “Thank God for the government,
because if they hadn’t intervened, we wouldn’t have had anybody to trade with,”
said Mr. Taylor, who has run his currency fund, FX Concepts, since the 1980s.
But he said he was not grateful to be on Alpha’s list, which he said
overestimated his pay by a multiple of five. The last time he received lots of
publicity, Mr. Taylor said, was in 1993, and that preceded his worst year ever.
“This is bad luck with the trading gods,” Mr. Taylor said. “We’re doomed next
year if you write about us.”
Top Hedge Fund
Managers Do Well in a Down Year, NYT, 25.3.2009,
Seeks Wider Power
to Seize Troubled Firms
March 25, 2009
The New York Times
By BRIAN KNOWLTON
and JACKIE CALMES
WASHINGTON — The Obama administration is renewing calls for
Congress to provide new authority to take over financial institutions in
distress, expanding its existing powers to include insurance companies and other
less-regulated market players.
“The United States government does not have the legal means today to manage the
orderly restructuring of a large, complex non-bank financial institution that
poses a threat to the stability of our financial system,” the Treasury
secretary, TimothyF. Geithner said in a statement prepared for delivery before
the House Financial Services Committee.
The proposal could help deflect some criticism of the government’s handling of
A.I.G., which is not a bank but an insurance company, including allowing the
company to pay big bonuses to executives after receiving government financing as
part of the bailout of financial institutions.
Had the Treasury Department had the expanded authority last fall, administration
officials have said, the government could have seized A.I.G. and more
efficiently wound down its operations in a less-costly manner. At the hearing,
Ben S. Bernanke, the chairman of the Fed, said that he had wanted to sue A.I.G.
to prevent the bonus payments but was talked out of it by lawyers who warned
that if the lawsuit failed, the government might have to pay double or triple
damages in addition to the bonus.
“We need resolution authority to go in and be able to change contracts, be able
to change the business model, unwind what doesn’t work,” the White House press
secretary, Robert Gibbs, told CNN on Tuesday.
The administration has been criticized for failing to provide sufficient detail
of its financial-rescue proposals. But on Tuesday, Mr. Gibbs appeared on several
television interviews to begin making the case for the new authority.
“This isn’t anything crazy. This is exactly what the Treasury Department needs
to deal with things like A.I.G.,” he said. It would allow the administration to
address systemic risk, he added, without having to place a failing financial
firm into bankruptcy.
The resolution authority — to take over non-bank financial institutions that
pose a systemic risk until problems are resolved — was intended to be part of
the administration’s comprehensive overhaul of the government’s financial
regulatory system, which has been delayed as the Treasury dealt with immediate
White House and Treasury officials decided amid the recent furor over A.I.G.’s
bonuses to push for the resolution authority now.
The government has such authority for banks; the Federal Deposit Insurance
Corporation has power to step in to clean up a bank’s books and alter business
practices like executive compensation. There is no such federal authority for
non-bank entities, like A.I.G., that in recent years have become bigger players
in the financial system.
Central to the A.I.G. controversy has been Mr. Geithner’s contention, based on
lawyers’ advice, that the administration could not legally override contracts
such as its bonus system for top employees that the insurance giant had entered
into before its government bailout last September. The government now owns
almost 80 percent of A.I.G.
Mr. Geithner met last week with Representative Barney Frank, a Democrat from
Massachusetts who is chairman of the House Financial Services Committee, about
the proposed legislation. Mr. Frank is holding a hearing on Thursday
specifically about the resolution authority proposal, and the Treasury secretary
is expected again to testify.
Mr. Geithner’s emphasis on the subject on Tuesday as well allows him to try to
take the initiative and be proactive at what is certain to otherwise be a long
and difficult hearing about why he was not aware sooner about the March 15
A.I.G. bonuses to more than 400 employees at the company’s Financial Products
unit that was responsible for the risky and exotic derivatives that ultimately
took the company down and threatened the global financial system with it.
Tuesday’s hearing, also before the House Financial Services Committee, will
feature a rare joint appearance by the Treasury secretary and the chairman of
the Federal Reserve, Ben S. Bernanke. They will doubtless be pressed not only on
the A.I.G. bonuses but on the new plan, unveiled Monday, to relieve banks of
their troubled assets.
At Thursday’s hearing, Mr. Geithner is expected to focus more explicitly on the
administration’s plans for tightened financial regulation.
At a conference Monday evening, Mr. Geithner was asked about the resolution
authority idea and suggested that expanded authority would be a “critical” part
of working through the financial crisis.
“It is a terrible, tragic thing that this country came into this crisis with
such limited tools for trying to protect the economy itself from the kind of
distress that would come as the system came back down to Earth,” he said.
“The executive branch had very limited authority to do the things all
governments have to do in a crisis,” which had been partially addressed by the
bailout legislation last year. “Better resolution authority will be a critical
complement of that.”
Mr. Geithner added that while a “very well-designed system” built up after the
savings and loan crisis of the 1980s had given the F.D.I.C. the ability to adopt
with banking crises. “No comparable framework exists for a range of other
institutions, including those that are associated with banks, that can pose
broader risk to the stability of the system.”
Treasury Chief Seeks
Wider Power to Seize Troubled Firms, NYT, 25.3.2009,
February Existing Home Sales
Rise by 5.1 Percent
March 23, 2009
Filed at 1:03 p.m. ET
By THE ASSOCIATED PRESS
The New York Times
WASHINGTON (AP) -- Sales of previously occupied homes jumped
unexpectedly in February by the largest amount in nearly six years as first-time
buyers took advantage of deep discounts on foreclosures and other distressed
Economists said sales, while still at levels not seen since 1997, may finally be
coming back to life after declining sharply following the stock market plunge
Prices, however, are expected to keep falling well into the year. Tens of
thousands of homes reman tied up in the foreclosure process and are not yet for
sale. Plus, as the recession deepens and job losses mount, many buyers are
likely to stay on the sidelines.
''The four-letter word in the housing market is 'jobs,''' said Nicolas Retsinas,
director of Harvard University's Joint Center for Housing Studies. ''If you're
worried about having a job tomorrow, you're not likely to buy a home now.''
The National Association of Realtors said Monday that sales of existing homes
grew 5.1 percent to an annual rate of 4.72 million last month, from 4.49 million
units in January.
It was the largest monthly sales jump since July 2003, with first-time buyers
accounting for about half of all transactions. Sales had been expected to dip to
an annual pace of 4.45 million units, according to Thomson Reuters. The results,
which came after a steep decline in January, mean that sales activity has
returned to December's levels, but still remains lower than most of last year.
''If January was a disaster for housing, February may be the rebound month,''
wrote Joel Naroff, president of Naroff Economic Advisors.
The sales figures don't yet reflect the new $8,000 tax credit designed to lure
even more first-time buyers into the market. That should juice up early summer
sales, but how much will depend on the overall condition of the U.S. economy.
''If the economy stabilizes around midyear and financial conditions improve,
then sales will probably begin to slowly increase as buyers step back into the
market,'' wrote JPMorgan Chase analyst Abiel Reinhart. ''An important reason for
this is that affordability has already increased sharply, both as a result of
lower prices and lower mortgage rates.''
The median sales price plunged to $165,400, down 15.5 percent from $195,800 a
year earlier. That was the second-largest drop on record and prices are now off
28 percent from their peak in July 2006.
However, in a positive sign, seller asking prices are starting to rise in places
like San Diego and Orange County, Calif., where declines have been severe, said
Lawrence Yun, chief economist for the Realtors. That could be an early
indication that prices are stabilizing in the most distressed parts of the
Meanwhile, in contrast with the housing boom, when buyers took out ever-riskier
loans and maxed out their home equity lines, ''homebuyers are not over
stretching'' Yun said. ''They want to stay within their budget.''
The number of unsold homes on the market last month rose 5.2 percent to 3.8
million, a typical increase for the winter months. At February's sales pace, it
would take 9.7 months to rid the market of all of those properties.
''Inventories are still high relative to sales rates, and would probably be even
more so if all those wishing to sell their home actually had the house on the
market instead of pulling it off in the face of rapidly eroding prices,'' wrote
Joshua Shapiro, chief U.S. economist at MFR Inc.
Sellers don't want to compete with foreclosures that have swamped the market,
especially in California, Florida, Nevada and Arizona.
About 45 percent of sales nationwide are foreclosures or other distressed
property sales, which typically sell at a 20 percent discount, according to the
That's great news for buyers, who are paying the most attractive prices in
years. Plus, interest rates have sunk to historic lows.
The Federal Reserve last week moved to reduce already low rates by printing $1.2
trillion and pumping it into the economy through the purchases of
mortgage-backed securities and Treasury debt.
The central bank also will double its purchases of debt issued by Fannie Mae and
Freddie Mac to $200 billion.
AP Business Writer J.W. Elphinstone contributed to this report from New York.
Home Sales Rise by 5.1 Percent, NYT, 23.3.2009,
Plan to Buy Risky Assets
March 24, 2009
The New York Times
By BRIAN KNOWLTON
and EDMUND L. ANDREWS
WASHINGTON — The Obama administration formally presented the
latest step in its financial rescue package on Monday, an attempt to draw
private investors into partnership with a new federal entity that could
eventually buy up to $1 trillion in troubled assets that are weighing down banks
and clogging up the credit markets.
The Dow Jones industrial average was up sharply early Monday, gaining more than
300 points by midday. When the Treasury secretary, Timothy F. Geithner, spoke on
Feb. 10 of a bank rescue plan without offering much detail, investors took that
as a worrying sign and the Dow fell sharply, losing 380 points.
The Treasury secretary did not deny the uncertainties inherent in the new
program on Monday but defended it as a practical approach. “There is no doubt
the government is taking a risk,” Mr. Geithner said, “the only question is how
best to do it.”
President Obama said later that he and his economic advisers were “very
confident” that the program outlined by Mr. Geithner would start to unclog the
credit markets. “The good news is that we have one more critical element in our
recovery,” the president said after meeting with his economic teams. “But we
still have a long way to go, and we have a lot of work to do.”
The success or failure of the plan carries not only enormous stakes for the
nation’s recovery but certain political risks for Mr. Geithner as well. At least
two Republican senators have called for his resignation. And on Sunday, Senator
Richard C. Shelby of Alabama, the ranking Republican on the Banking Committee,
told Fox News that “if he keeps going down this road, I think that he won’t last
long.” Initially, a new Public-Private Investment Program will provide financing
for $500 billion in purchasing power to buy those troubled or toxic assets —
which the government refers to more diplomatically as legacy assets — with the
potential of expanding later to as much as $1 trillion, according to a fact
sheet issued by the Treasury Department.
At the core of the financing package will be $75 billion to $100 billion in
capital from the existing financial bailout known as TARP, the Troubled Assets
Relief Program, along with the share provided by private investors, which the
government hopes will come to 5 percent or more. By leveraging this program
through the Federal Deposit Insurance Corporation and the Federal Reserve, huge
amounts of bad loans can be acquired.
The private investors would be subsidized but could stand to lose their
investments, while the taxpayers could share in prospective profits as the
assets are eventually sold, the Treasury said. The administration said that it
expected participation from pension funds to insurance companies and other
The plan calls for the government to put up most of the money for buying up
troubled assets, and it would give private investors a clearly advantageous
deal. In one program, the Treasury would match one-for-one every dollar of
equity that private investors invest of their own money in each “Public Private
On top of that the F.D.I.C. — tapping its own credit lines with the Treasury —
would lend six dollars for each dollar invested by the Treasury and private
investors. If the mortgage pool turns bad and runs big losses, the private
investors would be able to walk away from their F.D.I.C. loans and leave the
government holding the soured mortgages and the bulk of the losses.
The Treasury Department offered this illustrative example of how the program
would work: A pool of bad residential mortgage loans with a face value of, say,
$100 is auctioned by the F.D.I.C. Private investors would submit bids. In the
example, the top bidder, an investor offering $84, would win and purchase the
pool. The F.D.I.C. would guarantee loans for $72 of that purchase price. The
Treasury would then invest in half the $12 equity, with funds coming from the
$700 billion bailout program; the private investor would contribute the
An attractive feature of the program is that it will allow the marketplace to
establish values for the assets — based, of course, on the auction mechanism
that will signal what someone is willing to pay for them — and thus might ease
the virtual paralysis that has surrounded those assets up to now.
For a relatively small equity exposure, the private investor thus stands to make
a considerable return if prices recover. The government will make a gain as
well. In the worst case, the bulk of the risk would fall on the government. The
presumption, of course, is that the auction will lead to realistic purchase
One institutional investor said he was surprised that the government was lending
so much of the money, saying that private investors have been willing to buy up
pools of mortgage-backed securities with less “leverage” or outside borrowing
than the Treasury proposed on Monday.
The true magnitude of the toxic-asset purchase program could amount to well over
$1 trillion. Buried in Mr. Geithner’s announcement was the detail that the
Treasury would dramatically revise and expand its joint venture with the Federal
Reserve, known as the Term Asset-backed Secure Lending Facility, which was
originally created to finance consumer lending and some forms of business
Starting soon, the program will be expanded to finance investors who want to buy
existing mortgages and mortgage-backed securities, including commercial real
estate mortgages. By allowing the so-called TALF program to buy up older
“legacy” assets, as well as new loans, the Treasury and Fed will be putting
nearly an additional $1 trillion on the line — on top of all the money being
provided through the F.D.I.C. program and the Treasury partnership programs
announced on Monday.
The department defined three basic principles underlying the overall program.
First, by combining government financing, involving the F.D.I.C. and the Federal
Reserve, with private sector investment, “substantial purchasing power will be
created, making the most of taxpayer resources,” the fact sheet said.
Second, private investors will share both in the risk and potential profits, the
Treasury Department said, “with the private sector investors standing to lose
their entire investment in a downside scenario and the taxpayer sharing in
The third principle is the use of competitive auctions to help set appropriate
prices for the assets. “To reduce the likelihood that the government will
overpay for these assets, private sector investors competing with one another
will establish the price of the loans and securities purchased,” the department
By emphasizing that private investors will share in the risk, the Treasury
Department seemed to be seeking to reassure ordinary taxpayers that they will
not be bear the entire downside burden of yet another $1 trillion program.
At the same time, administration officials strove over the weekend to reassure
potential investors that they will not be subjected to the sort of pressures,
criticism and public outrage that followed reports of the million-dollar bonuses
to executives of the American International Group.
The Treasury Department defended its approach as a compromise that would avoid
the dangers both of too gradualist an approach and of one in which taxpayers
bear the entire risk.
“Simply hoping for banks to work legacy assets off over time risks prolonging a
financial crisis, as in the case of the Japanese experience,” the department
said. “But if the government acts alone in directly purchasing legacy assets,
taxpayers will take on all the risk of such purchases — along with the
additional risk that taxpayers will overpay if government employees are setting
the price for those assets.”
The plan relies on private investors to team with the government to relieve
banks of assets tied to loans and mortgage-linked securities of unknown value.
There have been virtually no buyers of these assets because of their uncertain
But some executives at private equity firms and hedge funds, who were briefed on
the plan Sunday afternoon, are anxious about the recent uproar over millions of
dollars in bonus payments made to executives of the American International
Some of them have told administration officials that they would participate only
if the government guaranteed that it would not set compensation limits on the
firms, according to people briefed on the conversations.
Mr. Geithner made it clear on Monday that no limits on executive compensation
would be imposed on companies that invest — unless the companies are already
subject to such limitations as recipients of TARP money — because the government
does not want to discourage investor participation.
Administration officials took to the airwaves Sunday to reassure investors that
the public would distinguish between companies like A.I.G., which are taking
government bailout money, and private investment groups that, under this latest
plan, would be helping the government take troubled assets off the books of some
of the country’s biggest banks.
“What we’re talking about now are private firms that are kind of doing us a
favor, right, coming into this market to help us buy these toxic assets off
banks’ balance sheets,” Christina D. Romer, the White House’s chief economist,
said in an interview on “Fox News Sunday.”
“I think they understand that the president realizes they’re in a different
category,” she said, adding, “They are firms that are being the good guys here.”
Eric Dash and Rachel L. Swarns reported from Washington, and
Andrew Ross Sorkin from New York.
Treasury Details Plan
to Buy Risky Assets, NYT, 24.3.2009,
New Deficit Forecast
Casts Shadow on Obama Agenda
March 21, 2009
The New York Times
By JACKIE CALMES
WASHINGTON — The Congressional Budget Office placed a new
hurdle in front of President Obama’s agenda on Friday, calculating that the
White House’s tax and spending plans would create deficits totaling $2.3
trillion more than the president’s budget projected for the next decade.
The difference largely reflects the administration’s more optimistic forecasts
of economic growth through 2019.
The budget office figures, which will guide Congress as it takes up Mr. Obama’s
proposals in earnest next week, were worse than Democratic leaders expected and
further complicated their job of achieving the president’s priorities on health
care, energy policy and much more.
Moderate Democrats from competitive districts and states have already expressed
nervousness about some of Mr. Obama’s plans, especially as Republicans have
grown increasingly emboldened to stay on the attack.
Senator Judd Gregg of New Hampshire, the senior Republican on the Senate Budget
Committee, said the new report “confirms that under the president’s plan, our
debt will increase to shocking levels that are simply unsustainable and will
devastate future economic opportunities for our children and grandchildren.”
The president, anticipating the report, referred to “the massive deficit we
inherited and the cost of this financial crisis” in a speech to state
legislators meeting in the capital. While he restated his vow to cut the deficit
in half by the end of his term, Mr. Obama gave no ground on trimming his
“What we will not cut are investments that will lead to real growth and real
prosperity,” he said, citing his budget’s spending commitments for health care,
energy alternatives to foreign oil, and education.
While long-term budget projections are notoriously unreliable, they help set the
terms of the debate and provide political ammunition to both parties. In this
case, the Congressional figures could make moderate Republicans and fiscally
conservative Democrats less open to supporting Mr. Obama’s agenda because of
concern about the nation’s long-term fiscal health.
Mr. Obama’s budget predicted total deficits for the next decade of nearly $7
trillion. The Congressional Budget Office analysis of his plan put the figure at
nearly $9.3 trillion, or a third higher.
The House and Senate Budget Committees are planning to draft their versions of a
budget next week, and both chambers expect to vote the following week before
leaving for an Easter and Passover recess.
Congress’s budget resolutions do not require the president’s signature and do
not have the force of law. But the blueprint that the House and Senate
ultimately agree to will go far in determining the odds for success of Mr.
Obama’s domestic program for this year and beyond.
To the extent that the nonpartisan budget office report made the
administration’s sales job harder, it added to the determination of some
Congressional Democrats — with White House coaxing — to use the budget process
to authorize a controversial parliamentary maneuver to help the White House win
passage of one of the president’s top priorities, health care legislation.
The maneuver, known as “reconciliation,” would allow the Senate to adopt a
health care bill this year with 51 votes instead of the 60 that would normally
be necessary. It takes 60 votes to shut off debate, but under reconciliation
rules the Republicans would be unable to use the threat of filibuster to block
That procedural question, as much as any issue of huge dollar figures and
weighty policy proposals, is one that divides both chambers and parties as the
budget debate gets under way. Senate Republicans, unwilling to lose their best
leverage to shape or stop a health care bill, have served notice that they would
consider the reconciliation tactic a breach of Mr. Obama’s promised spirit of
Partly to avoid alienating potential Republican allies in the Senate, some
influential Senate Democrats oppose using the reconciliation maneuver. Those
opponents include the chairmen of the Budget and Finance Committees, Senators
Kent Conrad of North Dakota and Max Baucus of Montana.
The tactic is “not the best way to write major substantive legislation” that
should have bipartisan buy-in, Mr. Conrad said in an interview.
But House Democratic leaders argue that presidents from Ronald Reagan to George
W. Bush have employed the reconciliation process to achieve their major campaign
promises; Mr. Obama, they said, should be no different.
Democrats in both chambers say the House is likely to approve a budget
resolution that authorizes the tactic for health care legislation, the Senate
most likely will not, and the issue will have to be settled in negotiations
between the chambers — with the result hinging on how hard the president wants
to lean on Democratic senators to go along.
After initial soundings, Congressional Democrats and the White House decided not
to seek the tactic for Mr. Obama’s equally controversial energy and climate
change proposals because of opposition from within the party, especially among
Democrats from manufacturing and coal-producing states.
Mr. Conrad said the budget office’s grim analysis merely “confirms what I’ve
been saying for days, that we’re going to have to make adjustments in the
president’s proposal,” especially to restrain spending.
“No one ever had an expectation that they would just take our budget, Xerox it
and vote on it,” said Peter R. Orszag, director of the White House Office of
Management and Budget.
The economy’s expected recovery after this year is projected to help bring in
enough additional tax revenue to reduce future annual deficits. Mr. Obama’s
budget shows a $533 billion deficit by fiscal 2013, the last of his term, which
would mean more than a two-thirds reduction—more than meeting his pledge to
shave the annual deficits in half.
Mr. Conrad predicted that Congress’s budget would project a similar two-thirds
cut. The budget office analysis of Mr. Obama’s budget put the deficit in 2013 at
$672 billion. The annual deficits for much of the next decade would range from
more than 4 percent to more than 5 percent of the gross domestic product, a
level that Mr. Orszag acknowledged would be unsustainable.
