History > 2009 > USA > Economy (I)

Julio Ponce, who is seeking work as a chef,

said he did not know how he would cover his rent

after his unemployment benefits lapsed this week.

Ruby Washington/The New York Times

Adding to Recession’s Pain,

Thousands to Lose Jobless Benefits

NYT

12 January 2009

http://www.nytimes.com/2009/01/12/nyregion/12benefits.html 

Obama Pledges

Assistance on Mortgages

January 31, 2009
Filed at 9:57 a.m. ET
The New York Times
By THE ASSOCIATED PRESS
 

WASHINGTON (AP) -- President Barack Obama on Saturday promised to lower mortgage costs, offer job-creating loans for small businesses, get credit flowing and rein in free-spending executives as he readies a new road map for spending billions from the second installment of the financial rescue plan.

The White House is deciding how to structure the remaining half of the $700 billion that Congress approved last year to save financial institutions and lenders. An announcement was possible as early as this coming week on an approach that would use a range of tools to unfreeze credit, helping families and businesses.

At the end of a week that saw hundreds of thousands of people lose their jobs, Obama also used his Saturday radio and Internet address to tell that nation that ''no one bill, no matter how comprehensive, can cure what ails our economy.''

During the final three months of 2008, the economy recorded its worst downhill slide in a quarter-century, stumbling backward at a 3.8 percent pace, the government reported Friday. It could get worse.

Treasury Secretary Timothy Geithner is trying to finish a plan to overhaul the bailout program begun in the Bush administration. Geithner has said the administration is considering using a government-run ''bad bank'' to buy up financial institutions' bad assets. But some officials now say that option is gone because of potential costs.

Many ideas under consideration could end up costing hundreds of billions beyond the original price tag. Aides would not rule out the possibility that the administration would seek more than the $350 billion already set aside.

Obama said Geithner soon would announce a new strategy ''for reviving our financial system that gets credit flowing to businesses and families. We'll help lower mortgage costs and extend loans to small businesses so they can create jobs. We'll ensure that CEOs are not draining funds that should be advancing our recovery.''

His administration ''will insist on unprecedented transparency, rigorous oversight and clear accountability so taxpayers know how their money is being spent and whether it is achieving results.''

Obama's message, largely repackaged from a week of White House statements, was as much for the country as it was for lawmakers: Pass the separate American Recovery and Reinvestment Plan or things are going to get worse.

''Rarely in history has our country faced economic problems as devastating as this crisis,'' the president said. ''Now is the time for those of us in Washington to live up to our responsibilities.''

Obama last week won passage of a separate $825 billion economic stimulus plan in the House without a single Republican vote. It now heads to the Senate, where Vice President Joe Biden predicts the measure will fare better among GOP lawmakers.

Republicans pledged to work with Obama. But they cautioned against treating government spending like a ''trillion-dollar Christmas list'' and renewed their opposition to much in the bill.

''A problem that started on Wall Street is reaching deeper and deeper into Main Street. And the president is counting on members of Congress to come together in a spirit of bipartisanship to act,'' Senate Minority Leader Mitch McConnell, R-Ky., said in the GOP radio address. ''Unfortunately, the plan that Democrats in Congress put forward this week falls far short of the president's vision for a bill that creates jobs and puts us on a path to long-term economic health.''

Obama has signaled his willingness to compromise. His chief spokesman said the president hoped to ''strengthen'' the bill as it headed toward a Senate vote in the week ahead.

Republicans said they hope the administration takes into account their wishes.

''Every day brings more news of layoffs, home foreclosures and shuttered businesses,'' McConnell said. ''And across the country, employers are cutting to the bone even at businesses that most Americans never thought were vulnerable.''

Republicans, however, kept putting forward their own plans. McConnell promoted a mortgage program for creditworthy borrowers, offering fixed-rate 4 percent loans designed to increase housing demands and lending.

------

On the Net:

White House: www.whitehouse.gov

Obama Pledges Assistance on Mortgages, NYT, 31.1.2009, http://www.nytimes.com/aponline/2009/01/31/washington/AP-Obama-Economy.html

Steep Slide in Economy

as Unsold Goods Pile Up

January 31, 2009
The New York Times
By LOUIS UCHITELLE

The economy shrank at an accelerating pace late last year, the government reported on Friday, adding to the urgency of a stimulus package capable of bringing the country back from a recession that appears to be deepening.

The actual decline in the gross domestic product — at a 3.8 percent annual rate — fell short of the 5 to 6 percent that most economists had expected for the fourth quarter. But that was because consumption collapsed so quickly that goods piled up in inventory, unsold but counted as part of the nation’s output.

“The drop in spending was so fast, so rapid, that production could not be cut fast enough,” said Nigel Gault, chief domestic economist at IHS Global Insight. “That is happening now, and the contraction in the current quarter, as a result, will probably exceed 5 percent.”

The dismal fourth quarter, and the likelihood of more of the same through the spring, are fueling discussion among policy makers and politicians over the best way to spend the soon-to-be-authorized federal money.

Some caution that President Obama’s proposals try to achieve too many objectives — for example, broader health care coverage and energy efficiency — at the expense of focusing tax dollars on the core issue of job creation. By this argument, more should be spent on things like infrastructure repair, either directly or by channeling money to the states for projects now delayed for lack of adequate tax revenue.

Others argue that the best bang for the buck would come from a stimulus package devoted mainly to tax cuts rather than public investment. The breakdown in the $819 billion bill that the House approved on Wednesday and the Senate will take up next week is two-thirds spending, one-third tax cuts.

The president took a different approach in a press conference on Friday. Seizing on the damaging fourth-quarter figures and the prospect of an even weaker first quarter, he called the contraction “a continuing disaster” for working families and pushed Congress to act quickly to provide relief.

Even with the help of swelling inventories, the 3.8 percent contraction, adjusted for inflation and representing all of the nation’s economic activity, was the largest quarterly drop in the nation’s output since the 1982 recession.

Business investment, commercial construction, home building and exports all fell steeply, most of them doing so for the first time since the recession began 13 months ago. Data released this week suggested that the decline had continued. As for consumer spending, in only one other quarter since records were first kept in 1947 have final sales of goods and services produced in America fallen so much.

“Consumer spending is often held up as the engine of growth, and we are now experiencing the second-largest contraction on record,” said Ben Herzon, an economist at Macroeconomic Advisers in St. Louis, referring to the 7.6 percent drop in spending in the midst of the 1974-75 recession, and 5.1 percent now.

Christina D. Romer, chairwoman of the president’s Council of Economic Advisers, said in a statement that “aggressive, well-designed fiscal stimulus is critical to reversing this severe decline.” She did not describe the elements of a well-designed fiscal stimulus, but the vast majority of the nation’s economists agree that one is necessary, and soon.

Virtually none dispute that the usual route to recovery, cheap credit, has failed to work this time — not when lenders are pulling back, despite prodding from the Federal Reserve, and borrowers are focused more on paying down debt and building up savings.

“I’m hoping the fiscal stimulus will be a catalyst to reignite the private sector,” said Stuart Hoffman, chief economist at the PNC Bank Corporation in Pittsburgh. “My hope is that as the fiscal stimulus kicks in, people will begin to spend and invest more, modestly anyway, in the second half of the year.”

Absent a large stimulus package, most economists expect the nation’s output to shrink not only in the first half of the year, but in the second half as well. In April, the recession would become the longest since the 1930s. Until now, the record, 16 months, was shared by the severe recessions of 1974-75 and 1981-82. This one began in December 2007 as employment peaked and began to fall.

“We are in the thick of it now,” said Robert Barbera, chief economist for ITG Investment Technology Group.

The Federal Reserve ended the mid-’70s and early ’80s recessions by cutting interest rates sharply to encourage borrowing and spending in the private sector. This time, the credit crisis, rising unemployment, plunging home prices and bank failures have disrupted that mechanism, particularly since late summer.

Indeed, until the fourth quarter, the nation’s output had declined only in the third quarter, falling by half a percent at an annual rate. The Fed, in response to the accelerating decline, cut rates to nearly zero — a tactic that in the past would have raised cries of loose money and rising inflation.

The concern now, however, is deflation, or falling prices, and Friday’s report from the Bureau of Economic Analysis suggested that the fear had some justification. Personal consumption expenditures, not counting food and energy, rose at an annual rate of only 1.6 percent, the smallest quarterly increase in years. If prices were to actually fall, consumers might respond by putting off purchases until prices were even lower.

“My sense is that business is slashing hugely and across the board,” said Allen Sinai, president and chief global economist of Decision Economics. “Everyone is cutting prices, people, capital spending and all kinds of expenses. It is almost a herd instinct.”

Steep Slide in Economy as Unsold Goods Pile Up, NYT, 31.1.2009, http://www.nytimes.com/2009/01/31/business/economy/31econ.html

Reports Underscore

Weakness of Economy

January 30, 2009
The New York Times
By JACK HEALY

Thursday brought a hat-trick of grim economic news: New-home sales fell to their slowest pace on record, businesses cut their orders and jobless claims continued to rise.

Taken together, the three reports released by the government painted a picture of an economy that continues to slide as falling consumer spending and rising unemployment amplify the effects of a year-long recession.

The Commerce Department reported that American businesses ordered fewer goods like computers, construction equipment and vehicles in December, cutting the prospects for growth as companies braced for a difficult 2009.

Durable goods orders dropped 2.6 percent last month to $176.8 billion. It was the fifth consecutive month of declines, after a 3.7 percent drop in November, and came as the country slipped deeper into a nearly 13-month recession.

Excluding transportation, new durable-goods orders fell 3.6 percent. Excluding military equipment orders, durable goods fell 4.9 percent.

For all of 2008, orders fell 5.7 percent, a decline topped only by a 10.7 percent drop in 2001.

“This is pretty much what you expect when the economy is in the process of shrinking and businesses don’t seen any need to purchase any capital goods,” said Bernard Baumohl, managing director of the Economic Outlook Group. “Even if you did want increase your capital investments, it’s going to be difficult to get the capital to purchase this.”

Orders for computers and electronic goods dropped by a stark 7.2 percent in December, and factory orders for metals, machinery, transportation equipment and communications equipment slumped as businesses cut their outlooks.

Shipment of goods also fell for a fifth month, declining 0.7 percent.

“The data show clear declines in sectors as diverse as cars, computers, metals, and machinery,” Ian Shepherdson, chief United States economist at High Frequency Economics, wrote in a note. “The industrial recession is deep and broad, and there’s no prospect of any easing of the downward pressure anytime soon.”

As businesses struggled, the problems of the housing market continued to multiply. The Commerce Department reported that new single-family home sales in December fell 14.7 percent to an annual pace of 331,000, a record low.

