History > 2008 > USA > Economy (XIIb)

Pat Bagley

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Salt Lake Tribune, Utah

Cagle

18 December 2008

Home Prices Fell

at Sharper Pace in October

December 31, 2008
The New York Times
By JACK HEALY

Home values in America’s 20 largest metropolitan areas dropped at a record pace in October as the fallout from the financial collapse reverberated through the housing market, according to data released Tuesday.

The price of single-family homes fell 18 percent in October from a year earlier, according to the closely watched Standard & Poor’s/Case Shiller Housing Index. All 20 cities reported annual price declines in October; prices in 14 of the 20 metropolitan areas surveyed fell at a record rate as the financial crisis reached a critical point.

“October was clearly the free-fall month,” said David M. Blitzer, chairman of the index committee at Standard & Poor’s. “Everything was going against us in October, without exception.”

After increasing steadily through the first part of the decade, home prices have fallen every month since January 2007, their slide accelerating as troubles in the housing market infected the broader economy and brought down financial firms.

Prices are falling at their fastest pace on record, a sign that the housing market is a long way from recovery.

“It is unlikely that we are anywhere near a bottom in nationwide home prices,” Joshua Shapiro, chief United States economist at MFR, wrote in a note.

The 10-city index dropped 19.1 percent in October, its largest decline in its 21-year history, and the new numbers show that the cities that played host to the greatest excesses of the housing boom are suffering the deepest drops.

Prices in Las Vegas and Phoenix, where developers built subdivisions stretching into the desert, fell by nearly a third in October from 2008. Home prices fell 31 percent in San Francisco and 29 percent in Miami. Prices in New York declined 7.5 percent in October over the same month a year ago.

Fourteen of the 20 cities in the Case-Shiller survey posted double-digit declines for the year. The relative winner was Dallas, which had the smallest yearly decline, of 3 percent. The value of a single-family house in Detroit, which has been pummeled by closing plants and the implosion of the auto industry, was less in October than it was in October 1998.

The Case-Shiller numbers were the latest round of bleak news for the housing sector, which is at the center of the country’s broader economic troubles. Foreclosures, bad loans and collapsing housing prices contributed to the financial crisis earlier this year, and now, the widening recession is dragging housing down even more.

Last week, the National Association of Realtors reported that sales of previously owned homes, which dominate the market, fell to the lowest pace in years. Home values tumbled 13 percent in November from a year earlier, the sharpest drop in more than 40 years, the industry group reported.

A glut of unsold houses is weighing down the market, and housing is likely to deteriorate further in 2009 as the jobs picture continues to weaken. Unemployment is now at 6.7 percent, its highest point in a decade, and economists predict it will rise to 8 or 10 percent next year.

“People who think they’re going to lose their job don’t buy a home,” Steven Ricchiuto, chief economist at Mizuho Securities, said.

    Home Prices Fell at Sharper Pace in October, NYT, 31.12.2008, http://www.nytimes.com/2008/12/31/business/economy/31econ.html

Breaking Up Is Harder to Do

After Housing Fall

December 30, 2008
The New York Times
By JOHN LELAND

When Marci Needle and her husband began to contemplate divorce in June, they thought they had enough money to go their separate ways. They owned a million-dollar home near Atlanta and another in Jacksonville, Fla., as well as investment properties.

Now the market for both houses has crashed, and the couple are left arguing about whether the homes are worth what they owe on them, and whether there are any assets left to divide, Ms. Needle said.

“We’re really trying very hard to be amicable, but it puts a strain on us,” said Ms. Needle, the friction audible in her voice. “I want him to buy me out. It’s in everybody’s interest to settle quickly. That would be my only income. It’s been incredibly stressful.”

Chalk up another victim for the crashing real estate market: the easy divorce.

With nearly one in six homes worth less than the mortgage owed on it, according to Moody’s Economy.com, divorce lawyers and financial advisers around the country say the logistics of divorce have been turned around. “We used to fight about who gets to keep the house,” said Gary Nickelson, president of the American Academy of Matrimonial Lawyers. “Now we fight about who gets stuck with the dead cow.”

As a result, divorce has become more complicated and often more expensive, with lower prospects for money on the other side. Some divorce lawyers say that business has slowed or that clients are deciding to stay together because there are no assets left to help them start over.

“There’s an old joke,” said Randall M. Kessler, Ms. Needle’s lawyer. “Why is a divorce so expensive? Because it’s worth it. Now it better really be worth it.”

In a normal economy, couples typically build equity in their homes, then divide that equity in a divorce, either after selling the house or with one partner buying out the other’s share. But after the recent boom-and-bust cycle, more couples own houses that neither spouse can afford to maintain, and that they cannot sell for what they owe. For couples already under stress, the family home has become a toxic asset.

“It’s much harder to move on with their lives,” said Alton L. Abramowitz, a partner in the New York firm Mayerson Stutman Abramowitz Royer.

Mr. Abramowitz said he was in the middle of several cases where the value of the real estate could not be determined. “All of a sudden,” he said, “prices are all over the place, people aren’t closing, and it becomes virtually impossible to judge how far the market has fallen, because nothing is selling.”

For John and Laurel Goerke, in Santa Barbara, Calif., the housing market crashed in the middle of what Mr. Goerke said had been an orderly legal proceeding. At the height of the market, Mr. Goerke said, they had their house appraised at $2.3 million, which would have given them about $1 million to divide after paying off the mortgage. But by the time they sold last year, the value had fallen by $600,000, cutting their equity by more than half.

“That changed everything,” said Mr. Goerke, who is now nearly two years into the divorce process, with legal and other fees of several hundred thousand dollars. “The prospect of us both being able to buy modest homes was eliminated. The money’s not there.”

Now, with both spouses living in rental properties, their lawyers still cannot agree on what their remaining assets are worth. Their wealth is ticking away at $350 an hour, times two.

“It’s got to end,” Mr. Goerke said, “because at some point there’s nothing left to argue about.”

For other couples it does not have to end. Lisa Decker, a certified divorce financial analyst in Atlanta, said she was seeing couples who were determined to stay together even after divorce because they could not sell their home, a phenomenon rarely seen before outside Manhattan.

“We’re finding the husband on one floor, the wife on the other,” Ms. Decker said. “Now one is coming home with a new boyfriend or girlfriend, and it’s creating a layer to relationships that we haven’t seen before. Unfortunately, we’re seeing ‘The War of the Roses’ for real, not just in a Hollywood movie.”

In California, James Hennenhoefer, a divorce lawyer, said couples were taking advantage of the housing crisis to save money by stopping their mortgage payments but continuing to live together for as long as they can.

“Most of the lenders around here are in complete disarray,” Mr. Hennenhoefer said. “They’re not as aggressive about evictions. Everyone’s hanging around in properties hoping the government will buy all that bad paper and then they’ll negotiate a new deal with the government. They just live in different parts of the house and say, ‘We’ll stay here for as long as we can, and save our money, so we have the ability to move when and if the sheriff comes to toss us out.’ ”

Mr. Hennenhoefer said this tactic worked only with first mortgages; on second and third mortgages, the lenders pursue repayment even after the homeowners have lost the home.

Dee Dee Tomasko, a nursing student and mother in suburban Cleveland, expected to leave her marriage with about $200,000 in starter money, primarily from the marital home, which was appraised at about $1 million in 2006. By the time of her divorce last year, however, the house was appraised at $800,000; her share of the equity came to about $105,000.

Though she is relieved to be out of the marriage, if she had known how little money she would get “I might have stuck with it a little more; I don’t know,” Ms. Tomasko said, adding, “Maybe it would’ve made me think a little harder.”

For divorcing spouses with resources, though, there can be opportunities in the falling housing market.

Josh Kaufman and his wife bought a new 6,500-square-foot house outside Cleveland on five and a half acres, with four bedrooms and two three-car garages, that was worth $1.5 million at the height of the market. When they divorced in June, Mr. Kaufman knew his wife could not afford to carry the home. The longer the divorce process continued, the more the house depreciated; by the time he assumed the house, its appraised value was half what the couple had put into it; he did not pay her anything for her share.

“From a negotiating standpoint we knew that she couldn’t afford to stay in it,” Mr. Kaufman said. “It appeared as an opportunity to turn the negative situation around. There was no emotion involved. It was a business decision on what made most financial sense. It wasn’t an attempt to take advantage of someone.”

Still, his lawyer, Andrew A. Zashin, said, “He bought this house at a bargain basement price.”

For Nancy R., who spoke on condition of anonymity because her colleagues do not know her marital status, the impediments to divorce are visible every time she opens her door.

“There’s three other houses for sale on our same road,” she said. “There’s no way our house would sell.”

For now the couple are separated, waiting for real estate prices to recover. But for Ms. R., that means remaining financially dependent on her husband. He moved out; she remains in the house.

“I still feel kept in certain ways, and I don’t want to rock the boat,” she said. “And it’s draining. So suddenly, when there’s an economic crunch, we’re paying for two places. And we’re both eating out more, because it’s no fun to eat alone.”

The same dynamics that marked their marriage now hang over their separation, she said: “He has the ultimate control.”

“We can’t sell the house,” she said, “and whatever settlement I get depends on a good relationship with him, based on his good will. The lines get blurry and confused quickly, which makes emotions fly easily” — especially if she were to start dating.

“Any icing on the cake is going to come from his good will,” she said, “and that means being the peacemaker. I’m the underdog in this situation. We’re basically forced to remain in a relationship after we’ve decided to end it.”

    Breaking Up Is Harder to Do After Housing Fall, NYT, 30.12.2008, http://www.nytimes.com/2008/12/30/us/30divorce.html

In Season of Recession,

New Ways to Celebrate

December 26, 2008
The New York Times
By JENNIFER MEDINA and KEN BELSON

No lamb this year; ham, at 89 cents a pound, was a better deal. There were gifts, yes, but fewer than usual, and only for the children. Maybe clothes this time around instead of a bag of toys. Somehow, the Long Island chill would have to be made as alluring a holiday destination as the isles of the Caribbean.

It is unsurprising, perhaps, that this is the Christmas of cutbacks, what with neighbors facing foreclosures, relatives being laid off and the endless chatter of a recession like no other. Nearly everyone in New York City, it seemed — from shoppers in central Brooklyn to churchgoers in the Bronx, people eating (and volunteering) at a Harlem soup kitchen and those heading out of town from Penn Station — had something they were doing without.

“It doesn’t feel like Christmas,” said Christine Enniss, who planned to pare her holiday spread to the essentials: green salad, roast chicken and, maybe, potato salad.

But as each family tried to make merry amid the misery, what stayed and went was revealing. Sharon Parker, whose husband recently lost his job as a mechanic, held Christmas dinner for her immediate family of five, rather than playing host to the more than a dozen cousins and friends she usually has over. Susan Strande, an art teacher who lives in the East Village, did her own baking rather than buying fancy tarts and pies. O’Neil Hutchinson, an engineering consultant, visited family in England several weeks ago to avoid the more expensive holiday fares.

Many tried to avoid sacrificing quantity by scaling back on quality. At Sherry-Lehmann Wine and Spirits on Park Avenue near 59th Street, sales of Nicolas Feuillatte Brut Champagne, at $27.95 a bottle, more than doubled, to 160 cases this month, from last December. But “all the higher-end stuff is more likely to stay on the shelves,” said Chris Adams, a partner in the store.

Mr. Adams, for his part, went to Saks Fifth Avenue on Christmas Eve to shop for a last-minute gift for his wife, as he always does. But he stayed away from the pricey perfumes, veering instead to the makeup counter to buy creams she might need and would normally pick up for herself.

Of course, this cutback Christmas can also be seen as the season of the sales. Some took advantage of bargain trips to Las Vegas resorts; others filled shopping bags with merchandise at half price. “Everything was really cheap,” said one woman, a bit defensively, as she boarded a train to see family in New Jersey, laden with Bloomingdale’s bags that were teeming with red-wrapped gifts.

For the Lombardo family, Christmas Eve has always been about the Feast of the Seven Fishes, a traditional Italian banquet.

But with business at the family’s pizzeria in Harrison, N.Y., pinched, the Lombardos scaled back. Each of the 18 adults and seven grandchildren was served the seven courses, but the grownups survived on one lobster tail instead of two. The crowd shared a few dozen clams on the half shell instead of 10 dozen or more, the shrimp cocktails were more modest, the linguini had fewer blue crabs, and there was a bit less scungilli. There were fewer Alaskan king crab legs, too.

“We’re not getting a lot of businessmen taking their clients to lunch,” Sofia Lombardo, a daughter of one of the founders, said of her family’s restaurant, Sofia’s Pizzeria. “They just have slices instead of chicken parmesan.”

The tug of tough times also led the Lombardos to trim their gift-giving. Last year, the adults traded “secret Santa” gifts worth about $75 each. This year, they decided to limit each gift to $30.

Ms. Lombardo’s parents and one of her brothers did away with swapping gifts entirely. “My family always went to the nines,” she said. “Is it weird not opening gifts on Christmas Day? Yes. But the catering business is not where it’s been in the last few years.”

Even with less, there were countless attempts to make Christmas as happy as it has always been. Parents, in particular, took pains to give their children an abundance of gifts, even while watching the price tag.

Last year, Veronica Tyms bought 30 presents for cousins, in-laws, friends and their children. This year, she chopped her list in half and fully expected the would-be recipients to do the same. “We didn’t have to talk about it,” said Ms. Tyms’s friend Margaret Gregory, who joined her this week on a bargain-hunting trip to the Target store in the Atlantic Terminal Mall in Brooklyn. “People just understood.”

Both women, however, still showered their children with presents. Ms. Gregory ticked off the list for her 18-year-old daughter: “clothes, movies, perfume, makeup.” Ms. Tyms bought gifts for her 8-year-old son and more than a dozen other children of friends and relatives.

“My son still believes in Santa Claus,” she said. “I’m not ready to change that yet.”

Ed Chin of Greenwich, Conn., who landed at job at China Merchants Bank in September after being out of work for six months, skipped the usual trip to North Carolina to visit his in-laws and to golf, and he canceled his family’s traditional Champagne brunch. Rather than expensive gifts for each of their four children, ages 9 to 14, Mr. Chin and his wife, Julie, bought an Xbox video game console for them to share.

“Even people in Greenwich have to tighten up,” Ms. Chin said of her wealthy hometown. “This is not the time to spend money on this kind of stuff.”

Dominic Giangrasso, who runs the computer systems at ConEdison Solutions, hooked up a Web camera to his flat-panel television so that his pregnant daughter, who lives in Massachusetts, could watch Christmas dinner at his home in Westchester County rather than spend money on traveling there.

The Rev. Jos Kandathikudy, the priest at St. Thomas Syro Malabar Catholic Church in the Bronx, said that last year he walked from the rectory through the neighborhood to admire the fanciful decorations. This year, he said, the streets were mostly dark.

“Businesses and residences both; I think people just want to and need to save money — everything is reduced,” he said. “But this is not the meaning of Christmas. It is not about lights and presents.”

Father Kandathikudy was one of many ministers to preach about how the tough economic times could help people focus on the religious meaning of Christmas.

One parishioner at the Church of the Ascension on West 107th Street simply handed over $500 to the Rev. John Duffell last week, saying only that someone needed it more than he did.

And at the Church of Saint Raymond on Castle Hill Avenue in the Bronx, one altar girl had trimmed her wish list.

“My daughter understood that things were difficult this year,” said Maria Gonzalez, 40, as she walked into the noon Mass at the church, beaming as her daughter, Jessica Garcia, led the processional. “She loves music and has worked so hard to practice, so all she wanted was a keyboard. She wants to play music to serve God, and I want to help her in that.”
 

Ralph Blumenthal and Kareem Fahim contributed reporting.

    In Season of Recession, New Ways to Celebrate, NYT, 26.12.2008, http://www.nytimes.com/2008/12/26/nyregion/26xmas.html?hp

In Madoff Scandal,

Jews Feel an Acute Betrayal

December 24, 2008
The New York Times
By ROBIN POGREBIN

There is a teaching in the Talmud that says an individual who comes before God after death will be asked a series of questions, the first one of which is, “Were you honest in your business dealings?” But it is the Ten Commandments that have weighed most heavily on the mind of Rabbi David Wolpe of Sinai Temple in Los Angeles in light of the sins for which Bernard L. Madoff stands accused.

“You shouldn’t steal,” Rabbi Wolpe said. “And this is theft on a global scale.”

The full scope of the misdeeds to which Mr. Madoff has confessed in swindling individuals and charitable groups has yet to be calculated, and he is far from being convicted. But Jews all over the country are already sending up something of a communal cry over a cost they say goes beyond the financial to the theological and the personal.

Here is a Jew accused of cheating Jewish organizations trying to help other Jews, they say, and of betraying the trust of Jews and violating the basic tenets of Jewish law. A Jew, they say, who seemed to exemplify the worst anti-Semitic stereotypes of the thieving Jewish banker.

