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History > 2009 > USA > Economy (VI)




Madoff Is Sentenced

to 150 Years for Ponzi Scheme


June 30, 2009
The New York Times


A criminal saga that began in December with a string of superlatives — the largest, longest and most widespread Ponzi scheme in history — ended the same way on Monday as Bernard L. Madoff was sentenced to 150 years in prison, the maximum for his crimes.

Mr. Madoff, looking thinner and more haggard than when he pleaded guilty in March, stood impassively as Federal District Judge Denny Chin condemned his crimes as “extraordinarily evil” and imposed a sentence that was three times as long as the federal probation office suggested and more than 10 times as long as defense lawyers had requested.

Though many questions still surround the case, the judge’s pronouncement offered a brief sense of resolution, followed by a short burst of applause and one stifled cheer from the victims who filled the soaring Lower Manhattan courtroom.

Only a few moments before, Mr. Madoff had apologized for the harm he inflicted on the clients who had trusted him, his employees and his family. He blamed his pride, which would not allow him to admit his failures as a money manager.

“I am responsible for a great deal of suffering and pain. I understand that,” he said, leaning slightly forward over the polished table, his charcoal suit sagging on his diminished frame.

“I live in a tormented state now, knowing of all the pain and suffering that I have created.”

At the end of his personal statement, Mr. Madoff abruptly turned to face the courtroom crowd. He was no longer the carefully tailored and coiffed financier. His hair was ragged. His eyes were sunken into deep gray shadows. His voice was a little raspy, and he stopped on occasion to sip water.

“I am sorry,” he said, and abruptly added: “I know that doesn’t help you.”

Nine victims, some choked by sobs or swiping at tears, told the court of the damage he had caused, describing him as a psychopath and a monster who had destroyed their lives.

“It feels like a nightmare that we can’t awake from,” said Carla Hirschhorn, a physical therapist who said her daughter was juggling two jobs in her junior year to help pay for college expenses that their lost savings were supposed to cover.

Michael Schwartz, who said Mr. Madoff had stolen money set aside to sustain his disabled brother, expressed the hope that “his jail cell will become his coffin.”

In meting out the maximum sentence, Judge Chin pointed out that no friends, family or other supporters had submitted any letters on Mr. Madoff’s behalf that attested to the strength of his character or good deeds he had done.

Mr. Madoff returned to his cell at the Metropolitan Correctional Center in Lower Manhattan while federal prison officials determine where he will serve his sentence. The defense has 10 days to decide whether to appeal the sentence.

Although Judge Chin suggested that Mr. Madoff be assigned to a prison in the Northeast, at the request of the defense, the judge said the Bureau of Prisons would decide what kind of facility will become his permanent home.

No members of Mr. Madoff’s immediate family were in court.

In his statement, Mr. Madoff acknowledged the “legacy of shame” he has created for his family.

His wife, Ruth, later released a statement — her first since her husband’s arrest — expressing her grief for the victims and her sense of shock and betrayal when she learned of the crime.

Mrs. Madoff has not been charged in the crime and insists that she did not know of it until her husband told her just before his arrest. But she acknowledged that her silence, imposed by lawyers protecting her own interests, “has been interpreted as indifference or lack of sympathy for the victims.” That, she added, “is exactly the opposite of the truth.”

She said she felt “devastated” by the harm her husband had done. “I am embarrassed and ashamed. Like everyone else, I feel betrayed and confused,” said Mrs. Madoff, who has forfeited all but $2.5 million in assets. “The man who committed this horrible fraud is not the man whom I have known for all these years.”

Many victims also accused regulators and lawmakers of betraying them for decades by failing to stop Mr. Madoff, and failing them again by not helping them deal with their financial hardships since they learned their savings had evaporated.

Judge Chin cautioned one speaker that those entities “are not before me,” but, in a larger sense, the Madoff case seemed to put an entire era on trial — a heady time of competitive deregulation and globalized finance that climaxed last fall in a frenzy of fear, panic and loss.

The blame has been spread wide — to arcane credit-default swaps, to lax enforcement of weak regulations, to poorly understood risks and badly managed financial institutions.

But with his arrest on Dec. 11, Mr. Madoff, a senior statesman in the private corridors of Wall Street who was respected for his vision and trusted by tens of thousands of customers, put a human face on those abstractions.

Mr. Madoff’s luxurious lifestyle, including a penthouse, yachts and French villa, all quickly became fuel for public outrage.

Every move in the case was closely watched, including his confession to his sons, Andrew and Mark, who were in his business; his guilty plea to 11 counts of various financial crimes in March; and his wife’s legal efforts to save some family assets from a sweeping government forfeiture.

The fury increased in January with Congressional testimony from a whistle-blower who had repeatedly alerted the Securities and Exchange Commission about his suspicion that Mr. Madoff was operating a gigantic fraud. An internal investigation is now under way at the S.E.C. to determine why the agency did not detect Mr. Madoff’s scheme and shut it down years ago.

The S.E.C. and the Securities Investor Protection Corporation, a government-chartered program to compensate customers of failed brokerage firms, were criticized repeatedly in the courtroom statements by the victims on Monday, and at a rally of victims held near the courthouse afterward.

The litigation already filed in and around the Madoff case will help shape how regulators, the courts and SIPC respond to large-scale Ponzi scheme losses in the future. How the losses of victims will be addressed is just one of many open questions.

The criminal investigation is continuing, as prosecutors try to determine who else bears responsibility for the crime. So far, only Mr. Madoff’s accountant has been arrested on criminal charges, but securities regulators have filed civil suits against several of his long-term investors, accusing them of knowingly steering other investors into the fraud scheme for their own gain.

And the bankruptcy trustee has sued more than a half-dozen hedge funds and large investors, seeking to recover more than $10 billion withdrawn from the fraud in its final months and years. It is uncertain how much money he will be able to recover to share among the victims and how long that effort will take.

And the sentence itself is likely to leave a mark as well, according to legal experts on white-collar crime.

In remarks before announcing his decision, Judge Chin acknowledged that any sentence beyond a dozen years or so would be largely symbolic for Mr. Madoff, who is 71 and has a life expectancy of about 13 years.

But “symbolism is important for at least three reasons,” he said, citing the need for retribution, deterrence and a measure of justice for the victims.

Judge Chin said he did not agree with the suggestion by Ira Lee Sorkin, Mr. Madoff’s lead lawyer, that victims were seeking “mob vengeance” through a maximum sentence.

“They are placing their trust in the system of justice,” he said, adding that he hoped the sentence he imposed would “in some small way” help the victims to heal.

Several former prosecutors called Judge Chin’s decision somewhat surprising but appropriate.

“The judge sent a powerful deterrent message and an ominous signal to possible co-conspirators,” said George Jackson III, a lawyer with Bryan Cave and a former federal prosecutor in Chicago.

Richard L. Scheff, a lawyer with Montgomery, McCracken, Walker & Rhoads and an assistant secretary for law enforcement for the Treasury Department, said the magnitude of the sentence “demonstrates real concern for the harm caused by Madoff to so many victims.”

He added, “Am I surprised? Yes, to a degree — but I strongly suspected that the sentence would be tantamount to a life sentence.”

To Robert S. Wolf, with the law firm Gersten Savage, the sentence “sent a clear and resounding message that Judge Chin felt that Madoff had not come clean and told all about the enormity of his criminal activity and others who participated.”

But James A. Cohen, an associate professor of law at Fordham, said he was troubled by the sentence. “I don’t think symbolism has a very important part in sentencing,” he said. “I certainly agree that a life sentence was appropriate, but this struck me as pandering to the crowd.”

The victims who spoke in the courtroom were unanimous in their demand for a maximum sentence, saying that Mr. Madoff had forfeited his right to live in society. They pointed to the extent of the crime: a fraud that ensnared millionaires, private foundations, a Nobel Prize laureate and hundreds of small investors who lost their life savings to an investment guru they had trusted completely.

Burt Ross, who lost $5 million in the fraud, cited Dante’s “The Divine Comedy,” in which the poet defined fraud as “the worst of sin” and expressed the hope that, when Mr. Madoff dies — “virtually unmourned” — he would find himself in the lowest circle of hell.

Prosecutors said Mr. Madoff deserved the maximum term for carrying out one of the biggest investment frauds in Wall Street history. Mr. Madoff’s lawyers said he should receive only 12 years.

After Mr. Madoff’s victims finished speaking, his lawyer, Mr. Sorkin, said the government’s request for a 150-year sentence bordered on absurd. He called Mr. Madoff a “deeply flawed individual,” but a human being nonetheless. “Vengeance is not the goal of punishment,” Mr. Sorkin said.

Even with a lesser term, Mr. Sorkin added, Mr. Madoff expects to “live out his years in prison.”


Zachery Kouwe and Jack Healy contributed reporting.

    Madoff Is Sentenced to 150 Years for Ponzi Scheme, NYT, 30.6.2009, http://www.nytimes.com/2009/06/30/business/30madoff.html?hp






Justices Rule That States Can Press Bank Cases


June 30, 2009
The New York Times


The Supreme Court paved the way on Monday for states to enforce fair-lending laws and other consumer protection measures against the nation’s biggest banks, striking down a rule that limited such powers to federal banking regulators.

The court concluded that rules issued by federal banking regulators under the National Bank Act — a law passed in 1864 — could not block, or pre-empt, efforts by the states to enforce their laws.

The case began with letters sent in 2005 by the New York attorney general at the time, Eliot Spitzer, to several national banks, including Citigroup, JPMorgan Chase and Wells Fargo, inquiring about their lending practices to minority customers.

The letters referred to “troubling” disparities that suggested black and Hispanic borrowers had been charged disproportionately higher interest rates on mortgages compared with those for whites.

The letters asked for the information “in lieu of subpoena” but strongly suggested that subpoenas might follow if the requests were not fulfilled.

A banking trade group and the Office of the Comptroller of the Currency brought suit to block Mr. Spitzer’s request, contending that the National Bank Act and rules issued by the Bush administration in 2004 gave that kind of law enforcement authority to the comptroller and prohibited such efforts by the states. A federal district court ruled against the states, and the United States Court of Appeals for the Second Circuit affirmed the lower court’s decision.

Writing for a 5-to-4 majority, Justice Antonin Scalia concluded that the attorney general had not been engaged in the broad “visitorial powers” reserved by the federal government, in which the government acts like a supervisor with free access to bank records on demand. The court, he wrote, has always understood that visitorial powers are “quite separate” from the power to enforce the law, and the attorney general was acting in the role of “sovereign-as-law-enforcer” in seeking the information.

Normally, Justice Scalia wrote, the court would defer to an agency’s interpretation of the law when the terms in dispute are ambiguous. But in this case, which turned on such terms as “visitorial powers,” he stated that even though the term was “somewhat ambiguous,” the court could discern “the outer limits” of the term, “even through the clouded lens of history.” The meaning that could be wrestled from the phrase, Justice Scalia wrote, did not include restrictions on “ordinary enforcement of the law” by the states.

The decision brought together an unusual coalition. Justice Scalia, one of the court’s most conservative members, was joined by the court’s more liberal wing of John Paul Stevens, David H. Souter, Ruth Bader Ginsburg and Stephen G. Breyer.

A decision concurring in part and dissenting in part was written by Justice Clarence Thomas and was joined by Chief Justice John G. Roberts Jr. and Justices Anthony M. Kennedy and Samuel A. Alito Jr., a group that did not share Justice Scalia’s view through the clouded lens of history. “The statutory term ‘visitorial powers’ is susceptible to more than one meaning,” Justice Thomas wrote, “and the agency’s construction is reasonable” and thus should be deferred to.

In a statement, New York’s current attorney general, Andrew M. Cuomo, called the decision “a huge win for consumers across the nation.” In a reference to the nation’s economic crisis, Mr. Cuomo added, “the court has recognized that fair lending and consumer protection — the cornerstones of a sound economy — require the cooperative efforts of both the states and the federal government.”

Seth Galanter, a lawyer in Washington who wrote a brief on behalf of former comptrollers, said that the worst case envisioned by federal regulators had not come to pass. While the decision does not block the attorneys general from enforcing state laws, he said, it does require judicial approval to gain access to records. “Our concern was really the establishment of 50 state supervisory regimes, where states could come in and look at the books whenever they wanted to,” he said.

The federal regulators had argued that their informal approach worked quietly with banks to address issues like fair lending in a “prophylactic way” that protected consumers.

John F. Cooney, a lawyer in Washington who specializes in bank regulation and a former deputy general counsel for litigation and regulatory affairs at the Office of Management and Budget, said that the decision upholds the theme of federalism that has run through several important cases of this just-ended Supreme Court term.

He added, however, that the banking decision would now require action by the legislative branch. “People are going to go to Congress and say, ‘You need to give us a functioning principle’ to define the boundaries of state and federal law,” he said. “The ultimate court of appeal will be Congress.”

James E. Tierney, director of the national state attorneys general program at Columbia Law School, said that a line-drawing exercise by Congress was unlikely to put state enforcers on the sidelines again.

In the absence of tough regulation of the banking industry by the federal government, he said, state attorneys general have stepped up to provide consumer protection and to fight discrimination. He called the case “a stinging defeat for the large banks and federal regulators who have worked for years to stop states from enforcing state consumer protection and antidiscrimination laws.”

Senator Patrick J. Leahy, Democrat of Vermont, agreed, calling the decision “a check against the former Bush administration’s attempt to prohibit state law from protecting consumers.”

    Justices Rule That States Can Press Bank Cases, NYT, 30.6.2009, http://www.nytimes.com/2009/06/30/business/30bizcourt.html?hpw






A Plan to Stem Foreclosures, Buried in a Paper Avalanche


June 29, 2009
The New York Times


LOS ANGELES — Somewhere on earth, there must be a more difficult task than this: persuading American mortgage companies to lower payments for homeowners who can no longer afford their loans. But as Karina Montenegro struggles to accomplish this feat for a troubled borrower, she strains to imagine a more futile pursuit.

Ms. Montenegro, an intern at a local company that seeks loan modifications, dials Washington Mutual to check on the status of an application for a homeowner whose income has plummeted. She endures a Muzak-scored purgatory while on hold. Syrupy-voiced customer service representatives chide her for landing in the wrong department. She learns that the documents her company sent in have simply vanished — for the third time since November.

“I don’t know what happened,” says a customer service officer who identifies himself as Chris. “I don’t know if there was a glitch in the system, whether it was transferred from one call center to the other.”

Think of the documents as being part of a pile massing inside the bank, Chris suggests. “This pile is not going to be moved forward at any point in time.”

Ms. Montenegro and her colleagues suffer these sorts of excruciating exchanges all day long. It is a potent indication of the difficulties afflicting the $75 billion taxpayer-financed program created by the Obama administration in an effort to avoid foreclosure for as many as four million distressed homeowners.

Under the plan, the government offers mortgage companies $1,000 for each loan they agree to modify, then another $1,000 a year for up to three years.

Hanging in the balance is more than the fate of individual homeowners. The administration portrays its mortgage program as a crucial piece of its broader effort to restore vigor to the economy. If the effort fails, foreclosures will continue to surge and home prices will probably keep falling, sowing fresh losses in the financial system and threatening to crimp credit anew for businesses and households.

Yet in the four months since the Treasury Department announced the program, millions of new homeowners have slipped into delinquency and foreclosure. For now, progress is constrained by the limited capacities of mortgage servicing companies, said Michael S. Barr, the assistant Treasury secretary for financial institutions. He offered the first signs of the administration’s impatience with the institutions that control home loans.

“They need to do a much better job on the basic management and operational side of their firms,” Mr. Barr said. “What we’ve been pushing the servicers to do is improve their infrastructure to make sure their call centers are doing a better job. The level of training is not there yet.”

The administration still does not know how many mortgages have been modified under the program. In a recent interview, Mr. Barr estimated the number at “over 50,000,” explaining that precise figures must wait for a soon-to-be-completed tracking system.

By the end of August, the program should produce 20,000 loan modifications a week, he said.

Tom Kelly, a spokesman for JPMorgan Chase, which now owns Washington Mutual, affirmed the administration’s criticism.

“We’ve done a lot,” he said, noting that the bank has added 950 loan counselors since the beginning of the year, bringing the total to 3,500. “But we’ve got a lot more to do.”

Two days in Los Angeles — where a loan modification company allowed a reporter to listen as its agents contacted mortgage servicers provided the firm not be named — starkly illustrated the problems.

The company charges homeowners $3,000, typically upfront, as it seeks to persuade lenders to rewrite loan documents so as to lower monthly payments. The company says it refunds the money when it fails to secure a modification.

For Ms. Montenegro, a college student at the University of Southern California, her summer job makes for fitting symmetry. In high school, she worked as a clerk at a Washington Mutual branch in Downey, Calif., which specialized in mortgages that invited customers to make such tiny payments that their balances increased.

Many homeowners did not understand the terms: Once they owed a lot more than their house was worth, their payments spiked. Now, that day has come, and Ms. Montenegro is working the other side. She calls WaMu, as the bank is known, trying to cut deals.

Among her clients is Vladimir Vishmid, who owes $490,000 on the mortgage for his three-bedroom home in the Sherman Oaks section of Los Angeles. Mr. Vishmid’s income as a self-employed computer engineer has plummeted, making it hard for him to make his $2,542 monthly payments. He is current on his loan, he says, but behind on his car insurance and utilities.

Software on Ms. Montenegro’s computer logs the details of the three applications her company has submitted for Mr. Vishmid. Chris, the WaMu representative, is telling her to send in No. 4.

“Personally, I’d submit a new file,” Chris counsels. “I’m telling you honestly, anything over 30 days is a new submission for us.”

For Ms. Montenegro, “honestly” is one of those words marinated in so much irony that her eyes roll. Two weeks earlier, she called the bank to check on the file and was told it was being reviewed. Now, it has disappeared.

“So, if I wouldn’t have called, we wouldn’t have known?” Ms. Montenegro scolds.

“It would have just sat in the queue and nothing would have happened,” Chris says. “I wish I had a better explanation.”

In the same office, Ms. Montenegro’s colleague, Sean Milotta, has run into a problem on a loan billed by American Home Mortgage Servicing. Though the borrower appears eligible for the Obama administration plan, the company refuses to take an application because the loan is owned by an investor who is unwilling to absorb a loss.

In another office down the hall, Ramin Lavi, 27, has picked up the file of Alice Descovich, who is seeking to shave down the $708,000 she owes on a mortgage serviced by WaMu for her home in Alameda, Calif. As the interest rates reset in coming months, it will become even harder for her to make the payments, which are now $4,400 a month.

A note in the system shows that the bank confirmed receiving documents on April 29 — pay stubs, tax returns, a letter disclosing her hardship, bank statements. Since then, the company has been waiting for WaMu to review the file.

But when Mr. Lavi calls, a representative coolly discloses that the application has been rejected because one document, a proof-of-insurance form, is missing. He must start over.

“The file had been submitted properly, and you didn’t put the pieces together,” Mr. Lavi says, his body quivering with anger. “I’m not going to stand in line again for another six months.”

He demands to speak to a supervisor, but the representative says none is free. He hangs up and redials, hoping to land in a different call center. Eventually, he reaches Chase’s executive offices, where Becky takes over the call.

“We’re not taking cases now,” she says calmly.

“Why was I transferred to you?” Mr. Lavi asks. Becky does not know. He implores her to keep the file open while he faxes in the lone missing document.

“Impossible,” she says, warning of “the sheer amount of papers coming in.”

Another agent, Lee Wasser, props his feet on an adjacent desk chair as he waits on hold for more than 20 minutes to speak with GMAC Mortgage.

His clients, Dean and Nancy Piercy, owe $380,000 on the loan for their home in Shasta Lake, Calif. A logger, Mr. Piercy has lost work hours, making it hard for them keep up with their $2,048 monthly payment — soon set to rise.

Mr. Wasser has already negotiated a solution: GMAC will accept only $270,000 in repayment, allowing the couple to get a fixed rate mortgage from another bank.

But that suddenly is in disarray. The Piercys have been making their payments, but GMAC has been putting their checks aside, holding the money as “loss mitigation fees,” until their application is completed. It has notified credit bureaus that their loan is more than 90 days delinquent, which has lowered their credit score, disqualifying them for the next mortgage.

Mr. Wasser reaches GMAC’s loss mitigation department. He asks for the delinquency to be removed from their status. But that must be handled by a different department: customer service. He is transferred there, where Jessica picks up the call.

“We are not going to amend,” she says, after a strained back and forth. If Mr. Wasser wants it otherwise, he will have to talk to loss mitigation.

“I just talked to them five minutes ago,” he tells Jessica.

“No, you didn’t.”

“Are you accusing me of lying?”

Mr. Wasser asks for Jessica’s employee identification number, but the line goes dead. Jessica has apparently hung up.

    A Plan to Stem Foreclosures, Buried in a Paper Avalanche, NYT, 29.6.2009, http://www.nytimes.com/2009/06/29/business/29loanmod.html?hp






U.S. Jobless Claims Rise; G.D.P Revised Upward


June 26, 2009
The New York Times


WASHINGTON (AP) — The government said Thursday that the number of people filing first-time jobless benefits rose last week while its revised reading on the first quarter economy was slightly better than expected.