In all, 482,000 new homes were sold last year as housing prices tumbled and credit dried up. That figure was 37.8 percent lower than the 776,000 homes sold a year earlier.

Also on Thursday, the Labor Department reported that first-time unemployment claims rose to a seasonally adjusted 588,000 for the week ending Jan. 24, up 3,000 from a revised 585,000 the week before.

Employers had long resisted making mass layoffs as the economy cooled and sought to cut costs through shorter work weeks, pay cuts and hiring freezes, but they are now cutting jobs by the thousands. Recently, companies including Microsoft, Caterpillar, Home Depot and Sprint Nextel have announced thousands of job cuts, a grim sign for labor markets.

The national unemployment rate has risen to 7.2 percent since the economy slipped into recession began last December, and the jobless rates in Michigan and Rhode Island have already reached 10 percent. Some economists expect that the national unemployment rate will rise to 9 percent before the economy gets back on track.

    Reports Underscore Weakness of Economy, NYT, 30.1.2009, http://www.nytimes.com/2009/01/30/business/economy/30econ.html?hp

Stocks Fall

on Fresh Worries About Economy

January 29, 2009
Filed at 11:42 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

NEW YORK (AP) -- Caution has returned to Wall Street, as weak earnings and record unemployment claims offered more evidence of the economy's struggles.

All the major indexes are down more than 1 percent Thursday, after soaring Wednesday on hopes the government will develop a way to remove bad debt from banks' books.

Investors' mood darkened after companies from Eastman Kodak Co. to chip maker Qualcomm Inc. reported that profits tumbled the final three months of 2008. And the government said Thursday the number of people drawing unemployment benefits reached a record 4.78 million this month.

In midday trading, the Dow industrials are down about 120 points at the 8,255 level. The Standard & Poor's 500 is down 17 at 857, and the Nasdaq composite index is off 29 at 1,528.

    Stocks Fall on Fresh Worries About Economy, NYT, 29.1.2009, http://www.nytimes.com/aponline/2009/01/29/business/AP-Wall-Street.html

Editorial

The Stimulus Advances

January 29, 2009
The New York Times

The signature achievement of the $819 billion stimulus and recovery bill, passed on Wednesday by the House, is that it directs most of its resources where they would do the most good to stimulate the economy.

The bill is large because this deep recession is getting deeper, and the recovery, when it comes, is expected to be slow. President Obama and the lawmakers who wrote the bill are to be commended for not letting size distort the substance. Contrary to the claims of Republican opponents that the bill indiscriminately rains money down, the amounts and categories of spending have, for the most part, been calculated carefully and chosen well.

Nearly 30 percent is devoted to unemployment benefits, food stamps and fiscal aid to states so that they don’t have to cut services, raise taxes and lay off employees and contractors. Evidence is overwhelming that such spending yields the biggest return for every dollar spent. The bill, however, takes into account that these areas cannot absorb unlimited money. In calculating the expanded food stamps, for instance, it provides a significant increase immediately that would otherwise have occurred over time in line with inflation. That way, ample funds are available when needed, but there is no sudden cut off down the road.

Aid to states also is well thought out. The single biggest chunk of spending — $87 billion for states to shore up Medicaid programs — would allow them to provide care to the neediest, whose ranks have been swelled by the deepening recession. Equally important, by taking on more of the states’ Medicaid burden, the federal government frees up states to continue providing other services that would have had to have been cut.

One of those vulnerable areas, states’ education budgets, is the main target of another $79 billion. The money would help to prevent lapses in early childhood education, which often cannot be made up later. It would also prevent cuts in the curriculum and in extracurricular activities in grade schools through college — while averting big layoffs in a sector that is among the largest employers in many states.

After jobless benefits, food stamps and aid to states, the most effective stimulus is to get money directly to low- and middle-income Americans, who are likely to spend it quickly, boosting demand. The package expands the Earned Income Tax Credit temporarily to raise the pay of the working poor. There also is money to allow low-income workers to qualify for a tax credit of up to $1,000 per child, a break currently denied them. These are good tax policy and good stimulus.

The measure devotes $145 billion to Mr. Obama’s “Making Work Pay” tax credit for the next two years. The credit, up to $500 per worker, would be more effective as stimulus if the cutoff for eligibility were lower. The richer the recipient, the more likely it is that the money would be saved, not spent.

Having maxed out on the most powerful forms of stimulus and facing an economic downturn that requires still more government intervention to prevent a more disastrous downward spiral, lawmakers sensibly expanded the package into other areas. It contains $62 billion on infrastructure spending for highways, mass transit and school buildings, and tens of billions more for other projects. It also includes $40 billion to subsidize the cost of health coverage for the unemployed.

Republicans’ objections are mostly ideological. They worry, in particular, that subsidizing health insurance may be a step toward universal coverage. They may be right. But that is an argument for another day. The government must act urgently to protect the vulnerable from what is shaping up to be the worst recession in modern history and to boost the economy at a time when consumer and business spending is slack. Besides, a lamentably large amount of money goes to business tax cuts dear to Republicans. That is folly as stimulus but more than enough for political compromise.

A more thoughtful criticism is that the package is not more transformative in scope. There is more money for fixing roads, but not for high-speed railroads; for Head Start, but not for curriculum reform. That, too, is a discussion for another day.

Indeed, even with an $819 billion package, the challenge for the Obama administration is to lower expectations, not raise them. The hole the economy is in is so deep that even the stimulus package will only dig us halfway out. According to recent testimony by Douglas Elmendorf, the director of the Congressional Budget Office, without the stimulus, the economy in 2010 could underperform its potential by an amount equal to 6.3 percent of gross domestic product. With the plan, the gap could be, at best, about half that.

It will be a long and unpleasant climb from the ruins of the economy. But the House stimulus package is a good first step. The Senate, which takes up its version next week, should follow suit.

    The Stimulus Advances, NYT, 29.1.2009, http://www.nytimes.com/2009/01/29/opinion/29thu1.html

Ford Has Its Worst Year Ever

but Won’t Ask for Aid

January 30, 2009
The New York Times
By NICK BUNKLEY

DETROIT — The Ford Motor Company, the only Detroit automaker not being propped up by billions of dollars in government loans, said on Thursday that it lost $14.6 billion last year, making 2008 its worst year in history as a result of the biggest sales slump in decades.

Still, the company said it had “sufficient liquidity to fund its business plan and product investments.” It finished 2008 with $24 billion in cash on hand but $25.8 billion in debt.

Ford, which says it is financially healthier than its cross-town rivals General Motors and Chrysler, reiterated that it did not need federal aid unless the economy worsened significantly or a competitor filed for bankruptcy protection. It expects to break even or earn a profit, excluding one-time charges, by 2011.

“It’s a very volatile time for all of us,” Ford’s chief executive, Alan R. Mulally, said on a conference call. But, he added, “It’s not our plan at all to access the government’s money.”

Ford lost $5.9 billion, or $2.46 a share, in the fourth quarter alone, compared with a loss of $2.8 billion, or $1.33 a share, in the final months of 2007. Auto sales in the United States plummeted 35 percent in the fourth quarter to levels last seen in 1982. Many would-be buyers were unable to obtain loans and the recession, which began in December 2007, kept many more people from even setting foot in a dealership.

And the months ahead do not look promising. Many economists expect that the economy will continue to contract until July at the very least, but at a slowing pace in the second quarter. That would make this the longest recession since the 1930s, outlasting the two record-holders, the mid-1970s and early 1980s downturns. And the unemployment rate, which jumped to a 16-year-high of 7.2 percent in December, is expected to rise even more.

“We still feel that, with the amount of stimulus that’s going on in the U.S. market, that we’ll see some improvement in the second half of this year,” Ford’s chief financial officer, Lewis Booth, said.

Fourth-quarter revenue was $29.2 billion, 36 percent less than the $45.5 billion it took in a year earlier. The company depleted its cash reserves at a rate of $2.4 billion a month.

Excluding special charges, Ford’s loss in the quarter was $1.37 a share. On that basis, analysts surveyed by Thomson Reuters expected a loss of $1.30.

Ford’s full-year loss of $14.6 billion, or $6.41 a share, was more than five times larger than its 2007 loss of $2.7 billion, or $1.38 a share. It is the equivalent of losing about $2,700 on every car and truck sold worldwide and more than the 105-year-old company’s 2006 loss of $12.7 billion, the previous record.

“We faced nearly unprecedented challenges across our global markets,” Mr. Mulally said. “The worldwide economic slowdown, driven by tight credit markets and weak consumer confidence, has shaken the foundation of even the strongest companies in the automotive sector and other industries. Clearly at Ford, the severe economic challenges had a significant impact on our fourth-quarter results.”

To give itself more of a financial cushion while trying to get its restructuring back on track, the company said it planned to draw $10.1 billion more from its available credit lines in the first quarter. This month, the company borrowed $2 billion from funds that are intended for a new retiree health care trust managed by the union.

“Given the instability of the capital markets with the uncertain state of the global economy,” Mr. Mulally said, “we believe it is prudent to draw these credit facilities at this time.”

Ford also said Thursday that the United Automobile Workers union had agreed to end its controversial jobs bank program, which pays factory workers after their jobs have been eliminated. The company is still negotiating the terms of that change.

Chrysler eliminated its jobs bank this week, and G.M. will end its program on Monday.

Together, Chrysler and G.M. have borrowed $13.4 billion from the federal government to avoid bankruptcy. Ford initially said it wanted a $9 billion credit line to tap if needed but changed its position after Congress balked at the companies’ requests. The Bush administration eventually approved taking money from the Treasury Department’s Troubled Assets Relief Program.

In addition to the automaker, the Ford Motor Credit Company, the company’s financial arm, reported a net loss of $1.5 billion in 2008, compared with net income of $775 million in the quarter a year earlier. The lender said that it would cut about 1,200 jobs or 20 percent of its work force.

    Ford Has Its Worst Year Ever but Won’t Ask for Aid, NYT, 30.1.2009, http://www.nytimes.com/2009/01/30/business/30ford.html

New Home Sales

Post 14.7 Pct Drop in December

January 29, 2009
Filed at 11:34 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- Sales of new homes plunged to the slowest pace on record last month as the hobbled homebuilding industry posted its worst annual sales results in more than two decades.

The Commerce Department said Thursday that new home sales fell 14.7 percent in December to a seasonally adjusted annual rate of 331,000, from a downwardly revised November figure of 388,000.

''This is an awful report...Builders just can't cut back fast enough, so prices remain under downward pressure,'' Ian Shepherdson, chief U.S. economist for High Frequency Economics, wrote in a research note.

December's sales pace was the lowest on records dating back to 1963. Economists surveyed by Thomson Reuters had expected sales would fall to a rate of 400,000 homes.