So in synagogues and community centers, on blogs and in countless conversations, many Jews are beating their chests — not out of contrition, as they do on Yom Kippur, the Day of Atonement, but because they say Mr. Madoff has brought shame on their people in addition to financial ruin and shaken the bonds of trust that bind Jewish communities.

“Jews have these familial ties,” Rabbi Wolpe said. “It’s not solely a shared belief; it’s a sense of close communal bonds, and in the same way that your family can embarrass you as no one else can, when a Jew does this, Jews feel ashamed by proxy. I’d like to believe someone raised in our community, imbued with Jewish values, would be better than this.”

Among the apparent victims of Mr. Madoff were many Jewish educational institutions and charitable causes that lost fortunes in his investments; they include Yeshiva University, Hadassah, the Jewish Community Centers Association of North America and the Elie Wiesel Foundation for Humanity. The Chais Family Foundation, which worked on educational projects in Israel, was recently forced to shut down because of losses in Madoff investments. Many of Mr. Madoff’s individual investors were Jewish and supported Jewish causes, apparently drawn to him precisely because of his own communal involvement and because he radiated the comfortable sense of being one of them.

“The Jewish world is not going to be the same for a while,” said Rabbi Jeremy Kalmanofsky of Congregation Ansche Chesed in New York.

Jews are also grappling with the implications of Mr. Madoff’s deeds for their public image, what one rabbi referred to as the “shanda factor,” using the Yiddish term for an embarrassing shame or disgrace. As Bradley Burston, a columnist for haaretz.com, the English-language Web site of the Israeli newspaper Haaretz, wrote on Dec. 17: “The anti-Semite’s new Santa is Bernard Madoff. The answer to every Jew-hater’s wish list. The Aryan Nation at its most delusional couldn’t have come up with anything to rival this.”

The Anti-Defamation League said in a statement that Mr. Madoff’s arrest had prompted an outpouring of anti-Semitic comments on Web sites around the world, most repeating familiar tropes about Jews and money. Abraham H. Foxman, the group’s national director, said that canard went back hundreds of years, but he noted that anti-Semites did not need facts to be anti-Semitic.

“We’re not immune from having thieves and people who engage in fraud,” Mr. Foxman said in an interview, disputing any notion that Mr. Madoff should be seen as emblematic. “Why, because he happens to be Jewish, he should have a conscience?”

He added that Mr. Madoff’s victims extended well beyond the Jewish community.

In addition to theft, the Torah discusses another kind of stealing, geneivat da’at, the Hebrew term for deception or stealing someone’s mind. “In the rabbinic mind-set, he’s guilty of two sins: one is theft, and the other is deception,” said Burton L. Visotzky, a professor at the Jewish Theological Seminary.

“The fact that he stole from Jewish charities puts him in a special circle of hell,” Rabbi Visotzky added. “He really undermined the fabric of the Jewish community, because it’s built on trust. There is a wonderful rabbinic saying — often misapplied — that all Jews are sureties for one another, which means, for instance, that if a Jew takes a loan out, in some ways the whole Jewish community guarantees it.”

Several rabbis said they were reminded of Esau, a figure of mistrust in the Bible. According to a rabbinic interpretation, Esau, upon embracing his brother Jacob after 20 years apart, was actually frisking him to see what he could steal. “The saying goes that, when Esau kisses you,” Rabbi Visotzky said, “check to make sure your teeth are still there.”

Rabbi Kalmanofsky said he was struck by reports that Mr. Madoff had tried to give bonus payments to his employees just before he was arrested, that he was moved to do something right even as he was about to be charged with doing so much wrong. “The small-scale thought for people who work for him amidst this large-scale fraud — what is the dissonance between that sense of responsibility and the gross sense of irresponsibility?” he said.

In a recent sermon, Rabbi Kalmanofsky described Mr. Madoff as the antithesis of true piety.

“I said, what it means to be a religious person is to be terrified of the possibility that you’re going to harm someone else,” he said.

Rabbi Kalmanofsky said Judaism had highly developed mechanisms for not letting people control money without ample checks and balances. When tzedakah, or charity, is collected, it must be done so in pairs. “These things are supposed to be done in the public eye,” Rabbi Kalmanofsky said, “so there is a high degree of confidence that people are behaving in honorable ways.”

While the Madoff affair has resonated powerfully among Jews, some say it actually stands for a broader dysfunction in the business world. “The Bernie Madoff story has become a Jewish story,” said Rabbi Jennifer Krause, the author of “The Answer: Making Sense of Life, One Question at a Time,” “but I do see it in the much greater context of a human drama that is playing out in sensationally terrible ways in America right now.”

“The Talmud teaches that a person who only looks out for himself and his own interests will eventually be brought to poverty,” Rabbi Krause added. “Unfortunately, this is the metadrama of what’s happening in our country right now. When you have too many people who are only looking out for themselves and they forget the other piece, which is to look out for others, we’re brought to poverty.”

According to Jewish tradition, the last question people are asked when they meet God after dying is, “Did you hope for redemption?”

Rabbi Wolpe said he did not believe Mr. Madoff could ever make amends.

“It is not possible for him to atone for all the damage he did,” the rabbi said, “and I don’t even think that there is a punishment that is commensurate with the crime, for the wreckage of lives that he’s left behind. The only thing he could do, for the rest of his life, is work for redemption that he would never achieve.”

    In Madoff Scandal, Jews Feel an Acute Betrayal, NYT, 24.12.2008, http://www.nytimes.com/2008/12/24/us/24jews.html

As Economy Dips,

Arrests for Shoplifting Soar

December 23, 2008
The New York Times
By IAN URBINA and SEAN D. HAMILL

Richard R. Johnson is the first to admit it was a bad idea.

Recently laid off from a job building trailers in Elkhart, Ind., Mr. Johnson came up a dollar short at Martin’s Supermarket last month when he went to buy a $4.99 bottle of sleep medication. So, “for some stupid reason,” he tried to shoplift it and was immediately arrested.

“I was desperate, I guess,” said Mr. Johnson, 25, who said he had never been arrested before. As the economy has weakened, shoplifting has increased, and retail security experts say the problem has grown worse this holiday season. Shoplifters are taking everything from compact discs and baby formula to gift cards and designer clothing.

Police departments across the country say that shoplifting arrests are 10 percent to 20 percent higher this year than last. The problem is probably even greater than arrest records indicate since shoplifters are often banned from stores rather than arrested.

Much of the increase has come from first-time offenders like Mr. Johnson making rash decisions in a pinch, the authorities say. But the ease with which stolen goods can be sold on the Internet has meant a bigger role for organized crime rings, which also engage in receipt fraud, fake price tagging and gift card schemes, the police and security experts say.

And as temptation has grown for potential thieves, so too has stores’ vulnerability.

“More people are desperate economically, retailers are operating with leaner staffs and police forces are cutting back or being told to deprioritize shoplifting calls,” said Paul Jones, the vice president of asset protection for the Retail Industry Leaders Association.

The problem, he said, could be particularly acute this December, “the month of the year when shoplifting always goes way up.”

Two of the largest retail associations say that more than 80 percent of their members are reporting sharp increases in shoplifting, according to surveys conducted in the last two months.

Compounding the problem, stores are more reluctant to stop suspicious customers because they fear scaring away much-needed business. And retailers are increasingly trying to save money by hiring seasonal workers who, security experts say, are themselves more likely to commit fraud or theft and are less practiced at catching shoplifters than full-time employees are.

More than $35 million in merchandise is stolen each day nationwide, and about one in 11 people in America have shoplifted, according to the nonprofit National Association for Shoplifting Prevention.

“We used to see more repeat offenders doing it because of drug addiction,” said Samyah Jubran, an assistant district attorney in Knoxville who for 13 years has handled the bulk of the shoplifting cases there. “But many of these new offenders may be doing it because of the economic situation. Maybe they’re hurting at home, and they’re taking a risk they may not take otherwise.”

Much of the stolen merchandise is sold online.

Dave Finley, the president of Leadsonline.com, which offers software that helps store owners track stolen goods being sold online and at pawn shops, said his company had seen a 50 percent increase over the last year in the number of shoplifting investigations handled by the company.

Security experts say retail theft is also being facilitated by Web sites that sell fake receipts that thieves can use to obtain cash refunds for stolen merchandise.

Andreas Carthy, the creator of one such site, denied that he was assisting with fraud.

“We provide a no-questions-asked service,” he said in an e-mail message, adding that his site was intended for people looking for prank gifts or students seeking to inflate spending to get more generous allowances from their parents.

At about $40 each, the Web site — which insists they are “for novelty use only” — sells about 80 fake receipts a month, Mr. Carthy said.

Local law enforcement and retailers have been trying new tactics to battle shoplifting and other forms of retail crime.

In Savannah, Ga., a local convenience store chain has linked its video surveillance to a police station so officers can help monitor the store for shoplifting and other crimes. In Louisiana, the police have been requiring shoplifters, even first-time offenders, to post $1,000 bail or stay in jail until their court date. On Staten Island, malls have started posting the mug shots of repeat shoplifters on video screens.

“There are more of them, and they seem more desperate,” said a store manager about shoplifters at the nation’s largest shopping center, the Mall of America in Bloomington, Minn., which has seen a 19 percent increase in shoplifting this year over last.

The manager, who asked not to be identified because she was not permitted to speak to reporters, said stealing gift cards was especially popular during the holidays.

Shoplifters also seem to be getting bolder, according to industry surveys.

Thieves often put stolen items in bags lined with aluminum foil to avoid detection by the storefront alarms. Others work in teams, with a decoy who tries to look suspicious to draw out undercover security agents and attract the attention of security cameras, the police said.

“We’re definitely seeing more sprinters,” said an undercover security guard at Macy’s in Oakland, Calif., referring to shoplifters who make a run for the door.

The guard said that most large department stores instructed guards not to chase shoplifters more than 100 feet outside the store, because research showed that confrontations tended to become more serious beyond that point.

The holidays are a particularly popular time for pilfering.

About 20 percent of annual retail sales occur in November and December, and even with precautions, the increased customer traffic makes it tougher to track thieves. Moreover, cashiers are rushed by long lines, making them less vigilant about checking for stolen credit cards.

Mr. Johnson, who was arrested last month, said that after being laid off from his $20-an-hour job at a trailer factory a year ago, he took a job for $6.55 an hour at McDonald’s. Six months later, he was laid off and has not been able to find a job since.

He and his two small children rely on his wife’s minimum-wage job at Wal-Mart, groceries from a food bank and help from his mother, he said.

“I just know things are going to get a lot rougher,” said Mr. Johnson, who is awaiting trial. He added that no matter how tough it became, he had no intention of shoplifting again.

Mr. Martin said he was shocked that the store had decided to prosecute him for stealing such a small amount. A manager at Martin’s Supermarket said the store had a policy of prosecuting all shoplifting.

Retail security experts, however, say that people like Mr. Johnson do not pose the biggest threat to stores. People like Tommy Joe Tidwell do.

Mr. Tidwell, 35, pleaded guilty last month to running a shoplifting ring out of Dayton, Ohio, that netted more than $1 million, according to court papers.

After Mr. Tidwell would print fraudulent UPC bar code labels on his home computer, he and several conspirators would place them on items at Wal-Mart and other stores, then buy the merchandise for a fraction of the real price. They would resell the goods on the Internet, according to court papers.

Joe LaRocca, vice president of loss prevention for the National Retail Federation, said that as the holidays approached, retail security workers were keeping a close eye on receipt fraud.

But to entice shoppers, three times as many stores as last year have loosened their return policies, extending the return period and being more lenient with shoppers who lack receipts, according to the federation.

“Retailers are trying to find a balance,” Mr. LaRocca said. “They want to provide good customer service at a time when it’s crucial for customers to be able to shop comfortably or to return unwanted or duplicate gifts.

“But they also want to prevent criminals from taking advantage of them.”
 

Bob Driehaus contributed reporting.

    As Economy Dips, Arrests for Shoplifting Soar, NYT, 23.12.2008, http://www.nytimes.com/2008/12/23/us/23shoplift.html?hp

As Outlook Dims,

Obama Expands Recovery Plans

December 21, 2008
The New York Times
By JACKIE CALMES

WASHINGTON — Faced with worsening forecasts for the economy, President-elect Barack Obama is expanding his economic recovery plan and will seek to create or save 3 million jobs in the next two years, up from a goal of 2.5 million jobs set just last month, several advisers to Mr. Obama said Saturday.

Even Mr. Obama’s more ambitious goal would not fully offset as many as 4 million jobs that some economists are projecting might be lost in the coming year, according to the information he received from advisers in the past week. That job loss would be double the total this year and could push the nation’s unemployment rate past 9 percent if nothing is done.

The new job target was set after a meeting last Tuesday in which Christina D. Romer, who is Mr. Obama’s choice to lead his Council of Economic Advisers, presented information about previous recessions to establish that the current downturn was likely to be “more severe than anything we’ve experienced in the past half-century,” according to an Obama official familiar with the meeting. Officials said they were working on a plan big enough to stimulate the economy but not so big to provoke major opposition in Congress.

Mr. Obama’s advisers have projected that the multifaceted economic plan would cost $675 billion to $775 billion. It would be the largest stimulus package in memory and would most likely grow as it made its way through Congress, although Mr. Obama has secured Democratic leaders’ agreement to ban spending on pork-barrel projects.

The message from Mr. Obama was that “there was not going to be any spending money for the sake of spending money,” said Lawrence H. Summers, who will be the senior economic adviser in the White House.

Mark Zandi, chief economist of Moody’s Economy.com, who was an adviser to Senator John McCain’s presidential campaign, said, “My advice is, err on the side of too big a package rather than too little.” In an interview, Mr. Zandi, who lately has advised Democratic leaders in Congress, also said he would probably soon raise his own recommendation of a $600 billion stimulus.

Besides new spending, the Obama plan would provide tax relief for low-wage and middle-income workers of roughly $150 billion, Democrats familiar with the proposal said. The government would probably reduce the withholding of income or payroll taxes so that most workers received larger paychecks as soon as possible in 2009, an Obama adviser said.

The sorts of jobs Mr. Obama would propose to create involve construction work on roads, mass transit projects, weatherization of government buildings and installation of information technology in medical facilities, among others.

The outlines for Mr. Obama’s emerging plan, which he is developing in consultation with Congress, including some Republicans, were mostly settled last Tuesday when he met for four hours with economic and policy advisers. Mr. Obama and his family left Saturday for a two-week vacation in Hawaii, his native state, but the advisers will take his guidance — including instructions to be “bolder,” according to one — and complete a draft in time for his return on Jan. 2.

The new Congress convenes on Jan. 6. The House and Senate, with larger Democratic majorities, will work to pass a bill for Mr. Obama to sign shortly after his inauguration, on Jan. 20.

The Obama blueprint covers five main areas of spending and tax breaks: health, education, infrastructure, energy, and support for the poor and the unemployed.

Mr. Summers said the president-elect set short- and long-term themes in choosing the plan’s components: “Creating jobs for people who need them, and doing things that need to be done to lay the foundation for an economy that works for middle-class families.”

At the meeting on Tuesday, Ms. Romer also laid out recommendations from private sector analysts and liberal to conservative economists for a government stimulus that ranged from $800 billion to $1.3 trillion over two years. Those consulted included Martin Feldstein, a conservative economist and longtime Republican presidential adviser, who is at the low end, and Lawrence B. Lindsey, a Federal Reserve governor and Bush administration economist, who has recommended up to $1 trillion.

Even before the election, Mr. Feldstein was publicly arguing that whoever was elected should immediately begin working with Congress on a big spending package. Since then, Mr. Feldstein has also been revising his assessment upward as the economy weakened further. “Without action,” he wrote in an e-mail exchange, “the economy will continue to decline rapidly.”

Many decisions about the details have not been made, or are tentative pending consultations with Congress. Several hundred billion dollars could go to states and cities to finance public works and subsidize their health and education programs so that local governments do not have to raise taxes and cut essential programs, steps that would be counterproductive economically.

The Obama team has a list of $136 billion in infrastructure projects from the National Governors Association that consists mostly of transit construction but also includes port expansions and renewable energy programs. For education, besides money to build and renovate schools, Mr. Obama will call for money to train more teachers, expand early childhood education and provide more college tuition aid.

Federal money to local governments would come with a “use it or lose it” clause under Mr. Obama’s plans, advisers say. The president-elect will also propose to direct some money to public and private partnerships for major projects like a national energy grid intended to harness alternative energy sources such as wind power.

For those “most vulnerable” because of the recession, as the Obama team describes the needy and jobless population, the president-elect will propose expanding the length of unemployment compensation, as well as food aid and additional support.

With millions more Americans losing their health care coverage, either through job losses or because they can no longer afford to pay for insurance, Mr. Obama will propose major new spending to subsidize states’ share of Medicaid and their children’s health programs, and to expand health care coverage for those who lose insurance from their employers.

Mr. Obama plans a down payment on his campaign promise to help pay for hospitals and other medical providers to computerize their health records to save billions in paperwork and administrative costs. He might also propose subsidies to train more nurses, both to create jobs now and address a looming shortage in the health professions.