On the unemployment front, the Labor Department says new jobless claims rose by 15,000 to a seasonally adjusted 627,000, partly because of layoffs related to the end of the school year. Economists expected a drop to 600,000 claims, according to Thomson Reuters.

A department analyst said that states reported more claims than expected from teachers, cafeteria workers and other school employees.

The number of people continuing to receive unemployment insurance rose by 29,000 to 6.74 million, slightly above analysts’ estimates of 6.7 million.

The four-week average of claims, which smoothes out fluctuations, was largely unchanged, at 616,750.

Economists expect the number of initial unemployment insurance claims, which reflects the level of layoffs, to slowly decline over the coming months as the economy bottoms out.

Still, claims remain far above levels associated with a healthy economy. A year ago they were 392,000.

Millions of Americans also are receiving jobless benefits through a federal extension enacted by Congress last year. For the week ending June 6, more than 2.4 million people received benefits under the extension, which adds 20 to 33 weeks on top of the 26 weeks typically provided by states.

About 288,000 people also are receiving benefits under state emergency programs, bringing the total jobless benefit rolls to nearly 8.8 million that week. The extended benefits data lags initial claims by two weeks.

On the economy front, the Commerce Department said the economy declined at a 5.5 percent annual pace in the first quarter.

The revised reading on gross domestic product shows the economy from January through March did not fall as deeply as the 5.7 percent annualized decline reported a month ago.

Economists were predicting the government would stick with its previous estimate.

The main forces behind the small upgrade: businesses did not cut stockpiles of goods as much and imports dropped more sharply than previously estimated.

The rebound in consumer spending was a little less energetic.

Consumers bolstered their spending at a 1.4 percent growth rate, down from 1.5 percent estimated last month. Still, it marked the strongest showing in nearly two years and a huge improvement from the fourth quarter when skittish consumers cut spending by the most in nearly three decades.

All told, the report showed the economic damage inflicted by the recession, the longest since World War II. The worst financial crisis since the 1930s, a housing bust and hard-to-get credit have eaten into businesses’ sales and profits, forcing them to cut back production and jobs. In the final quarter of last year, the economy plunged at a 6.3 percent annualized pace, the most in a quarter-century.

Many analysts believe the economy is not sinking nearly as much now as the recession eases it grip on the country.

    U.S. Jobless Claims Rise; G.D.P Revised Upward, NYT, 26.6.2009, http://www.nytimes.com/2009/06/26/business/economy/26econ.html?hpw






City Seeks New Powers in Its Stalled Fight Against Homelessness


June 24, 2009
The New York Times


In June 2004, Mayor Michael R. Bloomberg made a lofty promise to address one of the city’s most intractable problems: he would reduce the homeless population of 38,000 by two-thirds in five years.

Today, with the total homeless population down only slightly, and with more families in shelters than five years ago, the administration is seeking state approval for a new set of policies designed to move families out more quickly, applying the same market-driven, incentive-based philosophy to homeless shelters that it has used in schools and antipoverty programs.

Under the new rules, nonprofit agencies that provide shelter beds under contract with the city would be paid more than the usual rate, which is roughly $100 a day, for each family that arrives. But after six months, if the agency has not been able to get the family into stable housing, the city would begin paying it less than the standard rate.

And city officials are trying to toughen rules and consequences for homeless families, forcing them to follow a strict code of conduct or risk being ejected from the shelter.

“The thing that we have been trying to introduce is a greater expectation of accountability, both by the providers and by the clients themselves,” Linda I. Gibbs, the deputy mayor for health and human services, said in an interview. “We want them to overcome homelessness more quickly. We believe they are in shelter far longer than they need to be.”

Shelter providers say that they are doing the best they can, and that the proposed payment structure could achieve the opposite of its intended result, especially since the city just imposed a 4 percent budget cut as part of reductions in virtually every city agency.

Christy Parque, the executive director of Homeless Services United, a coalition of more than 60 providers, said that further reductions “could result in an increased length of stay in shelter, because there will be fewer staff and resources to help clients address their problems and return to the community quickly.”

Advocates for the homeless called the city’s plans mean-spirited, and warned that they would threaten the safety of families, especially children, forced to leave the shelter with no place to go.

“It’s an extraordinary change in what has been city policy for nearly three decades,” said Steven Banks, the attorney in chief of the Legal Aid Society. “It’s striking that the current city administration and the current state administration would be returning to these shelter-termination regulations, which are really a relic of another, harsher era.”

The attempt to evict families from shelters began under Mayor Rudolph W. Giuliani, an effort that was blocked by the courts. The Bloomberg administration has been no more successful. In 2002, the city pursued a policy that would allow it to eject families it deemed uncooperative, but backed down and agreed to reserve the right to eject single adults, but not families.

Ms. Gibbs said that an ejection could result from a homeless family “refusing to look for housing, refusing to seek employment, anything that is an unreasonable refusal to participate in the steps they need to take to overcome their homelessness.”

“The families need to understand that they can’t just thumb their nose at the rules and have no consequences,” she said.

One thing is indisputable: While the population of homeless single adults has gone down significantly in the last five years, the number of families sleeping in shelters is near an all-time high. According to the Web site for the Department of Homeless Services, there were 34,774 people in shelters last week, including 9,361 families — often single mothers with children.

About 150 organizations that hold contracts with the city operate most of the homeless shelters. (The city runs a small handful of its own shelters.)

The cost of providing shelter has risen. The city estimates that it costs roughly $36,000 a year to house a homeless family, up from $31,656 in 2004. The average stay in a shelter is about nine months.

City officials have privately expressed frustration at their inability to get a handle on the problem, despite efforts to expand homelessness prevention and introduce rental subsidy programs.

The new policies reflect the administration’s determination to rid the system of families who stay in shelters for long stretches, sometimes rejecting apartments offered to them, while giving the shelter providers an incentive to get them out.

Under the new rules, which would take effect in January, the city would pay the agencies a 10 percent premium for the first six months that it houses a family. During that time, the agency is expected to push the family toward economic independence and permanent housing. But if the family stayed longer, the agencies would be paid 20 percent less than the standard rate.

But advocates for the homeless questioned the city’s ability to avoid bureaucratic mistakes that could result in a family being wrongly ejected.

In May, a state-mandated program to charge rent to the working homeless was quickly suspended after it began with a dizzying series of errors from both state and city agencies. (City officials say the program is being revamped.)

State approval is required to make changes to social service policies. Anthony Farmer, a spokesman for the State Office of Temporary and Disability Assistance, said the state commissioner was considering the proposals.

Robert V. Hess, the city’s commissioner of homeless services, said that the new policies would be put in place after a long rollout, staff training and orientation, and that ejections would occur only after a thorough review.

“At the end of the day, we’re not putting policies in place that are intended, or will result in, people just arbitrarily having their shelter rights terminated,” Mr. Hess said. “That’s not what we’re about.”

Bonnie Stone, the executive director of Women in Need, a shelter for women and children, praised the city for its ability to house an ever-increasing number of people who needed help.

But the notion of ejecting a family, she said, made her uneasy.

“I believe that you only do that under huge, huge safety and due process, and not for small things,” she said, pausing. “I think it is not what we do.”

At the moment, shelter residents who resist following rules are frequently subject to another form of punishment: transfer to a shelter seen as less desirable.

Tina Rodriguez, a pink-haired 23-year-old with a silver stud in her lip, said she and her toddler son, Damonie, had been living in a shelter in Hell’s Kitchen since September, and lately workers there had threatened that if she did not move out soon, she would be transferred to a so-called Next Step shelter. The city says such shelters offer more intensive case management, but among families, they are known for stricter rules and more crowded conditions.

Still, when Ms. Rodriguez was recently offered a studio apartment in Harlem, she rejected it. “I was scared to tell my worker that I didn’t want it,” she said, standing outside the Hell’s Kitchen shelter as Damonie slept in a stroller. “But there was no living room. I can’t live with a 2-year-old in an apartment like that. They’re trying to force me into somewhere that I’m not comfortable.”

Amanda Hayes, 24, said she entered the shelter system with her toddler, Xavier, in April after growing fed up with her living arrangements in the Bronx: sharing a one-bedroom apartment with her mother, adult brother and Xavier.

She needs no additional pressure from shelter workers to persuade her to move out, she said.

“I’ve been looking for work every day,” Ms. Hayes said. “I don’t need to be threatened about it at every turn.”

    City Seeks New Powers in Its Stalled Fight Against Homelessness, NYT, 24.6.2009, http://www.nytimes.com/2009/06/24/nyregion/24homeless.html







Real Consumer Protection


June 24, 2009
The New York Times


The federal consumer protection system failed the country, disastrously, in the years leading up to the mortgage crisis. One big cause was the sharing of responsibility for compliance with laws and regulations among several agencies that communicate poorly with each other and tend to put the bankers’ interests first and consumer protection second — if they pay attention to it all.

The Obama administration was right on the mark last week when it recognized this problem and proposed a solution: consolidating the far-flung responsibilities into a strong, new agency that focuses directly on consumer protection. The plan, modeled on a bill already introduced in the Senate by Richard Durbin, Democrat of Illinois, deserves broad support in Congress.

Before the current crisis, the lure of big money from Wall Street, which could not get enough of mortgage-backed securities, spread corruption right through the mortgage process. Banks and mortgage companies fed kickbacks to brokers, who often steered borrowers into high-risk, high-cost loans. Appraisers did their part by inflating property values so that people could borrow beyond their means.

Deceptive practices became the order of the day. Borrowers who thought they were getting traditional fixed-rate mortgages sometimes learned at the last minute that they had been given loans with escalating interest rates, exploding payments or complicated structures that they clearly did not understand.

Federal regulators were slow to recognize the rising threat to the economy. They were also vulnerable to “regulatory arbitrage” by the banks, which currently get to choose their own regulators. If one regulator seems too scrupulous, a bank can shift to another and then another, in search of the weakest possible oversight.

Federal regulators may even have accelerated the mortgage crisis by invalidating state laws that would have protected people from misleading and predatory lending practices. By pre-empting those tougher state laws, the regulators helped create an atmosphere in which risky lending practices became the norm.

The new agency envisioned by the Obama administration would put an end to this slippery practice. It would have authority over all banks, credit card companies, other credit-granting businesses and independent, nonbank mortgage companies, which are currently not covered by federal bank regulation.

One of the agency’s principal responsibilities would be to ensure that mortgage documents are clear and easy to understand. Federal rules would serve as a floor, not a ceiling, so that the states could pass even more stringent laws without fear of federal pre-emption. The administration also envisions a data-driven agency that would react swiftly to events like the ones that should have foreshadowed the subprime crisis.

In general, the new agency would require little in the way of new institutional infrastructure. As the administration notes in its proposal, three of the four federal banking agencies have mostly or entirely separated the consumer protection function from the rest of the agency. It would be a relatively simple matter to consolidate those divisions in a new, free-standing agency.

Congress should resist its typical urge to water down this plan for the special interests that write campaign checks but helped precipitate this crisis. Lawmakers need to bear in mind that consumer protection laws don’t just shield individuals. They also protect the economy. That’s a good argument for building a strong, effective consumer protection agency.

    Real Consumer Protection, NYT, 24.6.2009, http://www.nytimes.com/2009/06/24/opinion/24wed1.html?hpw






Despite Recession, High Demand for Skilled Labor


June 24, 2009
The New York Times


Just as the recession began, Chris McGrary, a manager at the Cianbro Corporation, set out to hire 80 “experienced” welders. Only now, 18 months later, is he completing the roster.

With the unemployment rate soaring, there have been plenty of applicants. But the welding test stumped many of them. Mr. McGrary found that only those with 10 years of experience — and not all of them — could produce a perfect weld: one without flaws, even in an X-ray. Flawless welds are needed for the oil refinery sections that Cianbro is building in Brewer, Me.

“If you don’t hire in a day or two, the ones that can do that,” Mr. McGrary said, “they are out the door and working for another company.”

Six million jobs have disappeared across the country since Mr. McGrary began his quest. The unemployment rate has risen precipitously to 9.4 percent, the highest level in nearly 30 years, and most of the jobs that do come open are quickly filled from the legions of seekers. But unnoticed in the government’s standard employment data, employers are begging for qualified applicants for certain occupations, even in hard times. Most of the jobs involve skills that take years to attain.

Welder is one, employers report. Critical care nurse is another. Electrical lineman is yet another, particularly those skilled in stringing high-voltage wires across the landscape. Special education teachers are in demand. So are geotechnical engineers, trained in geology as well as engineering, a combination sought for oil field work. Respiratory therapists, who help the ill breathe, are not easily found, at least not by the Permanente Medical Group, which employs more than 30,000 health professionals. And with infrastructure spending now on the rise, civil engineers are in demand to supervise the work.

“Not newly graduated civil engineers,” said Larry Jacobson, executive director of the National Society of Professional Engineers. “What’s missing are enough licensed professionals who have worked at least five years under experienced engineers before taking the licensing exam.”

While these workers might be lured away by higher offers in a robust economy, they should be more plentiful when overall business demand is as slack as it is now.

For these hard-to-fill jobs, there seems to be a common denominator. Employers are looking for people who have acquired an exacting skill, first through education — often just high school vocational training — and then by honing it on the job. That trajectory, requiring years, is no longer so easy in America, said Richard Sennett, a New York University sociologist.

The pressure to earn a bachelor’s degree draws young people away from occupational training, particularly occupations that do not require college, Mr. Sennett said, and he cited two other factors. Outsourcing interrupts employment before a skill is fully developed, and layoffs undermine dedication to a single occupation. “People are told they can’t get back to work unless they retrain for a new skill,” he said.

None of this deterred Keelan Prados from pursuing a career as a welder, one among roughly 200,000 across the nation. At 28, he has more than a decade of experience, beginning when he was a teenager, building and repairing oil field equipment in his father’s shop in Louisiana. Marriage to a Canadian brought the Pradoses to Maine, near her family. And before Mr. Prados joined Cianbro, an industrial contractor, he ran his own business, repairing logging equipment out of a welding and machine shop on the grounds of his home in Brewer.

The recession dried up that work, and last December, he answered one of Mr. McGrary’s ads. “I welded a couple of pieces of plate together for them and two pipes, and they were impressed,” Mr. Prados said. In less than two weeks, he was at work on Cianbro’s oil refinery project, earning $22 an hour and among the youngest of Mr. McGrary’s hires, most of whom are in their mid-30s to early 40s.

The Bureau of Labor Statistics does not track how often Mr. Prados’s experience — applying for a job and quickly being offered it — is repeated in America in the midst of huge and protracted unemployment. A bureau survey counts the number of job openings and the number of hires, but the data is not broken down by occupation.

The Conference Board, a business organization in New York, comes closer. In a monthly count of online job openings — listed on Monster.com and more than 1,200 similar Web sites — it breaks the advertised openings into 22 broad occupational categories and compares those with the number of unemployed whose last job, according to the bureau, was in each category. In only four of the categories — architecture and engineering, the physical sciences, computer and mathematical science, and health care — were the unemployed equal to or fewer than the listed job openings. There were, in sum, 1.09 million listed openings and only 582,700 unemployed people presumably available to fill them.

The Conference Board’s hard-to-fill openings include registered nurses, but the shortage is not as great as it was before the recession, particularly in battered states like Michigan and Ohio, said Cheryl Peterson, a director of the American Nurses Association.

“Until the downturn, it was easy for experienced registered nurses to find employment right in their communities, in whatever positions they wanted,” Ms. Peterson said. “Now it is a little more difficult because the number of job openings has fallen and we have more retired nurses, in need of income, coming back.”

That does not hold for nurses who have a decade of experience caring for critically ill people, particularly in hospital recovery rooms, said Dr. Robert Pearl, chief executive and chairman of the Permanente Medical Group, a big employer of medical professionals. “There are probably more nurses recently trained than there are jobs for them,” he said, “but for those with the highest level of skill and experience, there are always openings.” And at $100,000 in pay.

That is also the case for geological engineers like Diane Oshlo, who was hired last month by Kleinfelder, a professional services firm headquartered in San Diego that takes on big projects, like the environmental cleanup work Ms. Oshlo is doing in Corpus Christi, Tex., at the site of an inactive oil refinery. Engineers like her, skilled in petroleum, are in short supply, and those who are also professional geologists are even rarer.

That made Ms. Oshlo, 50, a hot prospect when she decided to relocate from Chicago, where she had lived for years, doing similar work for a similar firm. Margaret Duner, a Kleinfelder recruiter, spotted her résumé when it arrived in the spring in response to a job ad, and quickly brought her into the hiring process. “Diane stood out,” Ms. Duner said.

Two other firms to which Ms. Oshlo sent résumés also quickly offered work. What swayed her was not the $65,000 salary — there will be raises and bonuses soon, Ms. Duner said — but Kleinfelder’s willingness to pay to move her to Corpus Christi.

“I told the two others I couldn’t wait,” Ms. Oshlo said. “They offered roughly the same pay, but they weren’t sure about the relocation package.”

    Despite Recession, High Demand for Skilled Labor, NYT, 24.6.2009, http://www.nytimes.com/2009/06/24/business/24jobs.html






Behind the Scenes, Fed Chief Advocates Bigger Role


June 24, 2009
The New York Times


WASHINGTON — During the debate over financial regulation, the Federal Reserve chairman, Ben S. Bernanke, has been surprisingly quiet.

But behind the scenes, he has been a forceful proponent of giving the Fed more power, both defending his management of the economic crisis and arguing that more authority would help the agency act more decisively to reduce the chances of a recurrence, according to interviews with lawmakers and officials from the Fed, the Treasury and the White House.

Despite criticism by some lawmakers that the Fed failed to anticipate the problems that led to the crisis, Mr. Bernanke has told associates that such critics fail to recognize the extraordinary actions taken by the central bank over the last year.

Mr. Bernanke believes the Fed’s actions have played a major role in averting a possible second Great Depression, according to government officials who know his thinking. Those steps, the Fed chairman has told these people, demonstrate that the agency is up to the larger task assigned to it by the Obama administration.

Mr. Bernanke has one important champion — President Obama. On Tuesday, the president reinforced his preference for an enlarged role for the Fed in a news conference at the White House.

The administration’s proposals for a regulatory overhaul are built around the idea “that there’s got to be somebody who is responsible not just for monitoring the health of individual institutions, but somebody who’s monitoring the systemic risks of the system as a whole,” Mr. Obama said. “And we believe that the Fed has the most technical expertise and the best track record in terms of doing that.”

He said that while the Fed was not blameless, it was not fair to single it out for failing to avert the crisis.

“I think that the Fed probably performed better than most other regulators prior to the crisis taking place, but I think they’d be the first to acknowledge that in dealing with systemic risk and anticipating systemic risk, they didn’t do everything that needed to be done,” Mr. Obama said.

The president and Mr. Bernanke do not, however, see eye-to-eye over whether to create a Consumer Financial Protection Agency, part of which would be carved out of the Fed’s existing jurisdiction over mortgages and credit cards.

Breaking ranks with the administration, Mr. Bernanke is expected to tell Congress that the Fed would prefer to keep the responsibility for consumer lending. He is also expected to promise a stronger emphasis on consumer debt issues in the future.

Mr. Bernanke’s surrogate in the debate has been the Treasury secretary, Timothy F. Geithner, who in Congressional testimony, speeches and interviews has praised the Federal Reserve’s performance.

(Mr. Geithner’s views may also have reflected his pedigree. He joined the administration after serving five years as president of the New York Federal Reserve, where he worked closely with Mr. Bernanke.)

Mr. Bernanke has been reluctant to get involved in the political debate, but has argued to associates and lawmakers that the often-mentioned alternative of a council supervising the largest firms would not be nimble or accountable enough.

He also has said that the plan is not a radical departure from the Fed’s current role. The Fed is already the umbrella supervisor of virtually all of Wall Street’s largest institutions, and the Obama plan would add only a handful of new companies to the Fed’s oversight list. The Fed so far has not specified which companies it would add to its purview, but once it decides, it is expected to make the list public.

The biggest impact, government officials said, is not in the number of institutions the Fed regulates, but in how it regulates them. It will have to go beyond measuring the financial safety of institutions to examining their connections to other firms and markets, and the dangers those connections could pose.

By possibly requiring the largest institutions to hold more capital against losses or to reduce the amount of debt they carry, for example, the Fed could make firms less profitable and less competitive with their smaller rivals. That in turn could prompt some of the largest institutions to decide to shrink, either by borrowing and lending less, or selling off units.

Fed officials said they expected that new capital requirements would be tailored to the risks and strengths of each bank.

They and top administration officials disagree that the Fed’s new authority amounts to overseeing “too big to fail” banks. Under the plan, the government would have explicit authority to seize any faltering institution that was judged an unacceptable risk to the overall financial system. As a result, the government would not have to guarantee creditors 100 cents on the dollar — and “too big to fail” would no longer be the default policy.