For 2008, builders sold 482,000 homes, the weakest results since 1982, when 412,000 homes were sold.

The median price of a new home sold in December was $206,500, a drop of 9.3 percent from a year ago. The median is the point where half the homes sold for more and half for less.

Builders have been forced to slash production during a prolonged and severe slump in housing that has seen sales and prices plummet. December's sales activity was depressed by the worst financial crisis in seven decades, which has made it harder for potential buyers to get mortgage loans.

The inventory of unsold new homes stood at a seasonally adjusted 357,000 in December, down 10 percent from November. But at the current sales pace, it would take a more than a year to exhaust the stock as houses are dumped onto a market already glutted by a tide of foreclosures.

''The inventory of unsold new homes is still too high,'' wrote Joshua Shapiro, chief U.S. economist at MFR Inc. ''Prices need to fall further to stimulate sufficient demand to begin to balance the market.''

The sales weakness in December reflected a 28 percent drop in the Northeast and a 20 percent drop in the West. The South and Midwest posted smaller declines of 12 percent and almost 6 percent, respectively.

Earlier this month, a key gauge of homebuilders' confidence sank to a new record low, as the deepening U.S. recession and rising unemployment erode chances for a housing turnaround.

Sales of existing homes, however, posted an unexpected increase last month, as consumers snapped up bargain-basement foreclosures in California and Florida. Sales of existing homes rose 6.5 percent from November's pace, the National Association of Realtors said Monday.

    New Home Sales Post 14.7 Pct Drop in December, NYT, 29.1.2009, http://www.nytimes.com/aponline/2009/01/29/business/AP-New-Home-Sales.html

Oil Prices Fall

on Housing, Industry, Job Numbers

January 29, 2009
Filed at 11:21 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

NEW YORK (AP) -- Oil prices dropped Thursday as layoffs spread, orders for big-ticket manufactured goods evaporated and the U.S. homebuilding industry posted its worst annual sales in more than two decades.

A worsening recession has cut severely into energy spending by businesses and consumers, pushing prices near five year lows.

Light, sweet crude for March delivery fell $1.12 to $41.04 a barrel on the New York Mercantile Exchange.

Oil traders are ''seeing a U.S. economic picture that shows no sign of getting pleasant,'' said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service. ''The recession is deepening.''

The Commerce Department said orders to U.S. factories for big-ticket manufactured goods fell for the fifth straight month in December.

The 5.7 percent drop for the year was the second largest in government records. Manufacturers have cut hundreds of thousands of jobs and millions of jobs have been lost across the entire economy since last year.

A record 4.78 million people claimed unemployment insurance for the week ending Jan. 17, according to a new Labor Department report. A department analyst said that as a proportion of the work force, the tally of unemployment recipients is the highest since August 1983.

Sales of new homes plunged 14.7 percent in December to the slowest monthly pace on record as the hobbled homebuilding industry posted its worst annual sales results in more than two decades.

The Commerce Department said Thursday that new home sales fell in December to a seasonally adjusted annual rate of 331,000, from a downwardly revised November figure of 388,000.

The ailing economy has led to unprecedented declines in the energy consumption habits on the consumer level. Billions fewer miles are being logged on the road. Manufacturer are slashing production, cutting energy use, and people are flying no where near as often as they have in recent years.

The mood is just as grim overseas, meaning that energy demand is falling everywhere.

The International Monetary Fund predicted global economic growth will slow to just 0.5 percent in 2009, down a sharp 1.7 percentage points from its November prediction of 2.2 percent.

''The lower GDP growth will have a significant impact on global oil demand,'' JBC Energy said in its market report. ''We see global demand falling by as much as 480,000 barrels a day.''

U.S. storage facilities are awash in surplus crude. Storage tanks in the United States are housing more than 338.9 million barrels of crude oil, up from 15.7 percent from a year ago, according to the Energy Information Administration.

Natural gas storage levels in the U.S. dropped more than expected last week, but remain slightly above year-ago levels and the five-year average, a government report said Thursday.

The Energy Department's Energy Information Administration said in its weekly report that natural gas inventories held in underground storage in the lower 48 states fell by 186 billion cubic feet to about 2.37 trillion cubic feet for the week ended Jan. 23.

The U.S. House of Representatives' $819 billion plan passed Wednesday night aims at spurring growth amid the worst recession in decades. The package, which includes tax cuts for individuals and businesses, should create or save more than 3 million jobs, President Barack Obama said after the vote. The Senate will begin debate on the bill next week.

Meanwhile, the Organization of Petroleum Exporting Countries said it may slash production again to siphon off expansive crude inventories around the world.

OPEC Secretary General Abdalla Salem El-Badri said Thursday at the World Economic Forum in Davos, Switzerland that OPEC members will fulfill their pledge to slash production by 4.2 million barrels a day by the end of January. He added that global oil demand would pick up ''by the end of this year or beginning of next year.''

If needed, ''OPEC will not hesitate to take some quantity out of the market,'' he said.

Pledges of production cuts, however, have had little effect on oil prices, with demand and not supply ruling the market.

Crude has plunged from a record $150 per barrel over the summer and has held around $40 since the beginning of the year.

In other Nymex trading, gasoline futures rose 2.65 cents to $1.21 a gallon. Heating oil dropped 1.2 cents to $1.4093 a gallon while natural gas for March delivery rose 3 cents to $4.449 per 1,000 cubic feet.

In London, the March Brent contract rose 7 cents to $44.97 on the ICE Futures exchange.

--------------

Associated Press writers Jake Neubacher in Vienna and Alex Kennedy in Singapore contributed to this report.

    Oil Prices Fall on Housing, Industry, Job Numbers, NYT, 29.1.2009, http://www.nytimes.com/aponline/2009/01/29/world/AP-Oil-Prices.html

Continental Posts Loss

as Fuel and Labor Costs Rise

January 30, 2009
The New York Times
By THE ASSOCIATED PRESS

Continental Airlines said Thursday that it lost $266 million in the fourth quarter as the recession bit into traffic and fuel and labor costs increased.

The airline lost $2.33 a share, compared with a loss of $32 million, or 33 cents a share, in the period a year ago.

Excluding charges of $170 million, Continental’s loss would have been $96 million, or 84 cents a share. Analysts surveyed by Thomson Reuters expected a loss of 89 cents a share.

Revenue slipped 1.5 percent to $3.47 billion, slightly below analysts’ forecast of $3.49 billion.

Fuel and labor — Continental’s two biggest expenses — rose 4 percent and 5.1 percent.

Continental operations were hurt in December by bad weather at its hubs in Houston, Newark, and Cleveland that caused flight delays and cancellations. The company said it had improved its de-icing ability in Houston, which was hit by a freak snow and freezing rain storm.

A Continental jet also skidded off the runway Dec. 20 at Denver International Airport, leading to injuries but no deaths. The airline said it was cooperating with the National Transportation Safety Board in finding the cause.

Continental cut capacity in the fall to save money on fuel. The reduction helped when travel demand slumped.

Still, fourth-quarter traffic measured in miles flown by passengers fell 8.1 percent, a steeper drop than Continental’s 7.4 percent reduction in capacity. As a result, flights on Continental and its regional carrier were slightly less full than a year ago.

Higher fares and new fees pushed the company’s yield higher by 5.7 percent. Yield — revenue divided by available seats times miles flown — is a closely watched measure of revenue-making efficiency in the airline industry.

By region, passenger revenue rose on service to Europe and Latin America but fell everywhere else, most notably a 6.9 percent decline in the United States.

Airlines caught a break from falling fuel prices during the second half of last year. But their strategy for coping with fuel costs by locking in prices backfired when oil prices slumped.

As it disclosed last week, Continental took a $125 million charge against fourth-quarter earnings to cover losses on a fuel-hedging contract with a Lehman Brothers unit that later filed for bankruptcy.

For all of 2008, Continental lost $585 million compared with a profit of $459 million in 2007. Revenue rose just over $1 billion, or 7.1 percent, to $15.24 billion, but that was swamped by a $1.9 billion increase in spending on fuel.

A rival airline, US Airways Group said that it lost $541 million in the fourth quarter on a mix of sour fuel hedges and operating losses.

The airline lost $4.74 a share, compared with a loss of $79 million, or 87 cents a share, in the period a year ago. Revenue was $2.76 billion, up 0.6 percent from almost $2.78 billion in the fourth quarter of 2007.

Not counting special items such as $234 million in paper losses on fuel hedges, US Airways says it would have lost $220 million, or $1.93 a share.

Analysts surveyed by Thomson Reuters, who generally exclude one-time charges, were expecting a loss of $2.15 per share on revenue of $2.78 billion.

    Continental Posts Loss as Fuel and Labor Costs Rise, NYT, 30.1.2009, http://www.nytimes.com/2009/01/30/business/30air.html?hp

What Red Ink?

Wall Street Paid Hefty Bonuses

January 29, 2009
The New York Times
By BEN WHITE

By almost any measure, 2008 was a complete disaster for Wall Street — except, that is, when the bonuses arrived.

Despite crippling losses, multibillion-dollar bailouts and the passing of some of the most prominent names in the business, employees at financial companies in New York, the now-diminished world capital of capital, collected an estimated $18.4 billion in bonuses for the year.

That was the sixth-largest haul on record, according to a report released Wednesday by the New York State comptroller.

While the payouts paled next to the riches of recent years, Wall Street workers still took home about as much as they did in 2004, when the Dow Jones industrial average was flying above 10,000, on its way to a record high.

Some bankers took home millions last year even as their employers lost billions.

The comptroller’s estimate, a closely watched guidepost of the annual December-January bonus season, is based largely on personal income tax collections. It excludes stock option awards that could push the figures even higher.

The state comptroller, Thomas P. DiNapoli, said it was unclear if banks had used taxpayer money for the bonuses, a possibility that strikes corporate governance experts, and indeed many ordinary Americans, as outrageous. He urged the Obama administration to examine the issue closely.

“The issue of transparency is a significant one, and there needs to be an accounting about whether there was any taxpayer money used to pay bonuses or to pay for corporate jets or dividends or anything else,” Mr. DiNapoli said in an interview.

Granted, New York’s bankers and brokers are far poorer than they were in 2006, when record deals, and the record profits they generated, ushered in an era of Wall Street hyperwealth. All told, bonuses fell 44 percent last year, from $32.9 billion in 2007, the largest decline in dollar terms on record.

But the size of that downturn partly reflected the lofty heights to which bonuses had soared during the bull market. At many banks, those payouts were based on profits that turned out to be ephemeral. Throughout the financial industry, years of earnings have vanished in the flames of the credit crisis.