Mr. Obama has spoken in recent days with the Senate majority leader, Harry Reid, and the House speaker, Nancy Pelosi. Last week, Mr. Reid’s office sent an e-mail message to senators saying that in conversations with the Obama transition team, “we have communicated our willingness to work within these parameters as closely as possible and urge all offices to do the same.”

    As Outlook Dims, Obama Expands Recovery Plans, NYT, 21.12.2008, http://www.nytimes.com/2008/12/21/us/21stimulus.html

The Reckoning

White House Philosophy

Stoked Mortgage Bonfire

December 21, 2008
The New York Times
By JO BECKER, SHERYL GAY STOLBERG
and STEPHEN LABATON

“We can put light where there’s darkness, and hope where there’s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.” — President Bush, Oct. 15, 2002

WASHINGTON — The global financial system was teetering on the edge of collapse when President Bush and his economics team huddled in the Roosevelt Room of the White House for a briefing that, in the words of one participant, “scared the hell out of everybody.”

It was Sept. 18. Lehman Brothers had just gone belly-up, overwhelmed by toxic mortgages. Bank of America had swallowed Merrill Lynch in a hastily arranged sale. Two days earlier, Mr. Bush had agreed to pump $85 billion into the failing insurance giant American International Group.

The president listened as Ben S. Bernanke, chairman of the Federal Reserve, laid out the latest terrifying news: The credit markets, gripped by panic, had frozen overnight, and banks were refusing to lend money.

Then his Treasury secretary, Henry M. Paulson Jr., told him that to stave off disaster, he would have to sign off on the biggest government bailout in history.

Mr. Bush, according to several people in the room, paused for a single, stunned moment to take it all in.

“How,” he wondered aloud, “did we get here?”

Eight years after arriving in Washington vowing to spread the dream of homeownership, Mr. Bush is leaving office, as he himself said recently, “faced with the prospect of a global meltdown” with roots in the housing sector he so ardently championed.

There are plenty of culprits, like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk.

But the story of how we got here is partly one of Mr. Bush’s own making, according to a review of his tenure that included interviews with dozens of current and former administration officials.

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

Mr. Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal. And the regulator Mr. Bush chose to oversee them — an old prep school buddy — pronounced the companies sound even as they headed toward insolvency.

As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn; as recently as February, for example, Mr. Bush was still calling it a “rough patch.”

The result was a series of piecemeal policy prescriptions that lagged behind the escalating crisis.

“There is no question we did not recognize the severity of the problems,” said Al Hubbard, Mr. Bush’s former chief economics adviser, who left the White House in December 2007. “Had we, we would have attacked them.”

Looking back, Keith B. Hennessey, Mr. Bush’s current chief economics adviser, says he and his colleagues did the best they could “with the information we had at the time.” But Mr. Hennessey did say he regretted that the administration did not pay more heed to the dangers of easy lending practices. And both Mr. Paulson and his predecessor, John W. Snow, say the housing push went too far.

“The Bush administration took a lot of pride that homeownership had reached historic highs,” Mr. Snow said in an interview. “But what we forgot in the process was that it has to be done in the context of people being able to afford their house. We now realize there was a high cost.”

For much of the Bush presidency, the White House was preoccupied by terrorism and war; on the economic front, its pressing concerns were cutting taxes and privatizing Social Security. The housing market was a bright spot: ever-rising home values kept the economy humming, as owners drew down on their equity to buy consumer goods and pack their children off to college.

Lawrence B. Lindsay, Mr. Bush’s first chief economics adviser, said there was little impetus to raise alarms about the proliferation of easy credit that was helping Mr. Bush meet housing goals.

“No one wanted to stop that bubble,” Mr. Lindsay said. “It would have conflicted with the president’s own policies.”

Today, millions of Americans are facing foreclosure, homeownership rates are virtually no higher than when Mr. Bush took office, Fannie and Freddie are in a government conservatorship, and the bailout cost to taxpayers could run in the trillions.

As the economy has shed jobs — 533,000 last month alone — and his party has been punished by irate voters, the weakened president has granted his Treasury secretary extraordinary leeway in managing the crisis.

Never once, Mr. Paulson said in a recent interview, has Mr. Bush overruled him. “I’ve got a boss,” he explained, who “understands that when you’re dealing with something as unprecedented and fast-moving as this we need to have a different operating style.”

Mr. Paulson and other senior advisers to Mr. Bush say the administration has responded well to the turmoil, demonstrating flexibility under difficult circumstances. “There is not any playbook,” Mr. Paulson said.

The president declined to be interviewed for this article. But in recent weeks Mr. Bush has shared his views of how the nation came to the brink of economic disaster. He cites corporate greed and market excesses fueled by a flood of foreign cash — “Wall Street got drunk,” he has said — and the policies of past administrations. He blames Congress for failing to reform Fannie and Freddie. Last week, Fox News asked Mr. Bush if he was worried about being the Herbert Hoover of the 21st century.

“No,” Mr. Bush replied. “I will be known as somebody who saw a problem and put the chips on the table to prevent the economy from collapsing.”

But in private moments, aides say, the president is looking inward. During a recent ride aboard Marine One, the presidential helicopter, Mr. Bush sounded a reflective note.

“We absolutely wanted to increase homeownership,” Tony Fratto, his deputy press secretary, recalled him saying. “But we never wanted lenders to make bad decisions.”

A Policy Gone Awry

Darrin West could not believe it. The president of the United States was standing in his living room.

It was June 17, 2002, a day Mr. West recalls as “the highlight of my life.” Mr. Bush, in Atlanta to unveil a plan to increase the number of minority homeowners by 5.5 million, was touring Park Place South, a development of starter homes in a neighborhood once marked by blight and crime.

Mr. West had patrolled there as a police officer, and now he was the proud owner of a $130,000 town house, bought with an adjustable-rate mortgage and a $20,000 government loan as his down payment — just the sort of creative public-private financing Mr. Bush was promoting.

“Part of economic security,” Mr. Bush declared that day, “is owning your own home.”

A lot has changed since then. Mr. West, beset by personal problems, left Atlanta. Unable to sell his home for what he owed, he said, he gave it back to the bank last year. Like other communities across America, Park Place South has been hit with a foreclosure crisis affecting at least 10 percent of its 232 homes, according to Masharn Wilson, a developer who led Mr. Bush’s tour.

“I just don’t think what he envisioned was actually carried out,” she said.

Park Place South is, in microcosm, the story of a well-intentioned policy gone awry. Advocating homeownership is hardly novel; the Clinton administration did it, too. For Mr. Bush, it was part of his vision of an “ownership society,” in which Americans would rely less on the government for health care, retirement and shelter. It was also good politics, a way to court black and Hispanic voters.

But for much of Mr. Bush’s tenure, government statistics show, incomes for most families remained relatively stagnant while housing prices skyrocketed. That put homeownership increasingly out of reach for first-time buyers like Mr. West.

So Mr. Bush had to, in his words, “use the mighty muscle of the federal government” to meet his goal. He proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending.

Concerned that down payments were a barrier, Mr. Bush persuaded Congress to spend up to $200 million a year to help first-time buyers with down payments and closing costs.

And he pushed to allow first-time buyers to qualify for federally insured mortgages with no money down. Republican Congressional leaders and some housing advocates balked, arguing that homeowners with no stake in their investments would be more prone to walk away, as Mr. West did. Many economic experts, including some in the White House, now share that view.

The president also leaned on mortgage brokers and lenders to devise their own innovations. “Corporate America,” he said, “has a responsibility to work to make America a compassionate place.”

And corporate America, eyeing a lucrative market, delivered in ways Mr. Bush might not have expected, with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment.

“This administration made decisions that allowed the free market to operate as a barroom brawl instead of a prize fight,” said L. William Seidman, who advised Republican presidents and led the savings and loan bailout in the 1990s. “To make the market work well, you have to have a lot of rules.”

But Mr. Bush populated the financial system’s alphabet soup of oversight agencies with people who, like him, wanted fewer rules, not more.
 

Like Minds on Laissez-Faire

The president’s first chairman of the Securities and Exchange Commission promised a “kinder, gentler” agency. The second was pushed out amid industry complaints that he was too aggressive. Under its current leader, the agency failed to police the catastrophic decisions that toppled the investment bank Bear Stearns and contributed to the current crisis, according to a recent inspector general’s report.

As for Mr. Bush’s banking regulators, they once brandished a chain saw over a 9,000-page pile of regulations as they promised to ease burdens on the industry. When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks.

The administration won that fight at the Supreme Court. But Roy Cooper, North Carolina’s attorney general, said, “They took 50 sheriffs off the beat at a time when lending was becoming the Wild West.”

The president did push rules aimed at forcing lenders to more clearly explain loan terms. But the White House shelved them in 2004, after industry-friendly members of Congress threatened to block confirmation of his new housing secretary.

In the 2004 election cycle, mortgage bankers and brokers poured nearly $847,000 into Mr. Bush’s re-election campaign, more than triple their contributions in 2000, according to the nonpartisan Center for Responsive Politics. The administration did not finalize the new rules until last month.

Among the Republican Party’s top 10 donors in 2004 was Roland Arnall. He founded Ameriquest, then the nation’s largest lender in the subprime market, which focuses on less creditworthy borrowers. In July 2005, the company agreed to set aside $325 million to settle allegations in 30 states that it had preyed on borrowers with hidden fees and ballooning payments. It was an early signal that deceptive lending practices, which would later set off a wave of foreclosures, were widespread.

Andrew H. Card Jr., Mr. Bush’s former chief of staff, said White House aides discussed Ameriquest’s troubles, though not what they might portend for the economy. Mr. Bush had just nominated Mr. Arnall as his ambassador to the Netherlands, and the White House was primarily concerned with making sure he would be confirmed.

“Maybe I was asleep at the switch,” Mr. Card said in an interview.

Brian Montgomery, the Federal Housing Administration commissioner, understood the significance. His agency insures home loans, traditionally for the same low-income minority borrowers Mr. Bush wanted to help. When he arrived in June 2005, he was shocked to find those customers had been lured away by the “fool’s gold” of subprime loans. The Ameriquest settlement, he said, reinforced his concern that the industry was exploiting borrowers.

In December 2005, Mr. Montgomery drafted a memo and brought it to the White House. “I don’t think this is what the president had in mind here,” he recalled telling Ryan Streeter, then the president’s chief housing policy analyst.

It was an opportunity to address the risky subprime lending practices head on. But that was never seriously discussed. More senior aides, like Karl Rove, Mr. Bush’s chief political strategist, were wary of overly regulating an industry that, Mr. Rove said in an interview, provided “a valuable service to people who could not otherwise get credit.” While he had some concerns about the industry’s practices, he said, “it did provide an opportunity for people, a lot of whom are still in their houses today.”

The White House pursued a narrower plan offered by Mr. Montgomery that would have allowed the F.H.A. to loosen standards so it could lure back subprime borrowers by insuring similar, but safer, loans. It passed the House but died in the Senate, where Republican senators feared that the agency would merely be mimicking the private sector’s risky practices — a view Mr. Rove said he shared.

Looking back at the episode, Mr. Montgomery broke down in tears. While he acknowledged that the bill did not get to the root of the problem, he said he would “go to my grave believing” that at least some homeowners might have been spared foreclosure.

Today, administration officials say it is fair to ask whether Mr. Bush’s ownership push backfired. Mr. Paulson said the administration, like others before it, “over-incented housing.” Mr. Hennessey put it this way: “I would not say too much emphasis on expanding homeownership. I would say not enough early focus on easy lending practices.”

‘We Told You So’

Armando Falcon Jr. was preparing to take on a couple of giants.

A soft-spoken Texan, Mr. Falcon ran the Office of Federal Housing Enterprise Oversight, a tiny government agency that oversaw Fannie Mae and Freddie Mac, two pillars of the American housing industry. In February 2003, he was finishing a blockbuster report that warned the pillars could crumble.

Created by Congress, Fannie and Freddie — called G.S.E.’s, for government-sponsored entities — bought trillions of dollars’ worth of mortgages to hold or sell to investors as guaranteed securities. The companies were also Washington powerhouses, stuffing lawmakers’ campaign coffers and hiring bare-knuckled lobbyists.

Mr. Falcon’s report outlined a worst-case situation in which Fannie and Freddie could default on debt, setting off “contagious illiquidity in the market” — in other words, a financial meltdown. He also raised red flags about the companies’ soaring use of derivatives, the complex financial instruments that economic experts now blame for spreading the housing collapse.

Today, the White House cites that report — and its subsequent effort to better regulate Fannie and Freddie — as evidence that it foresaw the crisis and tried to avert it. Bush officials recently wrote up a talking points memo headlined “G.S.E.’s — We Told You So.”

But the back story is more complicated. To begin with, on the day Mr. Falcon issued his report, the White House tried to fire him.

At the time, Fannie and Freddie were allies in the president’s quest to drive up homeownership rates; Franklin D. Raines, then Fannie’s chief executive, has fond memories of visiting Mr. Bush in the Oval Office and flying aboard Air Force One to a housing event. “They loved us,” he said.

So when Mr. Falcon refused to deep-six his report, Mr. Raines took his complaints to top Treasury officials and the White House. “I’m going to do what I need to do to defend my company and my position,” Mr. Raines told Mr. Falcon.

Days later, as Mr. Falcon was in New York preparing to deliver a speech about his findings, his cellphone rang. It was the White House personnel office, he said, telling him he was about to be unemployed.

His warnings were buried in the next day’s news coverage, trumped by the White House announcement that Mr. Bush would replace Mr. Falcon, a Democrat appointed by Bill Clinton, with Mark C. Brickell, a leader in the derivatives industry that Mr. Falcon’s report had flagged.

It was not until 2003, when Freddie became embroiled in an accounting scandal, that the White House took on the companies in earnest. Mr. Bush decided to quit the long-standing practice of rewarding supporters with high-paying appointments to the companies’ boards — “political plums,” in Mr. Rove’s words. He also withdrew Mr. Brickell’s nomination and threw his support behind Mr. Falcon, beginning an intense effort to give his little regulatory agency more power.

Mr. Falcon lacked explicit authority to limit the size of the companies’ mammoth investment portfolios, or tell them how much capital they needed to guard against losses. White House officials wanted that to change. They also wanted the power to put the companies into receivership, hoping that would end what Mr. Card, the former chief of staff, called “the myth of government backing,” which gave the companies a competitive edge because investors assumed the government would not let them fail.

By the spring of 2005 a deal with Congress seemed within reach, Mr. Snow, the former Treasury secretary, said in an interview.

Michael G. Oxley, an Ohio Republican and then-chairman of the House Financial Services Committee, had produced what Mr. Snow viewed as “a pretty darned good bill,” a watered-down version of what the president sought. But at the urging of Mr. Card and the White House economics team, the president decided to hold out for a tougher bill in the Senate.

Mr. Card said he feared that Mr. Snow was “more interested in the deal than the result.” When the bill passed the House, the president issued a statement opposing it, effectively killing any chance of compromise. Mr. Oxley was furious.

“The problem with those guys at the White House, they had all the answers and they didn’t think they had to listen to anyone, including the Treasury secretary,” Mr. Oxley said in a recent interview. “They were driving the ideological train. He was in the caboose, and they were in the engine room.”

Mr. Card and Mr. Hennessey said they had no regrets. They are convinced, Mr. Hennessey said, that the Oxley bill would have produced “the worst of all possible outcomes,” the illusion of reform without the substance.

Still, some former White House and Treasury officials continue to debate whether Mr. Bush’s all-or-nothing approach scuttled a measure that, while imperfect, might have given an aggressive regulator enough power to keep the companies from failing.

Mr. Snow, for one, calls Mr. Oxley “a hero,” adding, “He saw the need to move. It didn’t get done. And it’s too bad, because I think if it had, I think we could well have avoided a big contributor to the current crisis.”

Unheeded Warnings

Jason Thomas had a nagging feeling.

The New Century Financial Corporation, a huge subprime lender whose mortgages were bundled into securities sold around the world, was headed for bankruptcy in March 2007. Mr. Thomas, an economic analyst for President Bush, was responsible for determining whether it was a hint of things to come.

At 29, Mr. Thomas had followed a fast-track career path that took him from a Buffalo meatpacking plant, where he worked as a statistician, to the White House. He was seen as a whiz kid, “a brilliant guy,” his former boss, Mr. Hubbard, says.

As Mr. Thomas began digging into New Century’s failure that spring, he became fixated on a particular statistic, the rent-to-own ratio.

Typically, as home prices increase, rental costs rise proportionally. But Mr. Thomas sent charts to top White House and Treasury officials showing that the monthly cost of owning far outpaced the cost to rent. To Mr. Thomas, it was a sign that housing prices were wildly inflated and bound to plunge, a condition that could set off a foreclosure crisis as conventional and subprime borrowers with little equity found they owed more than their houses were worth.