That breaks from the practice of last year, when creditors to the American International Group, Fannie Mae and Freddie Mac were repaid in full because Mr. Bernanke and Henry M. Paulson Jr., then the Treasury secretary, did not think the government had the legal authority to shut down nonbank institutions, or to choose which loans to repay in full and which to discount.

Mr. Bernanke has also told people that he finds it illogical that some lawmakers are citing the Fed’s failure years ago to curtail deceptive or abusive subprime loans as the reason for their objections to the administration’s plan.

In recent months, a series of new regulations issued by the Fed on mortgages and credit card policies issued under Mr. Bernanke have generally been applauded by consumer groups and some lawmakers, although Congress recently passed a law, which President Obama signed, to add some features. The new law requires banks and card companies to give 45 days’ notice before a change in interest rates and prohibits them from raising rates on existing balances unless a card holder falls 60 days behind on minimum payments.

Some critics have raised other concerns — that the Fed is stretching itself too thin, or compromising the political independence that is essential for setting monetary policy.

“The plan does give more power to the Fed and just complicates its job and therefore raises questions about its ultimate mission,” said John B. Taylor, a professor of economics at Stanford and a Treasury under secretary in the Bush administration. His book, “The Road Ahead for the Fed,” (Hoover Institution Press) is being published this week. “If the Fed goes further off its course and doesn’t focus on what it did in the 1980s and 1990s, it will have less control over inflation. It will lose its independence. It will have to become more political.”

Vincent R. Reinhart, a resident scholar at the American Enterprise Institute and former director of the Fed’s division of monetary affairs, said that policy makers needed to be concerned about mission creep.

“The main problem in becoming the systemic risk regulator is that it can be a very diffuse responsibility,” Mr. Reinhart said. “Should the Federal Reserve have been monitoring Enron and Long Term Capital Management and the Hunt brothers when they were involved in silver market manipulation?”

He added: “What is the ideal governor of the Fed supposed to be, someone who understands monetary policy, systemic risk, bank regulation, consumer affairs and Congressional relations? You are reaching the point where the agency is being spread pretty thin.”

Mr. Bernanke’s views, which have evolved as the financial crisis has unfolded, contrast markedly with those of his predecessor. Alan Greenspan, who said last year in his book “The Age of Turbulence” that the idea of the Fed as a systemwide regulator was “mission impossible.”

    Behind the Scenes, Fed Chief Advocates Bigger Role, NYT, 24.6.2009, http://www.nytimes.com/2009/06/24/business/economy/24fed.html






Op-Ed Contributor

A Fairer Credit Card? Priceless


June 23, 2009
The New York Times


Cambridge, Mass.

INDUSTRY representatives would have you believe that the Credit Card Accountability, Responsibility and Disclosure Act enacted last month spells the end of the credit card as we know it. President Obama’s proposal last week to create a Consumer Financial Protection Agency to enforce the law has increased the industry’s concerns.

But the example of cards issued by credit unions puts the lie to these claims. Credit unions largely conform to the new rules already, while profitably maintaining the basic features that users know and love.

The credit card act is under fire for limiting a number of fees commonly used in credit card contracts, like the charge for going over the credit limit and the increased interest rate that applies once a borrower has missed a payment. These changes might look like a boon for the average card user, but industry advocates claim that fees on delinquent borrowers subsidize the perks for those who pay on time. Take away the lucrative fees, the argument goes, and credit card issuers will be forced to ax free plane rides, slash generous credit limits and impose hefty annual dues for all.

Some in the industry even say that profitability would require issuers to charge interest from the moment of purchase, thus eliminating the grace period of interest-free lending that borrowers have long enjoyed.

These fears are largely unfounded. We have performed a study that compared credit cards issued by investor-owned banks to those issued by customer-owned credit unions. We found that credit unions are less likely to charge the fees and penalties that the new act hopes to eliminate — and when they do, they charge less than other issuers.

While virtually all banks and other for-profit issuers increase the interest rate if the borrower fails to make a minimum payment on time, most credit unions do not. Similarly, credit union fees for exceeding the credit limit are on average just half those of other issuers. But contrary to industry assertions, more responsible card users don’t pay the price. Credit union cards actually offer lower annual fees and longer grace periods than regular cards.

Is the lending model used by credit unions feasible for banks and other issuers? Absolutely. Banks and credit unions compete for customers in the same market. The primary distinguishing characteristic of credit unions is that they answer to a different group of owners: profits that are not reinvested are paid to the union’s shareholder-customers as a dividend, much as investor-owned banks reinvest or pay dividends to their shareholder-investors.

True, unlike typical banks, credit unions have the advantage of being exempt from corporate income taxes, thus some might argue that this gives them an edge. But this is a proportional tax on profits. In other words, if credit unions were not exempt from the tax, their model would still make profits, they would just retain less of them.

Credit union cards are a great test case for how regular cards will perform under the new law. The evidence so far suggests that the credit card act is likely to bring about moderate, and even positive, changes. Card issuers, after all, need to retain customers. Any bank that attempts to pad its bottom line by, say, levying large annual fees will likely see its customers flee to credit unions or to banks that emulate the credit union model.

To be sure, the new law will require some sacrifices. Our data indicate that rewards programs, for example, may become less generous or less common. But is this necessarily a bad thing? While you may be reluctant to sacrifice your airline miles, rewards programs are anything but free for the nation as a whole. Debt-laden and often low-income borrowers tend to pay high fees to subsidize the vacations of those who manage to pay on time.

Credit union cards demonstrate that punishing fees are not an essential ingredient of profitable lending. This should help assuage fears that the credit card act will bring disaster for credit cards. Rather, it should nudge them toward the gentler credit union model that many Americans already enjoy.


Ryan Bubb and Alex Kaufman are doctoral candidates in economics at Harvard.

    A Fairer Credit Card? Priceless, NYT, 23.6.2009, http://www.nytimes.com/2009/06/23/opinion/23kaufman.html






States Turning to Last Resorts in Budget Crisis


June 22, 2009
The New York Times


In Hawaii, state employees are bracing for furloughs of three days a month over the next two years, the equivalent of a 14 percent pay cut. In Idaho, lawmakers reduced aid to public schools for the first time in recent memory, forcing pay cuts for teachers.

And in California, where a $24 billion deficit for the coming fiscal year is the nation’s worst, Gov. Arnold Schwarzenegger has proposed releasing thousands of prisoners early and closing more than 200 state parks.

Meanwhile, Maine is adding taxes on candy and ski tickets, Wisconsin on oil companies, and Kentucky on alcohol and cellphone ring tones.

With state revenues in a free fall and the economy choked by the worst recession in 60 years, governors and legislatures are approving program cuts, layoffs and, to a smaller degree, tax increases that were previously unthinkable.

All but four states must have new budgets in place less than two weeks from now — by July 1, the start of their fiscal year. But most are already predicting shortfalls as tax collections shrink, unemployment rises and the stock market remains in turmoil.

“These are some of the worst numbers we have ever seen,” said Scott D. Pattison, executive director of the National Association of State Budget Officers, adding that the federal stimulus money that began flowing this spring was the only thing preventing widespread paralysis, particularly in the areas of education and health care. “If we didn’t have those funds, I think we’d have an incredible number of states just really unsure of how they were going to get a new budget out.”

The states where the fiscal year does not end June 30 are Alabama, Michigan, New York and Texas.

Even with the stimulus funds, political leaders in at least 19 states are still struggling to negotiate budgets, which has incited more than the usual drama and spite. Governors and legislators of the same party are finding themselves at bitter odds: in Arizona, Gov. Jan Brewer, a Republican, sued the Republican-controlled Legislature earlier this month after it refused to send her its budget plan in hopes that she would run out of time to veto it.

In Illinois, the Democratic-led legislature is fighting a plan by Gov. Patrick J. Quinn, also a Democrat, to balance the new budget by raising income taxes. And in Massachusetts, Gov. Deval Patrick, a Democrat, has threatened to veto a 25 percent increase in the state sales tax that Democratic legislative leaders say is crucial to help close a $1.5 billion deficit in the new fiscal year.

“Legislators have never dealt with a recession as precipitous and rapid as this one,” said Susan K. Urahn, managing director of the Pew Center on the States. “They’re faced with some of the toughest decisions legislators ever have to make, for both political and economic reasons, so it’s not surprising that the environment has become very tense.”

In all, states will face a $121 billion budget gap in the coming fiscal year, according to a recent report by the National Conference of State Legislatures, compared with $102.4 billion for this fiscal year.

The recession has also proved politically damaging for a number of governors, not least Jon Corzine of New Jersey, whose Republican opponent in this year’s race for governor has tried to make inroads by blaming the state’s economic woes on him. Mr. Schwarzenegger, who sailed into office on a wave of popularity in 2003, will leave in 2011 — barred by term limits from running again — under the cloud of the nation’s worst budget crisis. And the bleak economy has played a major role in the waning popularity of Gov. David A. Paterson of New York.

Over all, personal income tax collections are down by about 6.6 percent compared with last year, according to a survey by Mr. Pattison’s group and the National Governors Association. Sales tax collections are down by 3.2 percent, the survey found, and corporate income tax revenues by 15.2 percent. (Although New Jersey announced last week that a tax amnesty program had brought in an unexpected $400 million — a windfall that caused lawmakers to reconsider some of the deeper cuts in a $28.6 billion budget they were set to approve in advance of the July 1 deadline.)

As a result, governors have recommended increasing taxes and fees by some $24 billion for the coming fiscal year, the survey found. This is on top of more than $726 million they sought in new revenues this year.

The proposals include increases in personal income tax rates — Gov. Edward G. Rendell of Pennsylvania has proposed raising the state’s income tax by more than 16 percent, to 3.57 percent from 3.07 percent, for three years — and tax increases on myriad consumer goods.

“They have done a fair amount of cutting and will probably do some more,” said Ray Scheppach, executive director of the governors association. “But as they look out over the next two or three years, they are also aware that when this federal money stops coming, there is going to be a cliff out there.”

Raising revenues is the surest way to ensure financial stability after the stimulus money disappears, Mr. Scheppach added, saying, “You’re better off to take all the heat at once and do it in one package that gets you through the next two, three or four years.”

While state general fund spending typically increases by about 6 percent a year, it is expected to decline by 2.2 percent for this fiscal year, Mr. Pattison said. The last year-to-year decline was in 1983, he said, on the heels of a national banking crisis.

The starkest crisis is playing out in California, where lawmakers are scrambling to close the $24 billion gap after voters rejected ballot measures last month that would have increased taxes, borrowed money and reapportioned state funds.

Democratic legislative leaders last week offered alternatives to Mr. Schwarzenegger’s recommended cuts, including levying a 9.9 percent tax on oil extracted in the state and increasing the cigarette tax to $2.37 a pack, from 87 cents. But Mr. Schwarzenegger has vowed to veto any budget that includes new taxes, setting the stage for an ugly battle as the clock ticks toward the deadline.

“We still don’t know how bad it will be,” Ms. Urahn said. “The story is yet to be told, because in the next couple of weeks we will see some of the states with the biggest gaps have to wrestle this thing to the ground and make the tough decisions they’ve all been dreading.”

In one preview, Gov. Tim Pawlenty of Minnesota, a Republican, said last week that he would unilaterally cut a total of $2.7 billion from nearly all government agencies and programs that get money from the state, after he and Democratic legislative leaders failed to agree on how to balance the budget.

In an example of the countless small but painful cuts taking place, Illinois announced last week that it would temporarily stop paying about $15 million a year for about 10,000 funerals for the poor. Oklahoma is cutting back hours at museums and historical sites, Washington is laying off thousands of teachers, and New Hampshire wants to sell 27 state parks.

Nor will the pain end this year, Ms. Urahn said, even if the recession ends, as some economists have predicted. Unemployment could keep climbing through 2010, she said, continuing to hurt tax collections and increasing the demand for Medicaid, one of states’ most burdensome expenses.

“Stress on the Medicaid system tends to come later in a recession, and we have yet to see the depth of that,” Ms. Urahn said. “So you will see, for the next couple years at least, states really struggling with this.”

    States Turning to Last Resorts in Budget Crisis, NYT, 22.6.2009, http://www.nytimes.com/2009/06/22/us/22states.html?hp






Obama Pushes Financial Reforms


June 21, 2009
The New York Times


WASHINGTON — President Obama, striking a forceful tone, said that he will fight for his package to reform the financial regulatory system — unveiled on Wednesday — as he tried to drum up support for his proposed Consumer Financial Protection Agency.

In his weekly radio address aired Saturday morning, Mr. Obama promised to battle what he called special interests and to push hard for regulatory reform.

“The American people sent me to Washington to stand up for their interests,” he said. “And while I’m not spoiling for a fight, I’m ready for one.”

He took another punch at Washington and Wall Street—as he has been doing in the past, and characterized the need for regulatory reform as “necessary to end” the economic crisis now facing the country.

“As we continue to recover from an historic economic crisis, it is clear to everyone that one of its major causes was a breakdown in oversight that led to widespread abuses in the financial system,” Mr. Obama said. “An epidemic of irresponsibility took hold from Wall Street to Washington to Main Street. And the consequences have been disastrous. Millions of Americans have seen their life savings erode; families have been devastated by job losses; business large and small have closed their doors.”

The plan the president announced on Wednesday would give the Federal Reserve greater supervisory authority over large financial institutions whose problems pose potential risks to the economic system. It would separately expand the reach of the Federal Deposit Insurance Cooperation to seize and break up troubled financial institutions. And it would create a council of regulators, led by the Treasury secretary, to fill in regulatory gaps.

In doing so, the plan seeks to give Washington the tools to police the shadow system of finance that has grown up outside the government’s purview, and to make it easier for regulators to head off problems at large, troubled institutions or take control of them if they fail.

The Consumer Financial Protection Agency would require banks, mortgage lenders and credit card companies to provide consumers with a more nutritious diet, financially speaking. But the banking industry, which says it stands to lose billions of dollars, is bracing for a fight as the administration’s plan to overhaul the way the industry is regulated heads to Capitol Hill.

Banking officials have complained that the scope of the agency is too large. Obama administration officials, for their part, argue that banking regulators in the past have had an inherent conflict of interest between ensuring the safety and soundness of institutions and protecting consumers.

“It is true that this crisis was caused in part by Americans who took on too much debt and took out loans they simply could not afford,” Mr. Obama said. “But there are also millions of Americans who signed contracts they did not always understand offered by lenders who did not always tell the truth. Today, folks signing up for a mortgage, student loan, or credit card face a bewildering array of incomprehensible options. Companies compete not by offering better products, but more complicated ones — with more fine print and hidden terms. It’s no coincidence that the lack of strong consumer protections led to abuses against consumers; the lack of rules to stop deceptive lending practices led to abuses against borrowers.”

    Obama Pushes Financial Reforms, NYT, 21.6.2009, http://www.nytimes.com/2009/06/21/us/politics/21address.html?hp






Your Money

For Older Investors, Old Rules May Not Apply


June 20, 2009
The New York Times


The stock market’s damage has already been done. And if you’re one of those people near or already in retirement, you already know you’re going to have to work longer, save more or spend less.

But what should you do right now with the money you have left? Should you wade back into the stock market, if you bailed out when the market was plunging? Or if you watched your investments drop and then recover a little in the last few months, should you just hold on? What happens if the market doesn’t fully recover for a long time? (That happened in Japan in the ’90s.)

This economic downturn has been steep enough and frightening enough to undermine the idea that the stock market, over time, will always deliver. So a lot of investors have retreated to a more conservative stance.

The wisdom of that move is debatable. The investment industry warns that becoming too defensive is costly in the long run. Its argument goes something like this: People are living longer, retirement may last 25 or 30 years and stocks are supposed to protect you from the ravages of inflation. And since stocks tend to outpace most investments over long periods of time, the industry says, your savings will do all right in the end.

But some people are no longer comfortable with that logic. There’s even a new study that contends holding stocks over long periods of time may be riskier than previously thought. Robert F. Stambaugh, a finance professor at the Wharton School at the University of Pennsylvania and a co-author of the report, said most investment research only accounted for the risk of short-term market swings around the stock market’s average gain over time. It doesn’t factor in the fact, he said, that the average itself is subject to change.

So what should retirees and pre-retirees make of all of this?

“If another decline in the market is going to bankrupt you or put you out of business or destroy your retirement account, you should not go back into the stock market,” said John C. Bogle, the founder of Vanguard and viewed by many as the father of index investing. “It’s not complicated. The stock market can go up and down a lot and nobody really knows how much and when.”

What’s worked for Mr. Bogle may not work for you, but his method isn’t a bad place to start. “I have this threadbare rule that has worked very well for me,” he said in an interview this week. “Your bond position should equal your age.” Mr. Bogle, by the way, is 80 years old.

That’s a rather conservative recommendation, by many financial planners’ standards. In fact, Vanguard itself offers products that are more aggressive. Its target-date funds — whose investment mix grows more conservative as retirement nears — recommend that people retiring in 2010 (generally, people who are 65) should split their savings evenly between stock and bonds.

Charles Schwab, by contrast, has recently reduced the risk for its target-date funds. The company’s 2010 fund will allocate about 40 percent to stock funds next year, down from 50 percent in the past. “It’s a reflection that our clients’ appetite for risk has changed,” said Peter Crawford, a senior vice president at Charles Schwab Investment Management.

But you shouldn’t simply view your investments through the lens of how much you allocate to different investments (though you will need to come up with a plan). Instead, you should work your way backward. First, consider how much you will need to live when you’re retired and then figure out how you’ll pay for it.

Nearing Retirement

Ideally, you should have started to slowly shrink your stock position over your working career. But some financial planners have become more conservative about that. Before the market’s sharp downturn, Warren McIntyre, a financial planner in Troy, Mich., typically reduced his clients’ stock allocations by about 1 percent each year. Now, for older investors, he ratchets down their stocks by 2 percent each year once they reach 60. So a 65-year-old’s investments would be evenly split between stocks and bonds.

Other planners are taking even more defensive positions. “We are still very concerned about the status of the economic recovery and remain quite defensive as a result,” said Chip Addis, a financial planner in Wayne, Pa., who invests his clients’ portfolios in only 40 percent stocks.

Of course, there’s no one formula. Milo Benningfield, a fee-only planner in San Francisco, for instance, said he put a 61-year-old client in a portfolio with 60 percent in diversified stocks and alternatives (like real estate) and 40 percent in fixed-income (largely split among high-quality, short-term and intermediate-term bonds and cash). But this client can afford to take that risk — the client owns a house, rental property and has other holdings outside the portfolio.

The picture may change for pre-retirees who are 61 and close to meeting their savings goals, but can’t afford to lose any money. “We would ask ourselves to what degree, if any, can you afford equities,” Mr. Benningfield said. If inflation was their only concern, he might invest their money across a ladder of Treasury Inflation-Protected Securities, or TIPS, which are backed by the government and keep pace with inflation.

But since retirees generally spend money on entertainment, health care and food — whose costs often exceed the general rate of inflation — he said he might invest 40 to 50 percent of their money in a portfolio of diversified stock funds (with at least 30 percent of that in international stock funds). But, he added, “Cash is risky, stocks and bonds are risky, life is risky.”

As to those investors who got out of stocks, Mr. Bogle said it might be time for some of them to get back in. “But I would take two years to do it,” he said. “Maybe average in over eight quarters, and do an eighth each quarter. I am just not in favor of doing things in a hurry or emotionally.”

And then? “Don’t touch it,” he said, emphatically. “One of my rules is don’t do something. Just stand there.”


Several planners recommended different variations on a similar strategy for retirees. Set aside anywhere from eight to 15 years of your expected expenses — that includes food, utilities, housing, insurance — in bonds and cash. That way, you’ll never have to tap your stock holdings at the worst possible moment.

“Once you have that in place, you feel like you can weather any economic storm,” said Chip Simon, a financial planner in Poughkeepsie, N.Y.

When you have figured out how much it costs to live each year, the next step is to see how much Social Security will cover. Whatever is left needs to be financed by your retirement portfolio. And the general rule of thumb is that you shouldn’t withdraw more than 4 percent of your portfolio (adjusted for inflation) each year.

There are different ways to invest your cash and bond holdings.

Rick Rodgers, a financial planner in Lancaster, Pa., invests 10 years of annual expenses in a bond ladder, with an equal amount coming due every six months. The ladder can include high-quality corporate bonds, Treasury notes, certificates of deposit or municipal bonds, depending on the retiree’s tax bracket. Mr. Simon takes a similar approach using a 15-year ladder of zero-coupon bonds. He says that investors can start building the ladder in their 50s, with the first rung coming due the year they retire.

Some advisers also say you can guarantee you’ll be able to cover your basic expenses by purchasing an immediate annuity from an insurance company. The annuity pays you a stream of income until you die. “You can buy four small ones from four insurers if you are worried about insolvency risk,” said Dallas L. Salisbury, president of the Employee Benefit Research Institute. “And if you are just worried about inflation protection, you can do TIPS.”