According to Mr. DiNapoli, the brokerage units of New York financial companies lost more than $35 billion in 2008, triple their losses in 2007. The pain is unlikely to end there, and Wall Street is betting that the Obama administration will move swiftly to buy some of banks’ troubled assets to encourage reluctant banks to make loans.

Many corporate governance experts, investors and lawmakers question why financial companies that have accepted taxpayer money paid any bonuses at all. Financial industry executives argue that they need to pay their best workers well in order to keep them, but with many banks cutting jobs, job options are dwindling, even for stars.

Lucian A. Bebchuk, a professor at Harvard Law School and expert on executive compensation, called the 2008 bonus figure “disconcerting.” Bonuses, he said, are meant to reward good performance and retain employees. But Wall Street disbursed billions despite staggering losses and a shrinking job market.

“This was neither the sixth-best year in terms of aggregate profits, nor was it the sixth-most-difficult year in terms of retaining employees,” Professor Bebchuk said.

Echoing Mr. DiNapoli, Professor Bebchuk said he was concerned that banks might be using taxpayer money to subsidize bonuses or dividends to stockholders. “What the government has been trying to do is shore up capital, and any diversion of capital out of banks, whether in the form of dividends or large payments to employees, really undermines what we are trying to do,” he said.

Jesse M. Brill, a lawyer and expert on executive compensation, said government bailout programs like the Troubled Asset Relief Program, or TARP, should be made more transparent.

“We are all flying in the dark,” Mr. Brill said. “Companies can simply say they are trying to do their best to comply with compensation limits without providing any of the details that the public is entitled to.”

Bonuses paid by one troubled Wall Street firm, Merrill Lynch, have come under particular scrutiny during the last week.

Andrew M. Cuomo, the New York attorney general, has issued subpoenas to John A. Thain, Merrill’s former chief executive, and to an executive at Bank of America, which recently acquired Merrill, asking for information about Merrill’s decision to pay $4 billion to $5 billion in bonuses despite new, gaping losses that forced Bank of America to seek a second financial lifeline from Washington.

A Treasury Department official said that in the coming weeks, the department would take action to further ensure taxpayer money is not used to pay bonuses.

Even though Wall Street spent billions on bonuses, New York firms squeezed rank-and-file executives harder than many companies in other fields. Outside the financial industry, many corporate executives received fatter bonuses in 2008, even as the economy lost 2.6 million jobs. According to data from Equilar, a compensation research firm, the average performance-based bonuses for top executives, other than the chief executive, at 132 companies with revenues of more than $1 billion increased by 14 percent, to $265,594, in the 2008 fiscal year.

For New York State and New York City, however, the leaner times on Wall Street will hurt, Mr. DiNapoli said.

Mr. DiNapoli said the average Wall Street bonus declined 36.7 percent, to $112,000. That is smaller than the overall 44 percent decline because the money was spread among a smaller pool following thousands of job losses.

The comptroller said the reduction in bonuses would cost New York State nearly $1 billion in income tax revenue and cost New York City $275 million.

On Wall Street, where money is the ultimate measure, some employees apparently feel slighted by their diminished bonuses. A poll of 900 financial industry employees released on Wednesday by eFinancialCareers.com, a job search Web site, found that while nearly eight out of 10 got bonuses, 46 percent thought they deserved more.

Paul J. Sullivan contributed reporting.

    What Red Ink? Wall Street Paid Hefty Bonuses, NYT, 29.1.2009, http://www.nytimes.com/2009/01/29/business/29bonus.html?hp

News Analysis

Components of Stimulus

Vary in Speed and Efficiency

January 29, 2009
The New York Times
By DAVID M. HERSZENHORN

WASHINGTON — At first, it will trickle into paychecks in small, barely perceptible amounts: perhaps $12 or $13 a week for many American workers, in the form of lower tax withholding.

For the growing ranks of the unemployed, it will be more noticeable: benefit checks due to stop will keep coming, along with an extra $25 a week.

At the grocery store, a family of four on food stamps could find up to $79 more a month on their government-issued debit card.

And far bigger sums will appear, courtesy of Washington, on budget ledgers in state capitals nationwide: billions of dollars for health care, schools and public works.

There is no doubt that the impact of the $819 billion economic stimulus package advanced by President Obama and approved by the House on Wednesday will start to be felt within weeks once the final version becomes law.

But estimating how effective the huge program of tax cuts and spending will be in getting America’s economic engines humming again is a far more complex calculation requiring almost line-by-line scrutiny of the 647-page bill, lawmakers, economists and policy analysts say.

While it may be difficult to predict how well the overall plan will work, it is easier to draw conclusions about its individual components, gauging them against the basic goal of any stimulus: to promote economic activity and create jobs as quickly and efficiently as possible.

Devising any economic stimulus plan is tricky: initiatives that can be carried out relatively fast, like tax cuts, tend to provide less bang for the buck in terms of generating jobs and economic growth, while initiatives likely to spur more robust activity, like public works projects, can take so long to get under way that they arrive too late.

Tax Cuts

The provisions intended to have the swiftest impact are the tax cuts, totaling $275 billion, roughly a third of the package.

Republicans say the cuts are too small, some Democrats say they were ill designed in a vain effort to appease House Republicans, and some economists say both sides are right: that the plan should include more effective tax cuts and more of them, and also address specific problems like the weak housing market.

Mr. Obama’s signature tax cut would provide a credit of up to $500 for individuals and $1,000 for couples. It won praise in an analysis by the Tax Policy Center, a nonpartisan research group, because it could be carried out quickly, by reducing the amount of money withheld from paychecks.

But the same group also criticized it because it would help families earning as much as $150,000 a year, who are more likely to save than spend. (Saving, or paying off debt, might make sense for individual households, but what the economy needs most is for people to spend money, helping stores to sell more, factories to produce more and employers to avoid cutting additional jobs.)

Some experts say adjusting withholding rates could prove complicated, delaying the money. But the White House says the plan would work even better than a lump-sum rebate; some research suggests that rebate checks are more likely to be saved than tax reductions spread out over a length of time.

Even some economists who generally support the stimulus think that the main tax proposal would provide limited economic lift.

“People are going to spend 30, 40 cents on the dollar, so the multiplier is going to be low,” said Adam S. Posen, deputy director of the Peterson Institute of International Economics.

Aid to States

One area where analysts say the bill would be relatively effective is in providing assistance to states, many of which, to comply with balanced-budget requirements, are facing the prospect of steep cuts in jobs and services. Aid to states does not expand economic activity, but it helps prevent cuts that would make the downturn even worse.

An $87 billion provision increasing the federal contribution for Medicaid costs is expected to go a long way to help states close their budget gaps.

But there has been little discussion so far on a proposal by the Senate Republican leader, Mitch McConnell of Kentucky, that aid to states be provided in the form of loans, encouraging them to spend the money wisely and, once the economy rebounds, obligating them to help reduce the national debt.

The bill would also create a $79 billion state fiscal stabilization fund, disbursing half the money in late 2009 and half in late 2010. The Congressional Budget Office has estimated that little of that money would be spent this year.

Infrastructure

The greatest prospect of delay in spending is on infrastructure. The bill provides $30 billion for highway construction and tens of billions more for other transportation projects, water projects, park renovation, military construction, local housing projects and more.

A Congressional Budget Office analysis found that only 64 percent of the bill’s spending would be completed within 19 months, and spending on construction projects was among the slowest.

If the economic recovery is slow, that timing could work out perfectly, giving the economy a jolt just when faster-acting components are wearing off. But if there is a quicker-than-expected rebound, many of those projects could start just in time to compete with renewed private spending.

Then there is the risk that the projects themselves have little or no long-term economic value and simply drive up the budget deficit. Democrats bowed to Republican pressure on Tuesday and stripped from the bill a $200 million provision for National Mall restorations.

Education, Health Care

And Alternative Energy

A look at more than $140 billion in the bill’s spending on education finds some that can move quickly — for instance, $13 billion each over two years for Title I schools, which serve impoverished students, and for special education under the Individuals With Disabilities Education Act.

But also included are programs that even under the most optimistic timetable will take longer to complete, like $20 billion for school renovations. These would provide little near-term help for the economy.

Similar scrutiny could be trained on health care and especially on alternative energy programs. Like some of the education spending, a large chunk of health care spending would not start until 2012 or later, when, most experts think, the recession will be over.

Automatic Stabilizers

Unemployment benefits and food stamps are such useful stimulus tools that budget analysts refer to them as “automatic stabilizers.”

They are built into the system, allowing money to flow quickly to people who need it and are likely to spend it.

The House bill would spend $20 billion over five years on added food stamps. If the recovery legislation is adopted by mid-February, officials say, the first added food stamps will be delivered in April and nearly all of that aid used that month.

The legislation would also devote roughly $43 billion over two years to extend and increase unemployment benefits. The provision would add as much as 33 weeks of benefits, for states with the highest unemployment rates.

    Components of Stimulus Vary in Speed and Efficiency, NYT, 29.1.2009, http://www.nytimes.com/2009/01/29/us/politics/29assess.html?hp

Troubled Times

Bring Mini-Madoffs to Light

January 28, 2009
The New York Times
By LESLIE WAYNE

Their names lack the Dickensian flair of Bernie Madoff, and the money they apparently stole from investors was a small fraction of the $50 billion that Mr. Madoff allegedly lost of his clients’ savings.

But the number of other people who have been caught running Ponzi schemes in recent weeks is adding up quickly, so much so that they have earned themselves a nickname: mini-Madoffs.

Some of these schemes have been operating for years, and others are of more recent vintage. But what is causing them to surface now appears to be a combination of a deteriorating economy and heightened skepticism about outsize returns after the revelations about Mr. Madoff. That can scare off new clients and cause longtime investors to demand their money back, which brings the charade tumbling down.

“There is no way for a Ponzi to survive given the large number of redemptions and a lack of new investors,” said Stephen J. Obie, the head of enforcement at the Commodity Futures Trading Commission. The agency has experienced a doubling of reported leads to possible Ponzi schemes in the last year, and its enforcement caseload has risen this year.

On Monday, at a suburban New York train station, Nicholas Cosmo surrendered to federal authorities in connection with a suspected $380 million Ponzi scheme, in which investors paid a minimum of $20,000 for high-yield “private bridge” loans that he had arranged.

Mr. Cosmo promised returns of 48 percent to 80 percent a year, and none of his investors apparently minded — or knew — that Mr. Cosmo had already been imprisoned for securities fraud. In the end, 1,500 people gave him their money, often through brokers who worked on his behalf.

And in Florida, not far from the Palm Beach clubs where Mr. Madoff wooed some of his investors, George L. Theodule, a Haitian immigrant and professed “man of God,” promised churchgoers in a Haitian-American community that he could double their money within 90 days.