It was not the Bush team’s first warning. The previous year, Mr. Lindsay, the former chief economics adviser, returned to the White House to tell his old colleagues that housing prices were headed for a crash. But housing values are hard to evaluate, and Mr. Lindsay had a reputation as a market pessimist, said Mr. Hubbard, adding, “I thought, ‘He’s always a bear.’ ”

In retrospect, Mr. Hubbard said, Mr. Lindsay was “absolutely right,” and Mr. Thomas’s charts “should have been a signal.”

Instead, the prevailing view at the White House was that the problems in the housing market were limited to subprime borrowers unable to make their payments as their adjustable mortgages reset to higher rates. That belief was shared by Mr. Bush’s new Treasury secretary, Mr. Paulson.

Mr. Paulson, a former chairman of the Wall Street firm Goldman Sachs, had been given unusual power; he had accepted the job only after the president guaranteed him that Treasury, not the White House, would have the dominant role in shaping economic policy. That shift merely continued an imbalance of power that stifled robust policy debate, several former Bush aides say.

Throughout the spring of 2007, Mr. Paulson declared that “the housing market is at or near the bottom,” with the problem “largely contained.” That position underscored nearly every action the Bush administration took in the ensuing months as it offered one limited response after another.

By that August, the problems had spread beyond New Century. Credit was tightening, amid questions about how heavily banks were invested in securities linked to mortgages. Still, Mr. Bush predicted that the turmoil would resolve itself with a “soft landing.”

The plan Mr. Bush announced on Aug. 31 reflected that belief. Called “F.H.A. Secure,” it aimed to help about 80,000 homeowners refinance their loans. Mr. Montgomery, the housing commissioner, said that he knew the modest program was not enough — the White House later expanded the agency’s rescue role — and that he would be “flying the plane and fixing it at the same time.”

That fall, Representative Rahm Emanuel, a leading Democrat, former investment banker and now the incoming chief of staff to President-elect Barack Obama, warned the White House it was not doing enough. He said he told Joshua B. Bolten, Mr. Bush’s chief of staff, and Mr. Paulson in a series of phone calls that the credit crisis would get “deep and serious” and that the only answer was big, internationally coordinated government intervention.

“You got to strangle this thing and suffocate it,” he recalled saying.

Instead, Mr. Bush developed Hope Now, a voluntary public-private partnership to help struggling homeowners refinance loans. And he worked with Congress to pass a stimulus package that sent taxpayers $150 billion in tax rebates.

In a speech to the Economic Club of New York in March 2008, he cautioned against Washington’s temptation “to say that anything short of a massive government intervention in the housing market amounts to inaction,” adding that government action could make it harder for the markets to recover.

Dominoes Start to Fall

Within days, Bear Sterns collapsed, prompting the Federal Reserve to engineer a hasty sale. Some economic experts, including Timothy F. Geithner, the president of the New York Federal Reserve Bank (and Mr. Obama’s choice for Treasury secretary) feared that Fannie Mae and Freddie Mac could be the next to fall.

Mr. Bush was still leaning on Congress to revamp the tiny agency that oversaw the two companies, and had acceded to Mr. Paulson’s request for the negotiating room that he had denied Mr. Snow. Still, there was no deal.

Over the previous two years, the White House had effectively set the agency adrift. Mr. Falcon left in 2005 and was replaced by a temporary director, who was in turn replaced by James B. Lockhart, a friend of Mr. Bush from their days at Andover, and a former deputy commissioner of the Social Security Administration who had once run a software company.

On Mr. Lockhart’s watch, both Freddie and Fannie had plunged into the riskiest part of the market, gobbling up more than $400 billion in subprime and other alternative mortgages. With the companies on precarious footing, Mr. Geithner had been advocating that the administration seize them or take other steps to reassure the market that the government would back their debt, according to two people with direct knowledge of his views.

In an Oval Office meeting on March 17, however, Mr. Paulson barely mentioned the idea, according to several people present. He wanted to use the troubled companies to unlock the frozen credit market by allowing Fannie and Freddie to buy more mortgage-backed securities from overburdened banks. To that end, Mr. Lockhart’s office planned to lift restraints on the companies’ huge portfolios — a decision derided by former White House and Treasury officials who had worked so hard to limit them.

But Mr. Paulson told Mr. Bush the companies would shore themselves up later by raising more capital.

“Can they?” Mr. Bush asked.

“We’re hoping so,” the Treasury secretary replied.

That turned out to be incorrect, and did not surprise Mr. Thomas, the Bush economic adviser. Throughout that spring and summer, he warned the White House and Treasury that, in the stark words of one e-mail message, “Freddie Mac is in trouble.” And Mr. Lockhart, he charged, was allowing the company to cover up its insolvency with dubious accounting maneuvers.

But Mr. Lockhart continued to offer reassurances. In a July appearance on CNBC, he declared that the companies were well managed and “worsts were not coming to worst.” An infuriated Mr. Thomas sent a fresh round of e-mail messages accusing Mr. Lockhart of “pimping for the stock prices of the undercapitalized firms he regulates.”

Mr. Lockhart defended himself, insisting in an interview that he was aware of the companies’ vulnerabilities, but did not want to rattle markets.

“A regulator,” he said, “does not air dirty laundry in public.”

Soon afterward, the companies’ stocks lost half their value in a single day, prompting Congress to quickly give Mr. Paulson the power to spend $200 billion to prop them up and to finally pass Mr. Bush’s long-sought reform bill, but it was too late. In September, the government seized control of Freddie Mac and Fannie Mae.

In an interview, Mr. Paulson said the administration had no justification to take over the companies any sooner. But Mr. Falcon disagreed: “They absolutely could have if they had thought there was a real danger.”

By Sept. 18, when Mr. Bush and his team had their fateful meeting in the Roosevelt Room after the failure of Lehman Brothers and the emergency rescue of A.I.G., Mr. Paulson was warning of an economic calamity greater than the Great Depression. Suddenly, historic government intervention seemed the only option. When Mr. Paulson spelled out what would become a $700 billion plan to rescue the nation’s banking system, the president did not hesitate.

“Is that enough?” Mr. Bush asked.

“It’s a lot,” the Treasury secretary recalled replying. “It will make a difference.” And in any event, he told Mr. Bush, “I don’t think we can get more.”

As the meeting wrapped up, a handful of aides retreated to the White House Situation Room to call Vice President Dick Cheney in Florida, where he was attending a fund-raiser. Mr. Cheney had long played a leading role in economic policy, though housing was not a primary interest, and like Mr. Bush he had a deep aversion to government intervention in the market. Nonetheless, he backed the bailout, convinced that too many Americans would suffer if Washington did nothing.

Mr. Bush typically darts out of such meetings quickly. But this time, he lingered, patting people on the back and trying to soothe his downcast staff. “During times of adversity, he bucks everybody up,” Mr. Paulson said.

It was not the end of the failures or government interventions; the administration has since stepped in to rescue Citigroup and, just last week, the Detroit automakers. With 31 days left in office, Mr. Bush says he will leave it to historians to analyze “what went right and what went wrong,” as he put it in a speech last week to the American Enterprise Institute.

Mr. Bush said he was too focused on the present to do much looking back.

“It turns out,” he said, “this isn’t one of the presidencies where you ride off into the sunset, you know, kind of waving goodbye.”

Kitty Bennett contributed reporting.

    White House Philosophy Stoked Mortgage Bonfire, NYT, 21.12.2008, http://www.nytimes.com/2008/12/21/business/21admin.html

Extended Benefits

Are a Lifeline for Many Unemployed

December 21, 2008
The New York Times
By MICHAEL LUO

HUDSON, Fla. — Rick E. Rockwell plopped his large frame down in front of his laptop on Thursday morning, next to a foot-wide sheaf of unpaid bills still in their envelopes, lined up like an accordion on his desk. He logged into his bank account to see if his unemployment check had been deposited yet.

His balance, however, remained stuck at $57.17.

“That’s amazing to me,” Mr. Rockwell said. “It still hasn’t posted yet.”

So Mr. Rockwell began another day as a man of the middle class who is now living on an economic precipice.

Mr. Rockwell, 56, who estimates he has sent out more than 400 job applications over the last year and gone to just four interviews, is one of the more than 5.4 million people across the country receiving unemployment benefits. And Mr. Rockwell is part of arguably the hardest-luck group of all — those who have been out of work for so long that they are depending on a second emergency extension of unemployment insurance that Congress passed and President Bush signed last month.

In the 21 states and the District of Columbia currently with three-month average unemployment rates above 6 percent that means 20 more weeks of what has become an economic lifeline for many in the midst of one of the deepest recessions in the past century. Florida’s rate for November was 7.3 percent. (The other states get seven additional weeks.)

For Mr. Rockwell, who lost his job in January as a sales manager at a computer store that he and his brother owned, the weekly checks of $275 — the maximum allowed him under Florida law and a little less than half his former take-home pay — have become like a crucial piece in the game Jenga, in which players construct a tower of blocks by removing one at a time from the bottom and moving it to the top. Mr. Rockwell is playing a balancing act so he can keep the edifice of his former life from crumbling, paying off certain bills and letting others lapse, so he can stay just ahead of his creditors.

Mr. Rockwell has been without benefits for more than a month after he exhausted the first federal extension, which lasted 13 weeks, on top of the 26 weeks he had received from the State of Florida, back in October.

After supporters were unable to get the legislation through Congress before the election, Mr. Bush signed the second extension in late November. Florida, like other states, has been rushing to get checks to so-called gap people like Mr. Rockwell whose benefits had expired. Advocates estimate there are about 800,000 of them nationwide.

“States are really overwhelmed in terms of responding to claims,” said Andrew Stettner of the National Employment Law Project. “They were pushed beyond the brink in terms of doing the second extension.”

Florida added 50 staff members to its unemployment insurance division in recent weeks, bringing its total to around 870. It also recently added 345 lines to its phone system for a total of just over 1,000, and has extended its call-in hours.

There are, of course, people who are much worse off than Mr. Rockwell; but there are also many who have had much more of a financial cushion to get through this crisis.

Last year, he was making $31,200 a year as sales manager of a small computer store that he had started 15 years ago with his brother, Rodney.

But the rise of big-box stores like Best Buy, along with the recession, combined to drive their store, Comp-U-Save, into the ground.

“All of a sudden, the floor came out from underneath it,” said Rodney Rockwell, who closed his old store in October and re-opened under a new name.

The brothers agreed that Rick would leave in January because the store, by that point, was depending mostly on its repair business, which was Rodney’s specialty. They also figured that because Rick was younger and had some background managing restaurants, he would be able to find a job relatively easily.

He had a little over $5,000 in his bank account, mostly what was left over from a $40,000 second mortgage he took out on his home four years ago for home repairs that never materialized.

But Mr. Rockwell has been succumbing to a slow economic death, which accelerated significantly in the last month as his unemployment benefits lapsed.

His mortgage lender has begun foreclosure proceedings on his modest two-bedroom home, which he bought in 1998 and still owes $117,000 on. He has begun packing to move into his 84-year-old mother’s two-bedroom condominium nearby.

He is in danger of losing his red 2005 Mitsubishi Eclipse Spyder convertible, a prized possession that he keeps gleaming in his garage, because he is behind in his payments. He has listed for sale both that car and a 1996 Toyota RAV4, which he owns outright and keeps in the driveway, but he is hoping to keep the Spyder. The only reason he can still drive it at all is because his mother, who is mostly living just on Social Security, paid his car insurance for this month.

He is two months behind on his electric bill. A partial payment by a local church that he went to recently for help helped him stave off losing his power. His water bill is in arrears as well.

Mr. Rockwell was settling into his love seat two weeks ago to watch the teenage drama “One Tree Hill” — an afternoon pleasure he developed while sitting around out of work — when he found his cable had been cut off.

Last Wednesday, after returning home from dinner with a reporter, Mr. Rockwell found a note on his door from his neighbor that someone had been looking for him.

It turned out to be a collection agency for one of his credit cards. Mr. Rockwell has racked up about $15,000 in bills on various cards, reaching his limit on all but one.

In a final indignity, Mr. Rockwell wakes up most mornings flat on his back on the ground because the air mattress he now sleeps on, after his waterbed sprang a leak earlier this year, has a hole in it.

Mr. Rockwell now spends most of his days hunched in front of his laptop. He spends several hours going through new job postings in the morning and then devotes himself to several Internet marketing schemes promising riches that he has stumbled upon.

Keeping in mind the criticism of those who say expanded unemployment benefits keep people from working, Mr. Rockwell conceded he might appear to be too picky in the jobs he would accept. He has mostly ruled out commuting to Tampa, a much larger city an hour away, because of the distance. He has also tried to confine himself to looking for management-level restaurant jobs.

“I’m not going to clean grills, take out the garbage,” Mr. Rockwell said. “I’ve done that before, but I feel I’m beyond that.”

His home is overflowing with sports memorabilia — autographed posters, baseballs and cards of every sort that he has collected. He has sold off some but is reluctant to part with others at fire-sale prices.

On Thursday, Mr. Rockwell spent several hours plowing through job listings and wound up applying — or re-applying, actually — to just two, one for a restaurant manager at an Arby’s in nearby New Port Richey and one for a shift supervisor job at a Wendy’s in Tampa.

He logged into his bank account again the next day and found to his surprise that his unemployment check had finally been deposited. It is a small reprieve for now.

    Extended Benefits Are a Lifeline for Many Unemployed, NYT, 21.12.2008, http://www.nytimes.com/2008/12/21/us/21unemployed.html

In Need of Cash, More Companies Cut 401(k) Match

December 21, 2008
The New York Times
By MARY WILLIAMS WALSH and TARA SIEGEL BERNARD

Companies eager to conserve cash are trimming their contributions to their workers’ 401(k) retirement plans, putting a new strain on America’s tattered safety net at the very moment when many workers are watching their accounts plummet along with the stock market.

When the FedEx Corporation slimmed down its pension plan last year, it softened the blow by offering workers enriched 401(k) contributions to make up for the pension benefits some would lose. But last week, with Americans sending fewer parcels and FedEx’s revenue growth at a standstill, the company said it would suspend all of its contributions for at least a year.

“We will have to work more years and retire with less money,” said Lee Higham, a 44-year-old senior aircraft mechanic at FedEx, who has worked there for 20 years. “That’s what we are up against now.”

FedEx is not the only one. Eastman Kodak, Motorola, General Motors and Resorts International are among the companies that have cut matching contributions to their plans since September, when the credit markets froze and companies began looking urgently for cash. More companies are expected to suspend their matching contributions in 2009, according to Watson Wyatt, a benefits consulting firm.

For workers, the loss of a matching contribution heightens the pain of a retirement account balance shriveling away because of the plunging stocks markets.

“We are taking a beating,” said another FedEx mechanic, Rafael Garcia. “In a year, I lost $60,000 of my 401(k). You can’t make that up.”

To many retirement policy specialists, the lost contributions are one more sign of America’s failure as a society to face up to the graying of the population and the profound economic forces it will unleash.

Traditional pensions are disappearing, and Washington has yet to ensure that Social Security will remain solvent as baby boomers retire and more workers are needed to support each retiree.

The company cutbacks may mean that some employees put less money into their retirement accounts. Even if they do not, the cuts, while temporary, will have a permanent effect by costing many workers years of future compounding on the missed contributions. No one knows how long credit will remain scarce for companies, or whether companies will start making their matching contributions again when credit loosens and business improves.

“We have had a 30-year experiment with requiring workers to be more responsible for saving and investing for their retirement,” said Teresa Ghilarducci, a professor of economics at the New School. “It has been a grand experiment, and it has failed.”

In the typical 401(k) plan, the employer’s matching contribution is more than just money for retirement. It also motivates employees to set aside more of their own money for old age. The more that workers save in a 401(k) plan, generally, the more “free money” they can get from their employers under the matching provisions.

Retirement policy specialists said they did not expect employees to react immediately to the loss of this incentive by stopping their own contributions. Study after study has shown that employees procrastinate when it comes to retirement-plan chores, and in this case the inertia may work, unwittingly, in their favor.

Americans, however, are facing extreme household financial pressure. President-elect Obama has said that he would support allowing withdrawals from retirement plans without penalties, which would provide short-term relief but would further undercut American’s long-term savings.

Benefits specialists said that if matching contributions continued to dwindle, fewer newly hired workers could be expected to join 401(k) plans. And employees might eventually slow or stop their contributions if the recession drags on and their own cash runs short.

“The problem is, we are heading into this serious recession, and we don’t know how long it will go on for,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “The bottom line is, people will have less money in their 401(k) plans, not just because the financial crisis has decimated their assets, but also because they will not have the employer match for some time.”

Currently, most companies that offer 401(k) plans do provide some sort of matching contributions, according to David Wray, president of the Profit Sharing/401(k) Council of America, an association of employers that provide such plans.

The most typical arrangement is for employers to match 50 cents of every dollar their employees set aside in their retirement accounts, up to 6 percent of pay. Sometimes the match is more, sometimes less, and some employers vary it depending on profitability. Over all, the employer’s cost usually works out to about 3 percent of payroll.

The latest 401(k) cutbacks underscore workers’ vulnerability in an age when companies have been replacing defined-benefit pension plans with the newer 401(k) design. Modern 401(k) plans give workers the power to opt in and out and require them to invest their own money, bearing market risk on their own. That may be appealing when the markets are rising, but it can be terrifying when they fall, as they have recently.