But you should probably delay any annuity purchases because payouts rise with interest rates. With current rates so low, and the possibility of inflation later, advisers said it’s best to wait a few years. You can also research inflation-adjusted annuities, but you’ll receive lower payouts in the beginning, Mr. Benningfield said, adding: “Less than most people can stomach.”

    For Older Investors, Old Rules May Not Apply, NYT, 20.6.2009, http://www.nytimes.com/2009/06/20/your-money/individual-retirement-account-iras/20money.html?hp






In Recession, Strategy Shifts for Big Chains


June 20, 2009
The New York Times


Shopping as we know it is on the brink of major change.

Hammered by the recession, some of the nation’s biggest retailers are seizing the moment to reinvent their business strategies. And the impact will mean both sweeping changes in the merchandise on their shelves and subtler alterations, like how many pantyhose to keep in stock.

High-end stores like Neiman Marcus, Saks and Coach will offer more midpriced merchandise. Many chains, including Wal-Mart, will carry less inventory and fewer brands. The likes of Sears and J. C. Penney will put self-service computers in stores so customers can browse collections or buy out-of-stock items. And retailers of all stripes will offer more exclusive merchandise and more attentive customer service.

One of the biggest changes consumers are likely to see is greater personalization and regionalization of merchandise.

An initiative known as “My Macy’s” requires the retailer’s merchandisers and other planners to go into stores each week to learn from the sales staff — who keep logs at the cash registers — what shoppers are requesting, snapping up or complaining about.

For instance, when strapless and bare-shouldered dresses were selling well everywhere except Salt Lake City and Pittsburgh, Macy’s employees in those stores knew the problem was that their customers wanted more modest dresses. So they passed that information on to the merchandisers. Out went the strapless dresses; in came dresses with cap sleeves. And sales went from lackluster to robust.

Under the new system it will not be unusual for a local Macy’s to stock the merchandise customers request, be it wide-width shoes or Sean John suits, and for those offerings to be different from the ones in a Macy’s store 100 miles away.

“I think what Macy’s is embarking on is perhaps the largest transformation in our company in a couple of decades,” said Terry J. Lundgren, president and chief executive.

The Macy’s change is just one example of a wide range of initiatives retailers are pursuing as they struggle to cope with an economy where sales are lower than they were just a few years ago.

At high-end stores, the era of ever-escalating prices on luxury goods appears to be over. In the future, consumers will still be able to buy chic brand names, but at a wider range of prices.

“Our customer loves our brands,” said Stephen I. Sadove, chairman and chief executive of Saks. “They don’t want to trade down to lower brands. But they want more of a range in price within the brands that they love.”

And that is what retailers intend to give them. Burton M. Tansky, president and chief executive of Neiman Marcus Group, told investors on a conference call last week that “we’re working with the designers to try and ease a portion of their collections into a new price range.”

Prices will also be lower at some “affordable luxury” chains, like Coach, which is increasing the proportion of handbags it sells for less than $300. About 50 percent of the company’s handbags will cost $200 to $300, in contrast to about 30 percent of handbags last year.

Another change is that consumers will have fewer brands from which to choose. Wal-Mart, Target, Home Depot, and PetSmart are just a few of the chains winnowing their brands. As Home Depot’s executive vice president for merchandising, Craig Menear, put it: consumers are “time-starved” and “looking for simplification in the entire shopping experience.”

That may delight minimalists, because it will be easier to find items on the shelves. But it also limits choice.

Another potential drawback for consumers is that stores may run out of stock more quickly than in the past because, as Mr. Lundgren of Macy’s explained, “retailers learned that you can’t get out of the merchandise that you ordered months before.”

“Instead,” he said, “you’re more likely to see retailers ordering fewer of each individual size and taking that risk that they’ll sell out and not capture every sale, rather than the risk of having too much inventory left over to mark down.”

Another trend is on the horizon: seasonal transitions for apparel will probably have shorter lead times. With strapped consumers buying only what they need when they need it, it has occurred to retailers that selling swimsuits to New Yorkers in early March is not necessarily a winning strategy. And so chains are beginning to work with suppliers to shorten the time between ordering and delivering merchandise.

Consumers will also see even more of the exclusive collaborations between retailers and prominent designers that are so prevalent today. That will help distinguish stores as well as avoid price wars because the same items will not be sold at multiple chains.

Yet another change will be the obliteration of any remaining divide between online and in-store shopping.

In Sears stores, “appliance research centers” with computers are enabling customers to compare local competitors’ prices. (If Sears does not offer the best price, it will match the lowest offer and hand over 10 percent of the difference.) Four J. C. Penney stores in Dallas are testing “FindMore” machines the size of arcade games, letting customers see every item J. C. Penney sells and find out if the item they want is in the store or online.

Shopping by cellphone will also become widespread.

“Everything we are developing is with a mind-set that it’s going to be running on a handset,” said J. C. Penney’s chief information officer, Thomas M. Nealon.

Despite all the new technology, consumers will be getting more attention from sales staff. During the last few years, retailers did not have to work hard to separate consumers from their dollars.

But those days are over. More middle-market chains are striving for Nordstrom-quality service to win customers. Even Home Depot has adopted its “most extensive customer service training ever,” its chairman and chief executive, Frank Blake, told investors and retailing analysts last week.

Of course, luxury chains have always featured a high level of attentiveness. But the chains say that in this economy, customers have heightened expectations. Saks, for one, has invested tens of millions of dollars in the last year on software that provides its sales staff easy access to information about client purchases and preferences, so that a returning customer might be greeted by a sales representative who recalls the shopper’s suit size and penchant for Christian Louboutin heels.

Economists and analysts forecast that it will take up to 10 years to return to 2007 levels of consumer spending — which makes now a good time for retailers to re-imagine the future. Paul A. Laudicina, chairman and managing officer of A. T. Kearney, the management consulting firm, noted that major consumer innovations like Neoprene and Teflon came out of the Depression.

Mr. Lundgren pointed out that if consumers were still throwing money around, stores might not want to alter strategies that were still working.

But with today’s recession, he said, “now is the time to aggressively rock the boat.”

    In Recession, Strategy Shifts for Big Chains, NYT, 20.6.2009, http://www.nytimes.com/2009/06/20/business/20retail.html?hp






Retailing Era Closes With Music Megastore


June 15, 2009
The New York Times


The sounds of the Velvet Underground echoed in the Virgin Megastore in Union Square on Sunday afternoon, as bargain-hunting passers-by and hard-core music shoppers poked through what few items remained at the last large-scale record store in New York City.

It was the final day of business for the Virgin Megastore chain in North America, which at its peak had 23 locations but by Sunday was down to two: the 57,000-square-foot, two-level New York outlet, and a smaller Hollywood shop that was also set to close. In Union Square posters trumpeted 90 percent discounts and offered the sale of “all furniture and equipment.” But when the store opened, perhaps 90 percent of the merchandise had already been sold, leaving two tables of CDs and DVDs, a dozen T-shirt racks and a few other scattered displays.

With the music industry stuck in a decade-long crisis, the sight of a record store closing is hardly surprising. But for many shoppers at Union Square on Sunday the loss of a big outlet in one of the most heavily trafficked areas of the city was particularly dispiriting.

“Unfortunately the large retail music store is a dinosaur,” said Tony Beliech, 39, a former Virgin employee who was lugging around an armful of CDs that he said would cost him no more than $20. “It does matter because it was also a social gathering space, and that’s one thing that buying music online lacks.”

Dozens of smaller record stores are still open in New York, and at least 2,000 independent shops exist around the country, according to the Almighty Institute of Music Retail, a market research company. Many of those independents have banded together to promote events like Record Store Day, which had its second anniversary in April. They are also promoting Vinyl Saturday on June 20, which will feature specially produced records by artists like Wilco and Modest Mouse to draw customers.

But the record store ranks have been severely thinned in recent years, and New York, once home to at least three large-scale music chains, now has none. Last month Virgin shut down its other New York Megastore, in Times Square. (There are still Virgin Megastores in Europe and the Middle East, but under different ownership.) HMV — like Virgin, of British origin — pulled out of the American market in 2004; Tower Records closed its 89 American stores in 2006. Trans World Entertainment, which operates the FYE chain, has closed at least 280 of its locations over the last two years, leaving it with about 700, but none comparable in size to the Virgin Megastore.

“It’s clear that the model of the large entertainment specialist working in a large space is not going to work in the future,” said Simon Wright, the chief executive of Virgin Entertainment Group, North America.

To an extent the closings are a result of the overall drop in music sales. From the industry’s peak in 2000 — when some 785 million albums were sold — until the end of 2008, album sales fell 45 percent, according to Nielsen SoundScan. Even with the rise of iTunes and other online outlets, however, CDs have remained consumers’ format of choice, though that advantage is slipping. As recently as 2006, CDs accounted for more than 90 percent of album sales. Last year that proportion dropped to 84 percent, and so far in 2009 it is 77 percent. As many as two-thirds of all album sales are made at large chains like FYE, Wal-Mart and Best Buy, according to industry estimates.

“The Titanic that is physical media started slowly sinking in 2000,” said Michael McGuire, an analyst with Gartner, a market research firm, when asked about Virgin. “Certainly this is a traumatic event for those who worked there, but it’s an expected product of the digital transition.”

But the end of Virgin is also a product of business concerns unrelated to music. Its first American store was opened in 1992 in Los Angeles, and it set itself apart from rivals by developing a clublike atmosphere with booming sound systems and by offering steep discounts. “The indies learned from them and applied that to our stores,” said Michael Kurtz, president of the Music Monitor Network, a coalition of about 100 independent retailers.

As CD sales declined, the Megastores remained profitable by offering T-shirts, DVDs and other items. The Times Square outlet, for example, had annual sales in excess of $50 million, according to company reports, making it by many industry estimations the highest-volume record store in the United States.

In 2007 Virgin’s North American branch was bought by two real estate firms, Related Companies and Vornado Realty Trust, and in a Reuters interview last year an executive from Vornado made it clear that the chain’s true value was not in its sales but in the real estate that its stores occupied. In both Times Square and Union Square, analysts say, Virgin’s rent was a fraction of the going rate.

Forever 21, a fashion chain, is taking over the Times Square store; a spokeswoman for Related Companies said it was in negotiations for the Union Square site but declined to identify any potential new tenants.

At Union Square on Sunday most new and popular titles had long since been gobbled up. In relative abundance, however, were Virgin-branded black T-shirts ($1), Guitar Hero action figures ($1.39) and a variety of Jonas Brothers memorabilia. Yet there were still some hidden gems. Mr. Beliech, the customer and former employee, scored CDs by, among others, the British folk-experimental group Current 93 and the hyperkinetic Japanese band Melt-Banana.

Max Redinger, 14, who was walking his dog, picked up some anime books and Guitar Hero figures. He said he buys most of his music on iTunes but still likes going to record stores and mentioned that a friend had recently introduced him to an independent shop upstate.

“I don’t really buy stuff from it,” Mr. Redinger said, “but it’s a really cool place.”

    Retailing Era Closes With Music Megastore, NYT, 15.6.2009, http://www.nytimes.com/2009/06/15/arts/music/15virgin.html






AP: Weak Security Opens Door to Credit Card Hacks


June 15, 2009
Filed at 11:11 a.m. ET
The New York Times


Every time you swipe your credit card and wait for the transaction to be approved, sensitive data including your name and account number are ferried from store to bank through computer networks, each step a potential opening for hackers.

And while you may take steps to protect yourself against identity theft, an Associated Press investigation has found the banks and other companies that handle your information are not being nearly as cautious as they could.

The government leaves it to card companies to design security rules that protect the nation's 50 billion annual transactions. Yet an examination of those industry requirements explains why so many breaches occur: The rules are cursory at best and all but meaningless at worst, according to the AP's analysis of data breaches dating to 2005.

It means every time you pay with plastic, companies are gambling with your personal data. If hackers intercept your numbers, you'll spend weeks straightening your mangled credit, though you can't be held liable for unauthorized charges. Even if your transaction isn't hacked, you still lose: Merchants pass to all their customers the costs they incur from fraud.

More than 70 retailers and payment processors have disclosed breaches since 2006, involving tens of millions of credit and debit card numbers, according to the Privacy Rights Clearinghouse. Meanwhile, many others likely have been breached and didn't detect it. Even the companies that had the payment industry's top rating for computer security, a seal of approval known as PCI compliance, have fallen victim to huge heists.

Companies that are not compliant with the PCI standards -- including one in 10 of the medium-sized and large retailers in the United States -- face fines but are left free to process credit and debit card payments. Most retailers don't have to endure security audits, but can evaluate themselves.

Credit card providers don't appear to be in a rush to tighten the rules. They see fraud as a cost of doing business and say stricter security would throw sand into the gears of the payment system, which is built on speed, convenience and low cost.

That is of little consolation to consumers who bet on the industry's payment security and lost.

It took four months for Pamela LaMotte, 46, of Colchester, Vt., to fix the damage after two of her credit card accounts were tapped by hackers in a breach traced to a Hannaford Bros. grocery store.

LaMotte, who was unemployed at the time, says she had to borrow money from her mother and boyfriend to pay $500 in overdraft and late fees -- which were eventually refunded -- while the banks investigated.

''Maybe somebody who doesn't live paycheck to paycheck, it wouldn't matter to them too much, but for me it screwed me up in a major way,'' she said. LaMotte says she pays more by cash and check now.

It all happened at a supermarket chain that met the PCI standards. Someone installed malicious software on Hannaford's servers that snatched customer data while it was being sent to the banks for approval.

Since then, hackers plundered two companies that process payments and had PCI certification. Heartland Payment Systems lost card numbers, expiration dates and other data for potentially hundreds of millions of shoppers. RBS WorldPay Inc. got taken for more than 1 million Social Security numbers -- a golden ticket to hackers that enables all kinds of fraud.

In the past, each credit card company had its own security rules, a system that was chaotic for stores.

In 2006, the big card brands -- Visa, MasterCard, American Express, Discover and JCB International -- formed the Payment Card Industry Security Standards Council and created uniform security rules for merchants.

Avivah Litan, a Gartner Inc. analyst, says retailers and payment processors have spent more than $2 billion on security upgrades to comply with PCI. And the payment industry touts the fact that 93 percent of big retailers in the U.S., and 88 percent of medium-sized ones, are compliant with the PCI rules.

That leaves plenty of merchants out, of course, but the main threat against them is a fine: $25,000 for big retailers for each month they are not compliant, $5,000 for medium-sized ones.

Computer security experts say the PCI guidelines are superficial, including requirements that stores run antivirus software and install computer firewalls. Those steps are designed to keep hackers out and customer data in. Yet tests that simulate hacker attacks are required just once a year, and businesses can run the tests themselves.

''It's like going to a doctor and getting your blood pressure read, and if your blood pressure's good you get a clean bill of health,'' said Tom Kellermann, a former senior member of the World Bank's Treasury security team and now vice president of security awareness for Core Security Technologies, which audited Google's Internet payment processing system.

Merchants that decide to hire an outside auditor to check for compliance with the PCI rules need not spend much. Though some firms generally charge about $60,000 and take months to complete their inspections, others are far cheaper and faster.

''PCI compliance can cost just a couple hundred bucks,'' said Jeremiah Grossman, founder of WhiteHat Security Inc., a Web security firm. ''If that's the case, all the incentives are in the wrong direction. The merchants are inclined to go with the cheapest certification they need.''

For some inspectors, the certification course takes just one weekend and ends in an open-book exam. Applicants must have five years of computer security experience, but once they are let loose, there's little oversight of their work. Larger stores take it on themselves to provide evidence to auditors that they comply with the rules, leaving the door open for mistakes or fraud.

And retailers with fewer than 6 million annual card transactions -- a group comprising more than 99 percent of all retailers -- do not even need auditors. They can test and evaluate themselves.

At the same time, the card companies themselves are increasingly hands-off.

Two years ago, Visa scaled back its review of inspection records for the payment processors it works with. It now examines records only for payment processors with computer networks directly connected to Visa's.

In the U.S., that means fewer than 100 payment processors out of the 700 that Visa works with are PCI-compliant.

Visa's head of global data security, Eduardo Perez, said the company scaled back its records review because it took too much work and because the PCI standards have improved the industry's security ''considerably.''

''I think we've made a lot of progress,'' he said. ''While there have been a few large compromises, there are many more compromises we feel we've helped prevent by driving these minimum requirements.''

Representatives for MasterCard, American Express, Discover and JCB -- which, along with Visa, steer PCI policy -- either didn't return messages from the AP or directed questions to the PCI security council.

PCI's general manager, Bob Russo, said inspector certification is ''rigorous.'' Yet he also acknowledged that inconsistent audits are a problem -- and that merchants and payment processors who suffered data breaches possibly shouldn't have been PCI-certified. Those companies also might have easily fallen out of compliance after their inspection, by not installing the proper security updates, and nobody noticed.

The council is trying to crack down on shoddy work by requiring annual audits for the dozen companies that do the bulk of the PCI inspections. Smaller firms will be examined once every three years.

Those reviews merely scratch the surface, though. Only three full-time staffers are assigned to the task, and they can't visit retailers themselves. They are left to review the paperwork from the examinations.

The AP contacted eight of the biggest ''acquiring banks'' -- the banks that retailers use as middlemen between the stores and consumers' banks. Those banks are responsible for ensuring that retailers are PCI compliant. Most didn't return calls or wouldn't comment for this story.

Mike Herman, compliance managing director for Chase Paymentech, a division of JPMorgan Chase, said his bank has five workers reviewing compliance reports from retailers. Most of the work is done by phone or e-mail.

''We have faith in the certification process, and we really haven't doubted the assessors' work,'' Herman said. ''It's really the merchants that don't engage assessors; those get a little more scrutiny.''

He defended the system: ''Can you imagine how many breaches we'd have and how severe they'd be if we didn't have PCI?''

Supporters of PCI point out nearly all big and medium-sized retailers governed by the standard now say they no longer store sensitive cardholder data. Just a few years ago they did -- leaving credit card numbers in databases that were vulnerable to hackers.

So why are breaches still happening? Because criminals have sharpened their attacks and are now capturing more data as it makes its way from store to bank, when breaches are harder to stop.

Security experts say there are several steps the payment industry could take to make sure customer information doesn't leak out of networks.

Banks could scramble the data that travels over payment networks, so it would be meaningless to anyone not authorized to see it.

For example, TJX Cos., the chain that owns T.J. Maxx and Marshalls and was victimized by a breach that exposed as many as 100 million accounts, the most on record, has tightened its security but says many banks won't accept data in encrypted form.

PCI requires data transmitted across ''open, public networks'' to be encrypted, but that means hackers with access to a company's internal network still can get at it. Requiring encryption all the time would be expensive and slow transactions.

Another possibility: Some security professionals think the banks and credit card companies should start their own PCI inspection arms to make sure the audits are done properly. Banks say they have stepped up oversight of the inspections, doing their own checks of questionable PCI assessment jobs. But taking control of the whole process is far-fetched: nobody wants the liability.

PCI could also be optional. In its place, some experts suggest setting fines for each piece of sensitive data a retailer loses.

The U.S. might also try a system like Europe's, where shoppers need a secret PIN code and card with a chip inside to complete purchases. The system, called Chip and PIN, has cut down on fraud there (because it's harder to use counterfeit cards), but transferred it elsewhere -- to places like the U.S. that don't have as many safeguards.

A key reason PCI exists is that the banks and card brands don't want the government regulating credit card security. These companies also want to be sure transactions keep humming through the system -- which is why banks and card companies are willing to put up with some fraud.

''If they did mind, they have immense resources and could really change things,'' said Ed Skoudis, co-founder of security consultancy InGuardians Inc. and an instructor with the SANS Institute, a computer-security training organization. Skoudis investigates retail breaches in support of government investigations. ''But they don't want to strangle the goose that laid the golden egg by making it too hard to accept credit cards, because that's bad for everybody.''

    AP: Weak Security Opens Door to Credit Card Hacks, NYT, 15.6.2009, http://www.nytimes.com/aponline/2009/06/15/business/AP-US-TEC-Shoppers-Gamble.html






On Web and iPhone, a Tool to Aid Careful Shopping


June 15, 2009
The New York Times


SAN FRANCISCO — These days, every skin lotion and dish detergent on store shelves gloats about how green it is. How do shoppers know which are good for them and good for the earth?

It was a similar question that hit Dara O’Rourke, a professor of environmental and labor policy at the University of California, Berkeley, one morning when he was applying sunscreen to his young daughter’s face.

He realized he did not know what was in the lotion. He went to his office and quickly discovered that it contained a carcinogen activated by sunlight. It also contained an endocrine disruptor and two skin irritants. He also discovered that her soap included a kind of dioxane, a carcinogen, and then found that one of her brand-name toys was made with lead.

And in looking for the answer, he hatched the idea for a company that used his esoteric research on supply chain management. “All I do is study this, and I know nothing about the products I’m bringing into our house and putting in, on and around our family,” Mr. O’Rourke said. But when he wanted to find that information, he could. Most consumers would struggle to do so.