He accepted only cash, and despite the too-good-to-be-true sales pitch, he found plenty of investors willing to turn over tens of thousands of dollars.

“The offices were beautiful, and I was told it was a limited liability corporation,” said Reggie Roseme, a deliveryman in Wellington, Fla., who lost his entire savings of $35,000 and now faces foreclosure on his home.

According to federal regulators who have accused him of operating a Ponzi scheme, Mr. Theodule bilked thousands of investors of modest means, like Mr. Roseme, out of $23 million in all, and put $4 million in his own pocket. This money helped pay for two luxury vehicles for Mr. Theodule, a wedding, a lavish house in Georgia and a recent trip to Zurich that federal authorities are now investigating. The fate of the other $19 million is still unknown.

Investors in Idaho say they lost $100 million in a scheme that promised 25 percent to 40 percent annual returns. In Philadelphia, a failed computer salesman tried his hand at trading nonexistent futures contracts for 80 investors and surrendered to federal authorities this month after losing $50 million.

A Ponzi scheme in Atlanta that promised investor returns of 20 percent every month through something called “30-day currency trading contracts” was shut down this month after losing $25 million. And Tuesday, Arthur Nadel, a prominent money manager in Sarasota, Fla., and philanthropist turned himself in to the authorities. He had disappeared this month, just days before the Securities and Exchange Commission charged him in a $300 million investment fraud that may be a Ponzi scheme.

Investors in many of the schemes were told that their money would go into stocks, foreign currencies and other investments and earn above-average returns — a deception backed up with what appeared to be legitimate monthly statements and fancy offices. Now, Ponzi-related losses are adding up to hundreds of millions of dollars.

The S.E.C. does not keep statistics on Ponzi fraud, but it has brought cases involving losses of over $200 million since the beginning of October last year, including one against the disgraced Democratic donor Norman Hsu. Mr. Hsu was accused of using money from a $60 million Ponzi scheme to make campaign donations to leading candidates, including President Obama and Secretary of State Hillary Clinton. (Mr. Obama and Mrs. Clinton later donated the money to charities.)

Regulators, chastened by failing to uncover the Madoff scandal, are focusing more on such swindles. The Commodity Futures Trading Commission, for instance, has established a new Forex Enforcement Task Force to prosecute Ponzi cases in which investors were told their money was being invested in foreign currencies. In 2008, the agency prosecuted 15 Ponzi schemes and expects that number to increase this year.

Last Thursday, Senators Charles E. Schumer, Democrat of New York, and Richard Shelby, Republican of Alabama, who are both influential members of the Senate Banking Committee, introduced legislation to provide $110 million to hire 500 new F.B.I. agents, 50 new assistant United States attorneys and 100 new S.E.C. enforcement officials to crack down on such crimes.

“Ponzi schemes are against the law,” Mr. Schumer said in an interview. “But we have not had enough law enforcement officials. Madoff should have been stopped. Our proposal would not just provide more resources, but it would work like a posse to go after this fraud.”

Lawsuits brought by bilked investors and federal regulators are piling up in courts.

One case brought by the federal government against a North Carolina company called Biltmore Financial describes an apparent $25 million fraud going back for 17 years that drew in more than 500 investors, many of whom were members of a Lutheran community in that state.

For an investment of as little as $1,000, investors were told they were buying packages of mortgages with 10 to 20 percent annual returns. In reality, the money went to buy an Aston Martin convertible, a $1 million recreational vehicle and vacation and rental properties for the head of the company, J. V. Huffman, who was charged by the S.E.C. last November.

Last week, the S.E.C. charged James G. Ossie of Atlanta with taking $25 million from 120 investors — who had to invest a minimum of $100,000 with him. Mr. Ossie even held periodic conference calls describing his trading strategy, which promised 10 percent monthly returns.

In the South Florida Haitian-American community, Mr. Theodule turned to churches. But his scheme fell apart in November when 40 investors showed up at Mr. Theodule’s office to try to get their money back.

“Theodule had been the king and lived in the community, and then one day he vanished,” said Mr. Roseme, the investor who lost $35,000 in savings.

He described Mr. Theodule as “friendly, someone you could trust, a real positive guy.”

Nerline Horace-Manasse, a 31-year-old Haitian immigrant with six children, saw her life’s savings of $25,000 disappear.

Statements showed her money had grown to $90,000, but when Ms. Manasse asked questions of Mr. Theodule, “he advised he could not tell me where he was putting the money because there were a lot of copycats out there and he’d go out of business.”

Now Ms. Manasse and Mr. Roseme are part of a class-action suit against Mr. Theodule.

Mr. Theodule’s attorney, Matthew N. Thibaut, did not return a call for comment. But in court papers, Mr. Theodule said, “Theodule admits he has told persons that he wants to help build wealth in the Haitian community.”

Lynnley Browning contributed reporting.

    Troubled Times Bring Mini-Madoffs to Light, NYT, 28.1.2009, http://www.nytimes.com/2009/01/28/business/28ponzi.html?hp

Economic Scene

A Stimulus With Merit,

and Misses Too

January 28, 2009
The New York Times
By DAVID LEONHARDT
 

WASHINGTON

How much of a difference will the stimulus make?

Two weeks ago, a Congressional committee posted a table of numbers on its Web site that gave an early answer. The numbers came from the Congressional Budget Office and seemed to show that only 38 percent of the money in the bill would be spent by September 2010. That didn’t sound very stimulating, and the numbers soon caused a minor media sensation.

But anyone who looked closely would have seen something strange about the table. It suggested that the bill would cost only $355 billion in all, rather than its actual cost of about $800 billion.

Why? It turns out that the table was analyzing only certain parts of the bill, like new spending on highways, education and energy. It ignored the tax cuts, jobless benefits and Medicaid payments — the very money that will be spent the fastest.

On Monday evening, the Congressional Budget Office put out its analysis of the full bill, and it gave a very different picture. It estimated that about 64 percent of the money, or $526 billion, would be spent by next September.

That timetable may still be slower than ideal, and short of the 75 percent benchmark President Obama has promised, but it isn’t terrible. Spending hundreds of billions of dollars takes time. In fact, for all the criticism the stimulus package has been getting, it does pretty well by several important yardsticks.

First of all, the package really is stimulus. It will quickly give money to the people who have been hardest hit by the recession and who, not coincidentally, will be most likely to spend that money soon. The spending also has a chance to do some long-term good, by paying for the computerization of medical records, the weatherization of homes and other such investments.

By my count, the current package has just one major flaw. It could do a lot more to change how the government spends its money. It doesn’t have nearly the amount of the fresh, reformist thinking as Mr. Obama’s campaign speeches and proposals did. Instead, the bill is mostly a stew of spending on existing programs, whatever their warts may be.

I understand that this approach reflects the realities of political negotiations. It even has some economic merits: it may help speed the flow of money out the door. But it still is a missed opportunity in a few instances.

The biggest is infrastructure. Transportation experts had hoped the package would be the start of not only more spending on infrastructure but also smarter spending on highways, mass transit, sewer systems and other public works. So far, the experts are disappointed.

In the current system, the federal government sends money to states without any real effort to evaluate whether it will pay for worthy projects. States rarely do serious analyses of their own. They build new roads before fixing old ones. They don’t consider whether those new roads will lead to faster traffic or simply more traffic. They spend millions of dollars on legislators’ pet projects and hulking new sports stadiums. In the world of infrastructure, cost-benefit analysis is still a science of the future.

A couple of weeks ago, Ed Rendell, the Democratic governor of Pennsylvania, came to Washington to talk up infrastructure. He is a member of a tripartisan threesome — along with Michael Bloomberg, New York’s independent mayor, and Arnold Schwarzenegger, California’s Republican governor — trying to persuade the country to get serious about infrastructure.

In his talk, Mr. Rendell said he understood that the stimulus bill couldn’t come close to solving all these problems. But it could make some progress, and Mr. Obama’s sky-high approval ratings gave him a wonderful chance to do so. “This is the time to put down some markers — this is the time,” Mr. Rendell said.

And the bill does include a couple of markers. It will list on the Web the projects that the federal government is financing — an idea that, amazingly enough, is considered radical — and will require that mayors and governors sign off on projects. That will make it harder for them to lobby for projects now and criticize those same projects later, as Gov. Sarah Palin did with the Bridge to Nowhere. At least one version of the bill also sets aside $5.5 billion to be awarded by the transportation secretary, supposedly on the merits of a project.

But it’s not clear how that will work, and there is so much more that could be done. The bill could create a small-scale version of an “infrastructure bank,” a free-standing entity that could make more merit-based decisions than Congress does (an idea that Mr. Obama supports). The bill could also finance the creation of new state offices to conduct cost-benefit analyses. It could also help cover the budget shortfalls of public transit systems, instead of simply allocating another $30 billion for the construction of new highways.

Fifty-one transit systems have recently proposed service cuts or fare increases, including those in Atlanta, Denver, New York, Phoenix, St. Louis, San Diego and Washington. If these cuts go through, they will make it harder for people to get to work (or look for work), and they will undermine one of the long-term goals of the stimulus package: laying the groundwork for a greener economy.

It’s not just infrastructure, either. The bill includes big, admirable increases in college financial aid — but appears likely to do little to use those increases to improve higher education. The package will also sprinkle millions of dollars on some debatable projects, like the renovation of the National Mall.

The standard that I’m setting here may seem a bit high. Even with its current flaws, the bill has much to recommend it. It will indeed try to encourage significant changes in health care and K-12 education, for example.

The bill is certainly superior to a huge package of tax cuts, which might be politically popular but end up in people’s bank accounts rather than stimulating the economy. By now, we should know that tax cuts are not a cure-all. The cuts of 2001 and 2003 couldn’t keep the recent expansion from being one of the weakest on record or the current recession from being so deep.

This bill should help the economy in both the near term and the long term. But the government doesn’t go out and spend about $800 billion every day. The details matter.

    A Stimulus With Merit, and Misses Too, NYT, 28.1.2009, http://www.nytimes.com/2009/01/28/business/economy/28leonhardt.html?hp

43,000 Jobs Are Eliminated

in Latest Wave of Layoffs

January 27, 2009
The New York Times
By JACK HEALY

It was a bleak start to the workweek for thousands of American workers.

Several corporations said Monday morning that they would cut a total of 43,000 jobs in an attempt to slash costs to survive a recession that has taken a toll on new orders, profits and companies’ outlooks for growth.

The cuts announced Monday included 20,000 jobs at the heavy-equipment manufacturer Caterpillar; 8,000 at the wireless provider Sprint Nextel, and 7,000 at Home Depot and 8,000 from the expected merger of the pharmaceutical makers Pfizer and Wyeth. Some smaller layoffs were also announced.