New Deficit Forecast
Casts Shadow on Obama Agenda, NYT, 21.3.2009,
AIG Bonus Payments $218 Million
March 21, 2009
Filed at 11:20 a.m. ET
The New York Times
CHICAGO (Reuters) - Documents turned over to the Connecticut
attorney general show that American International Group Inc paid out over $218
million in bonuses, more than the previously disclosed $165 million, published
reports said on Saturday.
The reports said the documents were turned over to Attorney General Richard
Blumenthal's office late on Friday in response to a subpoena.
The documents show that bonuses of at least $1 million were paid to 73 people,
and five received more than $4 million.
The giant insurance company has been widely criticized for granting bonuses
after receiving federal bailout funds exceeding $180 billion.
(Reporting by Jim Marshall +1 312-408-8717, editing by Alan
AIG Bonus Payments
$218 Million, NYT, 21.3.2009,
The Problem With Flogging A.I.G.
March 21, 2009
The New York Times
By JOE NOCERA
Can we all just calm down a little?
Yes, the $165 million in bonuses handed out to executives in the financial
products division of American International Group was infuriating. Truly, it
was. As many others have noted, this is the same unit whose shenanigans came
perilously close to bringing the world’s financial system to its knees. When the
Federal Reserve chairman, Ben Bernanke, said recently that A.I.G.’s
“irresponsible bets” had made him “more angry” than anything else about the
financial crisis, he could have been speaking for most Americans.
But death threats? “All the executives and their families should be executed
with piano wire — my greatest hope,” wrote one person in an e-mail message to
the company. Another suggested publishing a list of the “Yankee” bankers “so
some good old southern boys can take care of them.”
Or how about those efforts to publicize names of individual executives who
received bonuses — efforts championed by Attorney General Andrew Cuomo of New
York and Barney Frank, chairman of the House Financial Services Committee. To
How does outing these executives fix skewed compensation incentives, which have
created that unjustified sense of entitlement that pervades Wall Street? No,
it’s mostly about using subpoena power to satisfy the public’s thirst for blood.
(In light of the death threats, when Mr. Cuomo received the list of A.I.G. bonus
recipients on Thursday, he promised to consider “individual security” and
“privacy rights” in deciding whether to publicize the names.)
Then there was that awful Congressional hearing on Wednesday, in which A.I.G.’s
newly installed chief executive, Edward Liddy, was forced to listen to one
outraged member of Congress after another rail about bonuses — and obsess about
when Treasury Secretary Timothy Geithner learned about them — while ignoring far
more troubling problems surrounding the A.I.G. rescue.
Oh, and let’s not forget the bill that was passed on Thursday by the House of
Representatives. It would tax at a 90 percent rate bonus payments made to anyone
who earned over $250,000 at any financial institution receiving significant
bailout funds. Should it become law, it will affect tens of thousands of
employees who had absolutely nothing to do with creating the crisis, and who are
trying to help fix their companies.
Meanwhile, the real culprits — like Joseph J. Cassano, the former head of
A.I.G.’s financial products division— are counting their money in “retirement.”
Nobody on Capitol Hill seems much interested in getting that money back. (And
the bill does nothing about bonuses that were paid before 2009, meaning that
most of those egregious Merrill Lynch bonuses, paid at the end of last year,
will not be touched.)
By week’s end, I was more depressed about the financial crisis than I’ve been
since last September. Back then, the issue was the disintegration of the
financial system, as the Lehman bankruptcy set off a terrible chain reaction.
Now I’m worried that the political response is making the crisis worse. The
Obama administration appears to have lost its grip on Congress, while the
Treasury Department always seems caught off guard by bad news.
And Congress, with its howls of rage, its chaotic, episodic reaction to the
crisis, and its shameless playing to the crowds, is out of control. This week,
the body politic ran off the rails.
There are times when anger is cathartic. There are other times when anger makes
a bad situation worse. “We need to stop committing economic arson,” Bert Ely, a
banking consultant, said to me this week. That is what Congress committed:
How is the political reaction to the crisis making it worse? Let us count the
IT IS DESTROYING VALUE During his testimony on Wednesday, Mr. Liddy pointed out
that much of the money the government turned over to A.I.G. was a loan, not a
gift. The company’s goal, he kept saying, was to pay that money back. But how?
Mr. Liddy’s plan is to sell off the healthy insurance units — or, failing that,
give them to the government to sell when they can muster a good price.
In other words, it is in the taxpayers’ best interest to position A.I.G. as a
company with many profitable units, worth potentially billions, and one bad unit
that needs to be unwound. Which, by the way, is the truth. But as Mr. Ely puts
it, “the indiscriminate pounding that A.I.G. is taking is destroying the value
of the company.” Potential buyers are wary. Customers are going elsewhere.
Employees are looking to leave. Treating all of A.I.G. like Public Enemy No. 1
is a pretty dumb way for a majority shareholder to act when he hopes to sell the
company for top dollar.
IT IS, UNFORTUNATELY, BESIDE THE POINT Even on Wall Street this week, I didn’t
hear anyone condoning the A.I.G. bonuses. They should never have been granted,
and Mr. Liddy should have been tougher about renegotiating them. (A rich irony
here is that any nonfinancial company in A.I.G.’s straits would be in
bankruptcy, and contracts would have to be renegotiated. The fact that the
government is afraid to force A.I.G. into bankruptcy, despite its crippled
state, is the main reason Mr. Liddy felt he couldn’t try to redo the contracts.)
But there is a much bigger issue that has barely been touched upon by Congress:
the way tens of billions of dollars of taxpayers’ money has been funneled to
A.I.G.’s counterparties — at 100 cents on the dollar. How can it possibly make
sense that Goldman Sachs, Bank of America, Citigroup and every other company
that bought credit-default swaps from A.I.G. should be made whole by the
government? Why isn’t it forcing them to take a haircut?
What’s worse, some of those companies are foreign banks that used credit-default
swaps to exploit a regulatory loophole. Should the United States taxpayer really
be responsible for ensuring the safety of European banks that were taking
advantage of European regulations?
The person who has made this point most forcefully is Eliot Spitzer, of all
people. In his column for Slate.com, he wrote: “Why did Goldman have to get back
100 cents on the dollar? Didn’t we already give Goldman a $25 billion cash
infusion, and aren’t they sitting on more than $100 billion in cash?” Mr.
Spitzer told me that while “there is a legitimate sense of outrage over the
bonuses, the larger outrage should be the use of A.I.G. funding as a second
bailout for the large investment houses.” Precisely.
IT IS DESTABILIZING How can you run a company when the rules keep changing, when
you have to worry about being second-guessed by Congress? Who can do business
under those circumstances?
Take, for instance, that new securitization program the government is trying to
get off the ground, called the Term Asset-Backed Securities Loan Facility — or
TALF. Although it is backed by large government loans, it requires people in the
marketplace — Wall Street bankers! — to participate.
This program could help revive the consumer credit market. But at this point,
most Wall Street bankers would rather be attacked by wild dogs than take part.
They fear that they’ll do something — make money perhaps? — that will arouse
Congressional ire. Or that the rules will change. “The constant flip-flopping is
terrible,” said Simon Johnson, a banking expert who teaches at the M.I.T. Sloan
School of Business.
A.I.G. offers another good example. Not all the employees who face the
possibility of having their bonuses taxed out from under them work for the evil
financial products division. Many of them work in insurance divisions. Very few
of them pull down million-dollar bonuses, and none of them brought A.I.G. to its
knees. (And employees who bought the company’s stock are already hurting
financially, having seen its value virtually wiped out.) They are the ones the
company badly needs to keep if it hopes to sell those units at a healthy price.
Taking away their bonuses — after they’ve already put the money in their bank
accounts — hardly seems like the right way to motivate them. And demonizing them
in Congressional hearings doesn’t help either.
In previous columns, I have been an advocate of nationalizing big banks like
Citigroup. But after watching Congress this week, I’m having second thoughts. If
this is how Congress treats A.I.G., what would it do if it had a bank in its
What the country really needs right now from Congress is facts instead of
rhetoric. Instead of these “raise your hand if you took a private jet to get
here” exercises of outraged populism, we need hearings that educate and
illuminate. Hearings like the old Watergate hearings. Hearings in which
knowledge is accumulated over time, and a record is established. Hearings that
might actually help us get out of this crisis. It’s happened before. In 1932,
Congress established the Pecora committee, named for its chief counsel,
Ferdinand Pecora. It was an intense, two-year inquiry, and its findings —
executives shorting their own company’s stock, for instance — shocked the
country. It also led to the establishment of the Securities and Exchange
Commission and other investor protections. One person who has been calling for a
new Pecora committee is Senator Richard Shelby of Alabama, a Republican and key
member of the Senate Banking Committee.
“As we restructure our regulatory system, we need to be thorough,” he told me.
“We need to understand what caused it. We shouldn’t rush it.”
Meanwhile, the House Financial Services Committee has scheduled a hearing on
Tuesday featuring Mr. Bernanke and Mr. Geithner. The hearing has been called to
find out only one thing: what did the two men know about the A.I.G. bonuses, and
when did they know it?
Is that Nero I hear fiddling?
The Problem With
Flogging A.I.G., NYT, 21.3.2009,
Fed to Buy $1 Trillion in Securities
to Aid Economy
March 19, 2009
The New York Times
By EDMUND L. ANDREWS
WASHINGTON — The Federal Reserve sharply stepped up its efforts to bolster
the economy on Wednesday, announcing that it would pump an extra $1 trillion
into the financial system by purchasing Treasury bonds and mortgage securities.
Having already reduced the key interest rate it controls nearly to zero, the
central bank has increasingly turned to alternatives like buying securities as a
way of getting more dollars into the economy, a tactic that amounts to creating
vast new sums of money out of thin air. But the moves on Wednesday were its
biggest yet, almost doubling all of the Fed’s measures in the last year.
The action makes the Fed a buyer of long-term government bonds rather than the
short-term debt that it typically buys and sells to help control the money
The idea was to encourage more economic activity by lowering interest rates,
including those on home loans, and to help the financial system as it struggles
under the crushing weight of bad loans and poor investments.
Investors responded with surprise and enthusiasm. The Dow Jones industrial
average, which had been down about 50 points just before the announcement,
jumped immediately and ended the day up almost 91 points at 7,486.58. Yields on
long-term Treasury bonds dropped markedly, and analysts predicted that interest
rates on fixed-rate mortgages would soon drop below 5 percent.
But there were also clear indications that the Fed was taking risks that could
dilute the value of the dollar and set the stage for future inflation. Gold
prices rose $26.60 an ounce, hitting $942, a sign of declining confidence in the
dollar. The dollar, which had been losing value in recent weeks to the euro and
the yen, dropped sharply again on Wednesday.
In its announcement, the central bank said that the United States remained in a
severe recession and listed its continuing woes, from job losses and lost
housing wealth to falling exports as a result of the worldwide economic
“In these circumstances, the Federal Reserve will employ all available tools to
promote economic recovery and to preserve price stability,” the central bank
As expected, policy makers decided to keep the Fed’s benchmark interest rate on
overnight loans in a range between zero and 0.25 percent.
But to the surprise of investors and analysts, the committee said it had decided
to purchase an additional $750 billion worth of government-guaranteed
mortgage-backed securities on top of the $500 billion that the Fed is already in
the process of buying.
In addition, the Fed said it would buy up to $300 billion worth of longer-term
Treasury securities over the next six months. That would tend to push down
longer-term interest rates on all types of loans.
All these measures would come in addition to what has already been an
unprecedented expansion of lending by the Fed. The central bank also said it
would probably expand the scope of a new program to finance consumer and
business lending, which gets under way this week.
In effect, the central bank has been lending money to a wider and wider array of
borrowers, and it has financed that lending by using its authority to create new
money at will.
Since last September, the Fed’s lending programs have roughly doubled the size
of its balance sheet, to about $1.8 trillion, from $900 billion. The actions
announced on Wednesday are likely to expand that to well over $3 trillion over
the next year.
Despite a trickle of encouraging data in the last few weeks, Fed officials were
clearly still worried and in no mood to cut back on their emergency efforts.
Fed policy makers sharply reduced their economic forecasts in January,
predicting that the economy would continue to experience steep contractions for
the first half of 2009, that unemployment could approach 9 percent by the end of
the year and that there was at least a small risk of a drop in consumer prices
like those that Japan experienced for nearly a decade.
The Fed rarely buys long-term government bonds. The last occasion was nearly 50
years ago under different economic circumstances when it tried to reduce
long-term interest rates while allowing short term rates to rise.
Ben S. Bernanke, the Fed chairman, has been extremely cautious in recent weeks
about predicting an end to the recession, saying that he hoped to see the start
of a recovery later this year but warning that unemployment, a lagging
indicator, would probably keep climbing until some time in 2010.
In contrast to several recent Fed decisions, with the presidents of some
regional Fed banks dissenting, the decision at Wednesday’s meeting of the 10
members of the Federal Open Market Committee, the central bank’s policy making
group, was unanimous.
Jan Hatzius, chief economist at Goldman Sachs, said the Fed had adopted a
“kitchen sink” strategy of throwing everything it had to jolt the economy out of
its downward spiral.
But while Mr. Hatzius applauded the decision, he cautioned that the central bank
could not solve the economy’s problems by expanding cheap money.
“Even if the Fed could make interest rates negative, that wouldn’t necessarily
help,” Mr. Hatzius said. “We’re in a deep recession mainly because the private
sector, for a variety of reasons, has decided to save a lot more. You can have a
zero interest rate, but if you just offer more money on top of the money that is
already available, it doesn’t do that much.”
Fed officials have been wrestling for months with the fact that lenders remain
unwilling to lend and borrowers are unwilling or unable to borrow. Even though
the Fed has been creating money at the fastest rate in its history, much of that
money has remained dormant.
The Fed’s action is an expansion of its effort to bypass the private banking
system and act as a lender in its own right.
The Fed and the Treasury are starting a joint venture this week called the
Consumer and Business Lending Initiative in their latest effort to thaw the
still-frozen credit markets. The program will start out with $200 billion in
financing for consumer loans, small-business loans and some corporate purposes.
Fed officials have said they hope to expand the program next month, possibly to
include the huge market for commercial mortgages, and both the Fed and Treasury
hope the program will eventually provide up to $1 trillion in total financing.
Fed to Buy $1 Trillion
in Securities to Aid Economy, NYT, 19.3.2009,
A.I.G. Planning Huge Bonuses
After $170 Billion Bailout
March 16, 2009
The New York Times
By EDMUND L. ANDREWS
and PETER BAKER
WASHINGTON — The American International Group, which has received more than
$170 billion in taxpayer bailout money from the Treasury and Federal Reserve,
plans to pay about $165 million in bonuses by Sunday to executives in the same
business unit that brought the company to the brink of collapse last year.
Word of the bonuses last week stirred such deep consternation inside the Obama
administration that Treasury Secretary Timothy F. Geithner told the firm they
were unacceptable and demanded they be renegotiated, a senior administration
official said. But the bonuses will go forward because lawyers said the firm was
contractually obligated to pay them.
The payments to A.I.G.’s financial products unit are in addition to $121 million
in previously scheduled bonuses for the company’s senior executives and 6,400
employees across the sprawling corporation. Mr. Geithner last week pressured
A.I.G. to cut the $9.6 million going to the top 50 executives in half and tie
the rest to performance.
The payment of so much money at a company at the heart of the financial collapse
that sent the broader economy into a tailspin almost certainly will fuel a
popular backlash against the government’s efforts to prop up Wall Street. Past
bonuses already have prompted President Obama and Congress to impose tough rules
on corporate executive compensation at firms bailed out with taxpayer money.
“There are a lot of terrible things that have happened in the last 18 months,
but what’s happened at A.I.G. is the most outrageous,” said Lawrence H. Summers,
President Obama’s chief economic adviser, during an appearance Sunday on “This
Week With George Stephanopoulos.” “What that company did, the way it was not
regulated, the way no one was watching, what’s proved necessary — is
Mr. Summers, who also appeared on CBS’s “Face the Nation,” suggested, however,
that the government’s ability to require the bonuses be scaled back was
restricted by preexisting contracts, even though he did not specify what those
restrictions may be.
“We are a country of law,” said Mr. Summers, one of several economic officials
to hit the Sunday-morning talk show circuit. “There are contracts. The
government cannot just abrogate contracts. Every legal step possible to limit
those bonuses is being taken by Secretary Geithner and by the Federal Reserve
“What the Obama administration has done, based on the advice of attorneys, is
done everything that it can to, within the law and within the tradition of
upholding law that we have in this country, to limit these bonuses,” he added.
“And they have as a result of Secretary Geithner’s efforts been scaled back.
Obviously this whole area is something we have to look at as we think about
regulation in the future.”
A.I.G., nearly 80 percent of which is now owned by the government, has defended
its bonuses, arguing that they were promised last year before the crisis and
cannot be legally canceled. In a letter to Mr. Geithner, Edward M. Liddy, the
government-appointed chairman of A.I.G., said at least some bonuses were needed
to keep the most skilled executives.
“We cannot attract and retain the best and the brightest talent to lead and
staff the A.I.G. businesses — which are now being operated principally on behalf
of American taxpayers — if employees believe their compensation is subject to
continued and arbitrary adjustment by the U.S. Treasury,” he wrote Mr. Geithner
Still, Mr. Liddy seemed stung by his talk with Mr. Geithner, calling their
conversation last Wednesday “a difficult one for me” and noting that he receives
no bonus himself. “Needless to say, in the current circumstances,” Mr. Liddy
wrote, “I do not like these arrangements and find it distasteful and difficult
to recommend to you that we must proceed with them.”
An A.I.G. spokeswoman said Saturday that the company had no comment beyond the
letter. The bonuses were first reported by The Washington Post.
The senior government official, who was not authorized to speak on the record,
said the administration was outraged. “It is unacceptable for Wall Street firms
receiving government assistance to hand out million-dollar bonuses, while
hard-working Americans bear the burden of this economic crisis,” the official
Of all the financial institutions that have been propped up by taxpayer dollars,
none has received more money than A.I.G. and none has infuriated lawmakers more
with practices that policy makers have called reckless.
The bonuses will be paid to executives at A.I.G.’s financial products division,
the unit that wrote trillions of dollars’ worth of credit-default swaps that
protected investors from defaults on bonds backed in many cases by subprime
The bonus plan covers 400 employees, and the bonuses range from as little as
$1,000 to as much as $6.5 million. Seven executives at the financial products
unit were entitled to receive more than $3 million in bonuses.
Mr. Liddy, whom Federal Reserve and Treasury officials recruited after A.I.G.
faltered last September and received its first round of bailout money, said the
bonuses and “retention pay” had been agreed to in early 2008 and were for the
most part legally required.
The company told the Treasury that there were two categories of bonus payments,
with the first to be given to senior executives. The administration official
said Mr. Geithner had told A.I.G. to revise them to protect taxpayer dollars and
tie future payments to performance.
The second group of bonuses covers some 2008 retention payments from contracts
entered into before government involvement in A.I.G. Indeed, in his letter to
Mr. Geithner, Mr. Liddy wrote that he had shown the details of the $450 million
bonus pool to outside lawyers and been told that A.I.G. had no choice but to
follow through with the payment schedule.
The administration official said the Treasury Department did its own legal
analysis and concluded that those contracts could not be broken. The official
noted that even a provision recently pushed through Congress by Senator
Christopher J. Dodd, a Connecticut Democrat, had an exemption for such bonus
agreements already in place.
But the official said the administration will force A.I.G. to eventually repay
the cost of the bonuses to the taxpayers as part of the agreement with the firm,
which is being restructured.
A.I.G. did cut other bonuses, Mr. Liddy explained, but those were part of the
compensation for people who dealt in other parts of the company and had no
direct involvement with the derivatives.
Mr. Liddy wrote that A.I.G. hoped to reduce its retention bonuses for 2009 by 30
percent. He said the top 25 executives at the financial products division had
also agreed to reduce their salary for the rest of 2009 to $1.
Ever since it was bailed out by the government last fall, A.I.G. has been
defending itself against accusations that it was richly compensating people who
caused one of the biggest financial crises in American history.
A.I.G.’s main business is insurance, but the financial products unit sold
hundreds of billions of dollars’ worth of derivatives, the notorious
credit-default swaps that nearly toppled the entire company last fall.
A.I.G. had set up a special bonus pool for the financial products unit early in
2008, before the company’s near collapse, when problems stemming from the
mortgage crisis were becoming clear and there were concerns that some of the
best-informed derivatives specialists might leave. It locked in a total amount,
$450 million, for the financial products unit and prepared to pay it in a series
of installments, to encourage people to stay.
Only part of the payments had been made by last fall, when A.I.G. nearly
collapsed. In documents provided to the Treasury, A.I.G. said it was required to
pay about $165 million in bonuses on or before Sunday. That is in addition to
$55 million in December.
Under a deal reached last week, A.I.G. agreed that the top 50 executives would
get half of the $9.6 million they were supposed to get by March 15. The second
half of their bonuses would be paid out in two installments in July and in
September. To get those payments, Treasury officials said, A.I.G. would have to
show that it had made progress toward its goal of selling off business units and
repaying the government.
The financial products unit is now being painstakingly wound down.
Mary Williams Walsh contributed reporting from Washington and A.G. Sulzberger
contributed reporting from New York.