Hence GoodGuide, a Web site and iPhone application that lets consumers dig past the package’s marketing spiel by entering a product’s name and discovering its health, environmental and social impacts.

“What we’re trying to do is flip the whole marketing world on its head,” said Mr. O’Rourke. “Instead of companies telling you what to believe, customers are making the statements to the marketers about what they care about.”

A few years ago, Mr. O’Rourke noticed that at the end of his lectures, audience members were raising their hands to ask which kind of laptop or sneaker or lotion to buy. Americans are becoming increasingly interested in what is in the stuff they buy. (Mr. O’Rourke’s research caught mainstream interest once before when, in 1997, his report on Nike’s factories in Vietnam led to an uproar over that company’s labor conditions.)

Although the GoodGuide Web site, which started in September, had only 110,000 unique visitors in April, Mr. O’Rourke is encouraged that it is growing about 25 percent a month. Lately, interest in GoodGuide has begun to extend beyond techies and the Whole Foods crowd to the Wal-Mart crowd, as Mr. O’Rourke put it. One sign of that broader appeal: Apple recently featured the app in its iPhone ads.

GoodGuide’s office, in San Francisco, has 12 full-time and 12 part-time employees, half scientists and half engineers. They have scored 75,000 products with data from nearly 200 sources, including government databases, studies by nonprofits and academics, and the research by scientists on the GoodGuide staff. There are still holes in the data that GoodGuide seeks to fill.

Users enter a product’s name to get scores. For instance, Tom’s of Maine deodorant gets an 8.6 in part because it has no carcinogens, while Arrid XX antiperspirant rates a 3.8 because it contains known carcinogens. Another click leads to information behind the scores, like whether an ingredient causes reproductive problems or produces toxic waste, or whether the company has women and racial minorities in executive positions or faces labor lawsuits.

Mr. O’Rourke began gathering data in 2005 with the help of computer science graduate students at Berkeley and $300,000 from foundations. The do-gooder in Mr. O’Rourke, however, did not prevent him from seeing the commercial possibilities of what was being compiled.

Persuading venture capitalists to finance his idea was trickier. In 2007, he was rejected by dozens of firms over six months. The green tech investors were not interested in a start-up that did not make alternative energy. The Web investors were not interested in one that was not going to get 50 million users overnight and sell ads.

One of the most prominent Internet investors in Silicon Valley walked out of the room after snidely dismissing GoodGuide with: “Hmm, a noble cause.” GoodGuide eventually raised $3.7 million from New Enterprise Associates and Draper Fisher Jurvetson.

GoodGuide does not sell ads and does not plan to, in part because Mr. O’Rourke will not take money from a company whose product is rated on the site. It makes a small fee if customers click on links to Amazon.com or TheFind and buy the product.

The basic site will always be free, he says, but GoodGuide may someday charge subscription fees for personalized versions. It also plans to license data to governments and retailers. It could help a state avoid buying paper cups with ingredients from a certain country, for example, or enable a drugstore chain to list a product’s GoodGuide score next to the price tag.

This summer, GoodGuide will add a deeper database for users who want more detail by, for example, reading the academic studies on which ratings may be based. The next version of the iPhone will enable people to scan bar codes to get scores, rather than type in the product’s name.

Some companies, including Clorox and SC Johnson, have agreed in recent months to reveal more about the ingredients in their products because of gathering consumer concern. That will enable GoodGuide to fill gaps in its data. Federal law does not require makers of household products to list all ingredients.

“What we think of now as green is a marketing mirage,” usually based on a single environmentally friendly practice, said Daniel Goleman, author of “Ecological Intelligence,” who switched deodorants and shampoos because of GoodGuide. The site could potentially “have a revolutionary effect on industry and commerce,” he said, by educating shoppers about the ramifications of buying a particular product.

That could also be the problem with GoodGuide, said John R. Ehrenfeld, executive director of the International Society for Industrial Ecology. He worries that by collapsing dozens of data points into a single number, GoodGuide does not adequately inform consumers about each consequence of each ingredient.

“Consumers need to be very carefully educated as to what these scores mean if it’s going to serve the purpose GoodGuide says it does,” he said.

    On Web and iPhone, a Tool to Aid Careful Shopping, NYT, 15.6.2009, http://www.nytimes.com/2009/06/15/technology/internet/15guide.html?hpw






U.S. Trade Deficit Widens as Oil Moves Higher


June 11, 2009
The New York Times


As oil prices march higher, the United States trade deficit is again widening as consumers spend more on gasoline, the government reported on Wednesday.

The gap between what the United States sells to the rest of the world and the goods and services the country buys from foreign markets grew for a second month in April, the Commerce Department reported. The deficit widened to $29.2 billion from $28.5 billion in March as falling imports leveled off slightly and exports to other countries continued to slump.

The United States imported $150.3 billion worth of goods and services in April and exported $121.1 billion. Exports fell $2.8 billion in April from a month earlier, or 2.3 percent, and reached the lowest level since mid-2006. Imports fell a slightly smaller $2.2 billion.

Imports of crude oil rose $1 billion for the month, although the total value of crude-oil imports is down sharply this year compared with 2008. The United States also imported more consumer goods like pharmaceuticals, gems, jewelry and televisions.

The country’s exports of airplanes, industrial machines, automobiles and consumer goods fell for the month.

The balance of trade was roughly in line with economists’ expectations.

“The collapse in the global economy seems to be ending,” said James O’Sullivan, senior economist at UBS. “The global economy’s just not plunging the way it was. You’re not seeing outright growth yet, but it does look like the rate of decline has faded significantly.”

Even with crude-oil prices crossing $70 as the global economy struggles to right itself, the trade deficit is nowhere near the monthly imbalances of more than $60 billion last year, when oil crested at $145 a barrel and gasoline cost more than $4 a gallon. But economists expect that the gap between imports and exports could continue to grow if oil heads higher.

As the financial crisis erupted in the autumn, trade between the United States and the rest of the world plummeted, and the trade deficit narrowed sharply as oil prices crumbled and demand for foreign-made goods dried up and consumers began to save money they once spent freely.

    U.S. Trade Deficit Widens as Oil Moves Higher, NYT, 11.6.2009, http://www.nytimes.com/2009/06/11/business/economy/11econ.html






Economic Scene

America’s Sea of Red Ink Was Years in the Making


June 10, 2009
The New York Times


There are two basic truths about the enormous deficits that the federal government will run in the coming years.

The first is that President Obama’s agenda, ambitious as it may be, is responsible for only a sliver of the deficits, despite what many of his Republican critics are saying. The second is that Mr. Obama does not have a realistic plan for eliminating the deficit, despite what his advisers have suggested.

The New York Times analyzed Congressional Budget Office reports going back almost a decade, with the aim of understanding how the federal government came to be far deeper in debt than it has been since the years just after World War II. This debt will constrain the country’s choices for years and could end up doing serious economic damage if foreign lenders become unwilling to finance it.

Mr. Obama — responding to recent signs of skittishness among those lenders — met with 40 members of Congress at the White House on Tuesday and called for the re-enactment of pay-as-you-go rules, requiring Congress to pay for any new programs it passes.

The story of today’s deficits starts in January 2001, as President Bill Clinton was leaving office. The Congressional Budget Office estimated then that the government would run an average annual surplus of more than $800 billion a year from 2009 to 2012. Today, the government is expected to run a $1.2 trillion annual deficit in those years.

You can think of that roughly $2 trillion swing as coming from four broad categories: the business cycle, President George W. Bush’s policies, policies from the Bush years that are scheduled to expire but that Mr. Obama has chosen to extend, and new policies proposed by Mr. Obama.

The first category — the business cycle — accounts for 37 percent of the $2 trillion swing. It’s a reflection of the fact that both the 2001 recession and the current one reduced tax revenue, required more spending on safety-net programs and changed economists’ assumptions about how much in taxes the government would collect in future years.

About 33 percent of the swing stems from new legislation signed by Mr. Bush. That legislation, like his tax cuts and the Medicare prescription drug benefit, not only continue to cost the government but have also increased interest payments on the national debt.

Mr. Obama’s main contribution to the deficit is his extension of several Bush policies, like the Iraq war and tax cuts for households making less than $250,000. Such policies — together with the Wall Street bailout, which was signed by Mr. Bush and supported by Mr. Obama — account for 20 percent of the swing.

About 7 percent comes from the stimulus bill that Mr. Obama signed in February. And only 3 percent comes from Mr. Obama’s agenda on health care, education, energy and other areas.

If the analysis is extended further into the future, well beyond 2012, the Obama agenda accounts for only a slightly higher share of the projected deficits.

How can that be? Some of his proposals, like a plan to put a price on carbon emissions, don’t cost the government any money. Others would be partly offset by proposed tax increases on the affluent and spending cuts. Congressional and White House aides agree that no large new programs, like an expansion of health insurance, are likely to pass unless they are paid for.

Alan Auerbach, an economist at the University of California, Berkeley, and an author of a widely cited study on the dangers of the current deficits, describes the situation like so: “Bush behaved incredibly irresponsibly for eight years. On the one hand, it might seem unfair for people to blame Obama for not fixing it. On the other hand, he’s not fixing it.”

“And,” he added, “not fixing it is, in a sense, making it worse.”

When challenged about the deficit, Mr. Obama and his advisers generally start talking about health care. “There is no way you can put the nation on a sound fiscal course without wringing inefficiencies out of health care,” Peter Orszag, the White House budget director, told me.

Outside economists agree. The Medicare budget really is the linchpin of deficit reduction. But there are two problems with leaving the discussion there.

First, even if a health overhaul does pass, it may not include the tough measures needed to bring down spending. Ultimately, the only way to do so is to take money from doctors, drug makers and insurers, and it isn’t clear whether Mr. Obama and Congress have the stomach for that fight. So far, they have focused on ideas like preventive care that would do little to cut costs.

Second, even serious health care reform won’t be enough. Obama advisers acknowledge as much. They say that changes to the system would probably have a big effect on health spending starting in five or 10 years. The national debt, however, will grow dangerously large much sooner.

Mr. Orszag says the president is committed to a deficit equal to no more than 3 percent of gross domestic product within five to 10 years. The Congressional Budget Office projects a deficit of at least 4 percent for most of the next decade. Even that may turn out to be optimistic, since the government usually ends up spending more than it says it will. So Mr. Obama isn’t on course to meet his target.

But Congressional Republicans aren’t, either. Judd Gregg recently held up a chart on the Senate floor showing that Mr. Obama would increase the deficit — but failed to mention that much of the increase stemmed from extending Bush policies. In fact, unlike Mr. Obama, Republicans favor extending all the Bush tax cuts, which will send the deficit higher.

Republican leaders in the House, meanwhile, announced a plan last week to cut spending by $75 billion a year. But they made specific suggestions adding up to meager $5 billion. The remaining $70 billion was left vague. “The G.O.P. is not serious about cutting down spending,” the conservative Cato Institute concluded.

What, then, will happen?

“Things will get worse gradually,” Mr. Auerbach predicts, “unless they get worse quickly.” Either a solution will be put off, or foreign lenders, spooked by the rising debt, will send interest rates higher and create a crisis.

The solution, though, is no mystery. It will involve some combination of tax increases and spending cuts. And it won’t be limited to pay-as-you-go rules, tax increases on somebody else, or a crackdown on waste, fraud and abuse. Your taxes will probably go up, and some government programs you favor will become less generous.

That is the legacy of our trillion-dollar deficits. Erasing them will be one of the great political issues of the coming decade.

    America’s Sea of Red Ink Was Years in the Making, NYT, 10.6.2009, http://www.nytimes.com/2009/06/10/business/economy/10leonhardt.html?hp






Bank Accused of Pushing Subprime Deals on Blacks


June 7, 2009
The New York Times


As she describes it, Beth Jacobson and her fellow loan officers at Wells Fargo Bank “rode the stagecoach from hell” for a decade, systematically singling out blacks in Baltimore and suburban Maryland for high-interest subprime mortgages.

These loans, Baltimore officials have claimed in a federal lawsuit against Wells Fargo, tipped hundreds of homeowners into foreclosure and cost the city tens of millions of dollars in taxes and city services.

Wells Fargo, Ms. Jacobson said in an interview, saw the black community as fertile ground for subprime mortgages, as working-class blacks were hungry to be a part of the nation’s home-owning mania. Loan officers, she said, pushed customers who could have qualified for prime loans into subprime mortgages. Another loan officer stated in an affidavit filed last week that employees had referred to blacks as “mud people” and to subprime lending as “ghetto loans.”

“We just went right after them,” said Ms. Jacobson, who is white and said she was once the bank’s top-producing subprime loan officer nationally. “Wells Fargo mortgage had an emerging-markets unit that specifically targeted black churches, because it figured church leaders had a lot of influence and could convince congregants to take out subprime loans.”

Ms. Jacobson’s account and that of the other loan officer who gave an affidavit, Tony Paschal, both of whom have left Wells Fargo, provide the first detailed accusations of deliberate racial steering into subprimes by one of the nation’s top banks.

The toll taken by such policies, Baltimore officials argue, is terrible. Data released by the city as part of the suit last week show that more than half the properties subject to foreclosure on a Wells Fargo loan from 2005 to 2008 now stand vacant. And 71 percent of those are in predominantly black neighborhoods.

Judge Benson E. Legg of Federal District Court had asked the city to file the additional paperwork and has not decided whether the lawsuit can go forward.

Wells Fargo officials have declined detailed interviews since Baltimore filed suit in January 2008. In an e-mail statement on Friday, a spokesman said that only 1 percent of the city’s 33,000 foreclosures have come on Wells Fargo mortgages.

“We have worked extremely hard to make homeownership possible for more African-American borrowers,” wrote Kevin Waetke, a spokesman for Wells Fargo Home Mortgage. “We absolutely do not tolerate team members treating our customers or others disrespectfully or unfairly, or who violate our ethics and lending practices.”

City and state officials across the nation have investigated and sometimes sued Wells Fargo over its practices. The Illinois attorney general has investigated whether Wells Fargo Financial violated fair lending and civil rights laws by steering black and Latino homeowners into high-interest loans. New York’s attorney general, Andrew M. Cuomo, raised similar questions about the lending practices of Wells Fargo, JPMorgan Chase and Citigroup, among other banks.

The N.A.A.C.P. has filed a class-action lawsuit charging systematic racial discrimination by more than a dozen banks, including Wells Fargo.

At the heart of such charges is reverse redlining, specifically marketing the most expensive and onerous loan products to black customers.

The New York Times, in a recent analysis of mortgage lending in New York City, found that black households making more than $68,000 a year were nearly five times as likely to hold high-interest subprime mortgages as whites of similar or even lower incomes. (The disparity was greater for Wells Fargo borrowers, as 2 percent of whites in that income group hold subprime loans and 16.1 percent of blacks.)

“We’ve known that African-Americans and Latinos are getting subprime loans while whites of the same credit profile are getting the lower-cost loans,” said Eric Halperin, director of the Washington office of the Center for Responsible Lending. “The question has been why, and the gory details of this complaint may provide an answer.”

The affidavits of the two loan officers seem to bolster Baltimore’s lawsuit. Mr. Paschal, who is black and worked as a loan officer in Wells Fargo’s office in Annandale, Va., from 1997 to 2007, offers a sort of primer on Wells Fargo’s subprime marketing strategy by race.

In 2001, he states in his affidavit, Wells Fargo created a unit in the mid-Atlantic region to push expensive refinancing loans on black customers, particularly those living in Baltimore, southeast Washington and Prince George’s County, Md.

“They referred to subprime loans made in minority communities as ghetto loans and minority customers as ‘those people have bad credit’, ‘those people don’t pay their bills’ and ‘mud people,’ ” Mr. Paschal said in his affidavit.

He said a bank office in Silver Spring, Md., had an “affinity group marketing” section, which hired blacks to call on African-American churches.

“The company put ‘bounties’ on minority borrowers,” Mr. Paschal said. “By this I mean that loan officers received cash incentives to aggressively market subprime loans in minority communities.”

Both loan officers said the bank had given bonuses to loan officers who referred borrowers who should have qualified for a prime loan to the subprime division. Ms. Jacobson said that she made $700,000 one year and that the company flew her and other subprime officers to resorts across the country.

“I used to joke that ‘I’ll pay for your kids to go to private school if you give me clients,’ ” Ms. Jacobson said in the interview.

Loan officers employed other methods to steer clients into subprime loans, according to the affidavits. Some officers told the underwriting department that their clients, even those with good credit scores, had not wanted to provide income documentation.

“By doing this, the loan flipped from prime to subprime,” Ms. Jacobson said. “But there was no need for that; many of these clients had W2 forms.”

Other times, she said, loan officers cut and pasted credit reports from one applicant onto the application of another customer.

These practices took a great toll on customers. For a homeowner taking out a $165,000 mortgage, a difference of three percentage points in the loan rate — a typical spread between conventional and subprime loans — adds more than $100,000 in interest payments.

The accusations contained in the affidavits, which were given to Relman & Dane, a civil rights law firm working with the City of Baltimore, have not drawn a specific response from Wells Fargo. But city officials say the conclusion is clear.

“They confirm our worst fears: that this is not just a case based on a review of numbers and a statistical analysis,” said the city solicitor, George Nilson. “You don’t have to scratch your head and wonder if maybe this was just an accident. The behavior is pretty explicit.”

Both sides expect to appear in court at a hearing in the case in late June.


Janet Roberts contributed reporting.

    Bank Accused of Pushing Subprime Deals on Blacks, NYT, 7.6.2009, http://www.nytimes.com/2009/06/07/us/07baltimore.html?hp






Job Losses Slow; Unemployment at 9.4%


June 6, 2009
The New York Times


The United States economy lost 345,000 jobs in May, the government reported on Friday, a sharp slowing in the pace of job losses that fueled hopes that the economy was on its way toward stabilizing.

The recession continued to take a toll as the unemployment rate climbed to 9.4 percent, its highest point in a quarter-century. The rate — a measure of jobless people looking for work — rose more than expected, partly because more people were resuming the hunt for a job.

Economists were encouraged that businesses were cutting fewer jobs, but six million jobs have now disappeared since the recession began in December 2007, and 14.5 million people are now unemployed. They warned that job losses were likely to pile up through the rest of the year as the country’s labor market bottomed out. “These are still terrible numbers,” said Ian Shepherdson, chief United States economist at High Frequency Economics. “We’re a million miles away from a recovery.”

Financial markets nonetheless sensed recovery a bit nearer. Futures on the Dow Jones industrial average rose, and the price of oil shot above $70 a barrel for the first time since November, bolstered by hopes that demand would rebound as the global economy recovered.

In normal times, the loss of so many jobs in a single month would have been interpreted as a calamity. But 18 months into the longest recession since the 1930s, economists said the milder pace of job losses indicated that the economy was gradually leveling off as government stimulus money trickled out and businesses reined in their budgets and payrolls.

“Things are still getting worse, but the pace of decline has slowed down,” said David Wyss, chief economist at Standard & Poor’s. “Over all, it’s not quite as dire as it looked in the first quarter.”

The economy lost an average of more than 700,000 jobs per month during the first three months of the year as shocks from the credit crisis surged through the broader economy. But the pace of job losses eased to a revised 504,000 in April, a welcome sign that the decline in the job market would not continue forever.

Still, by nearly any measure, workers endured another brutal stretch of layoffs, furloughs and pink slips in May. Even as the broader economy made some halting steps toward recovery, businesses continued to slash their staffs and cut employee hours. Economists were expecting 520,000 job losses in May, and predicted the unemployment rate would reach 9.2 percent.

“There’s no question that the jobless rate is going to continue to rise,” said Bernard Baumohl, managing director of the Economic Outlook Group. “It’s a dismal job market. It’s going to remain awful easily for the balance of this year.”

Just this week, General Motors announced it was closing or idling 14 plants across the country, including several in Michigan, which has the nation’s highest unemployment rate. The closings will affect as many as 20,000 workers, and are just part of a vast reorganization by the automakers G.M. and Chrysler.

Across the country, parts suppliers, dealers and other workers tied to the auto industry are bracing for what comes next.

Some economists, anticipating an additional two million job losses nationwide, say the job market will be a disaster zone even after the economy starts to heal. After months of sharp economic contraction and falling profits, many employers will be reluctant to expand their work forces to meet the first increases in orders and sales.

Instead of hiring full-time workers, many employers are likely to hire temporary workers as needed, or have their extant employees work overtime. Economists said the length and severity of this recession will make businesses especially leery about re-inflating their payrolls once growth eventually resumes.

“Growth is going to be very sluggish,” Mr. Baumohl said. “Even when the economy begins to recover, we might be witnessing the mother of all jobless recoveries.”

That could be extremely problematic for people like Dante Whitfield, one of the approximately 24 million people out of work or forced to work part-time in the United States.

Since losing his job as a legal courier in February, Mr. Whitfield, 35, said he has been riding the bus around San Jose, Calif., to go look for jobs, eating from the McDonald’s Value Menu, and trying to get by on unemployment checks. He said he has no prospects of well-paying work.