President Obama cited the layoff announcements in remarks Monday morning urging Congress to approve an $825 billion economic stimulus package of tax cuts, emergency benefits and public spending projects.

“These are not just numbers on a page,” Mr. Obama said. “As with the millions of jobs lost in 2008, these are working men and women whose families have been disrupted and whose dreams have been put on hold. We owe it to each of them and to every single American to act with a sense of urgency and common purpose. We can’t afford distractions and we cannot afford delays.”

Monday’s announcements were only the latest in a grim parade of job cuts from employers from Wall Street to wireless providers to computer companies to retail stores.

The United States economy has shed some 2.59 million jobs since the recession began in December 2007, and unemployment rose to 7.2 percent last month. Economists worry that the economy could now be shedding as many as 600,000 jobs a month, and they said Monday’s layoff announcements served to underline the stricken state of the labor market. Last week, the government reported that first-time unemployment claims had risen to 589,000 for the week ending Jan. 17, tying an all-time high set in December.

“This is a big deal,” said Dean Baker, a director of the Center for Economic and Policy Research. “We’re losing jobs at an incredibly rapid rate, and even with that, I’m worried they’re accelerating. We’re seeing a much more rapid rate of layoff announcements.”

Caterpillar, which has been hurt by falling orders for construction and mining machinery, said Monday morning that it would cull 20,000 workers through layoffs and buyouts. It said it would make “sharp declines” in overtime and eliminate scores of temporary and contract jobs.

The company said 2009 would be one of its weakest years since World War II.

“These are very uncertain times,” the chief executive, James W. Owens,, said in a statement. “While it’s painful for our employees and suppliers, it’s absolutely necessary given economic circumstances. We expect to have most of the actions needed to lower employment and cost levels in place by the end of the first quarter.”

“We were whipsawed in the fourth quarter as key industries were hit by a rapidly deteriorating global economy and plunging commodity prices,” Mr. Owens said.

The wireless provider Sprint Nextel said its 8,000 job cuts were part of a plan to trim labor costs by $1.2 billion, and said most of the cuts would be completed by March 31. About 850 of the job cuts are expected to come through buyouts, which will cost the company $300 million in severance costs and related expenses.

“Labor reductions are always the most difficult action to take, but many companies are finding it necessary in this environment," Sprint’s chief executive, Daniel R. Hesse, said.

Home Depot, the country’s largest home-supply chain, said it would cut 7,000 jobs, about 2 percent of its work force, and close its high-end EXPO home design stores.

    43,000 Jobs Are Eliminated in Latest Wave of Layoffs, NYT, 27.1.2009, http://www.nytimes.com/2009/01/27/business/economy/27jobcuts.html

Caterpillar Moves to Cut 20,000 Jobs

January 27, 2009
The New York Times
By REUTERS

The heavy equipment maker, Caterpillar, announced layoffs on Monday and warned of a tough year ahead as a downturn that began in the United States metastasized into a full-blown global recession, gutting orders for its earth-moving equipment.

The world’s largest maker of construction and mining machines, which also reported lower-than expected fourth-quarter earnings, said on Monday it was laying off 17,000 workers, and buying out 2,500 others, to reduce costs in the face of what it predicted would be the weakest year for business since the end of WWII. The company said earlier that it was offering employees incentives to leave voluntarily, the company said.

The company cut its outlook for 2009 and seemed to raise the possibility that it would report a loss in the current quarter.

The news sent Caterpillar shares skidding 8 percent in premarket trading, pulling the broader market lower.

In a statement, the chief executive, James W. Owens, said Caterpillar had been “whipsawed” by a rapidly deteriorating global economy and plunging commodity prices.

He said the company had responded by encouraging dealers to align their inventory levels with falling volume and “they responded with significant order cancellations, particularly in December.”

The layoffs and buyouts, which will hit one in every 10 of the company’s regular workers and idle 8,000 contract workers, represent the biggest wave of job cuts at Caterpillar since the early 1980s, when the company was losing about $1 million a day.

In addition, the company said it was freezing salaries of most employees and significantly reducing the total compensation of executives and senior managers.

“It’s just a very pessimistic outlook in terms of the world economy,” said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, N.Y.. “Clearly the building of global infrastructure has come to a grinding halt.”

The company reported a fourth-quarter profit of $661 million, or $1.08 a share, compared with $975 million, or $1.50 a share, last year.

Sales rose 6 percent to $12.92 billion.

The company attributed the drop in profitability to significantly higher operating costs in its manufacturing operations as capacity utilization plunged. It also said a sharp decline in profit in its captive finance unit contributed to the poor showing.

Analysts, on average, expected the company to report a profit of $1.28 a share on sales of $11.97 billion.

After shrugging off the downturn in the housing market that sparked the worldwide crisis, Caterpillar and other makers of bulldozers, dump trucks and excavators have suddenly faced a world of challenges, including a drop in spending by their well-heeled energy and mining customers.

    Caterpillar Moves to Cut 20,000 Jobs, NYT, 27.1.2009, http://www.nytimes.com/2009/01/27/business/27caterpillar.html?hp
 

Sprint Nextel

Plans to Cut 8,000 Jobs in Quarter

January 27, 2009
The New York Times
By THE ASSOCIATED PRESS

KANSAS CITY, Mo. — The Sprint Nextel Corporation, the wireless provider, said Monday that it would eliminate about 8,000 jobs, or about 14 percent of its work force, in the first quarter as it seeks to cut annual costs by $1.2 billion.

The company said Monday it will complete the layoffs largely by March 31. About 850 of the reductions are voluntary and the company said it expected a charge of more than $300 million for severance and other costs.

The company is also suspending its 401(k) match for the year, extending a freeze on salary increases and is suspending a tuition reimbursement program.

Sprint Nextel, based in Overland Park, Kan., has struggled since acquiring Nextel Communications in 2005 as technical problems, poor efforts to consolidate the two companies and stiff competition for feature-rich phones has led many subscribers to switch to competing services.

A rival, AT&T, said last month that it would cut 12,000 jobs, or about 4 percent of its staff.

    Sprint Nextel Plans to Cut 8,000 Jobs in Quarter, NYT, 27.1.2009, http://www.nytimes.com/2009/01/27/technology/companies/27sprint.html?hp

Economic Forecasters

See More Job Cuts Ahead

January 26, 2009
Filed at 11:52 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- It's already been a lousy year for workers less than a month into 2009 and there's no relief in sight. Tens of thousands of fresh layoffs were announced Monday and more companies are expected to cut payrolls in the months ahead.

A new survey by the National Association for Business Economics depicts the worst business conditions in the U.S. since the report's inception in 1982.

Thirty-nine percent of NABE's forecasters predicted job reductions through attrition or ''significant'' layoffs over the next six months, up from 32 percent in the previous survey in October. Around 45 percent in the current survey anticipated no change in hiring plans, while roughly 17 percent thought hiring would increase.

The recession, which started in December 2007, and is expected to stretch into this year, has been a job killer. The economy lost 2.6 million jobs last year, the most since 1945. The unemployment rate jumped to 7.2 percent in December, the highest in 16 years, and is expected to keep climbing.

''Job losses accelerated in the fourth quarter, and the employment outlook for the next six months has weakened further,'' said Sara Johnson, NABE's lead analyst on the survey and an economist at IHS Global Insight.

Thousands more jobs cuts were announced Monday. Pharmaceutical giant Pfizer Inc., which is buying rival drugmaker Wyeth in a $68 billion deal, and Sprint Nextel Corp., the country's third-largest wireless provider, said they each will slash 8,000 jobs. Home Depot Inc., the biggest home improvement retailer in the U.S., will get rid of 7,000 jobs, and General Motors Corp. said it will cut 2,000 jobs at plants in Michigan and Ohio due to slow sales.

Caterpillar Inc., the world's largest maker of mining and construction equipment, announced 5,000 new layoffs on top of several earlier actions. The latest cuts of support and management employees will be made globally by the end of March. An additional 2,500 workers already have accepted buyout offers, and ties have been severed with about 8,000 contract workers worldwide. In addition, about 4,000 full-time factory workers already have been let go.

Just last week, Microsoft Corp. said it will slash up to 5,000 jobs over the next 18 months. Intel Corp. said it will cut up to 6,000 manufacturing jobs and United Airlines parent UAL Corp. said it would get rid of 1,000 jobs, on top of 1,500 axed late last year.

The NABE survey of 105 forecasters was taken Dec. 17 through Jan. 8.

Also in the survey, 52 percent said they expected gross domestic product to fall by more than 1 percent this year. GDP measures the value of all goods and services produced within the U.S. and is the best barometer of the country's economic fitness. The last time GDP fell for a full year was in 1991, a tiny 0.2 percent dip. The economy shrank by 1.9 percent in 1982, when the country was suffering through a severe recession.

Forecasters have grown more pessimistic about the outlook. In the October survey, no forecaster thought GDP would fall by more than 1 percent.

In terms of business conditions, more reported customer demand dropping, capital spending reductions and shrinking profit margins.

Peoria, Ill.-based Caterpillar also reported Monday that its fourth-quarter profit plunged 32 percent. The company expects sharply lower results this year as global economic problems cut into its business.

Altogether the NABE report ''depicts the worst business conditions since the survey began in 1982, confirming that the U.S. recession deepened in the fourth quarter of 2008,'' Johnson said.

Many analysts predict the economy will have contracted at a pace of 5.4 percent in the fourth quarter when the government releases that report on Friday. If they are correct, that would mark the worst performance since a 6.4 percent drop in the first quarter of 1982. The economy is still contracting now -- at a pace of around 4 percent, according to some projections.

    Economic Forecasters See More Job Cuts Ahead, NYT, 26.1.2009, http://www.nytimes.com/aponline/2009/01/26/business/AP-Business-Outlook.html

News Analysis

Nationalization

Gets a New, Serious Look

January 26, 2009
The New York Times
By DAVID E. SANGER

WASHINGTON — Only five days into the Obama presidency, members of the new administration and Democratic leaders in Congress are already dancing around one of the most politically delicate questions about the financial bailout: Is the president prepared to nationalize a huge swath of the nation’s banking system?

Privately, most members of the Obama economic team concede that the rapid deterioration of the country’s biggest banks, notably Bank of America and Citigroup, is bound to require far larger investments of taxpayer money, atop the more than $300 billion of taxpayer money already poured into those two financial institutions and hundreds of others.

But if hundreds of billions of dollars of new investment is needed to shore up those banks, and perhaps their competitors, what do taxpayers get in return? And how do the risks escalate as government’s role expands from a few bailouts to control over a vast portion of the financial sector of the world’s largest economy?