A.I.G. Planning Huge
Bonuses After $170 Billion Bailout, NYT, 16.3.2009,
Victims Seek a Glimpse of the Schemer
March 13, 2009
The New York Times
By SUSAN DOMINUS
Debra Schwartz, 67, may be the one woman in New York City who feels
compassion for Bernard L. Madoff. “I just pity him,” she said Thursday morning,
while waiting in the line outside the courthouse where he later pleaded guilty
to bilking investors. “I feel bad for this man who lost all sense of reality.”
Wherever one might expect to find sympathy for Mr. Madoff, it was not in that
line, which the judge had anticipated might hold so many outraged investors that
he set up a sign-up sheet to create some order.
By 7 a.m., a bustling line was indeed crowding Worth Street outside the
courthouse, but it consisted mostly of bleary-eyed journalists hoping to
identify, from a telltale cashmere scarf or well-preserved camel hair coat, a
Madoff investor who might talk.
Ms. Schwartz, one of the very few Madoff investors who showed up early — she
said she lost two-thirds of her retirement savings — was happy to oblige. Though
she felt pity for Mr. Madoff, she clarified, she did not want leniency. “I would
love for him to have nothing,” she said. “In jail, he’ll have food, clothing and
shelter, and there will be people who are affected who are going to be out on
Ms. Schwartz, a professional organizer (of closets, not workers), had arranged
to meet at the courthouse a new friend, Bennett Goldworth. They had been linked
up through mutual acquaintances who thought, as fellow Madoff victims, they
should talk. Mr. Goldworth, a formerly retired real estate broker with a
master’s degree in business, said he had lost $2 million in savings, everything
he had. Since the Madoff fiasco, he had put his home in Florida on the market
and moved in with his 84-year-old father in New York.
Ahead of them in line was Helen Chaitman, a commercial litigator in her 60s who
was hoping to retire in 10 years, but now, having lost all her savings with Mr.
Madoff, said she was “looking forward to retiring at 95.”
Apparently, a vast majority of the estimated 13,000 bilked investors had decided
they had endured enough already, and saw no need to add the hassle of an
early-morning trip to the courthouse. Of the three victims who had shown up,
none could articulate what compelled them to wake up so early — in Ms.
Schwartz’s case, at 4 a.m. — to wait in that line on a 32-degree morning.
Mr. Goldworth said he just wanted to see Mr. Madoff go to jail; Ms. Chaitman,
who carried with her letters from 30 clients who had also lost money with Mr.
Madoff, wanted to see, in person, a man who had devastated so many.
Ms. Schwartz, for her part, said, “I didn’t want to wake up tomorrow morning and
think, I should have gone.”
A professional organizer, a litigator and an M.B.A. — none of them the type very
likely to miss a trick, which might explain why all three not only showed up,
but did so three hours before Mr. Madoff was scheduled to appear. So much had
already slipped out of their hands; they would not risk missing something that
might bring them satisfaction.
REVELATIONS about Mr. Madoff’s scheme did not bring down the financial markets,
but they did deepen the sense of crisis, financial and moral, citywide. It was
not just that billions of dollars vaporized overnight — it was also that a crime
so vast could go undetected. It came to symbolize an era of runaway wealth, a
time when the golden coffers were so dazzling they apparently all but blinded
the regulators supposed to be keeping guard.
Before investing with Mr. Madoff, Ms. Chaitman had told the friend who
recommended it to her that the opportunity looked great — “and that the only
risk is that he’s a fraud,” she recalled in line Thursday, a scarf wrapped
around her head for warmth. “My friend laughed, and told me the S.E.C. had
investigated the fund several times.”
That friend, too, lost a fortune — and yes, he recalled with great grief that
prescient conversation. “The S.E.C.’s failure to ferret it out is
incomprehensible,” Ms. Chaitman said.
Thursday morning, she stood patiently outside the courthouse, waiting to watch
the law do its job. Since last weekend, there have been a few tentative signs of
optimism — unseasonable snow replaced by soul-warming sun, a market edging its
way upward, retail sales not as bad as some feared.
When Bernard Madoff takes up residence behind bars, rather than in his
doorman-tended apartment off Lexington Avenue, New Yorkers will surely allow
themselves another sigh of relief, one step closer to not only law, but also
Victims Seek a Glimpse
of the Schemer, NYT, 13.3.2009,
Household Wealth Falls by Trillions
March 13, 2009
The New York Times
By VIKAS BAJAJ
In the last few months, most Americans have felt poorer. Now they have the
numbers to prove it.
The Federal Reserve reported Thursday that households lost $5.1 trillion, or 9
percent, of their wealth in the last three months of 2008, the most ever in a
single quarter in the 57-year history of recordkeeping by the central bank.
For the full year, household wealth dropped $11.1 trillion, or about 18 percent.
Though the numbers do not yet reflect it, the decline in the stock market so far
this year has probably erased trillions more in the country’s collective net
The next biggest annual decline in wealth came in 2002, when household net worth
fell 3 percent after the collapse of the technology bubble. The most recent loss
of wealth is staggering and will probably put further pressure on the economy
because many people will have to spend less and save more.
Most of the wealth was lost in financial assets like stocks, which tumbled at
the end of last year. The Standard & Poor’s 500-stock index, for instance, fell
23 percent in the fourth quarter. The value of residential real estate, the
biggest asset for most families, fell much less — $870 billion, or about 4
Even the richest among us have become a lot poorer. This week, Forbes magazine
published its list of the richest people in the world. At No. 1, Bill Gates, the
founder of Microsoft, still had $40 billion to his name, but that was down $18
billion. The wealth of Warren E. Buffett, the investor whose company Berkshire
Hathaway had a rare bad year, tumbled $25 billion, to $37 billion.
The loss of wealth is concentrated among the most affluent Americans, in large
part because they own more stocks and bonds than the rest of the country. Only
about 50 percent of households own stock, and many of them own relatively small
sums in retirement accounts.
As a result of their greater wealth and higher incomes, the affluent tend to
spend a lot more than their share of the population would imply. The top 20
percent of income earners spend more than the bottom 60 percent of income
earners, according to calculations by Tobias Levkovich, the chief United States
equity strategist at Citigroup.
“When their wealth is mauled, they are not particularly interested in spending,”
Mr. Levkovich said.
The Fed report released on Thursday also showed that total borrowing and lending
increased at an annual rate of 6.3 percent in the fourth quarter, mostly as a
result of increased borrowing by the federal government to finance its
operations and various bailouts of the financial system. The government’s
borrowing increased at an annual rate of 37 percent.
But borrowing by households dropped 2 percent. Lending to businesses was up 1.7
percent. Recent surveys of loan officers by the Fed have shown that companies
have been drawing down lines of credit that were established in the past, and
that only a small fraction of the lending to the private sector is through new
loans, which are much harder to obtain than in recent years.
Household Wealth Falls
by Trillions, NYT, 13.3.2009,
Net Worth of Families Down Sharply
March 12, 2009
The New York Times
By THE ASSOCIATED PRESS
WASHINGTON (AP) — The net worth of American households fell by the largest
amount in more than a half-century of record keeping during the fourth quarter
of last year.
The Federal Reserve said Thursday that household net worth dropped by a record 9
percent from the level in the third quarter.
The decline was the sixth straight quarterly drop in net worth and underscored
the battering that families are undergoing in the midst of a steep recession
with unemployment surging and the value of their homes and investments plunging.
Net worth represents total assets such as homes and checking accounts minus
liabilities like mortgages and credit card debt.
Family net worth had hit an all-time high of $64.36 trillion in the April-June
quarter of 2007 but has fallen in every quarter since that time.
The record 9 percent drop in the fourth quarter pushed total net worth down to
$51.48 trillion, a level that is 20 percent below the third quarter 2007 peak.
After five straight years of sharp increases in home prices, the housing bubble
burst in 2007, sending shockwaves through the financial system as banks were hit
with billions of dollars of losses on mortgages and mortgage-backed securities.
The federal government created a $700 billion rescue fund for the financial
system last October but so far that effort has shown only modest results in
terms of getting banks to resume more normal lending patterns.
Households have also been battered by the recession that began in December 2006
and is already the longest in a quarter-century. That downturn has sent
unemployment soaring to a 25-year high of 8.1 percent in February with 4.4
million jobs lost since the downturn began.
The Federal Reserve began keeping quarterly records on net worth in 1951.
Net Worth of Families Down Sharply, NYT,
Times Are Tough
on Wall Street
and Wisteria Lane
March 12, 2009
The New York Times
By EDWARD WYATT
LOS ANGELES — Full-time moms are being forced to take part-time jobs, and
corporate executives treat themselves to expensive wine after asking for a
government bailout. Foreclosure signs are going up in the most familiar
neighborhoods. Three neighbors, laid off and their houses foreclosed upon, take
the chief executive of their mortgage company hostage, and out-of-work
investment bankers have to stoop to low-level jobs as corporate interns.
The economic meltdown has come to prime time. While each of those situations
seems real enough to have resulted from the global financial crisis, they are
plotlines of recent or coming episodes of popular prime-time television series,
including “Desperate Housewives” and “Ugly Betty” on ABC, “The Simpsons” on Fox,
“Flashpoint” on CBS and “30 Rock” on NBC.
Popular entertainment often takes the form of escapism in tough economic times.
But a growing number of broadcast network shows have recently incorporated more
real-life issues into their stories — a reflection, producers say, of how
widespread the current financial troubles are.
“If everyone in America is thinking about it, that means every writer in
Hollywood is thinking about it,” said Marc Cherry, the creator and executive
producer of “Desperate Housewives.” “I know people tune in to ‘Desperate
Housewives’ for a bit of escapism and a bit of fun. But here you have fairly
well-off people living in a fairly well-off neighborhood, and this time the
financial crisis is hitting everyone.”
So, on Wisteria Lane, Susan Mayer has been forced to take a part-time job to
help her ex-husband, a plumber who works 16-hour days, pay for their son’s
private-school tuition, and the Scavos’ pizzeria is threatened because people
are dining out less.
Although police dramas like “Law & Order” have long sought to present story
lines that are “ripped from the headlines,” and medical dramas like “ER” have
invoked actual cases as the basis for plots, those “actual” events — double
murders or rare tropical diseases — are usually far removed from the daily lives
of most viewers.
Now, however, the real-life financial situations being used for scripts stand
out for their directness in addressing the economic plight of average Americans.
“We’ve never really been an issues-driven show,” said Mark Ellis, a creator and
producer of “Flashpoint,” which follows the efforts of an urban police
department’s elite Strategic Response Unit, a SWAT-like team that also employs
the techniques of talk therapy in hostage negotiations.
“But we’ve all witnessed people close to us who have experienced the loss of
their home or job or the depletion of their savings account, and seen how
destructive that can be,” Mr. Ellis said. “These are tragic times, and we wanted
to explore the repercussions of that on a personal basis.”
In the Feb. 27 episode, titled “Business as Usual,” a mortgage company executive
who had received a $22 million bonus as his company foreclosed on hundreds of
homes was taken hostage by three former customers.
It never hurts when there is a convenient villain, of course, and television
writers have found plenty of them in the current crisis. On “Flashpoint” the
mortgage company chief is described by one of his foreclosed-upon victims as “a
guy who’s got four houses already who booked a five-star Caribbean resort with
his buddies to brainstorm how to make the most of these troubled times.”
Two coming episodes of “Lie to Me,” the new Fox hit, fit the pattern. One
focuses on a Bernard Madoff-like operator of a Ponzi scheme, and another
features a contractor who, pinched by the slow economy, cuts corners on a
construction project, resulting in a building collapse.
“What’s happening in the economy is very relevant to the substance of our show,”
said Samuel Baum, the show’s creator and executive producer. “We’re looking at
what lies people are willing to tell, and at what cost to their co-workers, to
maintain their own financial security.”
Depictions of the financial crisis have seeped into comedy as well as drama. On
an episode of “30 Rock” last month a fictional group of former Lehman Brothers
investment bankers resorted to jobs as interns at NBC. And Sunday night on “The
Simpsons” Homer Simpson faced foreclosure.
Because of the months-long delay between the genesis of a television plotline
and its broadcast, fictional series rarely make direct reference to current
events, lest they risk seeming stale by the time an episode makes it to air. The
episodes being shown now were conceived last summer or fall and filmed early
this year, meaning they have benefited from the extended economic downturn.
Networks are even considering entire series based on the recession. Fox is
developing a comedy titled “Two-Dollar Beer” that features a group of friends
living in Detroit who are trying to weather that city’s worsening financial
condition, and ABC Studios is developing “Canned,” a situation comedy about a
group of friends who all get fired on the same day.
“Television serves as a crucible for exploring and tapping into real emotions,”
said Gary Newman, chairman of 20th Century Fox Television, the studio that
produces “Lie to Me” and “The Simpsons.” “When our characters are dealing with
things that are relatable to our own lives, it can become more meaningful.”
Times Are Tough on Wall
Street and Wisteria Lane, NYT, 12.3.2009,
Mr. Obama’s Trade Agenda
March 11, 2009
The New York Times
In tough times, there is a strong temptation to turn inward. With so many
Americans already out of work, why shouldn’t the country raise trade barriers to
protect its workers from foreign competition?
The answer is clear: Trade will play an important role in the world’s eventual
recovery, transmitting economic growth from one country to the next.
Protectionism leads to further protectionism, and yielding to its temptation
could unleash destructive trade wars that would crush any chance of recovery.
Unfortunately, few politicians are willing to tell their constituents that
unpopular truth. Instead, governments are succumbing to protectionism’s
dangerous lure. In recent months, Russia has jacked up import barriers on cars,
farm machinery and other products. The European Union has reintroduced subsidies
on dairy products. Europe, India and Brazil raised tariffs on imported steel.
Protectionism is also taking subtler forms, like Britain’s requirement that
bailed-out banks favor domestic lending. The United States is not immune. The
stimulus bill had a “Buy America” provision, and it made it more difficult for
companies receiving stimulus dollars to hire foreign workers under the H-1B visa
President Obama’s choice for United States trade representative, Ron Kirk,
appears ambivalent about the value of free trade. As part of his confirmation
hearings this week, Mr. Kirk testified that he would work to expand trade but
also argued “that not all Americans are winning from it and that our trading
partners are not always playing by the rules.” He suggested that the
administration could press ahead on the ratification of the trade agreement with
Panama, which was negotiated by the Bush administration. But he said that Mr.
Obama was prepared to walk away from the Bush administration’s agreement with
South Korea, calling it “unfair.”
Mr. Obama’s annual trade report to Congress is similarly worrisome. It suggested
opening a “discourse with the public” on whether the trade agreements awaiting
ratification — with Colombia, South Korea and Panama — are a good idea. It
committed the administration to “improving” the North American Free Trade
Agreement, without saying how. And it poured cold water on efforts to restart
the World Trade Organization’s round of international negotiations.
Those talks, which were supposed to open markets for the world’s poorest
countries, are flawed. Still, the administration’s argument that negotiations
are imbalanced because it is not clear what they offer to the United States is
wrongheaded. The administration should press ahead on a deal and try to revive
at least some of its original intent.
If ever there was a need for collective action — on fiscal stimuli, monetary
policy, aid to the developing world, fighting protectionism — it is now. A place
to start the rethinking is China and how to encourage increased domestic
consumption and investment in China and other cash-rich Asian countries so they
can start pulling the world out of recession.
China’s leaders, in particular, need to understand that export-led growth no
longer works for them or for the world. The United States will have more
influence if it stops beating on Beijing for its foreign-exchange policy and
engages China’s leaders as partners, not rivals.
Vigorous trade will help the world recover. For that to happen, the United
States will have to provide strong leadership and a clear commitment to fighting
protectionism. Any sign of ambivalence from Washington will only make things
Mr. Obama’s Trade Agenda, NYT, 11.3.2009,
This Is Not a Test. This Is Not a Test.
March 11, 2009
The New York Times
By THOMAS L. FRIEDMAN
It’s always great to see the stock market come back from the dead. But I am
deeply worried that our political system doesn’t grasp how much our financial
crisis can still undermine everything we want to be as a country. Friends, this
is not a test. Economically, this is the big one. This is August 1914. This is
the morning after Pearl Harbor. This is 9/12. Yet, in too many ways, we seem to
be playing politics as usual.
Our country has congestive heart failure. Our heart, our banking system that
pumps blood to our industrial muscles, is clogged and functioning far below
capacity. Nothing else remotely compares in importance to the urgent need to
heal our banks.
Yet I read that we’re actually holding up dozens of key appointments at the
Treasury Department because we are worried whether someone paid Social Security
taxes on a nanny hired 20 years ago at $5 an hour. That’s insane. It’s as if our
financial house is burning down but we won’t let the Fire Department open the
hydrant until it assures us that there isn’t too much chlorine in the water.
Meanwhile, the Republican Party behaves as if it would rather see the country
fail than Barack Obama succeed. Rush Limbaugh, the de facto G.O.P. boss, said so
explicitly, prompting John McCain to declare about President Obama to Politico:
“I don’t want him to fail in his mission of restoring our economy.” The G.O.P.
is actually debating whether it wants our president to fail. Rather than help
the president make the hard calls, the G.O.P. has opted for cat calls. It would
be as if on the morning after 9/11, Democrats said they wanted no part of any
war against Al Qaeda — “George Bush, you’re on your own.”
As for President Obama, I like his coolness under fire, yet sometimes it feels
as if he is deliberately keeping his distance from the banking crisis, while
pressing ahead on other popular initiatives. I understand that he doesn’t want
his presidency to be held hostage to the ups and downs of bank stocks, but a
hostage he is. We all are.
Great and difficult crises are what produce great presidents, so one thing we
know for sure: Mr. Obama’s going to have his shot at greatness. This crisis is
uniquely difficult in four respects.
First, to get out of a crisis like this you need to let markets clear. You need
to let failed companies, or homeowners, go bankrupt, unlock their dead capital
and reapply it to thriving entities. That is how the dot-com bust ended, and out
of that carnage emerged a whole new set of companies. The problem with this
crisis is that A.I.G., Citigroup and General Motors — and your neighbor’s
subprime mortgage — are not Dogfood.com. You let the market clear them away, and
we could all be wiped out with them. Therefore, the president has to find a way
to punish bad financial actors without setting off another Lehman Brothers
Second, we need to get a market going that would bring fair value and clarity to
the “toxic mortgages” crippling the balance sheets of our major banks. This will
likely require some degree of government subsidy to private equity groups and
hedge funds to get them to make the first bids for these toxic assets by
guaranteeing they will not lose. This could make great policy sense, but be a
nightmare to sell politically. It will strike many as another unfair giveaway to
Unfortunately, the president may have to look the American people in the eye and
explain that “fairness is not on the menu anymore.” All that’s on the menu now
is whether or not we avoid a system meltdown — and this will require rewarding
some new investors.
Third, the president may have to make some trillion-dollar decisions — like
nationalizing major banks or doubling the economic stimulus — with no real
precedent and without knowing all the long-term ramifications.
Finally, to do all this, the president has to make us realize how dangerous a
moment we’re in, without creating a panic that will prompt Americans to put
every dime in their mattresses and undermine the economy even more.
All this will require leadership of the highest order — bold decisions,
persistence and persuasion. There is a huge amount of money on the sidelines
eager to bet again on America. But right now, there is too much uncertainty; no
one knows what will be the new rules governing investments in our biggest
financial institutions. If President Obama can produce and sell that plan,
private investors, big and small, will give us a stimulus like you’ve never
Which is why I wake up every morning hoping to read this story: “President Obama
announced today that he had invited the country’s 20 leading bankers, 20 leading
industrialists, 20 top market economists and the Democratic and Republican
leaders in the House and Senate to join him and his team at Camp David. ‘We will
not come down from the mountain until we have forged a common, transparent
strategy for getting us out of this banking crisis,’ the president said, as he
boarded his helicopter.”
Maureen Dowd is off today.
This Is Not a Test. This
Is Not a Test., NYT, 11.3.2009,
Bernanke Says Financial Rules
Need an Overhaul
March 11, 2009
The New York Times
By JACK HEALY
The Federal Reserve chairman, Ben S. Bernanke, on Tuesday called for a broad
reworking of how the government regulates the financial system to prevent future
In a speech before the Council on Foreign Relations in Washington, Mr. Bernanke
said the financial system needed to be regulated “as a whole, in a holistic way”
and that stricter oversight of banks would not be enough to guard against future
“Strong and effective regulation and supervision of banking institutions,
although necessary for reducing systemic risk, are not sufficient by themselves
to achieve this aim,” Mr. Bernanke said.
He said that the failures of government oversight systems and private risk
management helped to precipitate the economic crisis by not ensuring that a
flood of foreign money into the United States was prudently invested. Credit
markets seized up and global economies began contracting in what Mr. Bernanke
called the worst financial crisis since the 1930s.
Even as the Fed and other central banks scramble to rebuild confidence in the
financial system and free up credit, Mr. Bernanke said that policymakers needed
to look ahead to long-term changes in the financial system.
Mr. Bernanke said that policy makers also needed to examine the problem of
institutions deemed “too big to fail” because of the role they played in the
broader system. Huge institutions like Citigroup and the insurer American
International Group have received billions in bailout aid as the government
sought to ward off a collapse in the financial system.
“In the present crisis, the too-big-to-fail issue has emerged as an enormous
problem,” Mr. Bernanke said.
Specifically, he called for “especially close” oversight of firms whose collapse
would pose a systemic threat to the broader economy, and said that regulators
need to zealously monitor the risk-taking and financial stability of major
financial institutions, and that they must be held to high standards of
He called for a review of the accounting rules that govern how companies value
assets — a crucial issue as banks struggle under the weight of mortgage-related
debts whose underlying values have fallen as housing prices crumbled. Mr.