“There’s days I come home in tears,” he said. “You just feel lost. You don’t know what to do.”

    Job Losses Slow; Unemployment at 9.4%, NYT, 6.6.2009, http://www.nytimes.com/2009/06/06/business/economy/06jobs.html






Temp Work Helps Mask Joblessness Among Americans


June 5, 2009
Filed at 9:40 a.m. ET
The New York Times

TOWNSHEND, Vt. (AP) -- For weeks, Greg Noel roamed the spine of the Green Mountains with a handheld GPS unit, walking dirt roads and chatting with people as he helped create a map of every housing unit in the United States.

Work was good: The sun was out, the snow was gone and the blackflies hadn't begun to hatch. But now that work is over and Noel, 60, and more than 60,000 other Americans hired in April to help with the 2010 census are out of work once more.

It's a familiar predicament in today's economy, in which some 2 million people searching for full-time work have had to settle for less, and unemployment is much higher than the official rate when all the Americans who gave up looking for jobs are counted, too.

Because of the surge of hiring for the census, April unemployment only rose to 8.9 percent -- a much slower increase than had been feared. Figures out today show unemployment now stands at 9.4 percent.

But consider these numbers:

--The 9.4 percent May unemployment rate is based on 14.5 million Americans out of work. But that number doesn't include discouraged workers, people who gave up looking for work after four weeks. Add those 792,000 people, and the unemployment rate is 9.8 percent.

--The official rate also doesn't include ''marginally attached workers,'' or people who have looked for work in the past year but stopped searching in the past month because of barriers to employment such as child care, poor health or lack of transportation. Add those 1.4 million people, and the unemployment rate would be 10.6 percent.

--The official rate also doesn't include ''involuntary part-time workers,'' or the 2.2 million people like Noel who took a part-time job because that's all they could get, plus those whose work hours dropped below the full-time level. Once those 9.1 million workers are added to the unemployment mix, the rate would be 16.4 percent.

All told, nearly 25 million Americans were either unemployed, underemployed or had given up looking for a job in May.

The ranks of involuntary part-timers has increased by 4.9 million in the past year, according to a May study by the Federal Reserve Bank of Cleveland. Many economists now predict unemployment won't peak until 2010. And since employers generally increase the hours of existing workers before hiring new ones, workers could be looking for full-time jobs for some time.

Even so, one economist said the increase in involuntary part-timers might have a silver lining. Gary Burtless, a senior fellow in economic studies at the Brookings Institute, said employers are likely cutting back everyone's hours instead of laying off people.

''In many countries, it's regarded as a good thing,'' he said.

For tens of thousands of people like Noel, a part-time job isn't their dream, but it beats the alternative. A Pennsylvania native and veteran of the Silicon Valley boom-and-bust cycle, Noel settled in southern Vermont in 2003. He'd worked a series of jobs, commuting to his latest position as an auditor for a family owned food and beverage distributor in Brattleboro before being laid off in early spring.

Vermont is in better shape than most states -- but not by much. Real estate and tourism, pillars of the state's economy over the past decade, are staggering.

Many parents who were frantic last year about sons and daughters serving in Iraq and Afghanistan -- the state has sent a disproportionate share of its young people overseas -- now are relieved their children have a steady job with benefits. Financial jobs are few. ''The economy?'' Noel asks between bites of a bison burger in a tiny diner. ''You just don't know if it's ever going to come back. We may never have it so good again.''

When the Census Bureau offered him a part-time job mapping houses nearly an hour from his Windham home, Noel jumped at it. The money, $10 to $25 an hour plus 55 cents per mile, was a big factor. But Noel said he also wanted to be part of a larger community effort, and the 2010 census is nothing if not a large community effort.

When the first numbers are released in December 2010, the Census Bureau will have spent more than $11 billion and hired about 1.2 million temporary employees. The government conducts its census every decade to determine the number of congressional seats assigned to each state, but the figures collected also help the government decide where to spend billions of dollars for the poor and disabled, where to build new schools and prisons and how state legislative boundaries should be designed.

It hasn't been the perfect job -- that would be a full-time position with benefits -- but Noel says the census job worked out well. It eased the pain of being unemployed, giving him something to do and made him realize his entire life doesn't have to be about financial management.

''It's just statistics,'' said Noel, ''but it's important.''

But last week, he was unemployed again, a victim of the Census Bureau's efficiency. Since the government was able to draw from a well-qualified but mostly out-of-work pool of applicants, the work done by more than 140,000 field employees went far more quickly than expected.

''We've always done well, but this time around was amazing,'' said Stephen L. Buckner, a Census Bureau spokesman. ''It's a tough economic time.''

For some temporary workers, the outlook is brighter. Ian Gunn spent five weeks ''being paid to hike. It was great.'' Gunn, an 18-year-old high school senior heading to Renssalaer Polytechnic Institute next year to study computer science, hopes for a better economy when he graduates, one that offers more security than a series of part-time jobs.

''It's going to take time,'' he said, ''but I've got four more years.''

Noel, though, is uncertain about the future. It's possible he'll be called back to work later in the fall for the final push. The Census Bureau expects to send roughly 1.2 million workers out to count people who don't return their questionnaires; the hiring will push down unemployment numbers for several months during that period.

For now, Noel says, he and his wife are living without frills. He looks for another job and she runs Green Mountain Chef, a catering business near Stratton Mountain. Demand has slowed dramatically since the economic meltdown began, as it has for most tourism-dependent businesses in Vermont.

Noel hopes to avoid being a statistic for too long. Unemployment insurance will give him about $425 a week -- enough to pay the mortgage and maybe the health insurance bill. Right now, the couple pays about $280 a month, but that will climb to $850 in September, when his government-subsidized COBRA policy expires.

''I hope something comes up,'' he says. ''But there's not an awful lot out there.''


On the Net:

Census Bureau: http://www.census.gov

Bureau of Labor Statistics: http://www.bls.gov

    Temp Work Helps Mask Joblessness Among Americans, NYT, 5.6.2009, http://www.nytimes.com/aponline/2009/06/05/us/AP-US-Becoming-A-Statistic.html






Apple Races to Keep Ahead of Rivals


June 5, 2009
The New York Times


SAN FRANCISCO — With its coveted gadgets and resurgent stock price, Apple has cast something of a spell on both consumers and investors.

At its annual Worldwide Developers Conference, which begins here on Monday, Apple executives will try to sustain that magic, using what has become one of their highest-profile events of the year.

It will not be easy. While he is fond of surprises, Steven P. Jobs, Apple’s chief executive, whose personal star power has been known to amplify the company’s message, is not likely to be there. The company says it continues to expect his return from medical leave at the end of the month.

Apple must also meet sky-high and perhaps unrealistic expectations from enthusiasts and analysts, and it is just as likely to draw attention for what it does not unveil as for what it does. That challenge is partly one of its own making. Apple’s strategy — particularly with the iPhone — has come to depend on a steady stream of hit devices that are viewed by consumers as being so far ahead of the competition that they are worth paying extra money.

But the competition is now catching up. Palm, Google, Microsoft, Nokia and Research in Motion, maker of the BlackBerry, are all at varying stages of developing and introducing their own iPhone-like devices and software, along with easily accessible stores for the small programs known as applications, or apps, that run on those devices. In some cases, those companies are releasing a greater variety of phones, on more wireless carriers around the world, than Apple.

To maintain its advantage, Apple must preserve the impression that it is far ahead of rivals when it comes to the capabilities and the “cool” factor of its devices.

“If they start making products people don’t want, and start losing users, then Apple’s strategy will run into problems,” said Benjamin Reitzes, an analyst at Barclays Capital. “If they continue to have an aura where their products are seen as defining the marketplace, they are going to be fine. But that’s going to be the challenge and the opportunity for Apple.”

For now at least, Apple appears to have a comfortable lead in the simmering smartphone battle. In the last two years, it has sold more than 37 million iPhones and the similar-looking iPod Touches, and the devices have become its most profitable product category. Apple’s stock has nearly doubled in the last six months, largely on the iPhone’s inexorable momentum, although it is still down 28 percent from its high in December 2007.

The iPhone has also attracted an enthusiastic community of independent software makers that have created about 40,000 free or low-cost applications for the devices. Apple now celebrates that wide range of programs, from flight simulators to spreadsheets, as one of the major differences between the iPhone and competing systems.

Apple’s goal for next week: to keep the energy, momentum and spotlight focused on the iPhone and away from its rivals, like the new Pre from Palm, a well-reviewed new phone that goes on sale Saturday.

Apple is expected to use its keynote presentation on Monday to demonstrate the new types of programs that can be created on the latest version of the iPhone’s operating system.

Developers will be able to charge for certain features within their programs (perhaps a new level within a game), and applications will be able to send alerts to users even whey they are not actively running. Apple has also said it will show an early version of its latest operating system for the Macintosh, dubbed Snow Leopard.

But talking about new software can be dull. So analysts point to Apple’s need to surprise its fans, and to its dwindling inventory of iPhones in stores, and predict that Apple will introduce a new iPhone model next week as well. Its new tricks could include the ability to record video and an internal compass that will add extra intelligence to the device’s awareness of its location.

“Apple’s objective will be to clearly and strongly show why the iPhone platform is the best for developers, and that means there’s a high probability Apple will announce one or more phones at the conference,” said Michael Abramsky, an analyst at RBC Capital Markets.

Satisfying its large audience of developers may be Apple’s most significant challenge. They want to know they can build profitable businesses even if they focus exclusively on the iPhone, and that Apple will continue to do its part by wooing consumers with compelling new gadgets.

“We want to hear that there are going to be cool new devices, because that means our market gets bigger,” said Bart Decrem, the chief executive of Tapulous, a company in Palo Alto, Calif., that makes musical games for the iPhone.

Apple has actually set a high bar for itself. Unlike its rivals Google and Microsoft, which license their mobile operating systems to many phone makers, Apple builds its own hardware and software and carefully strikes exclusive relationships with wireless carriers that are willing to heavily subsidize its devices. The strategy depends on a constant flow of new products that people are willing to switch wireless companies and pay extra to use.

That same strategy — introducing expensive but elegant products with high switching costs — is showing signs of strain in other parts of Apple’s business. Although Apple has performed better lately than other American computer makers, its sales of Mac laptops and desktops declined by 3 percent in the first three months of the year. That was the first time in six years that sales in Apple’s personal computer business had a year-over-year decline.

Meanwhile, the Taiwanese manufacturers of the smaller, cheaper computers called netbooks, like Acer and Asustek, continue to have growing sales.

“Apple has to address the structural slide of the PC industry to more value-priced products,” said Ashok Kumar, an analyst at Collins Stewart.

But Apple is not expected to talk about the Mac next week, and that could be emblematic of one of the largest problems the company faces. Apple watchers and investors have many questions that Apple does not seem to want to answer in public, and they could punish the stock if they come away from the conference disappointed.

The big questions include whether Apple is working on any entirely new product lines (like a much rumored tablet computer), what it might do with its $29 billion hoard of cash, and how Mr. Jobs’s health is faring.

Mr. Jobs, Apple’s innovator in chief, has not been seen in public since last October, when he unveiled a line of laptops at Apple’s headquarters. A survivor of pancreatic cancer, Mr. Jobs has been on medical leave since January. Two people close to his personal circle say he looks healthier, and they expect him to be back at work full time soon. Apple will say only that it still expects Mr. Jobs back at the end of June.

That is one area where the expectations of Apple observers and investors may have fallen somewhat. Apple has thrived in the last six months under the leadership of Timothy D. Cook, Apple’s chief operating officer, who has handled day-to-day operations during Mr. Jobs’s absence. If Mr. Jobs does not return, or returns in a diminished role, investors and fans may no longer see it as the end of the world.

“Apple has had a nice rally because they put up very strong numbers, and at the end of the day it will still be all about numbers,” said Mr. Reitzes of Barclays Capital.

    Apple Races to Keep Ahead of Rivals, NYT, 5.6.2009, http://www.nytimes.com/2009/06/05/technology/companies/05apple.html?hp






Factory Orders Rise for Second Time in 3 Months


June 3, 2009
Filed at 12:14 p.m. ET
The New York Times


WASHINGTON (AP) -- Orders to U.S. factories rose 0.7 percent in April, the second increase in three months and further evidence that manufacturers may be recovering.

Still, the Commerce Department's report Wednesday was below analysts' expectations of a 0.9 percent increase. The department also sharply marked down the March figure to a 1.9 percent drop, compared with the 0.9 percent decline previously reported.

Shipments fell 0.2 percent, the ninth consecutive drop, though at a much slower pace than the 1.8 percent fall in March.

Manufacturers have been hit hard by the recession, the longest since World War II, which has cut back both domestic shipments and exports. The auto sector is also reeling as both General Motors Corp. and Chrysler LLC have filed for bankruptcy in the past month. Their restructuring plans call for sharply reducing U.S. production, which also puts thousands of their supplier companies at risk.

But other recent news has been better. Americans bought more cars in May than in any other month this year, according to data released Tuesday, as deep discounts by GM and Chrysler pushed sales above expectations.

The improvement was reflected in Wednesday's numbers, as orders for motor vehicle parts and assemblies rose 2.2 percent in April. A 5.8 percent jump in transportation equipment, which includes motor vehicles, drove the overall increase in factory orders.

GM's sales in May dropped 29 percent from the previous year, a smaller drop than earlier this year. Ford Motor Co.'s sales fell 24 percent from last May, but were up 20 percent from April, the company said Tuesday. Chrysler's sales fell 47 percent, about the same as before it filed for bankruptcy protection. Overall, industry sales fell 34 percent from a year ago.

Orders for big-ticket durable goods, such as industrial machinery and appliances, rose 1.7 percent, down slightly from the government's initial estimate last week of a 1.9 percent rise.

Orders for non-defense capital goods excluding aircraft, a measure that is seen as a proxy for business investment, fell 2.4 percent in April, a sign that businesses are still cutting back on spending amid the weak economy.

U.S. gross domestic product, the broadest measure of the economy's output, fell at a 5.7 percent annual rate in the first quarter of this year, the government said last week. Most economists expect the pace of decline to slow to roughly 2 to 3 percent in the April-June period.

In April, orders for machinery increased 0.6 percent, while electrical equipment and appliance orders rose 0.9 percent. Consumer goods, such as food, chemicals and paper products, dipped 0.1 percent.

Separately, the Institute for Supply Management said Monday that manufacturing activity in May contracted at the slowest pace in eight months. The trade group's index of manufacturing activity was 42.8, up from 40.1 in April. A reading below 50 still indicates activity contracted, but the figure surpassed economists' forecasts.

And an important measure of new orders placed with U.S. factories rose to 51.1 in May. It was the first time this barometer had grown since November 2007, the month before the recession began.

    Factory Orders Rise for Second Time in 3 Months, NYT, 4.6.2009, http://www.nytimes.com/aponline/2009/06/03/business/AP-US-Factory-Orders.html






Promised Help Is Elusive for Some Homeowners


June 3, 2009
The New York Times


MESA, Ariz. — She had seen the advertisements for the new government program offering relief. She had heard President Obama promise that help was on the way for homeowners like her, people who had lost jobs and could no longer make their mortgage payments.

But when Eileen Ulery called her mortgage company — Countrywide, now part of Bank of America — the bank did not offer to alter her mortgage. Rather, the bank tried to sell her a new loan with a slightly lower monthly payment while asking her to pay $13,000 toward the principal and a fresh $5,000 in fees.

Her problem was that she did not yet present a big enough problem to merit aid.

Yes, she was teetering toward delinquency. She was among millions of homeowners rapidly sliding toward danger for whom the Obama administration had devised an aid program — some already in foreclosure proceedings, others headed that way as they ran out of means to make their payments. But unlike those in imminent peril of losing their homes, Ms. Ulery had never missed a payment.

“I don’t know who this bailout is helping,” she said. “We’ve given these banks all this money and they’re not doing what they say they’re doing. Something’s not working right. They keep saying they’re doing all this, but we don’t see it down here at this level.”

More than three months after the Obama administration outlined a new program aimed at rescuing millions of distressed homeowners by compensating banks that modify mortgages, Ms. Ulery’s experience illustrates the mixture of confusion, frustration and limited assistance that now reigns.

Through many months of wrangling over the fate of the financial system, with hundreds of billions of taxpayer dollars dispensed on bailouts, distressed homeowners have waited for their own rescue amid talk that it was finally on the way. Modifications of so-called subprime and Alt-A mortgages — those made to people with tarnished credit — actually fell by 11 percent in May from April, according to research by Alan M. White at Valparaiso University School of Law.

A Treasury spokeswoman, Jenni Engebretsen, confirmed that homeowners like Ms. Ulery — current on their mortgages yet grappling with a hardship like unemployment — were eligible for loan modifications under the program. She said mortgage servicers had offered to modify more than 100,000 loans since the department announced the program.

But how many loans have been modified? Ms. Engebretsen declined to say, noting that the Treasury was working with mortgage companies to “fine-tune reporting systems.”

A spokesman for Bank of America Home Loans, Rick Simon, confirmed that the bank offered Ms. Ulery refinancing and not loan modification. The bank is now focusing on modifications only for those borrowers “who are already in severe threat of foreclosure,” he said.

“We’re still putting the systems in place to handle people who are current on their loans,” Mr. Simon said, declining to say how many loans Bank of America had modified. “It’s still very, very early in the program.”

Ms. Ulery, 63, is the face of the latest wave of troubled American homeowners, a surge of people in financial danger not because of reckless gambling on real estate, but because of lost income.

Far from being one of those who used easy-money loans to speculate on homes proliferating across the desert soil of greater Phoenix, she has lived in the same modest, stucco-sided condo in suburban Mesa for a dozen years. She bought the two-bedroom home in 1997 for $77,500.

For two decades, she worked as an executive assistant at nearby Arizona State University, bringing home more than $1,000 every other week — enough to pay the bills.

Round-faced, wry and given to staccato bursts of laughter, Ms. Ulery regularly visits yard sales, seeking out plates and patchwork quilts for her collections. She takes pleasure in her two grandchildren and her beagle. She enjoys an occasional glass of wine, favoring a $6 merlot that comes in a screw-top bottle.

“I’m not an extravagant-type person,” she said. “I see these big houses all around, and they’re beautiful, but I’m comfortable in my little condo.”

Like tens of millions of other American homeowners, she added to her mortgage balance as the value of her condo swelled, at one point exceeding $200,000. She refinanced to pay off some credit cards and settle into a 30-year, fixed-rate loan. Later, she took out a home equity line of credit to buy a new Hyundai. She refinanced again in 2007, borrowing $20,000, mostly for a new roof.

Over the years, her monthly payment swelled from about $600 to more than $1,000. With planning and self-control — she tracks her monthly expenses on a color-coded spreadsheet — she always came up with the money. “I’ve never been late,” she said.

But the equation broke down last year, when she lost her job in university budget cuts. Ms. Ulery received six months of severance. She arranged a monthly $1,500 Social Security check. But when the severance ran out in October, her mortgage finally exceeded her limited means.

With so many people out of work, and with her doctor counseling rest for a stress-related illness, she did not pursue another paycheck, negotiating to have her university pension begin earlier. She has been leaning on credit cards.

Across the country, millions of homeowners in similar straits have been sliding into delinquency. Some owe more than their houses are worth.

Ms. Ulery is among that unhappy cohort — her house is worth about $122,000, and she owes $143,000 — but walking away is not for her.

“In my family, we don’t do that,” she said. “You pay your bills. And I wanted my home.”

In March, she heard about the Obama administration program. The Countrywide Web site directed her to a government site, makinghomeaffordable.gov, she said. There, she took a test to determine her eligibility for a loan modification.

Was her home her primary residence? Check. Was she having trouble paying her mortgage? Check again, and so on until the screen told her that she might qualify.

In April, she called the bank. The representative said the bank was not doing modifications for people like her, she recalled. He shifted the conversation: if she handed over $18,000, he could lower her payment to $967 from $1,046. Her interest rate would actually increase slightly, with the drop largely because she was putting down more money.

“I just laughed,” Ms. Ulery said. “It was a really good deal for them.”

To which she poses her own question: What sort of deal is it for the American taxpayer? As she sees it, the same banks that generated the mortgage crisis are now getting public money to fix it, while doing little more than seeking new fees.

“I don’t think the government gets it,” she said. “These are the same people you couldn’t trust before.”

    Promised Help Is Elusive for Some Homeowners, NYT, 3.6.2009, http://www.nytimes.com/2009/06/03/business/03mortgage.html?hp







Foreclosures: No End in Sight


June 2, 2009
The New York Times

A continuing steep drop in home prices combined with rising unemployment is powering a new wave of foreclosures. Unfortunately, there’s little evidence, so far, that the Obama administration’s anti-foreclosure plan will be able to stop it.

The plan offers up to $75 billion in incentives to lenders to reduce loan payments for troubled borrowers. Since it went into effect in March, some 100,000 homeowners have been offered a modification, according to the Treasury Department, though a tally is not yet available on how many offers have been accepted.