An employer’s contributions to a traditional pension plan cannot be switched on and off at will. Federal rules set a firm contribution schedule, with deadlines and penalties for companies that fall behind. Employers also get significant tax and accounting benefits from operating a traditional pension plan, so they tend to think long and hard before freezing such a plan to save money when the economy cools.

In a 401(k) plan, by contrast, the employer has much greater freedom to stop making matching contributions when times are tough. The contributions are normally measured as a percentage of payroll, and the savings from any cuts are realized immediately. That greatly simplifies planning and making changes.

“Every percent you cut is a percent of payroll,” Ms. Munnell said. “It comes down to the choice of laying people off, or cutting back on some fringe benefits.”

Many of the latest 401(k) cutbacks are turning up in industries with obvious financial problems, like the auto industry, health care and newspaper publishing. Industries that depend on free-spending consumers, like resorts and casinos, are also seeing cuts. Often when one company in an industry cuts its benefits others will follow, to keep their labor costs competitive.

General Motors and Ford Motor have both suspended their matching contributions to their salaried employees’ 401(k) accounts, although their pension plans for unionized workers are unchanged.

Motorola, struggling to stay competitive, stopped contributions to its 401(k) plan this month and froze its pension plan as well.

Other recent cuts have occurred at Resorts International Holdings, Vail Resorts and Station Casinos.

In addition to stopping their 401(k) matching contributions, companies have been freezing salaries this fall, shifting more of the cost of health care to their workers, and laying people off.

“These are really hard times and people are losing their jobs, and in some ways, a suspension of a 401(k) match, while bad, is probably one of the lesser evils out there,” Ms. Munnell said.

In announcing the suspension of the contributions last week, FedEx made clear that its workers in the sorting centers would not be the only ones feeling the pinch. Pay to senior executives is to be cut by 7.5 percent to 10 percent, and the chief executive, Frederick W. Smith, said he would take a 20 percent pay cut. The cutbacks are projected to save $200 million in the remainder of the 2009 fiscal year and $600 million in the 2010 fiscal year.

    In Need of Cash, More Companies Cut 401(k) Match, NYT, 21.12.2008, http://www.nytimes.com/2008/12/21/your-money/401ks-and-similar-plans/21retire.html?hp

Madoff Scheme Kept Rippling Outward, Across Borders

December 20, 2008
The New York Times
 

By the end, the world itself was too small to support the vast Ponzi scheme constructed by Bernard L. Madoff.

Initially, he tapped local money pulled in from country clubs and charity dinners, where investors sought him out to casually plead with him to manage their savings so they could start reaping the steady, solid returns their envied friends were getting.

Then, he and his promoters set sights on Europe, again framing the investments as memberships in a select club. A Swiss hedge fund manager, Michel Dominicé, still remembers the pitch he got a few years ago from a salesman in Geneva. “He told me the fund was closed, that it was something I couldn’t buy,” Mr. Dominicé said. “But he told me he might have a way to get me in. It was weird.”

Mr. Madoff’s agents next cut a cash-gathering swath through the Persian Gulf, then Southeast Asia. Finally, they were hurtling with undignified speed toward China, with invitations to invest that were more desperate, less exclusive. One Beijing businessman who was approached said it seemed the Madoff funds were being pitched “to anyone who would listen.”

The juggernaut began to sputter this fall as investors, rattled by the financial crisis and reaching for cash, started taking money out faster than Mr. Madoff could bring fresh cash in the door. He was arrested on Dec. 11 at his Manhattan apartment and charged with securities fraud, turned in the night before by his sons after he told them his entire business was “a giant Ponzi scheme.”

The case is still viewed more with mystery than clarity, and Mr. Madoff’s version of events can only be drawn from statements attributed to him by federal prosecutors and regulators as he has not commented publicly on the case.

But whatever else Mr. Madoff’s game was, it was certainly this: The first worldwide Ponzi scheme — a fraud that lasted longer, reached wider and cut deeper than any similar scheme in history, entirely eclipsing the puny regional ambitions of Charles Ponzi, the Boston swindler who gave his name to the scheme nearly a century ago.

“Absolutely — there has been nothing like this, nothing that we could call truly global,” said Mitchell Zuckoff, the author of “Ponzi’s Scheme: The True Story of a Financial Legend” and a professor at Boston University. These classic schemes typically prey on local trust, he added. “So this says what we increasingly know to be true about the world: The barriers have come down; money knows no borders, no limits.”

While many of the known victims of Bernard L. Madoff Investment Securities are prominent Jewish executives and organizations — Jeffrey Katzenberg, the Spitzers, Yeshiva University, the Elie Wiesel Foundation and charities set up by the publisher Mortimer B. Zuckerman and the Hollywood director Steven Spielberg — it now appears that anyone with money was a potential target. Indeed, at one point, the Abu Dhabi Investment Authority, a large sovereign wealth fund in the Middle East, had entrusted some $400 million to Mr. Madoff’s firm.

Regulators say Mr. Madoff himself estimated that $50 billion in personal and institutional wealth from around the world was gone. It vanished from the estates of the North Shore of Long Island, from the beachfront suites of Palm Beach, from the exclusive enclaves of Europe. Before it evaporated, it helped finance Mr. Madoff’s coddled lifestyle, with a Manhattan apartment, a beachfront mansion in the Hamptons, a small villa overlooking Cap d’Antibes on the French Riviera, a Mayfair office in London and yachts in New York, Florida and the Mediterranean.

Just as the scheme transcended national borders, it left local regulators far behind. Its lies were translated into a half-dozen languages. Its larceny was denominated in a half-dozen currencies. Its warning signals were missed by enforcement agencies around the globe. And its victims are now scattered from Hollywood to Zurich to Abu Dhabi.

Indeed, while the most visible pain may be local — an important charity forced to close, an esteemed university embarrassed, a fabric of community trust shredded — the clearest lesson is universal: When money goes global, fraud does too.


Bernie Who?

In 1960, as Wall Street was just shaking off its postwar lethargy and starting to buzz again, Bernie Madoff (pronounced MAY-doff) set up his small trading firm. His plan was to make a business out of trading lesser-known over-the-counter stocks on the fringes of the traditional stock market. He was just 22, a graduate of Hofstra University on Long Island.

By 1989, Mr. Madoff ‘s firm was handling more than 5 percent of the trading volume on the august New York Stock Exchange, and Financial World magazine ranked him among the highest-paid people on Wall Street — along with two far more famous financiers, the junk bond king Michael Milken and George Soros, the international investor.

And in 1990, he became the nonexecutive chairman of the Nasdaq market, which at the time was operated as a committee of the National Association of Securities Dealers.

His rise on Wall Street was built on his belief in a visionary notion that seemed bizarre to many at the time: That stocks could be traded by people who never saw each other but were connected only by electronics.

In the mid-1970s, he had spent over $250,000 to upgrade the computer equipment at the Cincinnati Stock Exchange, where he began offering to buy and sell stocks that were listed on the Big Board. The exchange, in effect, was transformed into the first all-electronic computerized stock exchange.

“He was one of the early innovators,” said Michael Ocrant, a journalist who has been a longtime skeptic about Mr. Madoff’s investing success. “He was known to promote the idea that trading would be going electronic — and that turned out to be true.”

He also invested in new electronic trading technology for his firm, making it cheaper for brokerage firms to fill their stock orders. He eventually gained a large amount of business from big firms like A. G. Edwards & Sons, Charles Schwab & Company, Quick & Reilly and Fidelity Brokerage Services. “He was really a low-key guy. No one knew him outside of the sphere of market makers and people in the trading and brokerage business,” said Richard B. Niehoff, who was president of the Cincinnati exchange in the mid-1980s.

Mr. Madoff’s push to modernize trading did not make him popular with the traditional traders on the floor of the New York Exchange, as more of its orders were sent to his firm — partly because he was faster and cheaper, but also because he paid for those orders.

Mr. Madoff pioneered a controversial practice called “payment for order flow.” He would pay big players like Fidelity and Schwab to send their customer orders to his firm instead of to the New York Exchange or other regional exchanges.

The floor traders at those traditional exchanges claimed he was, in essence, paying bribes and that brokers steering business to him were not really getting the best prices for their customers.

Those complaints led to Congressional hearings, but Mr. Madoff made no apologies. He insisted the order-flow payments were necessary to inject greater competition into the marketplace and reduce the near monopoly of the Big Board.

As the debate received more attention, Mr. Madoff became increasingly better known in the financial world. By the end of the technology bubble in 2000, his firm was the largest market maker on the Nasdaq electronic market, and he was a member of the Securities Industry Association, now known as the Securities Industry and Financial Markets Association, Wall Street’s principal lobbying arm.

Still, one Wall Street heavyweight who knew him in those days said he remained “a self-effacing kind of guy,” more likely to spend time on the Riviera than at parties with other traders.
 

Local Hero

Unlike some prominent Wall Street figures who built their fortunes during the heady 1980s and ’90s, Mr. Madoff never became a household name among American investors. But in the clubby world of Jewish philanthropy in the New York area, his increasing wealth and growing reputation among market insiders added polish to his personal prestige.

He became a generous donor, then a courted board member and, finally, the money manager of choice for many prominent regional charities.

A spokeswoman for the New York Community Trust, Ani Hurwitz, recalled a Long Island couple who asked the trust in 1994 to invest their proposed $20 million fund with Mr. Madoff. “We have an investment committee that oversees all investments, and they couldn’t get anything out of him, no information, nothing,” Ms. Hurwitz said. “So we told the donors we wouldn’t do it.”

But many charities did entrust their money to Mr. Madoff, to their eventual grief. The North Shore-Long Island Jewish Health System, for instance, reported that it had lost $5.7 million on an investment with Mr. Madoff that was made at the donor’s behest. (That donor has pledged to cover the loss for the hospital system, its spokesman said.)

Other groups saw the handsome returns on those initial investments and put more of their money into Mr. Madoff’s firm, their leaders said. “Look, for years we made money,” one said.

Most successful business executives intertwine their personal and professional lives. But those two strands of Mr. Madoff’s life were practically inseparable. He sometimes used his 55-foot fishing boat, Bull, as a floating entertainment center for clients. He used his support of organizations like the Public Theater in Manhattan and the Special Olympics to build a network of trust that began to stretch wider and deeper into the Jewish community.

Through friends, the Madoff network reached well beyond New York. At Oak Ridge Country Club, in suburban Hopkins, Minn., known for a prosperous Jewish membership, many who belonged were introduced to the Madoff firm by one of his friends, Mike Engler.

The quiet message became familiar in similar pockets of Jewish wealth and trust: “I know Bernie. I can get you in.” Mr. Engler died in 1994, but many Oak Ridge members remained clients of Mr. Madoff. One elderly member, who said he was too embarrassed to be named, said he had lost tens of millions of dollars, and had friends who had been “completely wiped out.”

Dozens of now-outraged Madoff investors recall that special lure — the sense that they were being allowed into an inner circle, one that was not available to just anyone. A lawyer would call a client, saying: “I’m setting up a fund for Bernie Madoff. Do you want in?” Or an accountant at a golf club might tell his partner for the day: “I can make an introduction. Let me know.” Deals were struck in steakhouses and at charity events, sometimes by Mr. Madoff himself, but with increasing frequency by friends acting on his behalf.

“In a social setting — that’s where it always happened,” said Jerry Reisman, a lawyer from Garden City, N.Y., who knew Mr. Madoff socially. “Country clubs, golf courses, locker rooms. Recommendations, word of mouth. That’s how it was done.”

At exclusive retreats like the Palm steakhouse in East Hampton, Mr. Madoff would work the tables or receive friends at his own, building a following that came to include lawyers, doctors, real estate developers and accountants. Tomas Romano, a manager at the Palm, recalled that “people always came to talk with him” at the restaurant. “He was very well known.”

At his golf clubs — the Atlantic in Bridgehampton and the Palm Beach Country Club in Florida, for example — he frequently shot in the 80s, but often seemed far more interested in his fellow members, many of whom became investors, than in the game itself.

With his wife, Ruth, a nutritionist and cookbook editor, they were considered affable and charming people. “They stood out,” Mr. Reisman said. “Success, philanthropy, esteem — and, if you were lucky enough to be with him as an investor, money.”

He added: “That was the most important thing; he was looked on as someone who could make you money. Really make you money.”


The Go-Betweens

By the mid-1990s, as Mr. Madoff’s wealth and social standing grew, he had moved far beyond the days when golf-club buddies were setting up side deals to invest with him through their lawyers and accountants. Some of the most prominent Jewish figures in high finance and industry began to court Bernie Madoff — and, through them, he reached a new orbit of wealth.

He could not have had a more effective recruiter than Jacob Ezra Merkin, a lion of Wall Street who would be president of the Fifth Avenue Synagogue. Mr. Merkin’s father, Hermann, was the founding president of the synagogue and Herman Wouk, the author, wrote its constitution.

As a direct descendant of the founder of modern Orthodox Judaism and a graduate of Columbia’s English department and Harvard’s law school, Mr. Merkin easily held his own in a congregation that included such luminaries as the author Elie Wiesel, the deal maker Ronald O. Perelman and Ira Rennert, a wealthy financier perhaps best known for building one of the biggest houses and compounds in the Hamptons.

Mr. Merkin was fluent in Jewish and secular studies, as comfortable quoting Psalms as William James. In 1985, after a few years of practicing law at a top-tier firm, now known as Milbank, Tweed, Hadley & McCloy, he started the investment firm that would become Gabriel Capital Group. He contributed to a popular textbook on investing, lived in an art-filled Park Avenue apartment and continued his family’s legacy of generosity.

Philanthropies embraced him. He headed the investment committee for the UJA-Federation of New York for 10 years and was on the boards of Yeshiva University, Carnegie Hall and other nonprofit organizations. He became the chairman of GMAC.

Installed in these lofty positions of trust, Ezra Merkin seemed to be a Wall Street wise man who could be trusted completely to manage other people’s money. One vehicle through which he did that was a fund called Ascot Partners.

It was one of an unknown number of deals that prominent financial figures set up in recent years and marketed to investors, who thought they were tapping into the acumen of some Wall Street titan, like Mr. Merkin.

As it turned out, their money wound up in the same place — in Bernie Madoff’s hands.

These conduits began to steer billions of dollars into the Madoff operation. They operated below the financial radar until Mr. Madoff’s scheme collapsed, when investors suddenly got letters from the sponsoring titan disclosing that all or most of their money was probably gone.

Ascot itself attracted $1.8 billion in investments, almost all of which was entrusted to Mr. Madoff. New York Law School put $3 million into Ascot two years ago, and has now initiated a lawsuit in federal court that accuses Mr. Merkin of abdicating his duties to the partnership.

Mortimer Zuckerman, the billionaire owner of The Daily News, rebuked Ascot in a televised interview, saying he had been misled about what Mr. Merkin had done with some $30 million from Mr. Zuckerman’s charitable foundation.

Behind a wall of lawyers, Mr. Merkin did not take calls this week. In the “Dear Limited Partner” letter he sent on Dec. 11, he noted that he, too, was one of Mr. Madoff’s victims and suffered big losses alongside his investors. He has taken steps to wind down his Ascot, Gabriel and Ariel funds.

Still, some of his clients are stunned, and angry, to learn what Mr. Merkin did with their millions, while collecting an annual management fee of 1.5 percent of the assets for his services.


But before the losses and the outraged cries of betrayal, this was a heady way to steer money into an operation that has now been branded, by its own architect, as a Ponzi scheme. And nothing illustrates what a quantum leap it was for Mr. Madoff than the connections that led Tufts University to entrust him with $20 million in 2005.

Tufts did not actually send a check to Bernard L. Madoff Investment Securities. Rather, it invested in Ascot Partners, Mr. Merkin’s partnership. Mr. Merkin had been a major investor in a company whose board included James A. Stern, the chairman of the Tufts investment committee and a principal in a major private investment firm in New York called the Cypress Group.

Behind these veils of paperwork and partnerships, Mr. Madoff’s reach now extended into the top tiers of Jewish finance and philanthropy, where he rubbed shoulders with corporate directors and prominent hedge fund managers. But there were wider worlds to conquer.

The Circle Grows

Walter M. Noel was the courtly public face of the Fairfield Greenwich Group, the investment firm he started in 1983. A native of Tennessee, Mr. Noel had spent time at larger firms, notably at Chemical Bank, where he headed its international private banking practice, before setting out on his own.

From the beginning, the Noel family was built on access to prestigious social circles. Mr. Noel’s wife, Monica, was part of the prominent Haegler family of Rio de Janeiro and Zurich, and their daughters would marry into international families that provided additional connections for the firm.

In 1989, Mr. Noel merged his business with a small brokerage firm whose general partner was Jeffrey Tucker, a longtime New Yorker who had a law degree from Brooklyn Law School and a résumé that included eight years with the enforcement division of the Securities and Exchange Commission.