Bernanke said accounting rules and other financial regulations should not
amplify the natural ups and downs in market cycles.
“Further review of accounting standards governing valuation and loss
provisioning would be useful, and might result in modifications to the
accounting rules that reduce their pro-cyclical effects without compromising the
goals of disclosure and transparency,” he said.
In a question-and-answer session after the speech, Mr. Bernanke said he did not
favor a suspension of the mark-to-market accounting standards, but said that the
weakness in current rules should be identified and corrected.
Mr. Bernanke also called for the creation of an authority to monitor and oversee
broad, systemic risks, and said that policy makers need to add muscle to the
rules governing payment and trading so that the financial markets perform better
He said the United States could take a “macroprudential” approach — surveying
the breadth of markets and financial institutions for signs of bubbles, growing
risks like the subprime mortgage market, or risks shared by interconnected
markets. Congress could empower a government agency like the Fed to take on that
“The policy actions I’ve discussed would inhibit the buildup of risks within the
financial system and improve the resilience of the financial system to adverse
shocks,” Mr. Bernanke said.
Bernanke Says Financial
Rules Need an Overhaul, NYT, 11.3.2009,
Reviving the Dream
March 10, 2009
The New York Times
By BOB HERBERT
Working families were in deep trouble long before this megarecession hit. But
too many of the public officials who should have been looking out for the middle
class and the poor were part of the reckless and shockingly shortsighted
alliance of conservatives and corporate leaders that rigged the economy in favor
of the rich and ultimately brought it down completely.
As Jared Bernstein, now the chief economic adviser to Vice President Joseph
Biden, wrote in the preface to his book, “Crunch: Why Do I Feel So Squeezed?
(And Other Unsolved Economic Mysteries)”:
“Economics has been hijacked by the rich and powerful, and it has been forged
into a tool that is being used against the rest of us.”
Working people were not just abandoned by big business and their ideological
henchmen in government, they were exploited and humiliated. They were denied the
productivity gains that should have rightfully accrued to them. They were
treated ruthlessly whenever they tried to organize. They were never reasonably
protected against the savage dislocations caused by revolutions in technology
and global trade.
Working people were told that all of this was good for them, and whether out of
ignorance or fear or prejudice or, as my grandfather might have said, damned
foolishness, many bought into it. They signed onto tax policies that worked like
a three-card monte game. And they were sold a snake oil concoction called
“trickle down” that so addled their brains that they thought it was a wonderful
idea to hand over their share of the nation’s wealth to those who were already
America used to be better than this.
The seeds of today’s disaster were sown some 30 years ago. Looking at income
patterns during that period, my former colleague at The Times, David Cay
Johnston, noted that from 1980 (the year Ronald Reagan was elected) to 2005, the
national economy, adjusted for inflation, more than doubled. (Because of
population growth, the actual increase per capita was about 66 percent.)
But the average income for the vast majority of Americans actually declined
during those years. The standard of living for the average family improved not
because incomes grew but because women entered the workplace in droves.
As hard as it may be to believe, the peak income year for the bottom 90 percent
of Americans was way back in 1973, when the average income per taxpayer,
adjusted for inflation, was $33,000. That was nearly $4,000 higher, Mr. Johnston
pointed out, than in 2005.
Men have done particularly poorly. Men who are now in their 30s — the prime age
for raising families — earn less money than members of their fathers’ generation
did at the same age.
It may seem like ancient history, but in the first few decades following World
War II, the United States, despite many serious flaws, established the model of
a highly productive society that shared its prosperity widely and made
investments that were geared toward a more prosperous, more fulfilling future.
The American dream was alive and well and seemingly unassailable. But somehow,
following the oil shocks, the hyperinflation and other traumas of the 1970s,
Americans allowed the right-wingers to get a toehold — and they began the
serious work of smothering the dream.
Ronald Reagan saw Medicare as a giant step on the road to socialism. Newt
Gingrich, apparently referring to the original fee-for-service version of
Medicare, which was cherished by the elderly, cracked, “We don’t get rid of it
in Round One because we don’t think it’s politically smart.”
The right-wingers were crafty: You smother the dream by crippling the programs
that support it, by starving the government of money to pay for them, by
funneling the government’s revenues to the rich through tax cuts and other
benefits, by looting the government the way gangsters loot legitimate businesses
and then pleading poverty when it comes time to fund the services required by
The anti-tax fanatic Grover Norquist summed the matter up nicely when he
famously said, “Our goal is to shrink the government to the size where you can
drown it in a bathtub.” Only they didn’t shrink the government, they enlarged it
and turned its bounty over to the rich.
Now, with the economy in free fall and likely to get worse, Americans — despite
their suffering — have an opportunity to reshape the society, and then to move
it in a fairer, smarter and ultimately more productive direction. That is the
only way to revive the dream, but it will take a long time and require great
courage and sacrifice.
The right-wingers do not want that to happen, which is why they are rooting so
hard for President Obama’s initiatives to fail. They like the direction that the
country took over the past 30 years. They’d love to do it all again.
Reviving the Dream, NYT,
a Casualty of Recession
March 10, 2009
The New York Times
By SHAILA DEWAN
ATLANTA — It is a sign of the times when Sacha Taylor, a fixture on the
charity circuit in this gala-happy city, digs out a 10-year-old dress to wear to
a recent society party.
Or when Jennifer Riley, a corporate lawyer, starts patronizing restaurants that
Or when Ethel Knox, the wife of a pediatrician, cleans out her home and her
storage unit, gives away an old car to a needy friend and cancels the family
Christmas. “I just feel so decadent with all the stuff I’ve got,” she explained.
In just the seven months since the stock market began to plummet, the recession
has aimed its death ray not just at the credit market, the Dow and Detroit, but
at the very ethos of conspicuous consumption. Even those with a regular income
are reassessing their spending habits, perhaps for the long term. They are
shopping their closets, downscaling their vacations and holding off on trading
in their cars. If the race to have the latest fashions and gadgets was like an
endless, ever-faster video game, then someone has pushed the reset button.
“I think this economy was a good way to cure my compulsive shopping habit,”
Maxine Frankel, 59, a high school teacher from Skokie, Ill., said as she
longingly stroked a diaphanous black shawl at a shop in the nearby Chicago
suburb of Glenview. “It’s kind of funny, but I feel much more satisfied with the
things money can’t buy, like the well-being of my family. I’m just not seeking
happiness from material things anymore.”
To many, the adjustment feels less like a temporary, emergency response than a
permanent recalibration, one they view in terms of ethics rather than
“It’s kind of like we all went overboard,” said Ms. Taylor, 33. “And we’re
trying to get back to where we should have been.”
Not everyone thinks the new restraint will last. Ms. Riley, 37, who lives in
Atlanta, said she doubted it would extend beyond the recession.
“I do think that maybe now it’s a little bit chic or something to save money, or
to be pinching pennies,” she said.
Just as she stopped carpooling when gas prices went down, Ms. Riley said, she
predicted that people would start buying again when the economy rebounded.
“That’s just my own, maybe, cynical belief,” she said.
Still, economists point out that the Great Depression created a generation of
cautious savers. The longer the downturn this time, they say, the more likely it
is to change financial habits permanently.
Holly Moreno, 30, a part-time Web site manager in the Dallas suburb of Rowlett,
Tex., whose husband is a business analyst, said she had been taking their
2-year-old son to indoor playgrounds at the mall and free story-times at the
library instead of paying to get into the children’s museum, their favorite
“Even though we’re secure with our jobs, you’ve still got to plan for
just-in-case,” Ms. Moreno said, “especially because we have a kid.”
As many economists have noted, cutting spending is the worst thing people with
means can do for the economy right now. But that argument seems to have little
traction, especially because even those with steady paychecks and no fear of
losing their job have seen their net worth decline and their retirement savings
“I don’t think there’s been any other period in modern history where appeals to
people to spend the economy back into health have worked,” said Ethan S. Harris,
a co-chief of United States economics research at Barclays Capital. “The only
time I’ve ever seen where that kind of urging people to spend worked was after
9/11, and I did think at the time that there was some patriotic buying going
After the attacks of Sept. 11, though, President George W. Bush urged Americans
to go shopping. President Obama has taken a different tack, issuing a budget
whose very title, “A New Era of Responsibility,” strives for an austere tone. On
Inauguration Day, the first daughters, Sasha and Malia, dressed not in designer
labels but clothing from J. Crew. On television, the insurance giant Allstate is
running a sepia-toned “back to basics” advertising campaign, and in Target’s
“new day” commercials, the “new pedicure” is administered by a spouse and the
“new vacation glow” comes from a spray bottle.
“Though the recession was always talked about in economic terms, we felt really
strongly that, in fact, it was a crisis of culture,” said Tracy Johnson,
research director for the Context-Based Research Group, a market research firm
in Baltimore that views the recession as a rite-of-passage that will reorder
Ms. Johnson has advised clients to focus on quality rather than quantity. Malls
redecorated in screaming red “sale” signs are not the way to go, she said,
because “if you just give people the opportunity to buy more, you’re not
matching up to where their minds are.”
Carol Morgan, who teaches law at the University of Georgia and whose husband has
a private law practice, said she felt a responsibility to cut needless spending.
“That is probably something that is a prudent thing to do in any event, but
particularly now I see it as the right thing, as the moral thing to do,” she
said, adding that she also hoped to increase her charitable giving. “Before,
extravagance and opulence was the aspiration, and if we can replace that with a
desire to live more simply — replace that with time with family, or time for
spirituality — what a positive outcome to a very negative situation.”
Kim Gatlin, a novelist who lives in Park Cities, in the Dallas area, said some
of her friends had urged their husbands not to give them jewelry over the
holidays. “They were like, you know, ‘There’s nothing I’m dying for right now —
let’s just wait,’ ” she said. “It makes them feel like they’re participating,
although they don’t contribute to the income stream.”
Even some of the very affluent said they were reluctant to be conspicuous in
“It’s disrespectful to the people who don’t have much to flaunt your wealth,”
said Monica Dioda Hagedorn, 40, a lawyer in Atlanta who is married to an heir of
the Scotts Miracle-Gro fortune. “I have plenty of dresses to last me 10 years.”
Ms. Hagedorn said she did not hold herself apart from the rest of society
because of her money. “Everyone’s going to pull through together, or everyone’s
going to sink together,” she said.
Fear and uncertainty have paralyzed even the most insulated clients, said Jack
Sawyer Jr., who manages money for some of Atlanta’s wealthiest families. “I have
clients who have $20 million, young grandparents, and they’re concerned about
whether they can continue to pay tuition for their grandchildren. It’s not a
Any sharp decline in consumer spending will feed on itself, said Juliet B.
Schor, an economist at Boston College and the author of “The Overspent American:
Upscaling, Downshifting and the New Consumer” (Basic Books, 1998). Typically,
people spend when those around them are spending, but in a downturn, the need to
compete evaporates. “You can stay right where you are without falling behind,”
Ms. Schor said.
Consumers’ focus may have shifted, she said, from striving to catch up to those
above them to contemplating the fates of those below them.
Craig Robinson, 34, a manager at a real estate investment firm in Atlanta,
agreed, saying that he was not tempted to join those who were scooping up deals
at department stores. “There’s one guy to the right of me showing me this great
deal he got on his tie,” he said, “and there’s four guys to the left of me who
got laid off and can’t find a job.”
Karen Ann Cullotta contributed reporting from Chicago, Gretel C. Kovach from
Dallas, and Rebecca Cathcart from Los Angeles.
a Casualty of Recession, NYT, 10.3.2009,
A Zealous Watchman
to Follow the Money
March 10, 2009
The New York Times
By SCOTT SHANE
WASHINGTON — There is an alligator head in Earl E. Devaney’s office, with a
tiny camera concealed inside. The covert pictures it snapped in a Louisiana
bayou caught an Interior Department official on a fishing trip he had accepted
as a bribe, but today the stuffed gator lives on as a toothy deterrent to
“When an assistant secretary comes in and asks about it, I tell that story and
they get a little unnerved,” said Mr. Devaney, the inspector general for the
Interior Department and the man President Obama has chosen to police the
spending of the $787 billion stimulus package.
In 38 years of government service, Mr. Devaney, a hulking former college
football lineman and Secret Service man, has been unnerving would-be miscreants.
But now the Big Man, as Mr. Devaney’s colleagues call him, is taking on an
incomparably bigger job, tracking a sum 50 times the agency’s annual budget as
chairman of the Recovery Accountability and Transparency Board — or as the
irresistible acronym has it, RAT Board.
Squeezed with other honorees into the box of the first lady, Michelle Obama, for
the president’s address to Congress on Feb. 24, Mr. Devaney looked uneasy in the
spotlight, a deadpan Joe Friday at a political spectacle. But he likes the
“It’s sort of the Super Bowl of oversight,” said Mr. Devaney, 61, in an
interview between hunting for office space and recruiting staff members. He has
$84 million to run his office through September 2011, out of some $350 million
The stimulus is a bet-the-farm wager on the economy with few precedents in
American history, and Mr. Devaney’s appointment has been widely praised for
assuring tough scrutiny.
“He’s out of central casting as the old-time street cop who’s seen it all,” said
Danielle Brian, executive director for the Project on Government Oversight, an
advocacy group in Washington.
Unlike inspectors general who soft-pedal criticism of agency brass, Ms. Brian
added, Mr. Devaney “never got the memo that said he wasn’t supposed to be a
The job, however, comes with a glaring contradiction. Speedy spending is
considered critical to jump-starting the economy. Still, Mr. Devaney must make
sure the billions shoveled out the Treasury door in such a hurry are neither
wasted nor stolen. He said he was aware of the tension and hoped to deter waste
and fraud not with an alligator head, but with a Web site, Recovery.gov, with
voluminous details on every dollar spent.
“I want to make it possible for Mr. and Mrs. Smith in Ohio to see exactly how
the money is spent,” Mr. Devaney said.
If a project that promised to create 1,000 jobs only creates 100, the failure
will be recorded, he said: “The good, the bad and the ugly will all be on that
Not all believe the federal government is capable of such candor, and so far, an
independent site, StimulusWatch.org, easily outclasses Recovery.gov. Senator
Charles E. Grassley, Republican of Iowa, called Mr. Devaney “independent and
highly effective” but said the RAT board “puts another layer of bureaucracy
between taxpayers and the truth” about how the money is spent.
The only child of a middle-class couple in Reading, Mass., Mr. Devaney studied
government at Franklin and Marshall College in Pennsylvania. The quarterback he
helped protect, D. J. Korns, recalls Mr. Devaney’s steady leadership in a
fraternity and stoicism on the football field, where his bad shoulder would pop
out of joint, a trainer would snap it back in, and he would return to the fray.
“It was so painful I couldn’t watch,” Mr. Korns said.
Hooked on law enforcement after working summers as a police officer on Cape Cod,
Mr. Devaney went directly from graduation to the Secret Service in 1970. He
protected presidents — he liked the recent film “Frost/Nixon” for its portrait
of that president — and once was shot at by a disturbed woman who mistook him
for President Gerald R. Ford. She missed, and he went on to build a new fraud
division in the Secret Service.
In 1991, he was hired to create a criminal enforcement division for the
Environmental Protection Agency. Felicia Marcus, who worked with him as a
regional administrator at that agency in the 1990s — and whom he once saved from
a purse-snatcher — said he was tough but reasonable with polluters.
“He listens, but no one pushes this guy around,” Ms. Marcus said.
Arriving at the Interior Department in 1999, Mr. Devaney found a “broken”
inspector general’s office, said Mary Kendall, his deputy there. Senior
officials told him they had never before met any of his predecessors and that
they threw out reports unread because they were so dense.
Mr. Devaney created a special unit to focus on the most serious cases, which had
routinely languished, created a system for identifying the programs at highest
risk of failure, and ordered that reports no longer be written in “auditese or
cop talk,” as he called it. When programs worked, he praised them, to build
trust with the work force.
The 2004 investigation of the official photographed in the bayou, a Louisiana
regional supervisor who accepted fishing trips from a contractor, was one in a
parade of Interior Department scandals involving drugs and sex, free-spending
lobbyists and unpaid oil royalties. Mr. Devaney speaks of his beat at the
department with a mix of relish and dismay.
“Everything everyone would want is here,” he said. “Water, land, minerals, oil
and gas and the ever-popular Indian gaming.”
The job has proved frustrating at times. In 2004, his first report on J. Steven
Griles, the deputy secretary who was close to the lobbyist Jack Abramoff,
documented 25 ethical lapses, he said. But the interior secretary, Gale A.
Norton, shrugged it off.
“She said she’d talked to him, and he wouldn’t do it again,” Mr. Devaney said.
“Three years later, he was in jail.” (Ms. Norton, now at the oil giant Royal
Dutch Shell, declined to comment.)
That frustration was on display at a 2006 hearing when Mr. Devaney declared,
“Simply stated, short of a crime, anything goes at the highest levels of the
Department of the Interior.”
Jeff Ruch, who runs the whistle-blower group Public Employees for Environmental
Responsibility, is a rare critic, calling Mr. Devaney “the deflector general”
for emphasizing sensational corruption cases over more fundamental change.
But Ms. Brian of the Project on Government Oversight said a little showmanship
was useful. “He’s figured out that a lot of his impact is deterrence, and that
means making a splash,” she said.
Nearly three years ago, Mr. Devaney told Federal Times in a rare interview that
he was “in the fall of my career” and had “no aspirations other than to play
more golf.” Now, contemplating the stimulus job, he said that was a
“It turned out to be early fall,” Mr. Devaney said. “Or maybe late summer.”
A Zealous Watchman to
Follow the Money, NYT, 10.3.2009,
go from 'thriving' to 'struggling'
9 March 2009
By Susan Page
EXTON, Pa. — Casualties of the economic downturn include easy credit, rising
home values, stable retirement investment accounts and 4.4 million jobs.
Some fear that the American dream may be in peril as well.
The aspirations that have defined the American experience — that those who work
hard and play by the rules can get ahead, and that the next generation will have
a better life than this one — have been battered by a devastating recession that
shows few signs of having hit bottom.
"Maybe we were dreaming the American dream, you know what I mean?" says David
McLimans, a steelworker. The mill he works for in suburban Philadelphia
temporarily shut down last week amid the credit crunch. "I'm 63, so I'm not
dreaming it anymore. I have what I have and I hope I can keep what I have, but
my kids, I worry about. They're struggling."
His four grown children have a lot of company. More than 24 million Americans
shifted in 2008 from lives that were "thriving" to ones that were "struggling,"
according to a massive study by Gallup and Healthways, a Tennessee health
management company. Results from its Well-Being Index — including physical and
mental health as well as personal finances and job satisfaction — are being
For the project, Gallup has been surveying about 1,000 people every day except
major holidays since January 2008.
At the start of 2008, as the recession was beginning, slightly more people were
"thriving" than "struggling." By the end of the year, after an economic meltdown
that began with the subprime mortgage crisis, Americans by an overwhelming 20
percentage points were "struggling" rather than "thriving," 58%-38%.
The remaining 4% were "suffering," in more dire straits.
The index categorizes respondents based on how they rate their current lives as
well as their expectations of where they will be in five years. Among those
showing the steepest drop were African Americans, business owners and
executives, and people who were 35-39 years old — a stage in life when many are
building careers, expanding families and buying homes.
Among those with the smallest decline were Hispanics, seniors 65 and older, and
repair workers, whose skills suddenly may be more in demand as Americans try to
make do with what they have.
No group was immune, however. High levels of education and income have protected
many workers during previous downturns, but the Well-Being Index shows declines
in 2008 across all age groups and income levels, among both men and women and in
every major racial and ethnic group.
In Chester County, south of Philadelphia, the downturn has been felt not only by
steelworkers in Coatesville but also investment bankers in Exton and among
immigrants who toil on the mushroom farms in Kennett Square.
"People have lost their jobs and they're in the unemployment lines," says James
Kennedy, the 91-year-old mayor of South Coatesville. Even so, he recalls, the
Great Depression was worse.
"The current recession hits everyone and spares no one," says Andrew Dinniman,
the local state senator and a professor of global studies at West Chester
University of Pennsylvania. "The bottom line is: industrial worker, professional
worker — we're all in this together."
The wide reach of hard times has made it difficult for Americans to use some
traditional strategies to cope.
Get training for a new job? The index shows declines in every occupation, from
business managers and professionals to clerical staff and service workers. Move
to a different part of the country? The percentage of those "thriving" fell by
double digits in the West, South and Midwest and by more than 9 percentage
points in the East.
The findings underscore the enormous task the United States faces in pulling out
of the worst downturn since the Depression and in maintaining the sense of
possibility that has marked the nation since its founding.
Optimism that individuals could reach better days ahead fueled the westward
expansion, waves of innovation and the country's continued draw for immigrants
from around the world.
The concept of the American dream reflects aspirations for the long term that
have endured through good times and bad, but it is not indestructible, says
Claudia Goldin, an economic historian at Harvard.
"What people mean by the 'American dream' is something that is not a snapshot;
it's something that is played out over time and not just in their lifetime, but
the lifetimes of their children," she says.
"It may be impervious to a short-term job loss, to a short-run health problem,
but it's not going to be impervious to a slowdown of the entire economy that
lasts for a very long period of time," especially if traditional gains in
education are stalled.