That’s a slow start given the administration’s goal of preventing up to four million foreclosures. It is even more worrisome when one considers the size of the problem and the speed at which it is spreading. The Mortgage Bankers Association reported last week that in the first three months of the year, about 5.4 million mortgages were delinquent or in some stage of foreclosure.

Not all of those families will lose their homes. Some will find the money to catch up on their payments. Others will qualify for loan modifications that allow them to hang on. But as borrowers become more hard pressed, lenders — whose participation in the Obama plan is largely voluntary — may not be able or willing to keep up with the spiraling demand for relief.

One of the biggest problems is that the plan focuses almost entirely on lowering monthly payments. But overly onerous payments are only part of the problem. For 15.4 million “underwater” borrowers — those who owe more on their mortgages than their homes are worth — a lack of home equity puts them at risk of default, even if their monthly payments have been reduced. They have no cushion to fall back on in the event of a setback, like job loss or illness.

This page has long argued that a robust anti-foreclosure plan should directly address the plight of underwater homeowners by reducing the loans’ principal balance. That would restore some equity to borrowers — and give them a further incentive to hold on to their homes — in addition to lowering monthly payments. The mortgage industry has resisted this approach, and the Obama plan does not emphasize it.

With joblessness rising, lower monthly payments could quickly become unaffordable for many Americans. In a recent report, researchers at the Federal Reserve Bank of Boston argued that unemployment is driving foreclosures and to make a difference, anti-foreclosure policy should focus on helping unemployed homeowners. The report suggests a temporary program of loans or grants to help them pay their mortgages while they look for another job.

The government will also have to make far more aggressive efforts to create jobs. The federal stimulus plan will preserve and generate a few million jobs, but that will barely make a dent — in the overall economic crisis or the foreclosure disaster. Since the recession began in December 2007, nearly six million jobs have been lost, and millions more are bound to go missing before this downturn is over.

President Obama needs to put more effort and political capital into promoting the middle-class agenda that he outlined during the campaign, including a push for new jobs in new industries, expanded union membership and a fairer distribution of profits among shareholders, executives and employees.

There will be no recovery until there is a halt in the relentless rise in foreclosures. Foreclosures threaten millions of families with financial ruin. By driving prices down, they sap the wealth of all homeowners. They exacerbate bank losses, putting pressure on the still fragile financial system. Lower monthly payments are a balm, but they are no substitute for home equity. And until more Americans can find a good job and a steady paycheck, the number of foreclosures will continue to rise.

    Foreclosures: No End in Sight, NYT, 2.6.2009, http://www.nytimes.com/2009/06/02/opinion/02tue1.html?hpw






Bankrupt G.M. Says It Owes $172 Billion


June 2, 2009
The New York Times


This article was reported by David E. Sanger, Jeff Zeleny and Bill Vlasic, and written by Mr. Sanger.

General Motors filed for bankruptcy on Monday morning, submitting its reorganization papers to a federal clerk in Lower Manhattan in a move that President Obama said marked “the end of an old General Motors and the beginning of a new General Motors.”

The bankruptcy of a once-proud auto giant that helped to define the nation’s car culture and played a part in creating the American middle class immediately rippled across the country, part of a process that the president said would take “a painful toll on many Americans” but lead ultimately to a strong company ready to compete in the 21st century.

But for the moment, auto workers braced for news about their jobs as G.M. said it would shutter plants in Michigan, Indiana, Ohio and Delaware, and plants in Tennessee and elsewhere in Michigan were put on standby. In financial markets, shares of foreign automakers and Ford surged ahead.

President Obama, speaking at the White House, emphasized that investing more billions of taxpayer dollars in General Motors was not something he wanted to do, but something he felt the government had to do to avert a calamity that would hurt millions of people.

“We are acting as reluctant shareholders, because that is the only way to help G.M. succeed,” Mr. Obama said, asserting that the government’s backing, coupled with the painful restructuring that the once mighty company is undergoing, “will give this iconic American company a chance to rise again.”

“I will not pretend the hard times are over,” Mr. Obama said, adding that the sacrifice needed to be made for the next generation.

In its bankruptcy petition, G.M. said it had $82.3 billion in assets and $172.8 billion in debts. Its largest creditors were the Wilmington Trust Company, representing a group of bondholders holding $22.8 billion in debts, and affiliates of the United Auto Workers union, representing nearly $20.6 billion in employee obligations.

In a court affidavit, Fritz Henderson, G.M.’s chief executive, said that bankruptcy and a Treasury-sponsored sale of General Motors’ assets to a so-called “New G.M.” were the automaker’s only option to move forward. Failing that, he said, the company faced liquidation.

“There is no other sale, or even other potential purchasers, present or on the horizon,” Mr. Henderson said.

In a bit of good news, G.M. said Monday that it planned to keep its international headquarters in downtown Detroit, rather than move to the suburbs. It said it responded to concerns by city officials fearful of losing the only one of the Detroit companies to be based in the Motor City.

The company was forced into the filing by President Obama, who is betting that by temporarily nationalizing the onetime icon of American capitalism, he can save at least a diminished automaker that is competitive.

With the filing, G.M. follows its crosstown rival Chrysler in bankruptcy. And G.M. hopes that it can move as swiftly. Chrysler, which sought court protection on April 30, could emerge in the next few days. A bankruptcy judge in New York gave approval on Sunday night for most of its assets to be acquired by Fiat, a decision that President Obama hailed on Monday morning.

“A new, stronger Chrysler” is emerging, the president said, and a new, stronger General Motors can emerge too. But first, he said, more difficult times lie ahead, for those thousands of workers and retirees affected by the car industry. The president urged those affected to see themselves as making “a sacrifice for the next generation.”

The bankruptcy of General Motors culminates a remarkable four months of confrontation between Washington and Detroit that is expected to result in a drastic downsizing of the company. It also places the government in uncharted territory as a business owner, as it takes a majority ownership stake in the company during its restructuring.

The company’s Saturn unit, which G.M. began in 1990 to compete with foreign-made cars, also filed for bankruptcy on Monday. G.M. has said it will phase out the Saturn brand by 2012.

G.M.’s Saab unit is already under bankruptcy protection in Sweden. The German government last week picked Magna International, a Canadian car-parts maker, to buy G.M.’s Opel unit, which is based in Germany.

Reflecting the government’s extraordinary intervention in industry, aides say, Mr. Obama reiterated his hope that G.M. can be brought back from the brink of insolvency, even if the company looks almost nothing like the titan of old.

The new G.M. will be leaner and better run and its cars more fuel-efficient, the president said, in yet another acknowledgement that the days of high-finned gas-guzzlers are gone forever.

The president was envisioning a much smaller, retooled G.M. can make money even if new car sales remain at a sluggish 10 million a year in the United States and even if G.M., once the giant of the industry, drops below its current 20 percent market share in this country.

But to get there, American taxpayers will invest an additional $30 billion in the company, atop $20 billion already spent just to keep it solvent as the company bled cash as quickly as Washington could inject it. Whether that investment will ever be recovered is still an open question, although the president said he was optimistic, and that Washington really had no choice.

The company will also have to shed 21,000 union workers and close 12 to 20 factories, steps that most analysts thought could never be pushed through by a Democratic president allied with organized labor.

Forty percent of the company’s 6,000 dealers will close, the workers’ union will be forced to finance half of its $20 billion health care fund with stock of uncertain value in the restructured G.M. and bondholders, including many retirees, will be forced to take stock worth 10 cents for every dollar they lent the company.

G.M. will also lose its spot on the Dow Jones industrial average, a crucial stock-market gauge of 30 blue-chip stocks. The car maker had been a member of the closely watched stock index since 1925.In press releases and public statements, General Motors tried to put the best face possible on its bankruptcy filing.

“We see the path to the future for G.M.,” Ray Young, G.M.’s chief financial officer, said at a briefing Monday morning. “This is a once in a lifetime opportunity to get our balance sheet healthy. I feel very blessed to have this opportunity. It’s a huge responsibility.”

Judge Robert E. Gerber of United States Bankruptcy Court in Manhattan will oversee the bankruptcy. He was appointed in 2000, and oversaw the bankruptcy of the cable company, Adelphia.

Before that, he was a partner in the Manhattan firm of Fried, Frank, Harris, Shriver & Jacobson, which he joined in 1971 after graduating for Columbia Law School. He specialized in securities and commercial litigation and, thereafter, bankruptcy litigation and counseling.

The company’s last steps toward bankruptcy took place over the weekend as a majority of G.M. bondholders agreed not to challenge the filing in court and to exchange their debt for stock.

To assist in the restructuring, the automaker is expected to hire the consulting firm Alix Partners, which has worked on several major bankruptcies, including those for Enron and Kmart. One of the firm’s partners, Al Koch, is expected to manage the liquidation of corporate assets that G.M. will shed during its Chapter 11 restructuring, people with knowledge of the bankruptcy strategy said.

Mr. Obama is taking several risks under the plan. None may be bigger than the decision that the United States government will take a 60 percent share of the stock in a new G.M., leaving taxpayers vulnerable if the overhaul is not successful. (Canada, for its part, is taking a 12 percent stake.)

But he asserted that any alternative to his plan would be worse, and that a liquidation of G.M. — the only other real option — would send the unemployment rate soaring over 10 percent and would radiate damage throughout the economy.

“We are acting as reluctant shareholders, because that is the only way to help G.M. succeed,” the president said, declaring as he has before that his administration has no interest in running a car company and will stay out of all but the most fundamental decision-making as the new G.M. takes shape.

Aware of the hardships the plan will impose on regions across the country that depend on auto production, the White House is dispatching a dozen Cabinet members and other officials across four states this week to reassure residents.

Although the president said that, once the government sets up new management and a board it will remove itself from G.M.’s day-to-day operations, his aides anticipate intense pressure as the company’s managers are called to testify in Congress and face questions like why they decided to build new cars in Mexico and South Korea, rather than in Michigan or the South.

“Congress and many Americans are going to say, if we own it, why can’t we make these decisions?” one of Mr. Obama’s top economic aides said, “and it’s going to be a challenge to answer that.”

The president, anticipating those issues, said on Monday that a bigger share of the fuel-efficient cars to roll off G.M.’s assembly lines will indeed be made in the United States.

Mr. Obama has laid out goals for all the Detroit automakers that will presumably affect their major strategic decisions. He has urged them, for example, to build smaller cars with significantly better fuel efficiency. But under the new principles, the White House would be discouraged from getting involved in G.M’s decisions about when and where to build such a car, or how long to keep producing it if it sells poorly.

Six months ago, even the suggestion of such deep intervention into G.M.’s operations would have raised huge objections. But by the time the denouement came, the company seemed almost relieved. Robert Lutz, G.M.’s vice chairman, said that “for the first time in our history, the American auto industry has the ear of the administration. Their number one goal is to make us successful.”


Michael J. de la Merced, Jack Healy, David Stout and Micheline Maynard contributed reporting.

    Bankrupt G.M. Says It Owes $172 Billion, NYT, 2.6.2009, http://www.nytimes.com/2009/06/02/business/02auto.html?hp






The Safety Net

Slumping Economy Tests Aid System Tied to Jobs


June 1, 2009
The New York Times


WASHINGTON — For nearly two decades, Americans have built a safety net that is tough on those who fail to work and rewards those who do.

Insisting that the poor should work and agreeing that work should pay, policy makers spent the 1990s cutting welfare rolls while pouring billions of dollars into programs like wage and child care subsidies aimed at the working poor.

But joblessness, not welfare dependency, is now the national scourge. And as a poverty conference convened here last week, custodians of the safety net confronted an obvious question: If aid is reserved for people with jobs, what happens when the jobs go away?

“We have a work-based safety net without work,” said Timothy M. Smeeding, an economist at the University of Wisconsin. “We’re really in a pickle.”

The economic crisis is the toughest test yet of a safety net refashioned 13 years ago when President Bill Clinton kept a pledge to “end welfare as we know it” and joined a Republican-led Congress in sharply restricting cash aid. In the boom years that followed, millions of people left welfare for work and poverty rates plunged, though skeptics warned that needy families would be left with nothing when the economy faltered.

Few people thought the faltering would prove so swift and severe. Within weeks of taking office, President Obama had signed off on measures to spend more than $100 billion to shore up the safety net.

Some of the money goes to programs reserved for people who work (like unemployment insurance and wage subsidies). Even more bolsters programs that include the nonworking poor (like food stamps and Medicaid).

While that might suggest a desire for a broader safety net than the one that has emerged in recent years, aides say the package was as much an effort to jump-start the economy as an expression of aid philosophy.

“We’re not at the moment narrowly focused on, Is there a work-based safety net?” said Martha Coven, a White House official who spoke at the poverty conference. “We’re focused on, Is there work?”

A crisis this large would challenge any safety net. Nearly 14 million Americans are unemployed, and more than 100,000 people join their ranks each week. Eight states have double-digit unemployment rates; California and Michigan have counties where the rate reaches Depression-era levels of 25 percent.

Still, the challenges seem especially stark when set against the assumption on which the modern safety net was built: that low-wage jobs, however onerous, were at least easy to get. Urging the needy to take them, policy makers expanded wage subsidies (which now top $5,000 a year in some states), while putting time limits on cash benefits, cutting access to training and giving states wide discretion to turn aid-seekers away.

The new welfare program, Temporary Assistance for Needy Families, also gave states financial incentives to cut the rolls, and critics warned that the program would fail to grow in tough times to meet rising need. Now millions of jobs have disappeared, and caseloads have scarcely budged.

In many places they have continued to fall, including Mr. Obama’s home state, Illinois, which trimmed the rolls 8 percent last year as joblessness surged. Nationally, the rolls are down about 70 percent from the 1990s highs.

To encourage states to expand the welfare rolls, the recovery package Mr. Obama signed includes $5 billion of subsidies for programs with caseload growth.

Another essential safety net program, unemployment insurance, reaches just 44 percent of the unemployed, with the lowest-paid workers most often left out. The recovery package offers $7 billion for states that broaden coverage, though several Republican governors have spurned it, saying the costs would lead to higher business taxes.

The program that responded most readily to the recession, food stamps, has done so in large part because it serves the working poor and jobless alike. In the 12 months ending this February, the rolls grew 17 percent. One in 9 Americans now gets food stamps, and the recovery package temporarily raised the average benefit about 19 percent, to about $500 a month for a family of four.

All in all, “that’s a remarkable boost to the safety net, and it’s all been under the radar,” said Sheldon H. Danziger, a University of Michigan economist who spoke at last week’s gathering of researchers, advocates and government officials.

Much of the recovery act spending expires in two years. What happens then?

No one envisions a return to the time of unconditional aid. Even critics of the tougher welfare system credit it for raising employment rates; and poverty, though on the rise, is lower than in the early 1990s.

“It worked better than, I think, a lot of people anticipated,” Mr. Obama said at a campaign event last year. “One of the things that I am absolutely convinced of is that we have to have work as a centerpiece of any social policy.”

But progress had stalled even before the recession began, and two sets of problems had emerged. One is that the neediest people — the addicted, disabled or mentally ill — often fell through the cracks, finding neither welfare nor work. Another is that most low-wage workers were failing to advance.

Last week’s conference was filled with calls to knit more training opportunities into the safety net, a theme Mr. Obama often repeats. Still, as the conferees recognized, past training programs have often failed.

Beyond the recession, several big poverty challenges remain. Wage inequality has continued to rise. So has the share of children born to unmarried mothers, which increases their odds of growing up poor.

And huge deficits have made the long-term budget outlook bleak, as Robert Greenstein of the Center on Budget and Policy Priorities warned fellow conferees in Washington. Even as the meeting got under way, California was mulling its governor’s cost-saving plan to outright abolish programs of cash welfare and children’s health insurance.

Mr. Greenstein called for scrapping marginal programs to save the most essential.

“A budget tsunami is coming,” he said. “That threat should be taken a hell of a lot more seriously than it is now.”

    Slumping Economy Tests Aid System Tied to Jobs, NYT, 1.6.2009, http://www.nytimes.com/2009/06/01/us/politics/01poverty.html?hpw






Back to Business

Even in Crisis, Banks Dig In for Fight Against Rules


June 1, 2009
The New York Times


As the financial crisis entered one of its darkest phases in October, a handful of the nation’s largest banks began holding daily telephone sessions. Murmurs were already emanating from Washington about the need for a wide-ranging regulatory overhaul, and Wall Street executives girded for a fight.

Atop the agenda during their calls: how to counter an expected attempt to rein in credit-default swaps and other derivatives — the sophisticated and profitable financial instruments that were intended to limit risk but instead had helped take the economy to the brink of disaster.

The nine biggest participants in the derivatives market — including JPMorgan Chase, Goldman Sachs, Citigroup and Bank of America — created a lobbying organization, the CDS Dealers Consortium, on Nov. 13, a month after five of its members accepted federal bailout money.

To oversee the consortium’s push, lobbying records show, the banks hired a longtime Washington power broker who previously helped fend off derivatives regulation: Edward J. Rosen, a partner at the law firm Cleary Gottlieb Steen & Hamilton. A confidential memo Mr. Rosen drafted and shared with the Treasury Department and leaders on Capitol Hill has, politicians and market participants say, played a pivotal role in shaping the debate over derivatives regulation.

Today, just as the bankers anticipated, a battle over derivatives has been joined, in what promises to be a replay of a confrontation in Washington that Wall Street won a decade ago. Since then, derivatives trading has become one of the most profitable businesses for the nation’s big banks.

The looming fight over regulation is the beginning of a broader debate over the future of the financial industry. At the center of the argument: What is the right amount of regulation?

Those who favor more regulation say it would offer early warning signals when companies take on too much risk and would help avert catastrophic surprises like the huge derivatives losses at the giant insurer the American International Group, which has so far received more than $170 billion in taxpayer commitments. The banks say too much regulation will stifle financial innovation and economic growth.

The debate about where derivatives will trade speaks to core concerns about the products: transparency and disclosure.

There are two distinct camps in this argument. One camp, which includes legislative leaders, is pushing for trading on an open exchange — much like stocks — where value and structure are visible and easily determined. Another camp, led by the banks, prefers that some of the products be traded in privately managed clearinghouses, with less disclosure.

The Obama administration agrees that more regulation is needed. A proposal unveiled recently by Treasury Secretary Timothy F. Geithner won plaudits for trying to make derivatives trading less freewheeling and more accountable — a plan that hinges in part on using clearinghouses for the trades.

Critics in both the financial world and Congress say relying on clearinghouses would be problematic. They also say Mr. Geithner’s plan contains a major loophole, because little disclosure would be required for more complicated derivatives, like the type of customized, credit-default swaps that helped bring down A.I.G. A.I.G. sold insurance related to mortgage securities, essentially making a big bet that those mortgages would not default.

Mr. Rosen and other bank lobbyists have pushed on Capitol Hill to keep so-called customized swaps from being traded more openly. These are contracts written for the specific needs of a customer, whose one-of-a-kind nature makes them very hard to value or trade. Mr. Rosen has also argued that dealers should be able to trade through venues closely affiliated with banks rather than through more independent platforms like exchanges.

Mr. Rosen’s confidential memo, dated Feb. 10 and obtained by The New York Times, recommended that the biggest participants in the derivatives market should continue to be overseen by the Federal Reserve Board. Critics say the Fed has been an overly friendly regulator, which is why big banks favor it.

Mr. Rosen’s proposal for change was similar to the Treasury Department’s recently announced plan to increase oversight. Treasury officials say that their proposal was arrived at independently and that they sought input from dozens of sources.

Even so, market participants, analysts and members of Congress who have proposed stricter reforms worry that the Treasury proposal does not go far enough to close several important regulatory gaps that allowed derivatives to play such a destructive role in the current financial crisis.

But increased transparency of derivatives trades would cut into banks’ profits — hence the banks’ opposition. Customers who trade derivatives would pay less if they knew what the prevailing market prices were.

“The banks want to go back to business as usual — and then some. And they have a lot of audacity now that everyone has bailed them out,” said Yra Harris, an independent commodities trader who was involved in an effort to regulate derivatives nine years ago. “But we have to begin with the premise that Wall Street doesn’t want transparency, because more transparency means less immediate profits.”

Legislators in the Senate and the House of Representatives have introduced bills offering stricter controls than those pushed a decade ago. The pending legislation goes even further than Mr. Geithner’s proposals.

“These mathematical geniuses who create these things can find a way to turn anything into a customized swap,” said Senator Tom Harkin, an Iowa Democrat, who has introduced legislation that would require all derivatives to be traded on an exchange. “You’d get a loophole big enough to drive a truck through. It could be worth trillions and trillions of swaps.”


Lessons From History

Hotly contested legislative wars are traditional fare in Washington, of course, and bills are often shaped by the push and pull of lobbyists — representing a cornucopia of special interests — working with politicians and government agencies.

What makes this fight different, say Wall Street critics and legislative leaders, is that financiers are aggressively seeking to fend off regulation of the very products and practices that directly contributed to the worst economic crisis since the Great Depression. In contrast, after the savings-and-loan debacle of the 1980s, the clout of the financial lobby diminished significantly.