The Obama administration is making only glancing references to those questions. In an interview Sunday on “This Week” on ABC, the House speaker, Nancy Pelosi, alluded to internal debate when she was asked whether nationalization, or partial nationalization, of the largest banks was a good idea.

“Well, whatever you want to call it,” said Ms. Pelosi, Democrat of California. “If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization.

“I’m not talking about total ownership,” she quickly cautioned — stopping herself by posing a question: “Would we have ever thought we would see the day when we’d be using that terminology? ‘Nationalization of the banks?’ ”

So far, President Obama’s top aides have steered clear of the word entirely, and they are still actively discussing other alternatives, including creating a “bad bank” that would nationalize the worst nonperforming loans by taking them off the hands of financial institutions without actually taking ownership of the banks. Others talk of de facto nationalization, in which the government owns a sizeable chunk of the banks but not a majority, with all that connotes.

That has already happened; taxpayers are now the biggest shareholders in Bank of America, with about 6 percent of the stock, and in Citigroup, with 7.8 percent. But the government’s influence is far larger than those numbers suggest, because it has guaranteed to absorb the losses of some of the two banks’ most toxic assets, a figure that could run into the hundreds of billions of dollars.

Many believe this form of hybrid ownership — part government, part private, with the responsibilities of ownership unclear — will not prove workable.

“The case for full nationalization is far stronger now than it was a few months ago,” said Adam S. Posen, the deputy director of the Peterson Institute for International Economics. “If you don’t own the majority, you don’t get to fire the management, to wipe out the shareholders, to declare that you are just going to take the losses and start over. It’s the mistake the Japanese made in the ’90s.”

“I would guess that sometime in the next few weeks, President Obama and Tim Geithner,” he said, referring to the nominee for Treasury secretary, “will have to come out and say, ‘It’s much worse than we thought,’ and just bite the bullet.”

So far the Obama administration has signaled that it is trying to avoid that day, and members of its economic team — among them Mr. Geithner and the president’s top economic adviser, Lawrence H. Summers — made the case during the Asian financial crisis in the 1990s that governments make lousy bank managers.

Indeed, the risks of nationalization they warned about then apply equally to the United States now. The first is that nationalization can prove contagious. If the Obama administration took over Bank of America and Citigroup, two of the largest banks in the United States, private investors could decide to flee from the likes of JPMorgan Chase and Wells Fargo, or other major banks, fearing they could be next.

Moreover, Mr. Obama’s advisers say they are acutely aware that if the government is perceived as running the banks, the administration would come under enormous political pressure to halt foreclosures or lend money to ailing projects in cities or states with powerful constituencies, which could imperil the effort to steer the banks away from the cliff.

“The nightmare scenarios are endless,” one of the administration’s senior officials said.

The argument in favor of nationalization, even a brief nationalization of a few months or years, is straightforward: It might be the only way to pull America’s largest financial institutions out of the downward spiral that makes it enormously difficult to raise the capital they need to keep operating.

Right now, many banks are reluctant to write off their bad debts, and absorb huge losses, unless they can first raise enough capital to cushion the blow. But they cannot attract that capital without first purging their balance sheets of the toxic assets. Japan’s experience proved the dangers of that downward swirl; the economy stagnated, new lending ground to a halt and the country’s diplomatic clout shrank with its balance sheets.

Nationalization could pull the banks out of that dive, at least temporarily, as the government injected capital, hired new managers and ordered a restart to lending. But some Republicans who bit their tongues when President George W. Bush ordered huge interventions in the market would charge that Mr. Obama was steering America toward socialism.

Nationalization, said Charles Geisst, a financial historian at Manhattan College “is just not a term in the American vocabulary.”

“We think of it,” he continued, “as something foreigners do to us, not something we do.”

It is also something foreigners do to themselves: the British have recently taken a majority stake in the Royal Bank of Scotland.

Some of Mr. Obama’s advisers have asked who the government would get to run the banks. Many of the most experienced executives are tainted by the decisions they made during the age of excess. And how would the government attract the best talent if it demanded that they take minimal pay — a political reality in the current environment?

Another option is for the government to buy the banks’ most toxic assets either through a giant fund, or, more likely, a federally supported bad bank designed to buy up troubled investments. But in that case, taxpayers might well be the losers: They would have all of the banks’ worst assets and none of their performing loans. And unless a deal is worked out to take a larger share of the banks whose bad loans are shuffled off to the government, the taxpayers would not have the chance to benefit by selling the shares back to private investors.

Moreover, cleaning up the banks’ bad assets, without extracting a heavy price for the bank managers, shareholders and their lenders, is exactly what Mr. Summers and Mr. Geithner warned against during the Asian financial crisis.

“We told the Asians that they had to be willing to let banks and companies fail,” said Jeffrey Garten, a professor at the Yale School of Management and a top official in the Clinton administration. “We warned that there was great moral hazard if governments just bailed them out.”

“And now,” he said, “we are doing the polar opposite of our advice.”

Eric Dash contributed reporting from New York.

    Nationalization Gets a New, Serious Look, NYT, 26.1.2009, http://www.nytimes.com/2009/01/26/business/economy/26banks.html?hp

Fight Building

Over Judges Redoing Mortgages

January 25, 2009
Filed at 9:59 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- Most congressional Democrats say the quickest way to save homeowners like Troy Butler of Saginaw, Mich., is to let them declare bankruptcy and allow judges to dictate new mortgage terms.

Easy, except the lenders that would absorb the pain -- and lose control of any deals to ease the terms -- do not want to get dragged into bankruptcy court by millions of overextended borrowers.

Butler, 40, is a laid-off General Motors worker who has filed for bankruptcy. But the bankruptcy court has no authority to change the terms of his $90,000-plus mortgage that is more than double the value of his home.

A bill to give judges authority to alter loan terms for primary residences may be the quickest way to arrest the housing market's collapse. Most Democrats in the House and Senate support that plan. President Barack Obama told Democratic leaders Friday he also backs it, according to a Senate aide who was not authorized to be quoted by name.

But 10 groups representing the lending industry and other businesses are fighting back fiercely. Several have engaged portions of their lobbying machines to stop the legislation. The groups spent $83 million in lobbying on multiple issues in 2008, a figure that shows the power of the banking and investing industry and their business supporters.

One Democratic backer of the bankruptcy proposal, Rep. Maxine Waters of California, said the banking industry ''has owned this Congress far too long.''

Butler, the GM worker, and an industry lobbyist see things much differently.

''I'm living from day to day, hoping to make it through the day. I worry about my family, where we're going to live, how we'll survive,'' said, Butler, who has a disabled wife and two children, ages 15 and 11.

The chief lobbyist for the Mortgage Bankers Association, Steve O'Connor, said new homebuyers would end up paying higher interest and bigger down payments if lenders are saddled with the risk that a judge could change mortgage terms.

''We're going to defend the industry'' against ''bad public policy,'' O'Connor said.

The association's 23-member government affairs team is trying to persuade lawmakers to kill the bankruptcy legislation. The team includes six lobbyists and nine policy experts who double as lobbyists, said O'Connor, senior vice president of government affairs.

The bankruptcy solution would not cost taxpayers money, as would mortgage modification programs that could become part of the government's huge economic bailout package. But it certainly would harm the bottom line for lenders and investors holding mortgages.

The lending industry has voluntary programs in place to change mortgage terms. But Butler's lawyer, Peter Bagley, said it was a nightmare trying to contact his client's lender.

First, he was told the application for a loan modification would take at least 30 days to process. Bagley then called someone with authority to stop any sale of the home, but only received voice messages that the mailbox was full. The application never arrived.

The key to passage of the bankruptcy bill is the Senate, where Democrats need 60 votes to stop a possible filibuster. Ten Democrats -- all still in the Senate -- would not back the plan in a vote a year ago.

Sen. Dick Durbin, D-Ill., the chief Senate sponsor of the bill, said Obama persuaded him in a White House meeting Friday to remove the bankruptcy proposal from an economic recovery package -- to ensure it doesn't jeopardize the stimulus bill. But Obama pledged his support for the bankruptcy solution, Durbin said.

Obama said he would work with Durbin to attach the proposal to other ''must pass'' legislation -- with the hope that supporters of the overall bill would not vote against it because of the bankruptcy provisions.

Of the 10 organizations that asked the House Judiciary Committee to oppose the bill, the largest is the U.S. Chamber of Commerce. It spent $57.9 million on lobbying in 2008, according to the Center For Responsive Politics, an organization that tracks lobbying expenditures and political donations.

The Mortgage Bankers Association, which represents 2,400 member companies in the real estate property industry, spent $3.8 million and the American Bankers Association totaled $6.8 million.

    Fight Building Over Judges Redoing Mortgages, NYT, 25.1.2009, http://www.nytimes.com/aponline/2009/01/25/washington/AP-Bankruptcy-Foreclosures.html

For Growing Ranks

of the White-Collar Jobless,

Support With a Touch of the Spur

January 25, 2009
The New York Times
By MICHAEL LUO

HOFFMAN ESTATES, Ill. — The meeting could have been at any number of corporations across the country. Everyone present sat at tables around an LCD projector with their laptops open.

But the setting was a church conference room, not a board room, and the spreadsheets under discussion focused not on work but the lack of it. They documented how many hours each person had devoted the previous week to looking for a job.

“Total hours I spent last week was 68,” said Bob Roeder, 51, one of the group’s co-leaders, going over his report on a recent Monday. “Number of letters sent out was four. Total number of network contacts was 12.”

This was the weekly meeting of a job search “accountability” group, organized by the Executive Network Group of Greater Chicago, an organization for executives “in transition.”

Membership in various networking organizations across the country for unemployed executives and other professionals has ballooned in recent months, leaders of several say, as the recession has continued its march, sparing not even the highly educated and skilled.

And job search support groups like this one have become quasi families for people like Mr. Roeder, who was laid off nearly two years ago from his job earning almost six figures as an area sales manager for Electronic Data Systems.

Providing a spur as well as solace, the groups offer glimpses in miniature at the travails of a swath of individuals in this recession whose lives had once seemed, if not charmed, at least quite comfortable as they carved out places in the middle and upper-middle class.

“A job loss in America is, psychologically, a real big hit,” said Cathy-Ann Romero, 53, another co-leader, who lost her job as a human resources manager 10 months ago.

Ms. Romero, who holds two master’s degrees, recently applied for a part-time job as a packer on the overnight shift at an online grocery store to help make ends meet.

The Monday morning meetings at a church in this Chicago suburb, she said, help the members realize, “We’re not in it alone.”

Indeed, white-collar unemployment rose to 4.6 percent in December, up from 3 percent the year before. The figures still pale in comparison to the 11.3 percent unemployment rate for blue-collar workers. But Lawrence Mishel, president of the liberal Economic Policy Institute, said white-collar unemployment rose faster in the past year than in any other recession dating to at least the 1970s, even the devastating downturn of the early 1980s.