In a USA TODAY/Gallup Poll taken last week, Americans by about 3-to-1 said they
believed that with hard work they could achieve the American dream. Even so, one
tenet of that dream — faith that the next generation will have a better life
than their parents — is eroding.
Ten years ago, during an economic boom, 71% of Americans said it was likely that
those in the next generation would be better off than their parents.
One year ago, 66% agreed.
Now, 59% do.
The pursuit of happiness
The groundbreaking Gallup-Healthways index makes clear how intertwined
individual lives are with the nation's well-being. Dramatic shifts in the stock
market and the jobless rate often correlated with changes in Americans'
assessments of where their lives stood now and where they would be in the
Consider the Declaration of Independence's assertion of a natural-born right to
The survey lists several emotions, including happiness, and asks if respondents
experienced them the previous day. Weekends tended to have the highest
percentage of those reporting happiness or enjoyment without much stress or
worry — no surprise there — and Thanksgiving was the happiest day of the year,
when 68% were upbeat.
The five days with the lowest levels of happiness all coincided with awful
Just 37% of Americans said they felt a lot of happiness and not a lot of stress
on four downbeat days: Sept. 17, when the Dow fell 449 points; Sept. 29, when
the Dow dropped 778 points and the House rejected President Bush's Wall Street
bailout plan; Nov. 20, when new jobless claims hit the highest level since 1992;
and Dec. 2, one day after the nation officially was declared in recession,
pushing down the Dow by 680 points.
The unhappiest day of all was Dec. 11, when new jobless claims reached a 26-year
high. A record-low 35% of Americans reported that day as a happy one.
For Amy Beers, the past year has been trying.
The 36-year-old woman from Perkasie, in Bucks County, had been on a fast track.
She built a career in direct marketing, worked with an inventor who had
developed a handheld device that could neutralize land mines without detonation,
attended a land-mine conference in Croatia to promote it, then started her own
firm to help local companies develop customer loyalty.
Last year, her business dried up. She tends bar at night to help pay the bills
for her and her 7-year-old son, Zack, while she looks for a job in her field by
"I've gone from corporate America to the top of Comcast's shut-off list," she
says ruefully. "It's been a truly humbling experience, and for a very long time
I was embarrassed not to have a job. You go through the emotional loss. In some
ways, it's like mourning. I've had those doubts and depression: 'Oh my goodness,
my life is falling apart in front of my eyes!'
"But at the end of the day, I know who I am. I know that this isn't permanent,
and I really have belief that things are going to get better."
Even Beers' job at a Bennigan's restaurant in Montgomeryville is an opportunity,
she says. The traveling business executives who stay in the adjoining hotel and
come in for a nightcap might have a job at their companies.
Her pitch: "Hi, is anyone out there looking for an employee?"
Obama: Keep 'the dream alive'
President Obama regularly talks about the American dream as threatened and its
restoration as a central goal. "We have begun the essential work of keeping the
American dream alive in our time," he said when he signed the $787 billion
White House press secretary Robert Gibbs ticks off what the White House sees as
elements of the American dream: "That you could get a job that pays a living
wage, that if you got sick you wouldn't go bankrupt, that you don't have to be
rich to send your kids to college, that you could have a secure retirement."
Safire's New Political Dictionary puts it this way: "The American System is
considered the skeleton and the American Dream the soul of the American body
politic." Author William Safire adds that the phrase "defies definition as much
as it invites discussion."
Karen Beltran's family epitomizes one classic version of the American dream.
Her father came to southern Pennsylvania from Mexico to work on the mushroom
farms and as a dishwasher, eventually bringing his wife and their two young
daughters here. At first illegal immigrants, Jose and Martha Beltran eventually
gained legal status and last month became U.S. citizens.
An organization in Kennett Square called La Comunidad Hispana helped them gain
their high-school equivalency diplomas. They own their home now — he is a
mechanic; she is employed at a potato-chip factory — and have sent their two
older daughters to college.
Karen, 25, who graduated from Penn State in 2005, now works as a social worker
at the same community center that helped them.
The downturn has postponed her father's hopes of moving to a new job and reduced
their ability to contribute toward college expenses for their youngest,
American-born daughter, who is now in high school. Still, ask Karen Beltran
about the American dream and she plays down financial strains to boast about how
close-knit her family remains: "We're still together."
In the face of a faltering economy, some analysts say, Americans may be
redefining some fundamental ambitions. A study sponsored by Northwestern Mutual
and being released today asked Americans to define "success." Topping the list
were spending time with family, having a good relationship with a spouse or
partner, being healthy and maintaining a good work/life balance.
Ranked near the bottom were such material goals as owning "the home of your
dreams" and earning a high income.
Still, three of four in the nationwide poll ranked financial security as
important — and only 12% said they felt secure in their finances these days.
Chris Connell, 50, owner of the Pig & Whistle Deli in Havertown, in
Pennsylvania's Delaware County, has cut back on hours for his employees and
stopped drawing a salary for himself as he struggles to deal with a cash-flow
His wife's paycheck as an emergency-room nurse is keeping the family afloat for
Connell feels confident the economy will be better by the time his 11-year-old
twin daughters, head into the workforce, but he worries about his three older
children, including two who are now in college.
"The twins, we don't want to scare them. We don't want them to think someone is
going to come along and take the house away," he says. "But we at least want to
let them know that things are very, very tight and we have to work at this
"I do still want the same things for them. Never going to stop the dream,
absolutely. Never lower my standard of dreaming."
24 million go from
'thriving' to 'struggling', UT, 9.3.2009,
At Foreclosure Auction,
Houses Sell, in a Frenzy
March 9, 2009
The New York Times
By FERNANDA SANTOS
In rapid-fire speech that resembled a horse-race announcer’s, an auctioneer
introduced the first of the day’s 375 properties: a seven-bedroom, five-bathroom
home in Roselle, N.J., with an estimated value of $565,000 and a starting bid of
$129,000. (Final sale price: $245,000.)
On the floor, four men called the bids, screaming, blowing whistles, thrusting
their arms into the air and using their fingers to signal how much more was
being offered over the last bid.
“One man’s misery is another man’s fortune,” the saying goes, and perhaps
nowhere was it more true than at the Jacob K. Javits Convention Center on
Sunday, where a mob of potential buyers convened for an auction of foreclosed
homes, a fast-paced and somewhat unusual happening in a place more used to trade
shows and corporate events.
Some 1,400 people were there, a crowd twice as large as the one last year, when
the California-based Real Estate Disposition Corporation held its first
foreclosure auction in the city, in a conference room at a Midtown hotel. But
there were not nearly as many foreclosed houses then as there are now, said the
corporation’s chairman, Robert Friedman.
“The economy is much more severe these days,” Mr. Friedman added. “We’re seeing
more foreclosures than any other time in the 19 years we’ve been in business,
and we have auctions almost every day all across the country, sometimes more
than one auction a day.”
Outside the Javits Center, some 20 protesters — among them labor leaders,
antiwar activists and someone from City Councilman Charles Barron’s office in
Brooklyn — were critical of both the auction and the billions of dollars the
federal government has devoted to bailing out financial institutions. One
protester held a sign that read: “R.E.D.C. made $3 billion last year by
auctioning off working people’s homes. Bail out the people — not the corporate
The corporation does not have any role in foreclosing on homes; it is simply
hired by banks to sell the foreclosed homes they own at auction, Mr. Friedman
said. Last year, it held 300 auctions. This year, it expects to hold about 100
more than that.
From a dais that rose before packed rows of aluminum chairs, the company’s vice
president, Todd Gladis, greeted the audience with a mix of lament and rallying
cry. “Nobody likes the foreclosure crisis that’s going on,” he bellowed into a
microphone. “But we believe that everybody here in this room will play a role in
turning things around by turning houses into homes.”
Then, the auction began.
“I pray that God will help me find a place I will like and can afford,” said
Letisha Jones, 28, a nurse who lives with her parents and two sisters in East
New York, Brooklyn. Ms. Jones said that she planned to spend no more than
$100,000 on a home for herself, or maybe a bigger home for her family.
She left empty-handed. “Maybe I’ll have better luck next time, now that I know
how it works,” she said.
The audience was roughly divided into three categories. There were experienced
bidders, many of them investors who have made careers of buying, fixing up and
selling foreclosed homes for below-market prices — and quick profits. There were
the novices, who looked at once lost and awestruck, their eyes darting between
the booklet listing the houses that were up for grabs and the screens that
showcased them as the bidding went on. Finally, there were the curious, like
Ashley Durham and her fiancé, Darnell Smith, who plan to marry in May.
“We might come back to an auction after the wedding to see if we can buy a place
for us, but for now, we’re just looking,” said Ms. Durham, 25.
“And laughing,” Mr. Smith, 32, added. “This is crazy.”
The auction’s rules were simple. Buyers were required to pay 5 percent of a
house’s sale price on the spot, so the bidders had to come with a $5,000
cashier’s check and the ability to cover the remaining balance of a down payment
with cash or a personal check. The rest of the sale could be financed; mortgage
specialists were posted at desks behind the stage.
The properties included a weathered two-family home in Jamaica, Queens, offered
for $500 and sold for $125,000; and a two-bedroom, one-bathroom house in Hampton
Bays, on Long Island, offered for $89,000 and sold for $185,000.
The corporation adds a 5 percent fee to the final price of each house.
Beth Kaplan Bongar, 54, a writer and performer who also works as a real estate
agent, bought the Hampton Bays house with part of the money she received in the
sale of a loft in TriBeCa that she had owned for 30 years, she said.
Ms. Bongar said that she visited the house on Saturday. She noted that it had a
fenced-in front yard, where her two dogs could run free, and that outside of
windows that had to be replaced, it did not require substantial repair work.
“I need a place to call home,” she said. “And in the long run, this will cost me
a little more than the storage bin I have down in Jersey, which is costing me
$300 a month.”
At Foreclosure Auction,
Houses Sell, in a Frenzy, NYT, 9.3.2009,
651,000 Jobs Lost in February;
Rate Rises to 8.1%
March 7, 2009
The New York Times
By JACK HEALY
Another 651,000 jobs were lost in February, adding to the millions of people
who have been thrown out of work as the economic downturn deepens.
In a stark measure of the recession’s toll, the Bureau of Labor Statistics
reported on Friday that the national unemployment rate surged to 8.1 percent
last month, its highest in 25 years. The economy has now shed more than 4.4
million jobs since the recession started in December 2007.
And economists expect that unemployment will continue to rise for the rest of
the year and into early 2010, with the unemployment rate reaching 9 to 10
percent by the time a recovery begins. Even then, with so many job losses
centered in manufacturing, economists say that many positions devoured during
this recession will not be coming back.
“This is not people being on furlough for six weeks or a month or two — this is
permanent job losses, and that is what makes this so difficult,” said John
Silvia, chief economist at Wachovia. “That is very telling in terms of how we’re
really restructuring the overall economy.”
Although the tally of February’s losses was grim, the 651,000 jobs lost last
month were actually fewer than the number in each of the last two months,
according to revisions reported Friday. Some 655,000 jobs were lost in January,
when the unemployment rate rose to 7.6 percent. December’s decline was revised
to 681,000, from 577,000.
On Wall Street, financial markets initially seized on the fact that monthly job
losses had not increased in February, and stocks rose in early trading. But
shares gave up their gains and were lower in late morning trading.
February marked the fourth consecutive month that the economy has shed more than
500,000 jobs, a pace that underscores the magnitude of the problems facing the
Obama administration as it promises to save or create 3.5 million jobs over the
next two years.
Last month, President Obama signed a $787 billion stimulus package of tax cuts,
infrastructure spending and emergency aid. The first tax credits, in the form of
reduced payroll withholdings, are expected to appear on paychecks beginning
But in testimony this week before Congress, federal officials again cautioned
that even with the stimulus spending, a recovery will take time.
The package “should provide a boost to demand and production over the next two
years as well as mitigate the overall loss of employment and income,” the
Federal Reserve chairman, Ben S. Bernanke, told the Senate Budget Committee, but
the timing is “subject to considerable uncertainty.”
The pace of job losses has only increased since the credit crisis shook
financial markets last autumn, spawning a vicious circle of economic contraction
that dragged down corporate earnings, consumer spending and overall growth. And
Mr. Bernanke said in testimony this week that the labor market “may have
worsened further in recent weeks.”
“It just feels like we’re in the teeth of the recession, and the bite is still
very hard,” said Stuart Hoffman, chief economist at PNC Financial. “This is
economywide, industrywide. It just shows the severity and the breadth of the job
Economists worry that mounting job losses could make it harder for homeowners to
make their mortgage payments, igniting another wave of home foreclosures, which
would further depress home values and the mortgage-related securities owned by
“We’re feeling the negative fallout from the intensification of the financial
crisis,” Mickey Levy, chief economist at Bank of America, said. “We’re in the
middle of the worst stage of job losses as well as the speed of contraction of
gross domestic product.”
Workers from New York to Florida, from the Rust Belt to the Sun Belt, and across
nearly every sector of the economy are being affected as employers reduce costs
by slashing their payrolls and cutting their capital investment.
“There’s been no place to hide,” Mr. Hoffman said. “Everybody in every industry
has lost jobs or is feeling insecure about whether they’re going to keep their
jobs or how their company’s going to do.”
Retailers cut 39,500 jobs, and the construction industry cut 104,000 jobs as the
housing market remained in the doldrums and home builders all but halted
Manufacturers alone slashed a seasonally adjusted 168,000 jobs in February,
cutting payrolls in factories that produce machinery, electronics, furniture and
metals. In Michigan, where the unemployment rate of 10.6 percent is the nation’s
highest, the downward spiral of the automobile industry has left thousands of
workers like Kim Allgeyer, a machine toolmaker, looking for steady work.
After 20 years working for a company that built manufacturing assembly lines for
the Big Three automakers, Mr. Allgeyer said he lost his job in January and has
been unable to find full-time work. He has worked day jobs and one week-long
stint for contractors, but said there are so few jobs available that he is
thinking of moving to Mississippi or Louisiana to work as a shipbuilder.
“The people who do what I do in the Detroit area are a dime a dozen,” Mr.
Allgeyer said. “Who’s going to put me to work? Where’s the work at? It’s just a
great big black hole.”
Mark Ortiz was one of those who joined the ranks of the unemployed in February.
Mr. Ortiz lost his job at the art-framing company where he had worked for 11
years, most recently as the production manager.
“You spend all this time doing this, and now what?” he said. “It’s almost like
I’ve gotten divorced and I’ve got to find a new wife.”
He has plastered his résumé across the Internet and searches for jobs every day
from his home on Long Island, but his search for a good-paying job has been
hampered by the fact that he went straight to work when he was younger, and
never got a college degree.
“I was a guy who worked his whole life,” Mr. Ortiz said. “That was a major
strike against me, a major strike.”
The jobless rate for people with a bachelor’s degree or beyond is 4.1 percent —
its highest point in years, but still lower than the unemployment rate for
people with less education. Of workers with only a high-school diploma, 8.3
percent were unemployed, and 12.6 percent of people who did not graduate from
high school were unemployed.
Still, years of professional experience and multiple degrees, including one in
law, have not sheltered people like Jeffrey Green, 53, of Placentia, Calif.
Mr. Green said he had sent out 1,000 résumés and posted his credentials on more
than 100 job boards since he was laid off from his management position at a
data-analysis firm in January. With no immediate prospects in sight, he is
considering going to Japan to teach English, reprising his Japanese studies from
his years as a college undergraduate.
“I’m just resigned,” he said. “I’m thinking, if I’m not going to make a lot of
money I may as well have fun doing it.”
651,000 Jobs Lost in
February; Rate Rises to 8.1%, NYT, 7.3.2009,
Hanging On to Health Coverage,
if the Job Goes Away
March 7, 2009
The New York Times
By WALECIA KONRAD
If you’re fortunate to still have your job, but aren’t sure how much longer
that will be the case, lost income may not be your only worry. Your medical
insurance is at risk, too.
“When you’re still on the job, even if it’s just for a little while longer,
you’re in a slightly better position to make the most of the benefits you have
now and to figure out your options,” said the Oklahoma insurance commissioner,
Kim Holland, a longtime promoter of affordable health insurance.
She and other experts offer the following advice about girding for the worst
Use it before you lose it. “My clients wouldn’t want to hear me say this,” said
Tom Billet, a senior executive with the corporate benefits consulting firm
Watson Wyatt. “But if you feel a layoff is pending, now is the time for you and
your family to get physicals, dental check-ups, eye exams and prescriptions
That’s what Denise Young Farrell is doing. Ms. Farrell, the mother of two
children in Park Slope, Brooklyn, lost her job early this year when her
department at the Lifetime Networks cable channel moved to California. Her
husband lost his job at Bear Stearns last year. Ms. Farrell’s severance package
included two months of paid health care.
Check your benefits handbook to see how long your health care coverage will last
if you do lose your job. Often, employers will continue coverage until the last
day of the month in which the employee worked. So if your last day at work was
March 5, for example, you may have coverage until March 31, giving you a few
extra days for those doctor visits.
Sign onto your spouse’s plan. If your spouse has employer-sponsored family
health insurance benefits, he or she can add you and your dependents anytime
during the year. But do be aware of the deadlines. Most companies require any
changes to be filed within 30 or 60 days of the “qualifying event.” Depending on
your spouse’s company, that could mean the day you were laid off or your last
day of coverage.
In addition, some companies require written proof from your former employer that
you were laid off. To avoid snags, try to arrange this before your last day of
work. And be sure to check when the new coverage takes effect. If your spouse’s
plan has a three-month waiting period, for example, you’ll need to find
temporary coverage elsewhere.
Get to know Cobra. If you have health benefits in your current job, odds are
you’ll be eligible to continue purchasing that coverage temporarily under the
1986 law known by its acronym, Cobra.
Cobra requires employers with 20 or more workers to make health insurance
available to a former employee for up to 18 months after leaving the job —
regardless of whether you quit or were laid off. But because the former worker
must pay the full cost of that insurance, the premiums can easily exceed $1,000
a month for family coverage.
The new federal stimulus plan that President Obama recently signed into law does
provide some temporary relief for laid-off workers. But even if you qualify for
the subsidy, you’ll still pay 35 percent of the total health premium, compared
to the 10 or 15 percent you paid as an employee. So you might be paying $300 to
$400 or more a month. And that is for only the first 9 months of the 18-month
Cobra coverage. For the second nine months you’ll be paying full fare.
For fuller details on the new Cobra provisions, see this Congressional Web
page.If you do choose Cobra, pace yourself. Time it right, and you can
essentially get two months of free Cobra coverage.
After your last day of coverage under your employer’s plan, you have 63 days to
sign up to extend that coverage under Cobra. If you think you’re on the verge of
getting a new job, or if you’re trying to find a more affordable insurance
option, you can put off paying two months of Cobra premiums until you approach
the deadline. If the new job or alternate insurance works out, you will have
avoided those hundreds of dollars in Cobra premiums. But if you do fall ill or
get in an accident in the interim, you will be covered — as long as you pay
those back premiums.
Do be vigilant, though, about that 63-day deadline. Miss it, and you lose your
Try to negotiate health care as part of your severance. If you are eligible for
any type of severance, consider asking for an extension of health insurance in
exchange for a smaller cash payout. That will give you more time to research
your health insurance options and help you avoid a gap in coverage.
There is one caveat, said Kathryn Bakich, national health care compliance
director for the Segal Company, a benefits consulting firm: Avoid having your
company pay part or all of your Cobra premiums as part of a severance agreement.
Employers are still waiting for guidance on this point from the Department of
Labor and other government agencies, but if your former employer pays your Cobra
premiums directly, you may be ineligible for the new Cobra subsidy, according to
Ms. Bakich and other benefits experts. You’d be better off trying get a lump sum
payment that you could use to pay Cobra premiums, if extending your current
coverage isn’t an option.
When Cobra is not an option ... If you work for a small company (fewer than 20
employees) that doesn’t offer Cobra, 40 states offer what’s called mini-Cobra
continuation coverage that allows you to stay in your group plan. Some states
may offer the new Cobra subsidy in these plans. (Check with your state’s
insurance department.) If you do not have access to Cobra or a state
continuation plan, or if those benefits are close to running out, it’s important
to find insurance of some kind, whether it is group or individual.
Federal law mandates that at least one nongroup insurer in your state must
provide coverage to everyone, regardless of health issues. In many cases this is
your state’s high-risk insurance pool, but there are no limits on how much
insurers can charge for this coverage, so premiums can be extremely expensive.
For more information on what your state offers, go to the National Association
of Insurance Commissioners’ Web site, naic.org, to link to your state’s
If you have a flexible spending account — use it. Here’s a little known bonus in
the employee’s favor:
Let’s say you signed up to contribute $1,000 this year through payroll
deductions to your health care flexible spending account. So far you’ve only put
in about $200. No matter. “Companies must still reimburse you for the full
amount you’ve elected even if you haven’t contributed the total to the account
yet,” Mr. Billet said.
In this example, if you file claims for $1,000 of eligible health care expenses
before your last day on the job, you will get the full reimbursement — not just
the $200 you’ve paid in.
Hanging On to Health
Coverage, if the Job Goes Away, NYT, 7.3.2009,
Recession Job Losses Top Four Million
MARCH 6, 2009
11:19 A.M. ET
The Walll Street Journal
By BRIAN BLACKSTONE
WASHINGTON -- The U.S. economy continues to hemorrhage jobs at monthly rates
not seen in six decades, a government report showed, signaling that there's
still no end in sight to the severe recession that has already cost the U.S.
over four million jobs.