Again and again, this pedigreed experience was emphasized by Fairfield as it built itself into a fund of funds, investing in other hedge funds. It boasted to its prospects that its investigation of investment options was “deeper and broader” than those of most firms because of Mr. Tucker’s experience in the regulatory ranks.

Though he is not nearly as prominent as the Noels, who move in the forefront of Connecticut society, Mr. Tucker benefited just as much from Fairfield’s success. Indeed, last year he led a coalition of thoroughbred racing interests that sought to bid for New York State’s horse-racing franchise.

But it was Mr. Tucker who introduced Fairfield to Mr. Madoff. In the early 1990s, Fairfield began placing money with him, according to George L. Ball, the former president of E. F. Hutton and Prudential-Bache chief executive who knows Mr. Noel socially.

That began a long partnership that helped the Fairfield firm earn enviably steady returns, even in down markets — and that lifted Mr. Madoff into a global orbit, one that soon extended his reach into some of the most fabled banking centers of Europe.

If the wealthy Jewish world he occupied was his launch pad, the wealthy promoters he cultivated at Fairfield Greenwich were his booster rocket.

The Fairfield Sentry fund was one of several so-called feeder funds that became portals through which money from wealthy foreign investors would could capitalize on Mr. Madoff’s investment prowess — collecting those exclusive, steady returns that had made him the toast of Palm Beach and the North Shore so many years ago.

The Sentry fund quickly became Fairfield’s signature product, and it boasted of stellar returns. In marketing materials, Fairfield trumpeted Sentry’s 11 percent annual return over the last 15 years, with only 13 losing months. It was a track record that grew increasingly attractive as markets grew more volatile in recent years.

Though Fairfield Greenwich has its headquarters in New York City and its founder, Mr. Noel, operated from his hometown, Greenwich, Conn., a recent report showed that foreign investors provided 95 percent of its managed assets — with 68 percent in Europe, 6 percent in Asia, and 4 percent in the Middle East.

Friends and associates say that Mr. Noel’s sons-in-law spent much of their time marketing the firm’s funds in either their home countries or regions where they had their own family connections.

One of his most visible representatives was Andrés Piedrahita, a Colombian who had married Mr. Noel’s eldest daughter, Corina, and was eventually named a Fairfield founding partner. Based in Madrid and London, Mr. Piedrahita became one of the firm’s most visible representatives in the world of European banking and investment. But his brothers-in-law also had international roots. Yanko Della Schiava, who married Lisina Noel, was the son of the editor of Cosmopolitan in Italy and of the editor of Harper’s Bazaar in Italy and France. Philip J. Toub, who married Alix Noel, is the son of a director of the Saronic Shipping Company, in Lausanne, Switzerland.

Matthew Brown, who married Marisa Noel, is the son of a former mayor of San Marino, Calif. All three joined Fairfield, eventually becoming partners in marketing.

Thanks to the efforts of Mr. Piedrahita, Mr. Della Schiava and others, Fairfield reaped many millions of dollars in investor capital from Europe. The firm set up feeder programs with institutions like Banco Santander, Swedish Bank Nordea and Banque Benedict Hentsch. All became conduits that carried fresh money to Mr. Madoff.

Among his new investors were the Mugrabis, extremely wealthy art collectors from Colombia who have lived in New York for more 20 years. It was their longtime friendship with Mr. Piedrahita that led them to invest in the Sentry fund.

“We had very little money with the fund — just under a million dollars — so I am not that upset personally,” said Alberto Mugrabi, a son of the family patriarch. “It was a very informal thing. We know Andrés since forever, from Bogotá, he’s a great guy, and he says to us, ‘This is the Madoff thing, he’s the master.’”

He added: “I trusted Andrés. I still trust him.”

The World

Mr. Madoff’s higher profile in the highly competitive world of hedge fund management intensified the skepticism about his remarkably consistent returns. Rival money managers complained that when they sought to replicate his trading strategy based on the statements the Madoff firm sent its clients, they found it wasn’t possible.

There was a scattering of inconclusive regulatory investigations — efforts so unavailing that the chairman of the S.E.C. in Washington has ordered an internal investigation to determine how the agency could have missed so many red flags and ignored so many credible complaints over the years.

But foreign regulators were not any quicker to notice Mr. Madoff’s oddities — or the rapidly expanding pool of money entrusted to the various feeder funds he serviced.

There was the small Austrian merchant bank, Bank Medici, which had $2.1 billion invested in funds that ultimately wound up under Mr. Madoff’s control. It collected those investments through two main funds, the Herald USA Fund and the smaller Herald Luxemburg Fund, sold to banks, insurance companies and pension funds since 2004.

The funds, which were closed for private investors, were incredibly popular among investors and no questions were ever asked about its constant returns of about 7 percent, said a former employee at the bank who declined to be identified because he is not authorized to talk to the news media.

Bank Medici sold the funds to investors around the world from its offices in New York, Vienna, Gibraltar, Zurich and Milan. About 93 percent of the funds’ investors are outside Austria. Just last month, the Herald USA fund won Germany’s annual Hedge Fund Awards for “proving consistency in turbulent times.“

Peter Scheithauer, chief executive of Bank Medici since September, accepted the award, saying Bank Medici’s products “should represent mainly one thing: security and returns in good as well as bad times.“

But as he prepared to brief his management board on potential losses connected to the Madoff investments on Friday, he sounded downbeat. “It’s a real tragedy,” Mr. Scheithauer said. “It’s not just us, it’s so many other people as well. If only we knew, but he was paying out fine until just recently.”

Bank Austria, which is now owned by UniCredit of Italy, owns a stake in Bank Medici and also wound up investing with Mr. Madoff through a range of different funds offered under the name Primeo by its hedge fund unit, Pioneer Alternative Investments.

Mr. Madoff was not a well-known presence on the social circuit in Switzerland. Instead, Swiss money managers would go to him, visiting his offices in the Lipstick Building in Midtown Manhattan. Seeing Mr. Madoff there was a bit like visiting the Wizard of Oz: despite his unerring success in generating smooth returns, he seemed quite ordinary, lacking the flamboyance of other well-heeled money managers.

“He did not look like a huge spender; seemed like a family man,” said one veteran Geneva banker, whose firm had money with Mr. Madoff but insisted on anonymity because of the likelihood of lawsuits from angry clients. “He talked about the markets.”

The only thing that struck the Swiss banker as odd was the bull memorabilia strewn about his office. “It seemed strange for a guy to have all these bulls, little sculptures, paintings of bulls,” he recalled. “I’ve seen offices with bears. This was bulls.”

But the aura of exclusivity was the constant, he said. “This was the usual spiel: ‘It’s impossible to get in, but we can get you some if you’re nice.’ He made it look difficult to get into.”

New Frontiers

What began as a quietly coveted investment opportunity for the lucky few in the Jewish country clubs on Long Island became, in its final burst of growth, a thoroughly global financial product whose roots were obscured behind legions of well-dressed, multilingual sales representatives in the financial capitals of Europe.

Indeed, often with the assistance of feeder funds, Mr. Madoff was now in a position to seek and procure money from Arab investors, too. The Abu Dhabi Investment Authority, one of the largest of the world’s sovereign wealth funds, with assets estimated earlier this year to be approaching $700 billion, wound up in the same boat as Jewish charities in New York: caught in the collapse of Bernie Madoff.

In early 2005, the investment authority had invested approximately $400 million with Mr. Madoff, by way of the Fairfield Sentry Fund, according to a profile of the firm that it prepared for a prospective buyer in 2007. Fairfield Sentry had more than $7 billion invested with Mr. Madoff and was his largest investor; now, it says, it is his largest victim.

The investment authority, in turn, was one of Fairfield Sentry’s largest investors. Even after the investment authority took two significant redemptions from the fund, in April 2005 and 2006, its stake the following year of $132 million made up 2 percent of the fund’s assets under management.

The 2007 report lists Philip Jamchid Toub, one of Mr. Noel’s sons-in-law, as the firm’s “agent” with the Abu Dhabi investors, presumably meaning the person who manages the relationship with the particular clients. Mr. Toub, a Fairfield Greenwich partner, is married to Alix Noel and is the son of Said Toub, a wealthy shipping executive from Switzerland.

Other investors for whom Mr. Toub is listed as the agent include the Safra National Bank of New York and the National Bank of Kuwait.

And Fairfield was finding new fields for Mr. Madoff to cultivate. In 2004, the firm turned its eyes to Asia, forming a partnership with Lion Capital of Singapore, now Lion Global Investors, to create Lion Fairfield Capital Management, a joint venture meant to introduce Asian investors to the firm.

“Many investors believe that Asia holds the best global opportunities for hedge funds over the next two to five years, as compared to the U.S. and Europe,” Richard Landsberger, a Fairfield partner and director of Lion Fairfield, told HedgeWorld in 2006.

Yet it appears that Sentry remained Fairfield’s chief focus in this new vineyard. Among the institutions that had invested in the fund are Korea Life Insurance, which has about $30 million to $50 million in the fund; a Taiwanese insurer, Cathay Life, with about $12 million; and Samsung Investment and Securities, with about $6.3 million.

As Fairfield moved into Asia, another feeder fund, Stellar US Absolute Return, was incorporated in Singapore in 2006 to funnel investors’ capital into Sentry. According to data from Bloomberg News, Stellar borrowed $3 for every dollar of investor money it received, in an effort to extract higher returns.

Last year, Jeffrey Tucker went to Asia to educate potential investors in Beijing and Thailand about hedge funds, seeking to allay their concerns about previous blow-ups in the industry like Long-Term Capital Management, a Connecticut hedge fund that had been rescued under the supervision of the Federal Reserve Bank of New York when its exotic derivative investments brought it to the brink of a costly collapse.

“China is moving slowly as the reformers become familiar with what we do,” Mr. Tucker told HedgeWorld in November 2007. “It’s the same thing in Thailand. There are misunderstandings about hedge funds.”

The Scheme Collapses

But even with all the money pouring in, it was not enough, not in a year in which financial markets were plunging.

Suddenly, people wanted cash — even the people who had trusted their cash for so long to Mr. Madoff. Time was running out for history’s first worldwide Ponzi scheme.

But he maintained a brave face at the family firm that he had founded before his sons Mark and Andrew were born, and where they now worked, the firm where his brother Peter had labored at his side for decades, the firm that remained a stock-trading powerhouse on Wall Street.

But that trading business lived on the 18th and 19th floors of the Third Avenue tower, called the Lipstick Building, that was home to Bernard L. Madoff Investment Securities. Mr. Madoff operated his vast but largely unseen “asset management” business from the 17th floor, aided by a small staff that had been with him for years and a computer system separate from the trading business.

His family knew Mr. Madoff had an investment management business, but Mr. Madoff had always kept it separate. Moreover, he explained that he placed his trades through “European counterparties” rather than use the trading desks his sons oversaw.

But Mark and Andrew felt their father had been under increasing tension as the markets grew increasingly difficult this fall.

In early December he remarked to one of them that he was struggling to raise $7 billion to cover redemptions. He seemed tired and drawn, but so was just about everyone else during the turbulent weeks of late November and early December.

Then, early on Dec. 10, he shocked his sons by suggesting that the firm pay out several million dollars in bonuses two months ahead of schedule. When pressed by his sons for a reason, he grew agitated and insisted that they all leave the office and continue the conversation at his apartment on East 64th Street.

It was there, at midmorning, that he told his sons that his business was “a big lie” and, “basically, a giant Ponzi scheme.” There was nothing left, he told them — and he fully expected to go to jail.

The questions have piled up since then: Could Mr. Madoff have sustained this worldwide fraud for so long by himself? Why didn’t regulators, in Washington and abroad, catch him sooner? And will anything be recovered for investors, some of whom have lost every penny?

But when the news of his arrest began to spread on Dec. 11, the first thought that struck an old friend who had known him as a pioneer on Wall Street, was, “There must be an error. It must be another Bernie Madoff.” Then he added, “But then, there is no other Bernie Madoff.”
 

This article was reported by Diana B. Henriques, Alex Berenson, Alison Leigh Cowan, Alan Feuer, Zachery Kouwe, Eric Konigsberg, Nelson D. Schwartz, Michael J. de la Merced, Stephanie Strom, Julia Werdigier and Dirk Johnson.

    Madoff Scheme Kept Rippling Outward, Across Borders, NYT, 20.12.2008, http://www.nytimes.com/2008/12/20/business/20madoff.html?hp

Stocks Jump, Then Slide Back, After Auto Bailout

December 20, 2008
The New York Times
By JACK HEALY

A bailout for Detroit translated into a bounce for Wall Street.

Stocks rose in early trading on Friday, minutes after President Bush announced plans to shore up the auto industry with an infusion of government money for General Motors and Chrysler, the two most troubled carmakers.

Shortly after 11 a.m., the Dow Jones industrial average was up by 115 points or about 1.3 percent while the broader Standard & Poor’s index was 1.6 percent higher.

General Motors stock jumped 16 percent on the news while shares of the Ford Motor Company were 5 percent higher. Chrysler is not publicly traded. Shares of other carmakers like Toyota and Honda and auto-parts manufacturers were also higher Friday morning.

In a statement before the markets opened, Mr. Bush said the government would be providing $13.4 billion in emergency loans to G.M. and Chrysler, with the possibility of another $4 billion in February. Ford has said it does not need immediate aid.

Mr. Bush said an “orderly bankruptcy” — an idea floated by the White House on Thursday — was not possible, but said the automakers needed to undergo major restructuring to become viable.

“The only way to avoid a collapse of the U.S. auto industry is for the executive branch to step in,” Mr. Bush said. “The American people want the auto companies to succeed, and so do I. So today, I’m announcing that the federal government will grant loans to auto companies under conditions similar to those Congress considered last week.”

Stock in America’s publicly traded automakers — Chrysler is owned by the private equity giant Cerberus — has plummeted more than two-thirds this year alone, as sales screeched to a halt and huge operating costs and legacy obligations burned up their cash.

This fall, chief executives of Ford, Chrysler and G.M. made two trips to Congress to plead for a government rescue using money from the $700 billion bailout for financial companies. After the Senate refused to act on a plan, the White House stepped in.

While the government loan will probably keep the lights on at Chrysler and G.M. and prevent an imminent bankruptcy, analysts said it was too soon to say whether the companies would be able to become self-sustaining, or whether they would need to petition the Obama administration for more assistance as the economy languishes in a deep recession throughout 2009.

“Wouldn’t it be wonderful if it turned out to be enough,” said Dana Johnson, chief economist at Comerica Bank, who follows the auto industry. “But you have to think that that’s not the likeliest scenario. It seems pretty likely they’ll be revising these issues with the next administration and the next Congress.”

Crude oil prices fell for another day amid signs that stockpiles are piling up while global consumption slips as people drive less and construction projects halt as the economic slowdown spreads.

Oil futures slid $1.47 to $34.95 a barrel in New York, and are down 75 percent from their peak of $145 a barrel in July.

Standard & Poor’s cut its credit ratings on 11 American and European financial institutions on Friday, reflecting concerns about their balance sheets and their future prospects amid stormy credit markets. Despite the downgrade, shares of the companies, which include J.P. Morgan, Goldman Sachs, Bank of America and Wells Fargo, were mostly higher on Friday.

A two-month rally in the price of ultra-safe government debt abated slightly on Friday as credit markets continued to show signs of healing. Yields on the benchmark 10-year Treasury note, which have dropped to record lows as investors have run for cover, rose to 2.13 percent on Friday.

The three-month Libor, a closely watched measure of how much banks charge one another to borrow money, fell to 1.50 percent on Friday, down from 2.17 percent a month ago.

    Stocks Jump, Then Slide Back, After Auto Bailout, NYT, 20.12.2008, http://www.nytimes.com/2008/12/20/business/20markets.html?ref=business

Bush Approves $17.4 Billion Auto Bailout

December 20, 2008
The New York Times
By DAVID M. HERSZENHORN and DAVID E. SANGER

WASHINGTON — President Bush announced $13.4 billion in emergency loans on Friday to prevent the collapse of General Motors and Chrysler, and another $4 billion available for the hobbled automakers in February with the entire bailout conditioned on the companies undertaking sweeping reorganizations to show that they can return to profitability.

The loans, as G.M. and Chrysler teeter on the brink of insolvency, essentially throw the companies a lifeline from the taxpayers that will keep them afloat until March 31. At that point, the Obama administration will determine if the automakers are meeting the conditions of the loans and will continue to receive government aid or must repay the loans and face bankruptcy.

The money to aid the automakers will come from the Treasury’s $700 billion financial stabilization fund and shortly after Mr. Bush’s announcement, the Treasury secretary, Henry M. Paulson Jr., who will oversee the aid to the auto industry, said Congress would need to release the second $350 billion for that program in short order.

By law, once Mr. Paulson makes a formal request, Congress has 15 days to reject it and deny the additional money. It was unclear when that request would be sent or if lawmakers who have left Washington for the holidays, would return to debate it. The administration’s handling of the program has come under sharp criticism and several lawmakers in both parties have suggested they would oppose the release of more money.