The current battle mirrors a tug-of-war a decade ago. Arguing that regulation would hamper financial innovation and send American jobs overseas, Congress passed legislation in December 2000 exempting derivatives from most oversight. It was signed by President Bill Clinton.

The law passed despite the strenuous objections of Brooksley Born, a former head of the Commodity Futures Trading Commission, who left the government after her unsuccessful effort to impose more regulation. In a recent speech, Ms. Born said big banks are again trying to water down oversight efforts.

“Special interests in the financial-services industry are beginning to advocate a return to business as usual and to argue against any need for serious reform,” Ms. Born, now a lawyer in private practice, said at the John F. Kennedy Library in Boston, where she received a Profile in Courage Award.

After the 2000 legislation was passed, derivatives trading exploded, helping the biggest traders earn immense profits.

The market now represents transactions with a face value of $600 trillion, up from $88 trillion a decade ago. JPMorgan, the largest dealer of over-the-counter derivatives, earned $5 billion trading them in 2008, according to Reuters, making them one of its most profitable businesses.

Among the companies that expanded rapidly was A.I.G. Straying from its main business of providing property and life insurance, A.I.G. wrote a type of contract known as credit-default swaps that protected holders of mortgage securities against defaults. When millions of subprime borrowers stopped paying their mortgages, A.I.G. had to provide cash collateral that it did not have to clients that had bought its insurance.

Before the crisis, few market participants knew the size of A.I.G.’s exposure. Some derivatives transactions occur on exchanges, where the value and nature of the contracts are disclosed, but many do not. Credit-default swaps trade privately. This kept risk in these trades under wraps, leaving regulators unaware of how dangerously stretched and poorly managed the market was.


Where to Trade

On Capitol Hill, banking lobbyists have argued that derivatives should be traded on clearinghouses rather than exchanges, legislative leaders and their staffs say. The Geithner plan favors clearinghouses, where an intermediary would guarantee trades between participants, instead of participants dealing directly with one another as in an exchange.

A major New York clearinghouse is ICE U.S. Trust, an entity closely affiliated with banks that are also members of Mr. Rosen’s group, the CDS Consortium.

Although the Chicago Mercantile Exchange is a more established place for derivatives trading and is independent from the big New York banks, ICE seems to be the clearinghouse of choice, especially among policy makers in Washington, said Brad Hintz, a brokerage firm analyst at Bernstein Research. That is because under the Treasury proposal, the Federal Reserve Bank of New York would oversee ICE, while the Commodity Futures Trading Commission would oversee the Chicago Mercantile Exchange. Critics say the Fed has been too easy on those it oversees.

Theo Lubke, a senior New York Fed official, countered Mr. Hintz’s view, saying the Fed wants a market where a variety of clearinghouses can succeed.

Analysts say that because major banks that deal derivatives are so closely affiliated with ICE, they could seek to have many of the products classified as “customized” — the only category that would keep them off regulators’ radar screens under Mr. Geithner’s proposal.

This worries Mr. Harkin, the Iowa Democrat, whose constituents include agricultural concerns that want better oversight of trading.

This is needed, he said, to “add openness, transparency and integrity in futures trading to rebuild the financial system.”

Letting “customized” derivatives — like many credit-default swaps — trade without detailed disclosure is a way to keep regulators in the dark, he said.

Mr. Harkin said Mr. Geithner visited the Democratic caucus on Capitol Hill three weeks ago. At that meeting, Mr. Harkin said, he challenged Mr. Geithner to “define customized swaps.” Mr. Harkin said the Treasury secretary told him he would have to get back to him.

The big dealers, including major banks, say exchange trading would impose overly strict rules. But requiring exchange trading would have another effect: it would reduce the profits dealers make on derivatives.

Members of Congress say the lobbying efforts by big banks promise to produce one of the most intense political face-offs in Washington in years.

“The swaps and derivatives people are all over the place up here,” Mr. Harkin said. “They sure are trying hard to win. A lot of money is on the line.”

Lobbyists for the banks plan to make a renewed push on Capitol Hill this week.


The Financial Lobby

Through political action committees and their own employees, securities and investment firms gave $152 million in political contributions from 2007 to 2008, according to the most recent Federal Election Commission data.

The top five companies — Goldman Sachs, Citigroup, JP Morgan Chase, Bank of America and Credit Suisse — gave $22.7 million and spent more than $25 million combined on lobbying activities in that period, according to election data compiled by the Center for Responsive Politics.

All five companies are members of the CDS Dealers Consortium, the lobbying group formed in November. Lobbying records show that the group has paid Mr. Rosen, the Cleary Gottlieb partner, $430,000 for four months’ work. Mr. Rosen declined to comment, a spokeswoman said, citing “client sensitivities.”

Mr. Rosen, co-author of a treatise on derivatives regulation, frequently counsels the industry on these complex contracts. In late January, according to e-mail messages, he asked the members of the CDS dealer group if they would support his testifying before Congress on behalf of the Securities Industry and Financial Markets Association, a trade group. The CDS dealers are a much smaller group with a far larger interest in derivatives than Sifma as a whole.

Mr. Rosen received an e-mail response from Mary Whalen, managing director for public policy at Credit Suisse, the Swiss bank, which is active in the derivatives market:. “It is a good idea for Ed to write the testimony and if necessary testify. That way we can be sure that the banks’ point of view is expressed, rather than taking a chance on testimony that Sifma might craft.”

Sifma’s members include 650 firms of varying size and interests, many of which do not trade complex derivatives. By taking the lead, Mr. Rosen was able to position himself as the main advocate on derivatives for the securities industry and to make sure that the group of nine banks in the CDS Dealers Consortium had a loud voice within Sifma.

A spokeswoman for Ms. Whalen declined to comment.


Testimony to Congress

At a House Agriculture Committee hearing on derivatives in February, Mr. Rosen testified on behalf of Sifma. He did not mention that he was also a paid lobbyist for the CDS Dealers Consortium, whose interests might be different from Sifma’s.

Those testifying at such hearings are not required to disclose all of their affiliations. But when asked, Representative Collin C. Peterson, a Minnesota Democrat and the chairman of the House Agriculture Committee, said he had not known of Mr. Rosen’s relationship to the consortium. He said he would have liked to have known because it would have guided his questioning and interpretation of Mr. Rosen’s testimony, given that his clients in the smaller CDS group represented a narrower interest group with a more specific agenda.

Mr. Peterson, whose constituents include farmers, who are historically suspicious of Wall Street and whose livelihoods depend on efficient markets, is a longstanding critic of loose regulation. And since his committee oversees the Commodity Futures Trading Commission, he would retain more of his prerogatives overseeing the market if the C.F.T.C. were the main regulator.

Mr. Peterson’s bill specifically bars derivatives trading in a clearinghouse regulated by the New York Federal Reserve, which he said in an interview “is a tool of the big banks” that “wouldn’t do much” to regulate the contracts.

Because the banks’ lobbyists persuaded some of his Republican colleagues to resist more sweeping changes, Mr. Peterson said, he has had to modify a bill he introduced that is similar to Mr. Harkin’s in calling for wide-ranging limits on derivatives.

“The banks run the place,” Mr. Peterson said. “I will tell you what the problem is — they give three times more money than the next biggest group. It’s huge the amount of money they put into politics.”

As a result of the lobbying efforts, champions of broad-based regulation are concerned that proposals will be significantly limited by banking interests.

“The outrage among the public means that things have a chance to change, if things move quickly,” said Michael Greenberger, a professor at the University of Maryland Law School and a former director of trading and markets at the C.F.T.C. “We’re in this brief moment of time when the average citizen is on a level playing field with the lobbyist.”

    Even in Crisis, Banks Dig In for Fight Against Rules, NYT, 1.6.2009, http://www.nytimes.com/2009/06/01/business/01lobby.html?hp






After Many Stumbles, the Fall of an American Giant


June 1, 2009
The New York Times


It is a company that helped lift hundreds of thousands of American workers into the middle class. It transformed Detroit into the Silicon Valley of its day, a symbol of America’s talent for innovation. It built celebrated cars, like Cadillacs, that became synonymous with luxury.

And now it is filing for bankruptcy, something that would have been unfathomable even a few years ago, much less decades ago, when it was a dominant force in the American economy.

Rarely has a company fallen so far and so fast as General Motors. And while its bankruptcy appeared increasingly likely in recent weeks, the arrival of the moment is still a staggering blow, particularly for anyone with ties to the company.

“I never ever could have believed that one day this thing would go that way,” said Jim Wangers, a retired G.M. executive who was part of the team that developed the Pontiac GTO, and the author of “Glory Days,” about Pontiac’s heyday in the muscle-car era of the 1960s. “We were so successful,” he added.

Founded in 1908, G.M. ruled the car industry for more than half a century, with a broad range of vehicles, reflecting the company’s promise to offer “a car for every purse and purpose.”

The expression “What’s good for General Motors is good for the country” entered the lexicon, even though it was a slight misquotation of Charles E. Wilson, G.M.’s president in the early 1950s.

But then G.M. began a long and slow process of undermining itself. Its strengths, like the rigid structure that provided discipline early on, became weaknesses, and it lost its feel for reading the American car market it helped create, as Japanese automakers lured away even its most loyal buyers.

Only eight months ago, Rick Wagoner, then its chief executive, stood before hundreds of G.M. employees to celebrate the company’s 100th anniversary. “We’re a company that’s ready to lead for 100 years to come,” Mr. Wagoner said.

Instead of leading, G.M. will instead be following other failed companies on a well-worn path into bankruptcy court.

The moment will reverberate beyond G.M.’s epicenter in Detroit, to factory towns in other parts of Michigan and in states like Indiana, Tennessee and Louisiana. It will even be felt on Fifth Avenue in New York, where it built its financial headquarters, and Epcot at Walt Disney World in Florida, where G.M. sponsors the Test Track Pavilion, a showcase of its latest cars.

G.M. factories churned out family cars, pickup trucks and memorable muscle cars with taut, sculptured body panels that were rolling displays of American DNA.

A G.M. plant was a ticket to prosperity for the communities lucky enough to land one. G.M. literally put Spring Hill, Tenn., on the map when it picked the town outside Nashville for its Saturn plant in 1985, prompting the hamlet to swell with new homes, motels and restaurants.

Now city officials around the country, including those in Spring Hill, nervously await phone calls on Monday to tell them if their plants will be among the 14 G.M. is expected to announce it will close in the latest round of cuts.

But even after its deep cuts, G.M. can still claim to be the country’s largest automaker.

For G.M., that simple fact — its sheer size — was long used as a trump card to end debates. If the critics were so right about all that was wrong with G.M., why did so many people buy its cars?

The company did have vast numbers of loyal buyers, but G.M. lost them through a series of strategic and cultural missteps starting in the 1960s.

It bungled efforts in the 1980s to cut costs by sharing the underpinnings of its cars across different brands, blurring their distinctiveness.

G.M. gave in to union demands in 1990 and created a program that paid workers even when plants were not running, forcing it to build cars and trucks it could not sell without big incentives.

Its finance staff argued with product developers and marketers who pushed for aggressive spending on new cars and trucks. But forced to feed so many brands, G.M. often resorted to a practice called “launch and leave” — spending billions upfront to bring vehicles to market, but then failing to keep supporting them with sustained advertising.

With its market share shrinking, G.M. could not give its multiple brands and car models the individual attention that helped Honda attract customers to the Accord and Toyota to its Camry.

It also lost interest in vehicles that needed time to find their audience, as happened when the company introduced the EV1 electric vehicle and then dropped it in 1999 after only three years.

Now G.M.’s brand lineup is being halved, with the company jettisoning divisions like Pontiac.

“Nobody gave any respect to this thing called image because it wasn’t in the business plan,” Mr. Wangers said. “It was all about, ‘When is this going to earn a profit?’ ”

Over the years, G.M. executives became practiced at the art of explaining their problems, attributing blame to everyone but themselves.

That list included the United Automobile Workers, for demanding health care coverage and pensions (even though G.M. agreed to provide them); government regulators, for imposing rules that G.M. said hampered its competitiveness; the Japanese government, for unfairly helping its own carmakers break into the United States market; and the news media, for failing to appreciate G.M. vehicles and the strides the company was making to improve them.

Asked in 1995 why he had not moved faster to reorganize the company, the late G.M. chief executive Roger Smith replied, “Wouldn’t it have been wonderful if we could have flipped a switch?”

Even last week, G.M.’s newly retired vice chairman, Robert A. Lutz, said the automaker had experienced a “world of hurt, much of it not of our own doing.”

Sloganeering was not backed up by execution. Executives wore lapel pins, for example, in 2002, with the number “29” — referring to the market share the company vowed to regain (most companies focus on profits). Through April of this year, its share was 19 percent, a steep drop from its peak of 54 percent in 1954.

Consumers started blaming G.M. for sub-par vehicles. They may have given them second and third chances, but many eventually started switching to other brands, which will make it that much harder for G.M. to win them back.

Mr. Wagoner was able to hold on to his job for longer than people expected, as G.M.’s stock fell steadily from about $70 when he took charge at the start of the decade. It closed at 75 cents a share on Friday.

Mr. Wagoner was pushed out by the Obama administration, which is now making the call to push the company into bankruptcy court.

A judge will then start the process of building a new, though much diminished, G.M. into a company that might have a shot at a second century. But the automaker that so dominated center stage in the American car market for so long will have to earn that place back.


Nick Bunkley contributed reporting from Detroit.

    After Many Stumbles, the Fall of an American Giant, NYT, 1.6.2009, http://www.nytimes.com/2009/06/01/business/01downfall.html






G.M. to Seek Bankruptcy and a New Start


June 1, 2009
The New York Times


This article was reported by David E. Sanger, Jeff Zeleny and Bill Vlasic, and written by Mr. Sanger.

WASHINGTON — President Obama will push General Motors into bankruptcy protection on Monday, making a risky bet that by temporarily nationalizing the onetime icon of American capitalism, he can save at least a diminished automaker that is competitive.

The bankruptcy, to be filed in New York, is a moment of reckoning for an industry that was once at the heart of the American economy. It culminates a remarkable four months of confrontation between Washington and Detroit that is expected to result in a drastic downsizing of the company.

It also places the government in uncharted territory as a business owner, as it takes a 60 percent ownership stake in the company during its restructuring.

Reflecting the government’s extraordinary intervention in industry, aides say, Mr. Obama plans to tell the nation on Monday that he believes G.M. can be brought back from the brink of insolvency, even if the company looks almost nothing like the titan of old.

Meanwhile, a federal judge late Sunday night cleared a path for Chrysler to get out of bankruptcy by approving a sale of most of that carmaker’s assets to a new entity to be run by Fiat of Italy.

Administration officials briefed reporters on the G.M. plans Sunday night, as President Obama began to inform members of Congress. But the White House insisted that the aides who talked to reporters could not be named.

In his remarks on Monday, Mr. Obama will spell out a strategy in which a shrunken G.M. can make money even if new car sales remain at a sluggish 10 million a year in the United States and even if G.M., once the giant of the industry, drops below its current 20 percent market share in this country.

But to get there, American taxpayers will invest an additional $30 billion in the company, atop $20 billion already spent just to keep it solvent as the company bled cash as quickly as Washington could inject it. Whether that investment will ever be recovered is still an open question.

The company will also have to shed 21,000 union workers and close 12 to 20 factories, steps that most analysts thought could never be pushed through by a Democratic president allied with organized labor.

Forty percent of the company’s 6,000 dealers will close, the workers’ union will be forced to finance half of its $20 billion health care fund with stock of uncertain value in the restructured G.M., and bondholders, including many retirees, will be forced to take stock worth 10 cents for every dollar they lent the company.

The company’s last steps toward bankruptcy took place over the weekend as a majority of G.M. bondholders agreed not to challenge the filing in court and to exchange their debt for stock.

Lawrence H. Summers, who as head of the National Economic Council serves as one of the co-heads of the auto task force, argued in an interview on Sunday that the bailout of the auto industry was fundamentally different from the Mexican bailout in 1994, the Asian economic crisis in the late 1990s, and the continuing banking crisis.

General Motors and Chrysler, he said, were “clear cases of insolvency,” in which mere loans would not accomplish the goal of getting the automakers past a temporary crisis. “There was no argument that they were solvent, no argument they could meet their obligations.”

He said that left the Obama administration to decide whether to allow “a laissez-faire, uncontrolled bankruptcy, which would have had an enormous cost,” or a “controlled process,” in which the goal was to make sure that the auto companies not only restructured, but were not overburdened with debt. So, in return for what amounted to debtor-in-possession financing, Mr. Obama chose to accept equity in the new company — while insisting that he had no intention of exercising day-to-day control over the company.

“It’s a fine line,” Mr. Summers said, “but we think it is manageable.”

To assist in the restructuring, the automaker is expected to hire the consulting firm Alix Partners, which has worked on several major bankruptcies, including those for Enron and Kmart. One of the firm’s partners, Al Koch, is expected to manage the liquidation of corporate assets that G.M. will shed during its Chapter 11 restructuring, people with knowledge of the strategy said.

Mr. Obama is taking several risks under the plan. None may be bigger than the decision that the United States government will take its 60 percent share of the stock in a new G.M., leaving taxpayers vulnerable if the overhaul is not successful. (Canada, for its part, is taking a 12 percent stake.)

“We don’t think that after this next $30 billion, they will need more money,” one administration official said. “But the fact is there are things you don’t know — like when the car market will come back, and how much Toyota and Honda and Volkswagen will benefit from the chaos.”

On Monday, Mr. Obama is expected to argue that any alternative to his plan would be worse, and that a liquidation of G.M. — the only other real option — would send the unemployment rate soaring over 10 percent and would radiate damage throughout the economy.

But aware of the hardships the plan will impose on regions across the country that depend on auto production, the White House is dispatching a dozen Cabinet members and other officials across four states this week to reassure residents.

Aides say Mr. Obama will portray himself on Monday as a reluctant shareholder, eager to sell the company back to private investors, perhaps within 6 to 18 months.

Officials say the president will insist that once the government sets up new management and a board of directors, it will remove itself from G.M.’s day-to-day operations. But even his aides anticipate intense pressure as the company’s managers are called to testify in Congress and face questions like why they decided to build new cars in Mexico and South Korea, rather than in Michigan or the South.

“Congress and many Americans are going to say, if we own it, why can’t we make these decisions?” one of Mr. Obama’s top economic aides said, “and it’s going to be a challenge to answer that.”

To ease the way, the White House on Sunday briefed reporters on a new set of principles for how the government should behave as a majority shareholder. It argued that the government’s role should be limited primarily to the beginning of the process, but that it should then recede, becoming a passive investor, one seeking to sell its stake quickly.

At the same time, Mr. Obama has laid out goals for all the Detroit automakers that will presumably affect their major strategic decisions. He has urged them, for example, to build smaller cars with significantly better fuel efficiency.

Six months ago, even the suggestion of such deep intervention into G.M.’s operations would have raised huge objections. But by the time the denouement came, the company seemed almost relieved. Robert Lutz, G.M.’s vice chairman, said that “for the first time in our history, the American auto industry has the ear of the administration. Their number one goal is to make us successful.”

Nonetheless, Michael Useem, a professor of management at the Wharton School at the University of Pennsylvania, said the decision would “mean a new chapter in the history books on American capitalism.” He added, “How we think about American free enterprise is really hanging in the balance.”

For Mr. Obama, whose ascent to the White House depended on carrying states across the industrial Midwest, the political risk is significant.

The G.M. bankruptcy will ripple across several states where hundreds of parts suppliers and car dealerships face imminent closings.

Indeed, the four states where Cabinet secretaries are focusing their efforts this week — Indiana, Michigan, Ohio, Wisconsin — all were carried by Mr. Obama last November. It was the first time Indiana has supported a Democratic presidential candidate in 44 years.

These Main Street political challenges will almost certainly be an issue for Democrats on the ballot in next year’s midterm election campaign and in the president’s own re-election effort in 2012. If those jobs shift to nonunion plants in the South, where German and Japanese carmakers have built their facilities, or overseas, Mr. Obama could face criticism inside his own party.

“It is unacceptable to ask U.S. workers to subsidize the exportation of their own jobs,” said Representative Dennis Kucinich, Democrat of Ohio, whose district includes Cleveland. “The taxpayers’ investment should be used to protect American plants so that American workers can build the next generation of automobiles.”

In his presidential campaign speeches last year, often delivered in the shadow of closed manufacturing plants, Mr. Obama bluntly conceded that most of the jobs would not come back. Instead, his administration is pointing to investments that the economic recovery act will make in communities.

Rob McNabney, chairman of the Madison County Democratic Party in Anderson, Ind., a onetime booming automotive center, said the problems for Mr. Obama were severe. “He’s going to be judged by what he does,” Mr. McNabney said.


David E. Sanger and Jeff Zeleny reported from Washington, and Bill Vlasic from Detroit.

G.M. to Seek Bankruptcy and a New Start, NYT, 31.5.2009, http://www.nytimes.com/2009/06/01/business/01auto.html