The report suggests that households, already seeing the value of their homes
and investments plunge, face added headwinds from the labor market, which could
put more pressure on consumer spending in coming months.
Nonfarm payrolls, which are calculated by a survey of companies, fell 651,000 in
February, the U.S. Labor Department said Friday, in line with economist
expectations. However, December and January were revised to show much steeper
declines. In the case of December, the revision was to a drop of 681,000, the
most since 1949 when a huge strike affected half a million workers. However, the
labor force was smaller then than it is now.
The economy has shed 4.4 million jobs since the recession began in December
2007, with almost half of those losses occurring in the last three months alone.
And unemployment is lasting much longer. As of last month, 2.9 million people
were unemployed more than six months, up from just 1.3 million at the start of
"The sharp and widespread contraction in the labor market continued in
February," said Keith Hall, Commissioner of the Bureau of Labor Statistics.
Layoffs announcements continued last month across industries including Macy's
Inc., Time Warner Cable Inc., Estee Lauder Cos., Goodyear Tire & Rubber Co. and
General Motors Corp.
The unemployment rate, which is calculated using a survey of households, jumped
0.5 percentage point to 8.1%, the highest since December 1983 and slightly above
expectations for an 8% rate. Some economists think it could hit 10% by the end
of next year. For many industries including manufacturing, construction,
business services and leisure, the jobless rate is already in double digits.
"It is hard to see where the bottom is," said Sung Won Sohn, a professor at
California State University.
By some broader measures, labor-market conditions are much worse than the
overall jobless rate suggests. When marginally attached and involuntary
part-time workers are included, the rate of unemployed or underemployed workers
actually reached 14.8% last month, up almost six percentage points from a year
Average hourly earnings increased a modest $0.03, or 0.2%, to $18.47. That was
up 3.6% from one year ago, as the recession has made it harder for workers to
bid up wages. According to the Fed's latest economic summary known as the beige
book, "a number of reports pointed to outright reductions in hourly compensation
Friday's numbers suggest that the economy hasn't stabilized in the wake of the
fourth quarter's 6.2% slide in gross domestic product, which was the steepest
since 1982. Economists expect a decline of similar or even greater magnitude
One risk is that the stepped-up pace of layoffs may snuff out tentative signs
of stabilization in consumer spending, which accounts for about 70% of GDP.
Consumer spending rose in January, and retailers last month posted their first
monthly rise in sales since September.
"Consumers and businesses are likely to become even more cautious after a bleak
report such as this, and if they stop spending, the economy cannot get going
again," said Chris Rupkey, economist at Bank of Tokyo-Mitsubishi.
There's little Fed policymakers can do on the monetary policy side to stem the
slump, given that official rates are already near zero. But the Fed has created
a number of credit programs -- financed through an expansion of its balance
sheet -- aimed at spurring new lending. Officials this week unveiled a
long-awaited initiative aimed at stimulating consumer lending.
Ironically, some of the pressure on labor markets appears to be a byproduct of
robust productivity, which is actually a big plus for the economy over the long
run. But in the current environment, it seems to be making things worse for
workers as nimble businesses shed labor in anticipation of falling demand, which
could become a self-fulfilling prophesy.
Hiring last month in goods-producing industries fell by 276,000. Within this
group, manufacturing firms cut 168,000 jobs bringing the total since the
recession began to 1.3 million.
Construction employment was down 104,000 last month. The unemployment rate in
that sector is now 21.4%, almost double where it was this time last year.
Service-sector employment tumbled 375,000. Business and professional services
companies shed 180,000 jobs, the fourth-straight six-figure loss, and
financial-sector payrolls were down 44,000.
Retail trade cut almost 40,000 jobs, while leisure and hospitality businesses
shed 33,000 as households curtail nonessential spending.
Temporary employment, a leading indicator of future job prospects, fell by
The sole bright spot among private sector industries was health care, which
tends to be more labor intensive and less productive than manufacturing and
other services. Health care payrolls rose 26,900.
The government added 9,000 jobs.
The average workweek was unchanged at 33.3 hours. A separate index of aggregate
weekly hours fell 0.7 point to 101.9.
Recession Job Losses Top
Four Million, WSJ, 6.3.2009,
‘Staring Into the Abyss’
March 6, 2009
The Wall Street Journal
Economists and others weigh in on the sharp drop in nonfarm payrolls and
increase in the unemployment rate to 8.1%.
The recession is intensifying and the economy is rapidly shrinking. We are
staring into the abyss. –Stephen A. Wood, Insight Economics
We suspect that the employment outcome would have been even worse in February
were it not for unusual mild weather conditions across much of the country. Our
favorite proxy for weather-related influences on employment — the “not at work
due to bad weather” component of the household survey — came in at a much lower
than normal reading of 199,000. There have only been three occasions in the past
twenty years that showed a lower result for the moth of February. –David
Greenlaw, Morgan Stanley
Is this good news or bad news? On the one hand, the new estimates suggest
that the contraction in employment peaked in December with a 681,000 decline,
followed by a 655,000 loss in January. In other words, the worst could be behind
us. On the other hand, it turns out that the labor market was in an even worse
state than we previously thought and any improvement over the past couple of
months is marginal at best. –Paul Ashworth, Capital Economics
Job declines were widespread with losses in manufacturing and construction.
The only bright spots remaining are health care & education, which reflect
demographic trends. In contrast to the broad trend of declines in the private
sector, government employment continues to grow. This suggests a change in the
composition of the job market and economy. –John Silvia, Wachovia Economics
There is nothing redeeming about this employment report. The 0.5 percentage
point increase in the unemployment rate is a fairly solid barometer of what is
occurring in the economy. These job losses for February and the downward
revisions are a function of sharp decline in economic activity in the final
three months of 2008. Given the continuing slide in economic activity in the
first quarter of 2009 there is a strong probability that over the next three
months we will see a slow bleed in employment as the retail, financial and
business services sector of the economy continue to shed jobs. –Joseph
Brusuelas, Moody’s Economy.com
The new headline GDP number Within the major private sectors only education
and health jobs rose, as usual, but the 29,000 gain was trivial compared to the
losses elsewhere. Manufacturing and construction both lost fewer jobs than in
Jan but services were worse, down 375,000 compared to 276,000. Retail losses
have slowed to 40,000 average in the past two months, down from 90,000 in the
previous two but the trend is still awful; business services losses are rising.
Wage gains finally slowing; year-to-year down to a five-month low of 3.6%. Long
way to go. –Ian Shepherdson, High Frequency Economics
Sharp, broad-based job losses continued into February, compounded by net
downward revisions of 161,000 to December-January tallies. Manufacturing
industries, which make up only 12.5% of private sector employment, accounted for
30% of the 2 million jobs shed from nonfarm payrolls over the past three months.
For those looking for any signs of “second derivative” stabilization — in which
the rate of decline stops increasing — nonmanufacturing employment offers a
glimmer. The pattern of job loss has been relatively stable since November, and
rising productivity suggests that this pace of job losses may prove sufficient
to restore profitability. –Alan Levenson, T. Rowe Price
Of those who lost jobsin February, 50.2% are not on temporary layoff, the
highest share on record, while those on temporary layoff accounted for only
12.0% of those who lost their jobs. These percentages are a sign that businesses
do not expect any improvement in the outlook any time soon. The median duration
of unemployment held at 19.8 weeks in February, but the mean duration did
increase to 11 weeks, and 41.7% of the unemployed have been so for 15 weeks or
more. –Richard F. Moody, Mission Residential
The massive hemorrhage of jobs is reminiscent of the 1982 recession when the
jobless rate hit 10.8%. Unfortunately, it will get much worse. It is hard to se
where the bottom is. The layoffs are spreading to all sectors of the economy.
Those lucky enough to have jobs are facing wage freezes and reduction in work
hours… The $787 billion economic stimulus program won’t have immediate effect on
job creation even though some planned layoffs could be cancelled. The bulk of
the positive benefit on jobs will come in 2010 creating about 2 million jobs
over a two-year period. For the next two years, the unemployment rate will be
lower by one percentage point. –Sung Won Sohn, Smith School of Business and
Horrendous! There can be no other word to describe this employment report.
Adding in the revisions to December and January, there are more than 800,000
fewer jobs in February than were previously reported for January, while the
unemployment rate is higher than at any time since December 1983. Unfortunately,
the weekly jobless claims data suggest more of the same is coming for March. It
appears that the economy is contracting at a 6% or so pace in the first quarter
following a 6.2% drop in the fourth quarter. It is unlikely to be long before we
hear calls for more stimulus in Washington. –RDQ Economics
Although the result was worse than median expectations in our view, markets
appear to have been braced for downside surprises (consensus payroll forecasts
ranged from -500k to -800k). For the outlook, today’s report makes clear that
the recent improvement in consumer spending will be difficult to sustain given
the weakness in labor income. –Zach Pandl, Nomura Global Economics
A turn in employment is unlikely until consumption stabilizes. January
consumption gains were encouraging, but could have been a one-month bounce.
February results and aid for consumer loans via TALF are encouraging early
signals to stop the hemorrhaging of jobs. –Stephen Gallagher, Societe Generale
Even if February marked the biggest payroll decline since 1949, at least it
wasn’t a million man month. February tends to be the month worst impacted by
post-holiday company closings, and given the weak state of this year’s retail
spending season, many investors were braced for the worst. Clearly “the worst”
doesn’t seem to be coming true, which, if you look at the data, is a trend which
has repeated a number of times in the last few weeks. Still, it’s worth
cautioning that, while it appears the rate of job losses is starting to
stabilize, there are numerous one-off events that could trigger a sharp further
decline in payrolls before this ongoing mess resolves itself. –Guy LeBas, Janney
We expect labor market conditions to remain dreadful for many months to come,
which will reinforce the decline in consumer spending that is occurring for
other reasons as well. –Joshua Shapiro, MFR Inc.
Compiled by Phil Izzo
‘Staring Into the Abyss’, WSJ, 6.3.2009,
Jobless rate jumps to 8.1%
as 651,000 jobs slashed
6 March 2009
By Sue Kirchhoff
WASHINGTON — U.S. businesses slashed 651,000 jobs in February, pushing the
unemployment rate to a 25-year high of 8.1%, the Labor Department said Friday.
Job loss was widespread as the deepest, longest recession in decades affected a
broad swath of industries from construction to trucking to hotels.
While the February numbers were in line with analysts' projections, the Labor
Department said job losses in previous months were sharply higher than
previously reported, with business payrolls down another 161,000 in December and
Overall, companies have shed about 4.4 million jobs since the recession started
in December 2007, with more than half the job loss coming in the past four
months. The unemployment rate, 7.6% in October, has spiked by 3.3 percentage
points in the past 12 months.
"We are staring into the abyss," says Steven Wood of Insight Economics. "The
recession is intensifying and the economy is rapidly shrinking."
President Obama said Friday that he won't accept a future of job losses for the
Addressing a graduating class of new police officers in Ohio, Obama said the job
numbers underscore the importance of his economic stimulus package that Congress
passed with just a few Republican votes.
Obama said the nation has met every challenge with bold action and big ideas and
"that's what fueled a shared and lasting prosperity."
The Obama administration has pushed a series of radical steps to bolster the
economy. Obama recently signed the $787 economic stimulus bill designed to save
3.5 million jobs, and this week unveiled the details of a plan to restructure
mortgages for millions of homeowners. The Fed and the Treasury Department this
week initiated a program to spur up to $1 trillion in small business and
consumer lending on autos, student loans and other products.
But the administration has yet to come up with a workable solution for shoring
up the nation's largest banks, which has pushed their stock prices into the
basement. General Motors' (GM) auditors this week issued a report making it
clear that the auto giant may not be able to avoid bankruptcy. Big name
companies like Sears (SHLD) and General Electric (GE) have run into difficulty.
Lawmakers, labor and industry leaders are starting to call for more aggressive
action as the economy craters. Noting that unemployment in the construction
industry is now 21.4% the Laborers' International Union of North America said
the stimulus bill was only a first start, and that hundreds of thousands of
workers would still be without jobs even if it met its employment goals.
"The construction industry is in a near depression," says LIUNA General
President Terry O'Sullivan.
As has been the case for months, the construction and manufacturing industries
were battered in February. Professional and business services also recorded
large job losses, as did media, trucking, retail and hospitality. The health
care sector was one of the few bright spots, adding 27,000 workers during the
The top line numbers tell only part of the story, however, The number of
long-term unemployed, those out of work for six months or more, rose by 270,000
to 2.9 million in February, and has increased by 1.6 million in the past year.
The slice of people working part time for economic reasons jumped 787,000, to
8.6 million, and has increased by 3.7 million in the past year.
Richard Moody, chief economist of Mission Residential, noted that the Labor
Department's broader measure of underemployment in the economy rose to 14.8%,
due to the sharp rise in the number of people working part time for economic
"Combing the details of the employment report offers little hope of improvement
any time soon," Moody said, adding that the number of hours worked also dropped
sharply in February. He predicted the economy was currently contracting even
more dramatically than during the final months of 2008.
About 2 million people were marginally attached to the labor force in February,
meaning they wanted to work and had been looking for work in the past year, but
weren't counted as unemployed because they hadn't been job hunting in the past
The unemployment rate for men was 8.1% in February, while the female jobless
rate was 6.7%. There were big differences among racial groups, with the white
unemployment rate at 7.3%, the black jobless rate at 13.4% and Hispanic
unemployment jumping to 10.9%.
Professional and business service employment fell by 180,000 during February,
with the temporary help sector losing 78,000 jobs. Architectural and engineering
firms, business support centers and related companies took a hit.
The manufacturing sector lost another 168,000 jobs in February, mostly in plants
that produce long-lasting durable goods, including metal products and machinery.
Construction payrolls fell by 104,000 jobs, and are down by 1.1 million from the
peak in January 2007. About 40% of construction job loss has taken place in the
past four months, with reductions at both homebuilders and firms involved in
The trucking industry also took a blow, with a 33,000 job reduction in February.
With less freight to move as demand wanes, the trucking sector has lost 138,000
jobs since December 2007 and 88,000 in just the past for months.
The information industry, including media, lost 15,000 jobs. Employment has
plunged by 76,000 since October, with about 40% of the drop in publishing.
The financial sector lost 44,000 jobs for total losses of 448,000 since its peak
in December 2006.
Contributing: Associated Press
Jobless rate jumps to
8.1% as 651,000 jobs slashes, UT, 6.3.2009,
The Big Dither
March 6, 2009
The New York Times
By PAUL KRUGMAN
Last month, in his big speech to Congress, President Obama argued for bold
steps to fix America’s dysfunctional banks. “While the cost of action will be
great,” he declared, “I can assure you that the cost of inaction will be far
greater, for it could result in an economy that sputters along for not months or
years, but perhaps a decade.”
Many analysts agree. But among people I talk to there’s a growing sense of
frustration, even panic, over Mr. Obama’s failure to match his words with deeds.
The reality is that when it comes to dealing with the banks, the Obama
administration is dithering. Policy is stuck in a holding pattern.
Here’s how the pattern works: first, administration officials, usually speaking
off the record, float a plan for rescuing the banks in the press. This trial
balloon is quickly shot down by informed commentators.
Then, a few weeks later, the administration floats a new plan. This plan is,
however, just a thinly disguised version of the previous plan, a fact quickly
realized by all concerned. And the cycle starts again.
Why do officials keep offering plans that nobody else finds credible? Because
somehow, top officials in the Obama administration and at the Federal Reserve
have convinced themselves that troubled assets, often referred to these days as
“toxic waste,” are really worth much more than anyone is actually willing to pay
for them — and that if these assets were properly priced, all our troubles would
Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make
a distinction between the “basic inherent economic value” of troubled assets and
the “artificially depressed value” that those assets command right now. In
recent transactions, even AAA-rated mortgage-backed securities have sold for
less than 40 cents on the dollar, but Mr. Geithner seems to think they’re worth
much, much more.
And the government’s job, he declared, is to “provide the financing to help get
those markets working,” pushing the price of toxic waste up to where it ought to
What’s more, officials seem to believe that getting toxic waste properly priced
would cure the ills of all our major financial institutions. Earlier this week,
Ben Bernanke, the Federal Reserve chairman, was asked about the problem of
“zombies” — financial institutions that are effectively bankrupt but are being
kept alive by government aid. “I don’t know of any large zombie institutions in
the U.S. financial system,” he declared, and went on to specifically deny that
A.I.G. — A.I.G.! — is a zombie.
This is the same A.I.G. that, unable to honor its promises to pay off other
financial institutions when bonds default, has already received $150 billion in
aid and just got a commitment for $30 billion more.
The truth is that the Bernanke-Geithner plan — the plan the administration keeps
floating, in slightly different versions — isn’t going to fly.
Take the plan’s latest incarnation: a proposal to make low-interest loans to
private investors willing to buy up troubled assets. This would certainly drive
up the price of toxic waste because it would offer a heads-you-win,
tails-we-lose proposition. As described, the plan would let investors profit if
asset prices went up but just walk away if prices fell substantially.
But would it be enough to make the banking system healthy? No.
Think of it this way: by using taxpayer funds to subsidize the prices of toxic
waste, the administration would shower benefits on everyone who made the mistake
of buying the stuff. Some of those benefits would trickle down to where they’re
needed, shoring up the balance sheets of key financial institutions. But most of
the benefit would go to people who don’t need or deserve to be rescued.
And this means that the government would have to lay out trillions of dollars to
bring the financial system back to health, which would, in turn, both ensure a
fierce public outcry and add to already serious concerns about the deficit.
(Yes, even strong advocates of fiscal stimulus like yours truly worry about red
ink.) Realistically, it’s just not going to happen.
So why has this zombie idea — it keeps being killed, but it keeps coming back —
taken such a powerful grip? The answer, I fear, is that officials still aren’t
willing to face the facts. They don’t want to face up to the dire state of major
financial institutions because it’s very hard to rescue an essentially insolvent
bank without, at least temporarily, taking it over. And temporary
nationalization is still, apparently, considered unthinkable.
But this refusal to face the facts means, in practice, an absence of action. And
I share the president’s fears: inaction could result in an economy that sputters
along, not for months or years, but for a decade or more.
The Big Dither, NYT,
Helping the House Poor
March 6, 2009
The New York Times
President Obama’s anti-foreclosure plan, which took effect on Wednesday, is
better than anything attempted by the Bush administration, but it is at best one
step forward and, unfortunately, may prove to be fundamentally flawed.
The program’s success ultimately will rest on whether the administration is
willing to intensify its efforts and, as needed, shift gears. Congress also has
to bolster the plan with a new anti-foreclosure law.
The bulk of Mr. Obama’s plan is aimed at about four million borrowers who are in
default or at risk of default — people who cannot afford their monthly mortgage
payments and cannot refinance, generally because they owe more on their loans
than their homes are worth.
The idea is to lower the monthly payment on a loan by modifying its terms, which
is the right goal. The problem lies in the way loans will be modified. Mr.
Obama’s plan emphasizes lowering monthly payments by reducing a loan’s interest
rate, which certainly will allow many people to stay in their homes, in the near
term at least. What it won’t do is make staying there a wise move. And it’s not
the best way to guard against re-default.
Remember that most delinquent and high-risk borrowers are “under water.”
Reducing the interest would make their monthly payments more affordable, but
their loan balance would still be higher than the value of the property — in
many cases much, much higher. Essentially, they would be renting their homes
from the lender.
In the short run, and perhaps even in the long run, many troubled borrowers will
be relieved to qualify for a lower interest rate. But the fact is that being
under water is itself a big risk factor for default, even if the payment has
been cut. One reason is that there is no equity cushion to fall back on in the
event that job loss or any other financial setback — illness, divorce, major
repairs — make it impossible to keep up with the payments. Currently, some 13.6
million homeowners are under water. While most are current in payments, many of
them are just one unfortunate event away from default.
A better way to lower the monthly payments for these people is to reduce the
principal remaining on the loan. That way, the payments become affordable and,
as equity is rebuilt, the borrower has both an incentive and the means to keep
current. The Obama plan provides subsidies for lenders to reduce principal
balances, but the option is not promoted as prominently as simply reducing the
interest rate. That’s a shame. It is a better way to go, but lenders prefer
interest-rate reduction to principal reduction, in part, because it appears to
minimize the loss they have to recognize upfront.
This is where Congress can make a difference. On Thursday, the House passed a
bill that would allow bankrupt homeowners to have their loans modified in
bankruptcy court, where the most common solution is to reduce the principal. The
bill is overly restrictive, but if passed — and if the Senate doesn’t weaken it
any further from the House’s version — it could give underwater homeowners
another way to keep their homes.
Perhaps more important, lenders are more likely to pursue sound modifications if
the alternative is to face the borrower in court. Best of all, modifying loans
via bankruptcy proceedings costs the taxpayer nothing. The costs are borne by
the borrowers and the lenders.
Homeowners — like the banks, much of corporate America and the government itself
— are suffering under the weight of excessive debt. The Obama plan will make
mortgage indebtedness more manageable, but ultimately the debt itself needs to
be greatly reduced. The sooner we as a nation move in that direction, the
Helping the House Poor,
Sting Workers Without Notice
March 6, 2009
The New York Times
By STEVE LOHR
With the economy weakening, chief executives want Wall Street to see them as
tough cost-cutters who are not afraid to lay off workers. But plenty of job cuts
are not trumpeted in news releases.