Mr. Bush made his announcement a week after Senate Republicans blocked legislation to aid the automakers that had been negotiated by the White House and Congressional Democrats, and the loan package announced by the president includes roughly identical requirements in that bill, which had been approved by the House.

Mr. Bush, in a televised speech before the opening of the markets, said that under other circumstances he would have let the companies fail, a consequence of their bad business decisions. But given the recession, he said the government had no choice but to step in.

“These are not ordinary circumstances,” Mr. Bush said. “In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action.”

He said that bankruptcy was not a workable alternative. “Chapter 11 is unlikely to work for the American automakers at this time,” Mr. Bush said.

The loan deal requires the companies to quickly reduce their debt by two-thirds, mostly through debt-for-equity swaps, and to reach an agreement with the United Auto Workers union to cut wages and benefits so they are competitive with those of employees of foreign-based automakers in the United States.

The debt reduction and the cuts in wages were central components of proposal by Senator Bob Corker, Republican of Tennessee, who tried to broker a last-minute deal. Those talks had deadlocked on a demand by Republicans that the wage cuts take effect by a set date in 2009, while the union had pressed for a deadline in 2011.

The plan announced on Friday offered a compromise between the positions, by making the requirements non-binding and allowing the automakers to reach different arrangements with the union, provided that they explain how those alternative plans will keep them on a path toward financial viability.

To gain access to the loans, G.M. and Chrysler must agree to a range of concessions, including limits on executive pay and the elimination of private corporate jets.

Under the plan, Mr. Bush essentially handed off to President-elect Barack Obama what will become one of the first, most difficult calls of his presidency: a political and economic judgment about whether G.M. and Chrysler are financially viable. Ford is not seeking immediate government help.

If, by March 31, Chrysler and G.M. cannot meet that standard — and clearly they could not meet it today — the $13.5 billion in Treasury loans would be “called” for immediate repayment, with the government placed in priority, ahead of all other creditors.

In effect, the White House has required the auto companies to cut the equivalent of $13.5 billion in costs within three months, in order to repay the federal money and receive another infusion of capital that will keep them operating for the rest of the year outside of bankruptcy protection, or else providing financing while they reorganize in bankruptcy.

That is an enormous amount of savings to find in such a short period, industry analysts said, especially given the bleak conditions under which the companies are operating. Auto sales are the worst since the early 1980s, and there has been no sign that banks or the car companies’ financing arms would loosen tight restrictions on loans.

However, the car companies have already retained bankruptcy and restructuring advisers, who have been providing regular updates to board members on the steps the automakers would be required to take under a number of possibilities.

To avoid that fate, the companies will need to complete negotiations with the unions, the creditors, the suppliers and the dealers by March 31. Any judgment on the accords they reach with those groups will inevitably be both economic and political.

President-elect Barack Obama, in a statement, praised Mr. Bush’s action and warned the automakers not to blow their chance at achieving financial stability.

“Today’s actions are a necessary step to help avoid a collapse in our auto industry that would have devastating consequences for our economy and our workers,” Mr. Obama said. “The auto companies must not squander this chance to reform bad management practices and begin the long-term restructuring that is absolutely required to save this critical industry and the millions of American jobs that depend on it.”

Mr. Obama and his economic team will have to make a convincing, public case that the wage cuts, plant closings and creditor agreements so change the landscape of the industry that the carmakers can turn profitable in short order.

But Mr. Obama will be under tremendous political pressure as well. If his new team concludes that the automakers have not struck the right deals, it would mean a move to bankruptcy court, and probably widespread layoffs that would ripple far beyond the companies themselves.

Mr. Obama was elected partly with the support of the unions, who liked his talk of protecting jobs by renegotiating trade agreements. Now, in his first months, he will be asking them to give back gains they have negotiated over decades.

Because the bailout legislation failed in Congress, administration officials said that the loan package would essentially take the form of a contract between the government and the automakers. Officials said they expected the agreements would be signed by the end of the day.

In recent days, G.M. and Chrysler have found themselves in an increasingly precarious financial position, with some industry experts predicting that they could not survive through the month without government aid.

Both companies have announced drastic cutbacks, including an extension of the normal holiday-season idling of factories, with some operations to be suspended for a month or more. Other automakers, including Honda and Ford, have announced cutbacks in production as the entire industry deals with the economic downturn and a plunging demand for cars among consumers.

Ford, which is in better financial condition that G.M. and Chrysler, has said that it does not intend to tap the emergency government aid.

Ford, in a statement, applauded the move by the White House.

“All of us at Ford appreciate the prudent step the administration has taken.” Ford’s chief executive, Alan Mulally said in a statement. “The U.S. auto industry is highly interdependent and a failure of one of our competitors would have a ripple effect that could jeopardize millions of jobs and further damage the already weakened U.S. economy.”

And while the legislation that was rejected by Congress would have created a new position within the executive branch to oversee the automakers, a so-called “car czar” Mr. Bush said on Friday that while he remains in office, the emergency loan program will be supervised by Mr. Paulson.

In a statement, G.M. reacted with a mixture of gratitude and relief.

“We appreciate the president extending a financial bridge at this most critical time for the U.S. auto industry and our nation’s economy,” Greg Martin, a company spokesman, said. “This action helps to preserve many jobs, and supports the continued operation of G.M. and the many suppliers, dealers and small businesses across the country that depend on us.”

In a statement to employees, Robert Nardelli, the chief executive of Chrysler, said the company would hold up its end of the bargain.

“The receipt of this loan means Chrysler can continue to pursue its vision to build the fuel-efficient, high-quality cars and trucks people want to buy, will enjoy driving and will want to buy again,” Mr. Nardelli said.

G.M. and Ford shares rose sharply after the opening and Mr. Bush’s announcement helped send the broader markets higher as well. Chrysler is not publicly traded.

The relief of the auto companies was matched by quick criticism from angry lawmakers who said that Mr. Bush was making a mistake.

Senator Judd Gregg, Republican of New Hampshire, who was a lead negotiator in devising the $700 billion financial bailout legislation back in the fall, warned that Mr. Bush had set a dangerous precedent by extending aid to a particular industry.

“These funds were not authorized by Congress for non-financial companies in distress, but were to be used to restore liquidity and stability in the overall financial system of the country and to help prevent fundamental systemic risks in the global marketplace,” Mr. Gregg said in a statement.

Others warned that the money will just be wasted on companies which are suffering not because of the recent economic downturn but because of decades of failed business decisions.

Mr. Bush chided Congress for failing to approve the auto rescue legislation, but he did not note that it was his fellow Republicans in the Senate who were responsible for scuttling the bill in what amounted to a sharp rebuke to the White House in the waning days of his administration.

The decision to use the stabilization fund was also a major turnabout for Mr. Bush, who for weeks had insisted that the Treasury program should not be used to help the automakers.

In the end, it was clear, however, that Mr. Bush did not want G.M. or Chrysler, both American icons, to go down on his watch.

Bill Vlasic and Micheline Maynard contributed reporting from Detroit.

    Bush Approves $17.4 Billion Auto Bailout, NYT, 20.12.2008, http://www.nytimes.com/2008/12/20/business/20auto.html?hp

Editorial

You Mean That Bernie Madoff?

December 19, 2008
The New York Times

Warren Buffett once noted that “you only find out who is swimming naked when the tide goes out.” The collapse of what prosecutors say was the biggest Ponzi scheme in history, orchestrated by the New York money manager Bernard Madoff, has left a large number of powerful and smart people shivering on that beach.

Mr. Madoff’s suspected multibillion-dollar fraud, discovered as falling markets exposed the fiction of its 10 percent annual profits, provided a stark reminder of how greed impairs judgment, duping some of the world’s supposedly savviest investors for decades. It raises once more a fundamental question of these times: Where were the regulators when all of this was happening?

Christopher Cox, the chairman of the Securities and Exchange Commission, acknowledged this week that the agency had received “credible and specific” allegations about the scheme at least a decade ago. He promised an internal inquiry to figure out why the agency did not thoroughly investigate. Two years ago, the commission’s enforcement arm in New York opened an investigation into whether Mr. Madoff’s business was a Ponzi scheme but closed it after finding only mild violations that “were not so serious as to warrant an enforcement action.”

The S.E.C.’s failings go much further than missing this one outrageous scheme. The agency urgently needs new leadership, more resources and high-level political backing to recover its role as Wall Street’s top cop.

Though many details remain unknown, Mr. Madoff’s activities should have set off plenty of alarms. His firm posted improbably constant returns, regardless of market volatility. It claimed to employ strategies that at such a large scale should have produced highly visible movements in options markets, yet passed undetected. Its auditor was a tiny, unknown outfit.

While it is particularly embarrassing to have overlooked what appears to be a low-tech fraud invented 100 years ago, the S.E.C.’s failure to pursue the case aggressively exemplifies its lackadaisical approach to enforcing the law on Wall Street. That has gotten much worse during the Bush administration.

Like other agencies, the S.E.C. has suffered from this administration’s fierce aversion to government regulation. Under Mr. Cox, the enforcement division has been hampered by budget cuts and rule changes that have made it more difficult to impose penalties on companies found guilty of wrongdoing.

In a series of recent reports, the office of the S.E.C.’s inspector general, H. David Kotz, detailed the commission’s repeated failure to pursue investigations. It criticized the agency for not exercising any oversight over Bear Stearns in the months preceding its collapse, among other criticisms.

The S.E.C.’s inability, or unwillingness, to catch Mr. Madoff is extremely troubling. Mary Schapiro, the head of the Financial Services Regulatory Authority and President-elect Barack Obama’s choice to be chairwoman of the commission, has a reputation for diligence. The S.E.C. will need that, as well as financing and strong political backing. All of us, not just Mr. Madoff’s clients, are paying the price for the regulators’ failure to do their job.

    You Mean That Bernie Madoff?, NYT, 19.12.2008, http://www.nytimes.com/2008/12/19/opinion/19fri1.html

Wall Street Lower a Day After Rate Cut

December 18, 2008
The New York Times
By JACK HEALY

Wall Street pared some gains Wednesday morning after soaring a day earlier in response to the Federal Reserve’s decision to cut interest rates to historic lows of zero to 0.25 percent.

And the plummeting yield the benchmark 10-year Treasury note hit lows of 2.11 percent as investors bet that interest rates would remain “exceptionally low,” as the Fed put it on Tuesday, for the foreseeable future. Long-term Treasury debt continued its rally on Wednesday morning as investors searched for a safe place to put their money on the longer end of the yield curve.

After 11 a.m., the Dow Jones industrial average was down 90 points and the broader Standard & Poor’s index of 500 stocks was down 0.9 percent as investors cashed their profits from Tuesday’s 5 percent rally.

Financial stocks, the leaders on Tuesday, tugged stock markets down on Wednesday morning after Morgan Stanley posted a $2.36 billion loss for the fourth quarter, reminding investors that banking and investment institutions were still hurting from the country’s financial and credit crises. Shares of Morgan Stanley were down 2 percent while rival Goldman Sachs was 1.8 perent higher.

Crude oil prices fell even as the OPEC cartel planned to announce that it would cut oil production by 2 million barrels a day beginning Jan. 1. Oil futures in New York fell 24 cents, to $43.36 a barrel, and are down by more than two-thirds from a July high above $145 a barrel.

In Europe, stocks were mixed, though mostly unchanged, in afternoon trading after modest gains in Asia and the dollar fell sharply against other major currencies. The Fed on Tuesday reduced its benchmark interest rate virtually to zero and said that it would pour money into the economy through an array of new lending programs.

Economists had expected the Fed to cut the federal funds rate to 0.5 percent from 1 percent but the central bank cut the target for overnight loans between banks to a range of zero to 0.25 percent.

On Wednesday, the dollar fell to its lowest against the yen since August 1995. In European morning trading, the dollar was at 88.43 yen, down from 89.06 late Tuesday in New York. The euro rose to $1.4112 from $1.4007 late Tuesday in New York, while the British pound rose to $1.5599 from $1.5579. The dollar fell to $1.1155 Swiss francs from 1.1236.

“The Fed cut more than most people expected,” Tohru Sasaki, chief foreign exchange strategist at JPMorgan Chase in Tokyo, said. “But the dollar was already weakening because of the large U.S. current-account deficit, the fiscal deficit and the low investment yields”

The dollar had risen over the last few months as the credit crisis led investors to repatriate funds held overseas, Mr. Sasaki said. But the fed funds rate has now fallen below the Bank of Japan’s overnight rate — the first time that has happened since January 1993. It has also dropped further below the European Central Bank’s benchmark rate of 2.5 percent and the Bank of England’s 2 percent.

That leaves little incentive for money managers to buy short-term government assets, especially considering the currency risk that accompanies such purchases, Mr. Sasaki said. He predicted the dollar would hit record lows by the end of March.

In early afternoon trading, shares in the major European exchanges were slightly lower. The Tokyo benchmark Nikkei 225 stock average rose 0.5 percent, while the S&P/ASX 200 in Sydney gained 0.4 percent. The Hang Seng index in Hong Kong added 2.2 percent, while the Shanghai Stock Exchange composite index rose 0.1 percent.

David Jolly contributed reporting.

    Wall Street Lower a Day After Rate Cut, NYT, 18.12.2008, http://www.nytimes.com/2008/12/18/business/18markets.html?hp

Fed Cuts Key Rate to a Record Low

December 17, 2008
The New York Times
By EDMUND L. ANDREWS and JACKIE CALMES

WASHINGTON — The Federal Reserve entered a new era on Tuesday, lowering its benchmark interest rate virtually to zero and declaring that it would now fight the recession by pumping out vast amounts of money to businesses and consumers through an expanding array of new lending programs.

Going further than expected, the central bank cut its target for the overnight federal funds rate to a range of zero to 0.25 percent and brought the United States to the zero-rate policies that Japan used for years in its own fight against deflation.

Though important as a historic milestone, the move to an interest rate of zero from 1 percent is largely symbolic. The funds rate, which affects what banks charge for lending their reserves to each other, had already fallen to nearly zero in recent days because banks have been so reluctant to do business.

Of much greater practical importance, the Fed bluntly announced that it would print as much money as necessary to revive the frozen credit markets and fight what is shaping up as the nation’s worst economic downturn since World War II.

In effect, the Fed is stepping in as a substitute for banks and other lenders and acting more like a bank itself. “The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth,” it said. Those tools include buying “large quantities” of mortgage-related bonds, longer-term Treasury bonds, corporate debt and even consumer loans.

The move came as President-elect Barack Obama summoned his economic team to a four-hour meeting in Chicago to map out plans for an enormous economic stimulus measure that could cost anywhere from $600 billion to $1 trillion over the next two years.

The two huge economic stimulus programs, one from the Fed and one from the White House and Congress, set the stage for a powerful but potentially risky partnership between Mr. Obama and the Fed’s Republican chairman, Ben S. Bernanke.

“We are running out of the traditional ammunition that’s used in a recession, which is to lower interest rates,” Mr. Obama said at a news conference Tuesday. “It is critical that the other branches of government step up, and that’s why the economic recovery plan is so essential.”

Financial markets were electrified by the Fed action. The Dow Jones industrial average jumped 4.2 percent, or 359.61 points, to close at 8,924.14.

Investors rushed to buy long-term Treasury bonds. Yields on 10-year Treasuries, which have traditionally served as a guide for mortgage rates, plunged immediately after the announcement to 2.26 percent, their lowest level in decades, from 2.51 percent earlier in the day.

Yields on investment-grade corporate bonds edged down to 7.215 percent on Tuesday, from 7.355 on Monday. Yields on riskier high-yielding corporate bonds remained in the stratosphere at 22.493 percent, almost unchanged from 22.732 on Monday.

By contrast, the dollar dropped sharply against the euro and other major currencies for the second consecutive day — a sign that currency markets were nervous about a flood of newly printed dollars. Some analysts predict that the Treasury will have to sell $2 trillion worth of new securities over the next year to finance its existing budget deficit, a new stimulus program and to refinance about $600 billion worth of maturing government debt.

For the moment, Mr. Obama and Mr. Bernanke appear to be on the same page, though that could abruptly change if the economy starts to revive. Fed officials have already assumed that Congress will pass a major spending program to stimulate the economy, and they are counting on it to contribute to economic growth next year.

In more normal times, the Fed might easily start raising interest rates in reaction to a huge new spending program, out of concern about rising inflation.

But data on Tuesday provided new evidence that the biggest threat to prices right now was not inflation but deflation.

The federal government reported on Tuesday that the Consumer Price Index fell 1.7 percent in November, the steepest monthly drop since the government began tracking prices in 1947. The decline was largely driven by the recent plunge in energy prices, but even the so-called core inflation rate, which excludes the volatile food and energy sectors, was essentially zero.

Mr. Obama’s goal is to have a package ready when the new Congress convenes on Jan. 6. His hope is that the House and Senate, with their bigger Democratic majorities, can agree quickly on a plan for Mr. Obama to sign into law soon after he is sworn into office two weeks later.

The Fed, in a statement accompanying its rate decision, acknowledged that the recession was more severe than officials had thought at their last meeting in October.

“Over all, the outlook for economic activity has weakened further,” the central bank said.

“Labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment and industrial production have declined.”

The central bank added: “The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

With fewer than 10 days until Christmas, retailers from Saks Fifth Avenue to Wal-Mart have been slashing prices to draw in consumers, who have sharply reduced their spending over the last six months. On Tuesday, Banana Republic offered customers $50 off on any purchases that total $125. The clothing retailer DKNY offered customers $50 off any purchase totaling $250.

Ian Shepherdson, an analyst at High Frequency Economics, said falling energy prices were likely to bring the year-over-year rate of inflation to below zero in January.

The Fed has already announced or outlined a range of unorthodox new tools that it can use to keep stimulating the economy once the federal funds rate effectively reaches zero. On Tuesday, Fed officials said they stood ready to expand them or create new ones to relieve bottlenecks in the credit markets.

All of the tools involve borrowing by the Fed, which amounts to printing money in vast new quantities, a process the Fed has already started. Since September, the Fed’s balance sheet has ballooned from about $900 billion to more than $2 trillion as it has created money and lent it out. As soon as the Fed completes its plans to buy mortgage-backed debt and consumer debt, the balance sheet will be up to about $3 trillion.

“At some point, and without knowing the timing, the Fed is going to have to destroy all that money it is creating,” said Alan Blinder, a professor of economics at Princeton and a former vice chairman of the Federal Reserve.

“Right now, the crisis is created by the huge demand by banks for hoarding cash. The Fed is providing cash, and the banks want to hoard it. When things start returning to normal, the banks will want to start lending it out. If that much money is left in the monetary base, it would be extremely inflationary.”

Vikas Bajaj contributed reporting from New York.

    Fed Cuts Key Rate to a Record Low, NYT, 17.12.2008, http://www.nytimes.com/2008/12/17/business/economy/17fed.html

Retail Prices Fell at Record Rate in November

December 17, 2008
The New York Times
By JACK HEALY

Consumer prices fell at their fastest rate on record in November while home construction plunged nearly 20 percent in a single month, skidding to its lowest levels in 50 years, according to new government data that shows further weakness in the ailing economy.

The reports on Tuesday morning heightened investors’ expectations that the Federal Reserve would cut its target overnight interest rate from 1 percent to 0.5 percent later in the day. Financial markets in New York opened higher as investors awaited a 2:15 p.m. announcement from the Fed’s Open Market Committee.

The Labor Department reported Tuesday morning that consumer prices fell for the second straight month, and at the fast rate since the government began keeping track in 1947.

Prices at cash registers and gas pumps across the country were a seasonally adjusted 1.7 percent lower in November from the month before, led downward by tumbling energy prices, which fell 17 percent over one month as the demand for gasoline and oil eclipsed.

The core rate of inflation, excluding volatile food and energy prices, was flat for the month.

The price of gasoline plunged 29.5 percent while the cost of fuel oil fell 13.6 percent. Food and beverage prices crept up 0.2 percent in November, their slowest rate of growth all year, while clothing prices were up 0.3 percent.

The unadjusted year-over-year inflation rate was 1.1 percent, the government reported.

In just six months, economists who had fretted about out-of-control inflation as oil peaked near $150 a barrel are now warning of deflation as prices drop as the economy grinds into a lower gear.

“I’ve never seen the economy slam on the brakes as much as it has in the last three months,” said Bill Hampel, chief economist at the Credit Union National Association. “And as the tires are squeaking on the pavement, that’s pulling prices down too.”Meanwhile, new data showed the nation’s housing market continuing to lag. The Commerce Department reported that housing starts fell to a seasonally adjusted 625,000 in November, far below Wall Street’s expectations.

The housing starts in November represented a 18.9 percent drop from the prior month and were 47 percent lower than November 2007. New-home construction in October was revised downward to 771,000 units from an earlier estimate of 791,000.

“This is mind-bogglingly awful,” Ian Shepherdson, United States economist at High Frequency Economics, wrote in a note. “The only consolation here is that unless sales drop much further from their already fantastically-depressed level, the pace of new construction is so low that inventory will fall quickly. Right now, though, housing is still a disaster area.”

Building permits, a measure of future construction, also fell sharply in November, dropping by 15.6 percent to a seasonally adjusted 616,000.

The fall in consumer prices and housing starts follows reports of a continuing slide on the wholesale side of the economy. Last week, the Labor Department reported that the price of finished goods fell 2.2 percent in November, its fourth straight month of declines.

Energy prices led the dip in producer prices, with the cost of home-heating oil, natural gas and gasoline dropping by double digits. But excluding volatile food and energy prices, core producer prices grew at 0.1 percent, their slowest rate all year.

    Retail Prices Fell at Record Rate in November, NYT, 17.12.2008, http://www.nytimes.com/2008/12/17/business/economy/17econ.html?hp

Morgan Stanley Posts $2.36 Billion Loss in Quarter

December 18, 2008
The New York Times
By LOUISE STORY

Morgan Stanley reported a fourth-quarter loss of $2.36 billion — or $2.34 a share — on Wednesday, as the bank remained battered by old investments.

The quarter was Morgan’s first loss this year, though it did not outweigh the profit earned earlier this year. Morgan reported a full-year profit of $1.59 billion, or $1.54 a share.

Revenues in every corner of the bank fell, even when compared with last quarter, showing a deteriorating environment that cut across businesses. Analysts polled by Thomson Reuters had forecast a loss of 34 cents a share. The loss from continuing operations for the quarter, which does not include Discover, the credit card unit that was spun off, was $2.20 billion, or $2.24 a share.

“I was very disappointed with what Morgan Stanley had to report,” Ada Lee, an analyst with Sterne Agee, said. “I just don’t know how this organization got to this point.”

Ms. Lee said she was wrong to have issued a positive report on Morgan’s prospects last month. She said she did not appreciate the bank’s continued exposure to toxic assets at the time. The bank’s expenses are bloated, she said, and a turnaround could be years away.

In a statement, the bank’s chief executive, John J. Mack, pointed to the financial crisis but said Morgan Stanley was aggressively repositioning itself.

“These exceptional market conditions profoundly impacted our performance this year, especially in the fourth quarter,” Mr. Mack said. “The environment will continue to be challenging. But we have successfully evolved and adapted our business across numerous cycles and the current market dislocation gives us openings.”

In response to the earnings release, Moody’s downgraded Morgan’s long-term senior debt rating from A1 to A2 because of the deterioration of its businesses. Morgan shares were down 2 percent, to $15.81, in late morning trading,

The bank is attempting to chart a new course as a deposit-taking institution, which will provide new types of earnings as well as a steady base of financing for some of the bank’s operations. But the makeover includes a retrenchment from areas that once provided handsome profits like proprietary trading, principal investing and prime brokerage, the business that services hedge funds.

Morgan — and its closest rival, Goldman Sachs — have yet to prove they can find new ways to churn out high profits again in the new environment. Goldman reported a quarterly loss of $2.1 billion on Tuesday, its first loss ever. Investors pushed Goldman’s stock upwards on the news, because the loss was not as bad as some had feared.

Much of Morgan’s woes continue to relate to investments it made before the credit crisis began. The bank continued to take losses on those all year, but in the past three quarters, revenues outweighed those losses. In the fourth quarter, the worst losses came from mortgage investments, private equity and real estate.

The bank’s loss this quarter was less than its fourth-quarter loss last year of $3.6 billion or $3.61 a share, when Morgan took the bulk of its mortgage write-downs. But profit this year was down overall 49 percent — to $1.59 billion — from last year, when it was $3.14 billion.

Morgan’s pain was most concentrated in the bank’s asset management unit, where revenues were negative $386 million, down 160 percent from the third quarter. The unit was stung by a $187 million loss related to structure investment vehicles on its balance sheet and write-downs on real estate and private equity in its merchant bank. It also took a $243 million impairment charge on its Crescent real estate subsidiary. And customers also pulled out $76.5 billion of assets from the unit, leaving Morgan with a much lower fee revenue.

The institutional securities group also suffered from write-downs, recording revenue of $844 million, down 86 percent from the third quarter. The tally of losses included: $1.2 billion on mortgage assets, $1.1 billion of write-downs on loans related to buyout commitments and $1.8 billion in loses in real estate and other investment funds. And revenues in businesses like underwriting, equity sales and credit products remained lower than a year ago.

The global wealth management unit showed the least decline with $1.422 billion in revenue, down 9 percent from the third-quarter. This unit includes Morgan’s brokerage network, which the bank has been trying to grow. The unit took $364 million in charges related to auction rate securities that the bank agreed to repurchase from customers earlier this year.

And, reversing a three quarter trend of growth, the broker’s unit had net client outflows of $3.9 billion. Through the third quarter, the unit had attracted $38 billion in new client assets at a time customers were pulling money from elsewhere, and the outflow in the fourth-quarter raises questions over whether the growth will continue next year. Morgan appointed two executives from Wachovia last month to oversee its deposit-base, which it hopes to grow in part through its brokerage network. The bank is also hoping to purchase small banks around the country.

Morgan is also planning joint strategies with its most recent investor, Mitsubishi UFJ, a large bank in Japan. But details of the partnership have not been released yet.

    Morgan Stanley Posts $2.36 Billion Loss in Quarter, NYT, 17.12.2008, http://www.nytimes.com/2008/12/18/business/18morgan.html?hp

    Related > http://www.morganstanley.com/about/ir/shareholder/4q2008.pdf

Goldman Sachs Reports $2.1 Billion Quarterly Loss

December 17, 2008
The New York Times
By BEN WHITE

Goldman Sachs’s long run of profitable quarters came to an end Tuesday as the bank announced a fourth-quarter loss of $2.12 billion, driven by big markdowns on its large portfolio of proprietary investments in everything from Japanese golf courses to Chinese banks.

It was the first losing quarter since Goldman went public in 1999 and demonstrates that even some of Wall Street’s most skilled operators have not been able to overcome historically tough markets and sagging economies across the globe.

Goldman sidestepped earlier losses by staying out of the high-risk subprime mortgage market and taking an early bet against the United States housing industry. But it has been unable to avoid taking big markdowns following nearly 30 percent declines across global equity markets in its fiscal fourth quarter, which ended in November.

Goldman’s quarterly loss, which amounted to $4.97 a share, kicks off a run of what are expected to be poor banking results. Morgan Stanley will report its earnings on Wednesday, and is expected to announce a loss of around $400 million.

Revenue in Goldman’s big trading and principal investment business was negative $4.36 billion compared with $6.93 billion in the fourth quarter of last year.

Goldman slashed compensation and expenses and benefits by 46 percent in 2008 to $10.93 billion, reflecting lower payments because of poor performance. None of Goldman’s top seven executives will take a bonus for this year. Morgan Stanley has made a similar decision.

Employment at the firm, which had been 32,569 at the end of the third quarter, decreased 8 percent. Goldman has said it will reduce head count by a total of 10 percent, but some analysts believe it will need to make deeper cuts to reflect declining revenue and a slowing global economy.

After the announcement, Moody’s, the debt rating agency, downgraded the long-term senior debt ratings of Goldman Sachs to A1 from Aa3. Other ratings were affirmed but the outlook on them remains negative. Goldman shares, down 70 percent this year amid the financial crisis, rose nearly 8 percent, to $71.68 in early trading.

David Viniar, Goldman’s chief financial officer, said it an interview that about $1 billion in losses came in real estate investments while $600 million came in its stake in the shares of the Industrial and Commercial Bank of China.

“Over time, a lot of those are great investments,” he said, reiterating the belief within Goldman that these were largely unavoidable losses that will be reversed as market conditions improve. The same cannot be said for banks with huge holdings in subprime mortgages and related securities that may never recover much of their value, according to Goldman executives.

Mr. Viniar said it was too soon to say when markets might recover but that huge efforts by governments in the United States and around the world should begin having positive effects.

“Economies around the world are quite slow but governments around the world are throwing in enormous resources,” he said. “You don’t know when they will kick in. They may already have kicked in, or they may kick in in a year.”

Mr. Viniar reiterated the view privately expressed by Goldman officials that he does not believe the bank needs to make a major acquisition to help its balance sheet. He noted that the bank reduced its balance sheet to about $885 billion at the end of the quarter from $1 trillion last quarter. He added that $111 billion of that is free cash that does not need to be funded.

Both Goldman Sachs and Morgan Stanley have transformed themselves into deposit-taking bank holding companies that have direct access to borrowing from the Federal Reserve but must also take less risk by law.

Speculation has centered on Goldman’s buying a retail bank or a trust bank that manages money for large institutions and wealthy individuals.

Goldman executives have looked at many possible acquisitions but found none that were both cheap and strategically useful.

    Goldman Sachs Reports $2.1 Billion Quarterly Loss, NYT, 17.12.2008, http://www.nytimes.com/2008/12/17/business/17goldman.html?hp

Mind

A Crisis of Confidence for Masters of the Universe

December 16, 2008
The New York Times
By RICHARD A. FRIEDMAN, M.D.

Meltdown. Collapse. Depression. Panic. The words would seem to apply equally to the global financial crisis and the effect of that crisis on the human psyche.

Of course, it is too soon to gauge the true psychiatric consequences of the economic debacle; it will be some time before epidemiologists can tell us for certain whether depression and suicide are on the rise. But there’s no question that the crisis is leaving its mark on individuals, especially men.

One patient, a hedge fund analyst, came to me recently in a state of great anxiety. “It’s bad, but it might get a lot worse,” I recall him saying. The anxiety was expected and appropriate: he had lost a great deal of his (and others’) assets, and like the rest of us he had no idea where the bottom was. I would have been worried if he hadn’t been anxious.

Over the course of several weeks, with the help of some anti-anxiety medication, his panic subsided as he realized that he would most likely survive economically.

But then something else emerged. He came in one day looking subdued and plopped down in the chair. “I’m over the anxiety, but now I feel like a loser.” This from a supremely self-confident guy who was viewed by his colleagues as an unstoppable optimist.

He was not clinically depressed: his sleep, appetite, sex drive and ability to enjoy himself outside of work were unchanged. This was different.

The problem was that his sense of success and accomplishment was intimately tied to his financial status; he did not know how to feel competent or good about himself without this external measure of his value.

He wasn’t the only one. Over the last few months, I have seen a group of patients, all men, who experienced a near collapse in their self-esteem, though none of them were clinically depressed.

Another patient summed it up: “I used to be a master-of-the-universe kind of guy, but this cut me down to size.”

I have plenty of female patients who work in finance at high levels, but none of them has had this kind of psychological reaction. I can’t pretend this is a scientific survey, but I wonder if men are more likely than women to respond this way. At the risk of trading in gender stereotypes, do men rely disproportionately more on their work for their self-esteem than women do? Or are they just more vulnerable to the inevitable narcissistic injury that comes with performing poorly or losing one’s job?

A different patient was puzzled not by his anxiety about the market, but by his total lack of self-confidence. He had always had an easy intuitive feel for finance. But in the wake of the market collapse, he seriously questioned his knowledge and skill.

Each of these patients experienced a sudden loss of the sense of mastery in the face of the financial meltdown and could not gauge their success or failure without the only benchmark they knew: a financial profit.

The challenge of maintaining one’s self-esteem without recognition or reward is daunting. Chances are that if you are impervious to self-doubt and go on feeling good about yourself in the face of failure, you have either won the temperamental sweepstakes or you have a real problem tolerating bad news.

Of course, the relationship between self-esteem and achievement can be circular. Some argue that that the best way to build self-esteem is to tell people at every turn how nice, smart and talented they are.

That is probably a bad idea if you think that self-esteem and recognition should be the result of accomplishment; you feel good about yourself, in part, because you have done something well. On the other hand, it is hard to imagine people taking the first step without first having some basic notion of self-confidence.

On Wall Street, though, a rising tide lifts many boats and vice versa, which means that there are many people who succeed — or fail — through no merit or fault of their own.

This observation might ease a sense of personal responsibility for the economic crisis, but it was of little comfort to my patients. I think this is because for many of them, the previously expanding market gave them a sense of power along with something as strong as a drug: thrill.

The human brain is acutely attuned to rewards like money, sex and drugs. It turns out that the way a reward is delivered has an enormous impact on its strength. Unpredictable rewards produce much larger signals in the brain’s reward circuit than anticipated ones. Your reaction to situations that are either better or worse than expected is generally stronger to those you can predict.

In a sense, the stock market is like a vast gambling casino where the reward can be spectacular, but always unpredictable. For many, the lure of investing is the thrill of uncertain reward. Now that thrill is gone, replaced by anxiety and fear.

My patients lost more than money in the market. Beyond the rush and excitement, they lost their sense of competence and success. At least temporarily: I have no doubt that, like the economy, they will recover. But it’s a reminder of just how fragile our self-confidence can be.

Richard A. Friedman is a professor of psychiatry at Weill Cornell Medical College.

    A Crisis of Confidence for Masters of the Universe, NYT, 16.12.2008, http://www.nytimes.com/2008/12/16/health/views/16mind.html