Big companies also routinely carry out scattered layoffs that are small enough
to stay under the radar, contributing to an unemployment rate that keeps
climbing, as Friday’s monthly jobs report is likely to show.
I.B.M. is one such company. It reported surprisingly strong quarterly profits in
January, and in an e-mail message to employees, Samuel J. Palmisano, the chief
executive, said that while other companies were cutting back, his would not.
“Most importantly, we will invest in our people,” he wrote.
But the next day, more than 1,400 employees in I.B.M.’s sales and distribution
division in the United States and Canada were told their jobs would be
eliminated in a month. More cuts followed, and over all, I.B.M. has told about
4,600 North American employees in recent weeks that their jobs are vanishing.
J. Randall MacDonald, I.B.M.’s senior vice president for human resources, said
it was routine for the company to lay off some employees while hiring elsewhere.
“This business is in a constant state of transformation,” he said. “I think of
this as business as usual for us.”
These unannounced cuts, labor experts say, raise issues of disclosure and the
treatment of workers. They argue that the federal law requiring warning of
certain kinds of layoffs should be overhauled to cover smaller job cuts. That
would give people more time to seek new jobs, career counseling and retraining.
“The twin goals are transparency and decency,” said Harley Shaiken, a labor
economist at the University of California, Berkeley. “The issue becomes all the
more pressing in this downward economic spiral.”
The notification law, known as the WARN Act, is a legacy of an era when the
economy was more dependent on manufacturers and legislators were concerned about
blue-collar workers being locked out of their factory. That kind of shutdown is
hard to hide, while white-collar layoffs spread across many locations are not.
The WARN Act requires 60 days’ notice, but the events that require notification
are site-specific — a plant closing, a layoff of 500 or more people at one
location, or a cut of at least one-third of the work force at a site.
If notification is not required, the standard practice at large companies is to
give 30 days’ notice before a layoff. Some states have passed their own WARN
Acts to cover more layoffs. California, for example, now requires a WARN notice
when a company cuts 50 or more workers in one place. Last month, New York
enacted a law requiring 90 days’ notice when laying off 250 or more workers at a
Companies sometimes have good reason for dismissing workers quietly. Depending
on how the businesses want to portray themselves to investors and the public,
layoffs might not fit the message.
Most companies today, of course, are not hesitating to make layoff
announcements. Managers are straining to demonstrate that they are taking
forceful action on expenses, the one front where they have some control amid
economic turmoil and uncertainty.
Two days after I.B.M.’s report, Microsoft said that its quarterly profits were
disappointing. It declared it would cut annual operating expenses by $1.5
billion, lopping off up to 5,000 jobs over the next 18 months, including 1,400
Labor experts advise taking near-term cuts seriously and being skeptical about
intentions several months down the road. “The most effective job-cutting is done
on a short timetable, clearly explained inside and outside the company, and
grafted tightly to the business strategy,” said Peter Cappelli, director of the
Center for Human Resources at the University of Pennsylvania. “Plans for cuts 12
and 18 months in the future are mostly irrelevant, even if the companies are
sincere at the time.”
At I.B.M., the layoffs are coming swiftly, if with less disclosure. The estimate
of 4,600 job cuts comes from adding up the itemized headcounts in information
packages given to employees in each of the businesses. Some of them were
supplied by Alliance@IBM, a small but active unit of the Communications Workers
of America union, and some by I.B.M. workers directly.
The cutbacks surfaced only because of their size and timing, with word spread
through blogs, employee message boards and the union group.
In its financial statements, I.B.M. does report the cost of severance payments
and outplacement counseling for layoffs — about $400 million annually in the
last five years — but not head counts.
I.B.M. says it remains the largest high-tech employer in the nation, with
115,000 workers. The company is adding jobs as well as slicing, in a cycle that
it says has helped make it increasingly global and successful as it shifts
toward higher-profit software and technology services businesses.
In January, for example, it said it would open a call center in Dubuque, Iowa,
for corporate customers. It is to employ up to 1,300 people. And Mr. MacDonald,
the human resources executive, said I.B.M. was hiring analysts and engineers to
work on Internet software, health technology and smart electrical grids.
But I.B.M.’s American employment has declined steadily, down to 29 percent of
its worldwide payroll of 398,445 at the end of 2008. The cuts have also come
sooner and deeper in North America this year than in recent years.
As part of a government filing last week, I.B.M. said its work force in Brazil,
Russia, India and China had climbed to 113,000. These are markets with faster
growth than the United States, and less expensive skilled labor.
In interviews, I.B.M. workers whose jobs are being eliminated were mainly
chagrined that the undisclosed cuts, and the timing, seemed to contradict the
company’s public statements.
Rick Clark, 50, an engineer in East Fishkill, N.Y., had worked for I.B.M. for 11
years. He said he was disappointed in I.B.M. this time because the job cuts were
deep and spread across so many businesses and came at a time when I.B.M. has
been proclaiming its success. “I do think I.B.M., like other companies, has used
this recession as an excuse to lay people off,” he said.
I.B.M. has had to issue two WARN Act notices recently under the tighter state
laws of California and New York. The company is cutting 141 jobs in San Jose and
295 jobs in East Fishkill.
To strengthen the federal layoff-warning law, labor experts make a few
suggestions. They include adopting the California threshold of 50 people let go
at one site, or a national standard, requiring 60 days’ notice if a company lays
off at least 1,000 workers nationally or at least 10 percent of its work force.
Some labor experts would also like to see a requirement for large corporations
to report employment country by country annually.
“All our multinational companies are increasingly less American, except when
they are asking for tax breaks and increased government spending in their
industries,” said Ross Eisenbrey, a labor researcher at the Economic Policy
Institute, a labor-oriented research organization in Washington. “Knowing where
their employment really is would be useful information for policymaking.”
Quiet Layoffs Sting
Workers Without Notice, NYT, 6.3.2009,
pack into a few counties
5 March 2009
By Brad Heath
WASHINGTON — More than half of the nation's foreclosures last year took place
in 35 counties, a sign that the financial crisis devastating the national
economy may have begun with collapsing home loans in only a few corners of the
Those counties, spread over a dozen states, accounted for more than 1.5
million foreclosure actions last year, a USA TODAY analysis of figures compiled
by the real estate listing firm RealtyTrac shows — more than were recorded in
the entire United States just two years earlier. They were the epicenter of a
wave of foreclosures that have left leading banks teetering and magnified the
nation's economic problems.
"This crisis was triggered by foreclosures, and a lot of those were in a very
small number of areas," says William Lucy, a University of Virginia professor
who has studied the link between lenders and faltering home loans. Banks spread
the risk and "it became like a car with no reverse gear. Once it starts to go
over the cliff, it's gone."
In other parts of the country, the foreclosure wave was barely a ripple — at
least until it started swamping major banks that had invested heavily in
mortgages. Banking giant Wachovia Corp., for example, was hammered after
California and Florida customers of one mortgage firm it bought began defaulting
at high rates. The risks of such lending were spread so broadly among financial
institutions that, when the loans went bad, it drove the national credit crisis,
says Christopher Mayer, who studies real estate at Columbia Business School.
A few of the 35 counties leading the foreclosure boom are in already-distressed
areas around Detroit and Cleveland. But most are clustered in places such as
Southern California, Las Vegas, Phoenix, South Florida and Washington, where
home values shot up dramatically in the first half of the decade, then began to
RealtyTrac's counts of foreclosure actions include default notices, auctions and
repossessions by lenders, and can sometimes count the same property twice. As a
result, they tend to be higher than estimates from other tracking firms. But
they remain one of the best geographic measures of the nation's housing
The Obama administration on Wednesday detailed a $75 billion plan to keep more
homeowners from slipping into foreclosure by helping them refinance loans or
reduce their monthly payments. But that effort could face political challenges
because most of the foreclosure problem has been so concentrated in a few areas,
says Brookings Institution researcher Alan Mallach.
The worst-hit counties are home to about 20% of U.S. households, but accounted
for just over 50% of the nation's foreclosure actions last year, driving most of
the national increase. And even among those places, a few stand out: Eight
counties in Arizona, California, Florida and Nevada were the source of about a
quarter of the nation's foreclosures last year.
In more than 650 other counties — about a fifth of the nation — the number of
foreclosure actions actually dropped since 2006.
Most foreclosures pack
into a few counties, 5.3.2009,
U.S. Sets Big Incentives
to Head Off Foreclosures
March 5, 2009
The New York Times
By EDMUND L. ANDREWS
WASHINGTON — The Obama administration on Wednesday began the most ambitious
effort since the 1930s to help troubled homeowners, offering lenders and
borrowers big incentives and subsidies to try to stem the wave of foreclosures.
People with mortgages as high as $729,750 could qualify for help, and there is
no ceiling on how high their income can be as long as they are in danger of
losing their homes. Interest rates on loans could go as low as 2 percent for
some. Many homeowners could see their mortgage payments drop by several hundred
dollars a month, and some could save more than $1,000 a month.
Administration officials estimate that the plan will help as many as four
million people avoid foreclosure, at a cost to taxpayers of about $75 billion.
In addition, the Treasury Department said it intended to follow up with a plan
to help troubled borrowers with second mortgages, which many homebuyers used as
“piggyback” loans to buy houses with no money down.
The plan is bolder and more expensive than any of the Bush administration’s
programs, which were based almost entirely on coaxing lenders to voluntarily
modify loans. While the number of loan modifications has climbed sharply, the
number of foreclosures skyrocketed to 2.2 million at the end of 2008, a record.
The new plan, which takes effect immediately, is intended to win much bigger
concessions from lenders by offering a mix of generous financial incentives and
regulatory arm-twisting. The final impact will depend on how both lenders and
the investors who own mortgages respond, but housing experts said the
administration had a good chance of achieving its goal.
The eagerness with which lenders agree to modify loans is likely to be affected
by a bill that the House is expected to take up on Thursday.
It would give bankruptcy judges the power to order changes in mortgages on
primary residences and would protect loan-servicing companies from lawsuits by
Several of the nation’s biggest mortgage-servicing companies, overseeing
two-thirds of all home loans in the country — Citigroup, JPMorgan Chase, Bank of
Amer ica and Wells Fargo — are expected to participate in the plan.
In addition, any bank that receives additional federal money under the Treasury
Department’s $700 billion financial rescue program will be required to take
part. But many lenders are expected to participate voluntarily, because the
government would be absorbing much of the cost of resolving their bad loans.
“I predict this program will be extremely effective at reducing foreclosures,”
said Eric Stein, senior vice president at the Center for Responsible Lending, a
nonprofit advocacy group for homeowners.
Administration officials have similar expectations.
“It is imperative that we continue to move with speed to help make housing more
affordable and help arrest the damaging spiral in our housing markets,” said
Timothy F. Geithner, the Treasury secretary.
In releasing detailed guidelines on the plan, first unveiled Feb. 17, the
Treasury Department made it clear that the program would not help every
homeowner in trouble. It will do little to help families whose income has
evaporated because one or more breadwinners have lost their jobs, nor will it
save those swamped by big debts beyond their mortgages. It will not do much for
homeowners who are current on their loans but “upside down” — owing more than
their houses are worth.
Still, the program, when combined with a separate effort to help homeowners
refinance their loans even if they are not in distress, could help put a floor
under home prices.
The Treasury has instructed Fannie Mae and Freddie Mac, the two
government-controlled mortgage-finance companies, to refinance homeowners at
today’s low market rates even if the owners have less than the standard 20
percent equity that is usually required.
This second program applies to about 30 million people with mortgages owned or
guaranteed by Fannie or Freddie, but will not be available to people whose
mortgages are much higher than their home’s market value.
Administration officials said it could lower monthly payments for as many as
five million homeowners. To finance that effort, the Treasury is providing the
two companies with up to $200 billion in additional capital, on top of $200
billion that it had already pledged to them.
Under the new loan modification guidelines, the Treasury will offer
mortgage-servicing companies upfront incentive payments of $1,000 for every loan
they modify and additional payments of $1,000 a year for the first three years
if the borrower remains current. The Treasury will also chip in $1,000 a year to
directly reduce the borrower’s loan amount, if the borrower stays up to date on
But the biggest subsidies are in reducing the size of a person’s monthly
payment. If the lender reduced the borrower’s monthly housing payment to 38
percent of the household’s gross monthly income, the Treasury Department would
match, dollar for dollar, the lender’s cost in reducing payments down to 31
percent of monthly household income.
The program calls on lenders first to reduce interest rates to as low at 2
percent for the next five years to hit the monthly income target. After five
years, some borrowers would start to pay gradually higher rates, but their rates
could not exceed the market rate at the time they renegotiated.
That would be a favorable deal for many people. At the moment, the market rate
for such loans is just over 5 percent — very low by historical standards.
The key to determining whether a person receives help will be a so-called net
present value calculation by the mortgage company.
In essence, a lender will first have to calculate how much it would cost to
reduce a person’s monthly payments to an “affordable” range, 31 to 38 percent of
the borrower’s monthly income.
If the calculation shows that the lender’s cost in modifying the loan, after
receiving the taxpayer subsidy, would be lower than the cost of foreclosing, the
lender would be required to offer a borrower the new deal. If the estimated cost
of the concessions appeared to be higher than the cost of foreclosure, the
decision would be voluntary.
Housing experts estimate that lenders lose about half the outstanding loan
amount if they pursue foreclosure, and those losses are climbing as the resale
value of houses continues to fall. As a result, the program could lead to
millions of loan modifications.
Borrowers cannot be charged any modification fees, the Treasury Department said.
Lenders will have to bear the administrative expense of reviewing the loans and
making their cost estimates. Treasury officials said they were trying to warn
consumers against fraud artists and consultants who are seeking to collect fees
for helping homeowners negotiate with lenders.
There is no ceiling on how much a person can earn and still qualify for help,
but the size of the mortgage to be modified cannot be higher than $729,750 for a
single-family home, or $1.4 million for the mortgage on a four-unit condominium
The program is open only to borrowers who live in the homes at issue, and not to
investors or people with mortgages on second or third homes. It is open to
people who obtained a mortgage before Jan. 1, 2009. Borrowers can apply for loan
modifications until the end of 2012.
Tara Siegel Bernard contributed reporting from New York.
U.S. Sets Big Incentives
to Head Off Foreclosures, NYT, 5.3.2009,
Unlucky or Unwise,
Some Borrowers Are Left Out
March 5, 2009
The New York Times
By JOHN LELAND
Chadi Moussa lives in a house valued at more than $1 million in Dublin,
Calif., in the desirable East Bay area. Unfortunately, he owes nearly twice that
much on his mortgage. Mr. Moussa, who runs a used luxury car dealership, is by
any definition a troubled homeowner.
But when he looked at President Obama’s housing rescue plan, he saw nothing for
him because his mortgage was too high.
“You give $25 billion to a bank, at least they should help people stay in their
homes,” Mr. Moussa said. “But once you get to big loans, nobody’s doing anything
Administration officials say the plan, the details of which were released
Wednesday, is intended to help as many homeowners as possible and could prevent
three million to four million foreclosures through loan modifications and help
four million to five million through low-cost refinancing.
But it does little for borrowers who have had significant jolts to their income,
or who owe more than their home’s value on loans that exceed $729,750. In
boom-and-bust housing markets like Florida, Las Vegas, Phoenix or California,
where values have fallen 30 percent to 40 percent, the plan leaves many in homes
they cannot afford — some because they borrowed recklessly, others because they
were buffeted by the market swings.
About 20 percent of the country’s 50 million mortgage holders owe more than 105
percent of their house’s value, and so do not qualify for refinancing under the
plan, according to J.P. Morgan.
“The refinance portion of the plan is set up so it provides the least help for
the people who need it most,” said Christopher J. Mayer, a professor of real
estate at the Columbia Business School. “We’re missing an opportunity to help
many more Americans.”
Refinancing is only for loans owned or backed by Fannie Mae and Freddie Mac, or
roughly half of all homes. Homeowners can tell whether the agencies back their
loan by calling their mortgage companies.
For other borrowers, the government plan subsidizes lenders who modify loan
payments, but only on loans below $729,750.
Mr. Moussa missed out on both counts.
The Treasury Department estimates that 2 percent of mortgages exceed these
limits; the figure approaches 6 percent in California.
“The program made choices,” said Bill Apgar, a senior adviser at the Department
of Housing and Urban Development. “In order to have the resources available to
help the most people, it was decided to put limits on the help to the folks who
have better than average capacity to adjust.” The planners expect 20 percent to
30 percent of people who receive modifications to default again, which is about
half the rate for previous loan modifications.
Homeowners with more modest mortgages may also fall through the cracks. Tracy
Frazier, 33, has a first mortgage of $325,000 on his house in Phoenix. But the
county recorder valued it at $177,000, making him ineligible for refinancing and
unlikely to get a loan modification because he is a poor risk.
“The situation we’re in, it stinks,” said Mr. Frazier, whose income has fallen
to $42,000 from $80,000. “But I want to keep this home. Why get us out of it? If
it goes to auction, you’ll get half the value.”
J.P. Morgan estimates that the loan modification plan will prevent 600,000 to
2.6 million foreclosures, depending on how liberally banks modify mortgages and
how many borrowers default again.
Paul Willen, a senior economic adviser at the Federal Reserve Bank of Boston,
cited another group not helped by the plan: the newly unemployed.
“Cutting my payment by 20 percent isn’t going to help me if I have no income,”
Mr. Willen said. “And often these people have gotten a new job offer but they
can’t move because their house is under water.”
Because house prices often stay low even after the economy recovers, he said,
high foreclosure rates are likely to continue after the banks and employment
Even with refinancing and loan modifications, many borrowers will still end up
in foreclosure, said Christopher A. Viale, president of the Cambridge Credit
Counseling Corporation, a nonprofit agency in Agawam, Mass.
“There’s 10 million households that aren’t being talked about, and they aren’t
going to be helped at all,” Mr. Viale said. “They aren’t behind on their
mortgages, but they’re putting everything on their credit cards, they’re making
minimum payments and paying penalty rates, and there’s no way they can pay off
In the past, these homeowners might have refinanced their homes to pay down this
debt, but that is no longer an option. “They need reductions of 30 or 40
percent” on their mortgage payments, Mr. Viale said.
For Mr. Moussa, the road toward foreclosure has been precipitous. He bought his
home in 2005 for $2.24 million, with a down payment of more than $500,000, and
monthly payments of $4,000 for the first year. But as California real estate
prices plummeted, his house’s value fell to about $1.1 million, he said. Then
his income dropped by half.
After he defaulted on his mortgage five months ago, Mr. Moussa said he asked his
lender, Countrywide Financial, to change the term of his loan to 40 years and to
lower the interest to 4 percent until the car business revived.
“Two days ago I got the answer that at this point they can’t do anything,” he
Mr. Moussa now has monthly mortgage payments of $8,700 and a home that may never
recover its equity. The stress has eroded his marriage, and his wife and
daughter are now with her family in Beirut.
His frustration was evident in his voice. “I can make $5,000 payments per month.
Why not do that for me for a couple years? Why take it away, sell it” for a huge
loss, he asked. “In my area, half the houses are in foreclosure or short sales.
And some of them have been stripped down, everything torn out.”
The president has called for legislation empowering bankruptcy court judges to
lower the principal on mortgages to reflect fallen home values. This legislation
has met strong resistance from the lending industry and many lawmakers.
For Mark Klepper, 50, who lives in Miami, buying a big house was a way to
establish credit to start a business. In 2004 he bought a home for $585,000, and
watched its value rise to $1.4 million. After refinancing twice, he owes
$1,064,000. But the home is now worth a little more than he paid for it, and his
income has fallen by 40 percent. He stopped paying his mortgage in January. If
he were to continue paying, he said, the drain would crush his business. The
government’s plan does not help him.
“I feel if there’s a plan out there, there shouldn’t be a limit,” Mr. Klepper
said. “If the government is helping these lenders, they need to take some
He asked his lender to reduce his balance to $600,000 and his rate to 4 percent,
but so far has made no headway.
“I’m saying I can afford to pay, just not what I did in the past,” he said. “I
wouldn’t be asking for it if everything was fine, but it’s not.”
Unlucky or Unwise, Some
Borrowers Are Left Out, 5.3.2009,
Brown Speaks to Congress on Economy
March 5, 2009
The New York Times
By BRIAN KNOWLTON
WASHINGTON — Prime Minister Gordon Brown urged American leaders on Wednesday
to “seize the moment,” in tandem with their European allies, to work through the
global economic crisis and prepare for a future that brings “the biggest
expansion of middle-class incomes and jobs the world has ever seen.”
Speaking from one of the most prominent stages accorded any visiting foreign
dignitary — a joint meeting of Congress — Mr. Brown called for a clear rejection
of protectionist tendencies as the world struggles toward recovery.
The address came a day after President Obama assured Mr. Brown that the “special
relationship” between the two countries was as strong as ever — despite what
some observers have described as coolness in the handling of the prime
minister’s visit. The White House spokesman, Robert Gibbs, said again Wednesday
that “the relationship remains strong and special.”
In any case, the senators and congressmen, joined by American military leaders
and other dignitaries, gave the prime minister a warm welcome, interrupting his
45-minute speech at least a dozen times with standing ovations. One of those
came after he announced that Senator Edward M. Kennedy of Massachusetts, who is
suffering from brain cancer, had been granted an honorary knighthood.
The chamber was nearly full as Mr. Brown spoke; the Capitol interns who are
sometimes summoned to fill empty seats on such occasions were relatively few in
Mr. Brown praised his host country as one of remarkable strength, optimism and
resilience. “America is not just the indispensable nation,” he said, “you are
the irrepressible nation.”
Those strengths, he added, needed to be marshaled fully now in what Mr. Brown
said would have to be concerted world action to stimulate national economies,
bolster banks and improve their oversight, and help developing countries survive
Echoing a point that Mr. Obama has begun to make, Mr. Brown argued that a big
part of the solution to the crisis lay in having confidence that it can be
“While today people are anxious and feel insecure, over the next two decades our
world economy will double in size,” Mr. Brown said. “Twice as many opportunities
for business, twice as much prosperity, and the biggest expansion of middle
class incomes and jobs the world has ever seen.”
He argued that the United States, under a president who enjoys great popularity
at home and sometimes even greater popularity abroad, would find a rare
receptiveness to its efforts to move forward.
“Let me say that you now have the most pro-American European leadership in
living memory,” Mr. Brown said.
“There is no old Europe, no new Europe, there is only your friend Europe. So
once again I say we should seize the moment — because never before have I seen a
world so willing to come together. Never before has that been more needed. And
never before have the benefits of cooperation been so far-reaching.”
He also vowed to continue close cooperation in the fight against terrorism, in
efforts to induce Iran to suspend its nuclear program, and in moves to curtail
global warming. And he paid tribute to the soldiers of both countries who had
fought in Iraq and Afghanistan.
Mr. Brown, who was chancellor of the Exchequer, or finance minister, in the
Labour Party government of Tony Blair, has been calling for a “global new deal”
with every country working to end the downturn.
The prime minister has been laying the groundwork for a meeting on April 2 in
London of the leaders of the Group of 20 major economies. He has been calling
for greater accountability and transparency, and stricter oversight, for banking
and financial institutions around the world.
Mr. Obama has supported many of the same goals, at least in principle.
But Julianne Smith, director of the Europe program at the Center for Strategic
and International Studies in Washington, said that Mr. Brown might not get all
“I don’t think he’s going to be able to go back home and say ‘Obama and I see
completely eye-to-eye on some big global regulation scheme,’ ” she said.
Part of that is a general American skepticism toward such internationalist
approaches, Ms. Smith said. “Europeans, even the Brits, have a higher level of
comfort with global machinery and bureaucratic machinery than Americans do,” she
Commentators on both sides of the ocean have catalogued a number of signs that
the reception accorded to Mr. Brown in Washington was not quite as warm as the
ones British prime ministers enjoyed during the Bush years: No invitation to
Camp David, no full-scale news conference, no state dinner — and while there was
a meeting between the men’s wives, none was held between the two couples. Mr.
Brown, whose own approval ratings in Britain are suffering, had hoped to profit
from his visit to the popular American president.
Mr. Obama brushed such concerns aside on Tuesday, saying that the two countries
were united by a bond “that will not break.”
And Mr. Brown said the same on Wednesday: “Partnerships of purpose are
indestructible,” he said. “There is no power on Earth that can drive us apart.”
Brown Speaks to Congress
on Economy, NYT, 5.3.2009,
Job Losses Show Breadth of Recession
March 4, 2009
The New York Times
By DAVID LEONHARDT
What does the worst recession in a generation look like?
It is both deep and broad. Every state in the country, with the exception of a
band stretching from the Dakotas down to Texas, is now shedding jobs at a rapid
pace. And even that band has recently begun to suffer, because of the sharp fall
in both oil and crop prices.
Unlike the last two recessions — earlier this decade and in the early 1990s —
this one is causing much more job loss among the less educated than among
college graduates. Those earlier recessions introduced the country to the
concept of mass white-collar layoffs. The brunt of the layoffs in this recession
is falling on construction workers, hotel workers, retail workers and others
without a four-year degree.
The Great Recession of 2008 (and beyond) is hurting men more than women. It is
hurting homeowners and investors more than renters or retirees who rely on
Social Security checks. It is hurting Latinos more than any other ethnic group.
A year ago, a greater share of Latinos held jobs than whites. Today, the two
have switched places.
If the Great Recession, as some have called it, has a capital city, it is El
Centro, Calif., due east of San Diego, in the desert of California’s Inland
Valley. El Centro has the highest unemployment rate in the nation, a
depressionlike 22.6 percent.
It’s an agricultural area — because of water pumped in from the Colorado River,
which allows lettuce, broccoli and the like to grow — and unemployment is in
double digits even in good times. But El Centro has lately been hit by the
brutal combination of a drought, a housing bust and a falling peso, which cuts
into the buying power of Mexicans who cross the border to shop.
Until recently, El Centro was one of those relatively cheap inland California
areas where construction and home sales were booming. Today, it is pockmarked
with “bank-owned” for sale signs. A wallboard factory in nearby Plaster City —
its actual name — has laid off workers once kept busy by the housing boom. Even
Wal-Mart has cut jobs, Sam Couchman, who runs the county’s work force
development office, told me.
You often hear that recessions exact the biggest price on the most vulnerable
workers. And that’s true about this recession, at least for the moment. But it
isn’t the whole story. Just look at Wall Street, where a generation-long bubble
seems to lose a bit more air every day.
In the long run, this Great Recession may end up afflicting the comfortable more
than the afflicted.
The main reason that recessions tend to increase inequality is that lower-income
workers are concentrated in boom-and-bust industries. Agriculture is the classic
example. In recent years, construction has become the most important one.
By the start of this decade, the construction sector employed more men without a
college education than the manufacturing sector did, Lawrence Katz, the Harvard
labor economist, points out. (As recently as 1980, three times as many such men
worked in manufacturing as construction.) The housing boom was like a giant jobs
program for many workers who otherwise would have struggled to find decent
The housing bust has forced many of them into precisely that struggle and helps
explain the recession’s outsize toll on Latinos and men. In the summer of 2005,
just as the real estate market was peaking, I spent a day visiting home
construction sites in Frederick, Md., something of a Washington exurb,
interviewing the workers. They were almost exclusively Latino.
At the time, the national unemployment rate for Latino men was 3.6 percent.
Today, when there aren’t many homes being built in Frederick or anywhere else,
that unemployment rate is 11 percent. And this number understates the damage,
since it excludes a considerable number of immigrants who have returned home.
Frederick was typical of the boom in another way, too. It wasn’t nearly as
affluent as some closer suburbs. Now the bust is widening that gap.
If you look at the interactive map with this column, you will see the places
that already had high unemployment before the recession have also had some of
the largest increases. Some are victims of the housing bust, like inland
California. Others are manufacturing centers, as in Michigan and North Carolina,
whose long-term decline is accelerating. Rhode Island, home to both factories
and Boston exurbs, has one of the highest jobless rates in the nation.
All of these trends will serve to increase inequality. Yet I still think the
Great Recession will eventually end up compressing the rungs on the nation’s
economic ladder. Why? For the same three fundamental reasons that the Great
The first is the stock market crash. Clearly, it has hurt wealthy and upper
middle-class families, who own the bulk of stock, more than others. In addition,
thousands of high-paying Wall Street jobs — jobs that have helped the share of
income flowing to the top 1 percent of earners soar in recent decades — will
Hard as it may be to believe, the crash will also help a lot of young families.
The stocks that they buy in coming years are likely to appreciate far more than
they would have if the Dow were still above 14,000. The same is true of future
house purchases for the one in three families still renting a home.
The second reason is government policy. The Obama administration plans to raise
taxes on the affluent, cut them for everyone else (so long as the government can
afford it, that is) and take other steps to reduce inequality. Franklin D.
Roosevelt did something similar and it had a huge effect.
Of course, these two factors both boil down to redistribution. One group is
benefiting at the expense of another. Yes, many of the people on the losing end
of that shift have done quite well in recent years, far better than most
Americans. Still, the shift isn’t making the economic pie any bigger. It is
simply being divided differently.
Which is why the third factor — education — is the most important of all. It can
make the pie larger and divide it more evenly.
That was the legacy of the great surge in school enrollment during the Great
Depression. Teenagers who once would have dropped out to do factory work instead
stayed in high school, notes Claudia Goldin, an economist who recently wrote a
history of education with Mr. Katz.
In the manufacturing-heavy mid-Atlantic states, the high school graduation rate
was just above 20 percent in the late 1920s. By 1940, it was almost 60 percent.
These graduates then became the skilled workers and teachers who helped build
the great post-World War II American economy.
Nothing would benefit tomorrow’s economy more than a similar surge. And there is
some evidence that it’s starting to happen. In El Centro, enrollment at Imperial
Valley Community College jumped 11 percent this semester. Ed Gould, the college
president, said he expected applications to keep rising next year.
Unfortunately, California — one of the states hit hardest by the Great Recession
— is in the midst of a fiscal crisis. So Imperial Valley’s budget is being
capped. Next year, Mr. Gould expects he will have to tell some students that
they can’t take a full load of classes, just when they most need help.
Job Losses Show Breadth
of Recession, NYT, 4.3.3009,
Drops Highlight Despair
Over Rescue Efforts
March 3, 2009
The New York Times
By FLOYD NORRIS
Fears that the world’s economies are even weaker than had been thought
ricocheted around the globe on Monday as investors from Hong Kong to London to
New York bailed out of stocks.
Losses cascaded from one market to the next as concern spread that government
efforts had not been enough to stabilize troubled financial institutions or
The losses were bad everywhere but especially severe in Europe, where an
emergency meeting over the weekend ended in bickering and the rejection of a
bailout plea from Hungary.
In the United States, the Dow Jones industrial average fell below 7,000 for the
first time since 1997 as investors reacted to reports that construction and
industrial activity had continued to decline and to a $61.7 billion loss posted
by the insurance giant, the American International Group. It was the largest
quarterly loss ever for a company.
In Britain, the major stock market index lost 5.3 percent, and the performance
of the major Italian index was worse, declining 6 percent. With the dollar also
gaining, the losses were even greater for international investors in those
In the United States, the Dow fell 299.64 points, or 4.24 percent, to 6,763.29,
while the Standard & Poor’s 500-stock index fell 34.27 points, or 4.66 percent,
to 700.82. The Nasdaq composite ended 54.99 points, or 3.99 percent, lower, at
Crude oil settled at $40.15 a barrel, down $4.61.
“It’s pretty despondent everywhere,” said Dwyfor Evans, a strategist at State
Street Global Markets in Hong Kong. “O.K., there are signs that some of the
leading indicators have stabilized to some extent, but it’s at a very, very low
level, and we’re not seeing corporate investment picking up, or consumers
starting to spend again — in other words, the traditional mechanisms by which
economies come out of a recession are absent at this time.”
Hopes that the American economy, which led the world into recession, might lead
it back out this year have been fading.
Last weekend, Warren E. Buffett, the chairman of Berkshire Hathaway, wrote in
his company’s annual report that “the economy will be in shambles, throughout
2009, and, for that matter, probably well beyond.”
As if to emphasize the problems, the Institute for Supply Management reported
that companies in Britain, France, Germany, Italy, and the United States said
business was getting much worse, especially in terms of jobs.
Paul Dales, an economist with Capital Economics, pointed to the survey in
forecasting that the February employment report will show a decline of 785,000
jobs when it is released on Friday. If so, it would be the largest one-month
decline in employment in nearly 60 years.
Last week, the United States revised its estimate of fourth quarter gross
domestic product to show a decline at an annual rate of 6.2 percent, the worst
in more than a quarter century. On Monday in reporting that construction
activity fell sharply in January, the government also revised the December
“That change could move the fourth quarter figure down to a 7 percent decline,”
said Robert Barbera, the chief economist of ITG, a research firm.
Despite the American problems, the dollar has been gaining, particularly against
European currencies. The euro slipped to under $1.26, nearing a two-year low and
down from a high of almost $1.60 last spring. There was a renewed flight to
safety, with the 10-year Treasury bond yield falling to under 3 percent.
The continued plunge of the stock markets has stunned investors and governments.
Over the six months that ended last week, the S.& P. 500 lost 43 percent of its
value. There were similar declines during the Great Depression, but since then,
the worst six-month performance before the current plunge was a 32 percent fall
in 1974 when the world was also in recession.
While there has been speculation about international cooperation to deal with
the growing financial and economic crisis, the European Union summit this
weekend provided an indication that few countries were willing to risk their own
taxpayers’ money to help others.
“The E.U. again has proven it is unable to manage a coordinated response to the
crisis,” Commerzbank analysts wrote in a note Monday. “The problems arising in
Eastern Europe will put further pressure on the euro.”
While all countries are suffering, the United States and some Western European
countries still have access to loans, which has enabled them to mount large
stimulus plans and bear the costs of bailing out banks.
But in some other areas, notably Eastern Europe, the value of the local
currencies has plunged as economic activity has weakened. That is a perilous
path in countries where the government and many homeowners took out loans in
foreign currencies, seeking lower interest rates, and now find themselves owing
far more than they borrowed.
Reflecting that fact, over the same six months that the American stock market
fell 43 percent, most European and Asian markets did even worse when measured in
dollars. The Hungarian market, for example, was off 67 percent, while the German
exchange fell 48 percent.
Investors have greeted the stimulus spending plans with some hesitation in part
because of signs that the financial system continues to weaken.
“We can unleash as many trillions of dollars in stimulus as we wish, but if we
don’t fix the banking system, we still have a patient in cardiac arrest,” the
chief strategist at Charles Schwab, Liz Ann Sonders, said.
In addition to the loss at A.I.G., HSBC, the London-based international bank,
said it would close its American consumer finance business, which it took on
when it acquired Household Finance in 2003, in one of the decade’s worst
acquisitions. HSBC said it would raise $17 billion in new capital from
shareholders. Its shares fell 19 percent, to its lowest level in a decade.
The A.I.G. loss far exceeded the previous quarterly record deficit of $44.9
billion, set by Time Warner in 2002 when it wrote down the value of AOL.
Another factor depressing investors is the dividend cuts that many companies
have been forced to make. On Monday, the large regional bank PNC Financial
Services Group cut its dividend 85 percent and the International Paper Company
cut its by 90 percent. Last week, General Electric cut its dividend 68 percent,
and JPMorgan Chase reduced its dividend 87 percent.
The surveys of businesses, which ask whether various aspects of business are
getting better or worse, showed figures in the low-to-mid 30s in all countries,
driven down by sharply lower employment expectations. On those surveys, a figure
of 50 indicates that business is neither getting better nor worse, and figures
below 40 show a sharp rate of decline.
That very plunge could augur well in the not-too-distant future, since it
appears that production in many areas is running below sales as companies seek
to cut costs.
“The intensity of inventory reduction is stunning,” said Tobias Levkovich, a
Citigroup strategist, in a note to clients. “The depressed level of production
relative to final sales argues that there is real potential for production
levels to lift” in the second half of the year, he said, leading to surprisingly
For now, at least, few investors expect any such good news. The S.&. P 500 fell
18.6 percent in the first two months of 2009, even before Monday’s fall. That
was its worst start, exceeding the 18.2 percent fall recorded in the first two
months of 1933, another year when a new president took office during an economic
and financial crisis. In 1933, the stock market soon turned, and nearly doubled
over 12 months.
The S.& P. 500 has now fallen below, and the Dow is close to, the levels that
prevailed on Dec. 5, 1996, when Alan Greenspan, then the chairman of the Federal
Reserve, inquired in a speech, “How do we know when irrational exuberance has
unduly escalated asset values, which then become subject to unexpected and
prolonged contractions as they have in Japan over the past decade?”
It was a question that has been answered over the last 17 months. During that
period, the Dow has fallen 52.3 percent, a larger percentage decline than in any
bear market since the Great Depression, but nowhere near the 89 percent collapse
that took less than three years to complete after the 1929 high.
Bettina Wassener and Judy Dempsey contributed reporting.
Steep Market Drops
Highlight Despair Over Rescue Efforts, NYT, 3.3.2009,
A.I.G. Reports $61.7 Billion Loss
as U.S. Gives More Aid
March 3, 2009
The New York Times
By ANDREW ROSS SORKIN and MARY WILLIAMS WALSH
The federal government agreed Monday morning to provide an
additional $30 billion in taxpayer money to the American International Group and
loosen the terms of its huge loan to the insurer, even as the insurance giant
reported a$61.7 billion loss, the biggest quarterly loss in history.
The loss of $22.95 a share compared with a fourth-quarter loss in the period a
year ago of $5.3 billion or $2.08 a share.The intervention would be the fourth
time that the United States has had to step in to help A.I.G., the giant
insurer, avert bankruptcy. The government already owns nearly 80 percent of the
insurer’s holding company as a result of the earlier interventions, which
included a $60 billion loan, a $40 billion purchase of preferred shares and $50
billion to soak up the company’s toxic assets.
Federal officials, who worked feverishly over the weekend to complete the
restructuring, said they thought they had no choice but to prop up A.I.G.,
because its business and trading activities are so intricately woven through the
world’s banking system.
But the deal also presents more financial risks to taxpayers at a time when the
public and Congress have been sharply questioning the wisdom of risking federal
money to bail out private enterprises.
The government’s commitment to A.I.G. far eclipses its rescue of other financial
companies, including Citigroup, which has received $50 billion in rescue
financing, and Bank of America, with $45 billion.
Credit rating agencies like Moody’s, Fitch Ratings and Standard & Poor’s had
been preparing to sharply downgrade A.I.G.’s credit ratings on Monday because of
the record quarterly loss. That would have forced A.I.G. to default on its debt,
threatening to set off shock waves throughout the financial system as banks
holding A.I.G. derivatives contracts would probably demand cash collateral and
other payments from A.I.G. during a time when it has little to spare.
The major credit-rating agencies were briefed on the pending deal between A.I.G.
and the government, the people involved in the talks said, and they have
committed not to downgrade the company’s debt as a result.
Under the deal, the government will commit $30 billion in cash to A.I.G. from
the Troubled Asset Relief Program, should the company need it, the Treasury
Department said in a statement. A.I.G. is not expected to draw down the money
immediately, and but the government’s commitment was enough to satisfy the
To further ease A.I.G.’s debt burden, instead of paying back $38 billion in cash
with interest that it has used from a federal credit line, government will
convert that into equity in two of the insurer’s subsidiaries in Asia — American
International Assurance and the American Life Insurance Company.
Both units are performing well. This would give the government direct ownership
in those subsidiaries and provide saleable assets to American taxpayers even if
the A.I.G. holding company were to default on its loans.
The government stake in American International Assurance is likely to be
controversial. The unit had been put up for sale recently, without success. That
suggests that the government is giving A.I.G. better terms than private
investors were willing to give, exposing the government to further accusations
that it is providing a handout to A.I.G.
Also as part of the deal, the government would agree to lower the interest rate
on all remaining A.I.G. debt to match the London Interbank Offered Rate, or
Libor. That would replace the previous rate, which was three percentage points
higher than Libor. That move would save A.I.G. $1 billion in interest payments.
A.I.G.’s loss would be the largest ever by any company in a single quarter.
Still, of the $61.7 billion loss being reported, only about $2 billion is a cash
loss. The rest is the result of noncash items like write-downs on the value of
the company’s assets.
The new cash commitment reached on Sunday represented the fourth time since
September that the federal government has taken steps to keep A.I.G. from
collapsing. The previous rescues were intended to stabilize A.I.G. and buy it
time to restructure. But the rescues were insufficient, in part because A.I.G.
has either invested in or insured so many assets that keep losing value as the
In September, the Federal Reserve lent A.I.G. $85 billion when the company
suddenly found itself unable to meet a round of cash calls. To secure the
emergency loan, A.I.G. issued the Fed warrants for slightly less than 80 percent
of the company’s shares.
Officials said at the time that they thought the loan would provide A.I.G. all
the cash it could possibly need. The government brought in a seasoned insurance
executive, Edward M. Liddy, to sell off some of A.I.G.’s operating units to
raise money, since the rescue loan had to be paid back within two years. Mr.
Liddy drew up a plan, saying he expected a smaller, well-capitalized version of
A.I.G. to remain after the restructuring.
But in just weeks it became clear that A.I.G.’s problems were so grave the $85
billion would not be enough. It was using up that money alarmingly fast, thus
burdening itself with higher than expected debt-servicing costs, because it had
to pay the Fed a higher rate of interest on the part of the loan that it drew
In October, the government cut A.I.G. some slack by creating a new $38 billion
facility to shore up its securities lending business, and gave the company
access to a new commercial paper program, which had a much lower interest rate
than the rescue loan.
But that was not enough either. In mid-November, the government restructured its
loans to A.I.G., raising its total commitment to $150 billion. The new
arrangement reduced the rescue loan to $60 billion and stretched out its term to
five years instead of two.
At the same time, it injected $40 billion into A.I.G. in exchange for preferred
shares. And it created two special-purpose entities to take the most toxic
assets then plaguing A.I.G. out of play.
Those arrangements kept the government’s stake in A.I.G. at just below 80
percent. The government has not wanted to go above 80 percent, because it would
then have to consolidate all of A.I.G.’s assets and liabilities into its own
finances, putting taxpayers on the hook for the claims of roughly 76 million
insurance policyholders around the world.
While November’s restructuring did buy A.I.G. more time, it was not able to sell
the operating units that Mr. Liddy put up for sale — or, when assets were sold,
the prices were shockingly low.
A.I.G. Reports $61.7
Billion Loss as U.S. Gives More Aid, NYT, 3.3.2009,