Moreover, white-collar workers also tend to form a disproportionate share of the long-term unemployed — those who have been out of work six months or longer.

In the Chicago group, which has been meeting since April 2008, seven of nine members have been out of steady work for six months or longer; the other two are approaching the six-month mark.

Several in the group are now considering part-time “survival jobs.” Many are wrestling with whether, or how much, to draw down on their retirement accounts. Holding onto health insurance, with its high cost without an employer, has been a constant worry.

Mr. Roeder, who has two young children, took a part-time job this winter plowing snow for his township to pay the bills. He was initially depressed at what he considered the indignity, but then he discovered that several others in his crew were unemployed professionals just like him.

He jumped actively into his job search last February but said he had gotten fewer than 10 interviews in two years, despite averaging nearly 40 hours a week looking for work.

“I’m not getting any face time, and that is extremely frustrating,” Mr. Roeder said.

With his family’s savings rapidly dwindling, he drove seven hours to Troy, Mich., last weekend in a snowstorm for a job fair organized by BAE Systems, a military contractor, standing in line for two-and-a-half hours to get an interview.

“You can never turn down a job possibility in this economy,” he said.

Gregarious by nature, Mr. Roeder enjoys leading the group through its paces, enabling him to function, albeit briefly, in a corporate environment again. And he said he took special pleasure in compiling the members’ weekly reports, which are due to him every Sunday.

“I feel like I’m working again,” he said.

Jim Moorman, who arranged for the group to meet at his church, lost his job 16 months ago as a senior engineer at Motorola, where he was making more than $100,000 a year, after working there for 33 years.

After months of scrambling, Mr. Moorman missed his first mortgage payment last month.

“I have some alternatives,” said Mr. Moorman, who is also fretting about how to pay for a daughter going to college next year. “But they’re not ideal ones.”

He said he had struggled to get interviews and wondered at the recent meeting whether he was spending too much time applying to jobs online.

“I’m not doing something right yet,” he said later.

Nevertheless, the group’s sessions are intentionally businesslike and upbeat. Griping and self-pity are discouraged. Meetings begin with members reporting two highlights from their job search — even if they are hard to name — as well as two activities they did besides looking for work.

Mr. Roeder said he “plowed snow for 15 hours on Saturday and slept afterwards.” Tom Nolan, 54, who lost his job earning six figures as a chief financial officer of a midsize manufacturing company six months ago, reported seeing the movie “Slumdog Millionaire” with his wife.

But the urgency of their situations inevitably intrudes. Ms. Romero told others in the group that “reality is checking in” and that she needed cash, so she had applied for the part-time work.

The problem, she said, is that she was one of some 300 people applying for 15 jobs on the graveyard shift. So group members brainstormed ways she could gain some advantage.

The group meets on Mondays to provide structure for the week. Members’ days are filled with a revolving door of networking meetings, applications and chasing down the all-important but elusive hiring “decision-maker” at their target companies.

The stress has taken its toll on not just the members but also their families. Ms. Romero’s husband, Joseph, who is retired from his job as a public works supervisor, began seeing a psychiatrist for depression.

In an unheated workshop in the couple’s basement, Mr. Romero has been lighting candles to the Virgin of Guadalupe, in front of a crucifix draped over one of his son’s amplifiers.

“I heard she does miracles to a lot of people,” he said. “I figure she can give us the miracle of Cathy finding a job.”

For Jack Elliott, 58, who was laid off nine months ago from a six-figure job as director of franchise operations for Merlin 200,000 Mile Shops, a Chicago-area automotive maintenance chain, this is his third job search.

“Nowadays, you work someplace, you work there three years,” Mr. Elliott said. “Not only is this my third time, there will be a fourth time, more than likely.”

Many in the group are dialing back their expectations, conceding they will most likely have to take a pay cut, or accept a step down in responsibilities. But Matt Zimmerman, 28, who was laid off five months ago as director of new business development for a home décor company and is the group’s most aggressive networker, assured a new member at the meeting that this group was “beating the odds.”

Two former members of the group found jobs over the summer. And some have had success getting interviews. But it is not lost on members that no one in the group has landed a job since Lehman Brothers collapsed in September. Promising leads suddenly dried up. And their lives remain stuck.

    For Growing Ranks of the White-Collar Jobless, Support With a Touch of the Spur, NYT, 25.12009, http://www.nytimes.com/2009/01/25/us/25support.html



 

David G. Klein

Six Errors on the Path to the Financial Crisis

NYT        25.1.2009

http://www.nytimes.com/2009/01/25/business/economy/25view.html

Economic View

Six Errors

on the Path to the Financial Crisis

January 25, 2009
The New York Times
By ALAN S. BLINDER

WHAT’S a nice economy like ours doing in a place like this? As the country descends into what is likely to be its worst postwar recession, Americans are distressed, bewildered and asking serious questions: Didn’t we learn how to avoid such catastrophes decades ago? Has American-style capitalism failed us so badly that it needs a radical overhaul?

The answers, I believe, are yes and no. Our capitalist system did not condemn us to this fate. Instead, it was largely a series of avoidable — yes, avoidable — human errors. Recognizing and understanding these errors will help us fix the system so that it doesn’t malfunction so badly again. And we can do so without ending capitalism as we know it.

My list of errors has six whoppers, in chronologically order. I omit mistakes that became clear only in hindsight, limiting myself to those where prominent voices advocated a different course at the time. Had these six choices been different, I believe the inevitable bursting of the housing bubble would have caused far less harm.

WILD DERIVATIVES In 1998, when Brooksley E. Born, then chairwoman of the Commodity Futures Trading Commission, sought to extend its regulatory reach into the derivatives world, top officials of the Treasury Department, the Federal Reserve and the Securities and Exchange Commission squelched the idea. While her specific plan may not have been ideal, does anyone doubt that the financial turmoil would have been less severe if derivatives trading had acquired a zookeeper a decade ago?

SKY-HIGH LEVERAGE The second error came in 2004, when the S.E.C. let securities firms raise their leverage sharply. Before then, leverage of 12 to 1 was typical; afterward, it shot up to more like 33 to 1. What were the S.E.C. and the heads of the firms thinking? Remember, under 33-to-1 leverage, a mere 3 percent decline in asset values wipes out a company. Had leverage stayed at 12 to 1, these firms wouldn’t have grown as big or been as fragile.

A SUBPRIME SURGE The next error came in stages, from 2004 to 2007, as subprime lending grew from a small corner of the mortgage market into a large, dangerous one. Lending standards fell disgracefully, and dubious transactions became common.

Why wasn’t this insanity stopped? There are two answers, and each holds a lesson. One is that bank regulators were asleep at the switch. Entranced by laissez faire-y tales, they ignored warnings from those like Edward M. Gramlich, then a Fed governor, who saw the problem brewing years before the fall.

The other answer is that many of the worst subprime mortgages originated outside the banking system, beyond the reach of any federal regulator. That regulatory hole needs to be plugged.

FIDDLING ON FORECLOSURES The government’s continuing failure to do anything large and serious to limit foreclosures is tragic. The broad contours of the foreclosure tsunami were clear more than a year ago — and people like Representative Barney Frank, Democrat of Massachusetts, and Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, were sounding alarms.

Yet the Treasury and Congress fiddled while homes burned. Why? Free-market ideology, denial and an unwillingness to commit taxpayer funds all played roles. Sadly, the problem should now be much smaller than it is.

LETTING LEHMAN GO The next whopper came in September, when Lehman Brothers, unlike Bear Stearns before it, was allowed to fail. Perhaps it was a case of misjudgment by officials who deemed Lehman neither too big nor too entangled — with other financial institutions — to fail. Or perhaps they wanted to make an offering to the moral-hazard gods. Regardless, everything fell apart after Lehman.

People in the market often say they can make money under any set of rules, as long as they know what they are. Coming just six months after Bear’s rescue, the Lehman decision tossed the presumed rule book out the window. If Bear was too big to fail, how could Lehman, at twice its size, not be? If Bear was too entangled to fail, why was Lehman not?

After Lehman went over the cliff, no financial institution seemed safe. So lending froze, and the economy sank like a stone. It was a colossal error, and many people said so at the time.

TARP’S DETOUR The final major error is mismanagement of the Troubled Asset Relief Program, the $700 billion bailout fund. As I wrote here last month, decisions of Henry M. Paulson Jr., the former Treasury secretary, about using the TARP’s first $350 billion were an inconsistent mess. Instead of pursuing the TARP’s intended purposes, he used most of the funds to inject capital into banks — which he did poorly.

To illustrate what might have been, consider Fed programs to buy commercial paper and mortgage-backed securities. These facilities do roughly what TARP was supposed to do: buy troubled assets. And they have breathed some life into those moribund markets. The lesson for the new Treasury secretary is clear: use TARP money to buy troubled assets and to mitigate foreclosures.

Six fateful decisions — all made the wrong way. Imagine what the world would be like now if the housing bubble burst but those six things were different: if derivatives were traded on organized exchanges, if leverage were far lower, if subprime lending were smaller and done responsibly, if strong actions to limit foreclosures were taken right away, if Lehman were not allowed to fail, and if the TARP funds were used as directed.

All of this was possible. And if history had gone that way, I believe that the financial world and the economy would look far less grim than they do today.

For this litany of errors, many people in authority owe millions of Americans an apology. Richard A. Clarke, former national security adviser, set a good example when he told the commission investigating the 9/11 attacks that he wanted victims’ families “to know why we failed and what I think we need to do to ensure that nothing like that ever happens again.” I’m waiting for similar words from our financial leaders, both public and private.

Alan S. Blinder is a professor of economics and public affairs at Princeton and former vice chairman of the Federal Reserve. He has advised many Democratic politicians.

    Six Errors on the Path to the Financial Crisis, NYT, 25.1.2009, http://www.nytimes.com/2009/01/25/business/economy/25view.html

Bad Times

Spur a Flight to Jobs Viewed as Safe

January 25, 2009
The New Yoirk Times
By LOUIS UCHITELLE

After years of struggling to get their wages up, the nation’s workers are trying to find jobs that will simply last, at least through the deep recession.

Fearing layoffs, investment bankers at a Merrill Lynch or a Morgan Stanley are joining small Wall Street firms for less pay but with signed employment guarantees. Academics are migrating to community colleges, which are adding teachers as enrollment rises. And in Eastern Wisconsin, workers furloughed from a paper mill they fear will not reopen are training as truck drivers and welders.

“Looking online and in newspapers and talking to my instructors, I’ve decided that trucking and welding stand out as jobs that are available and will continue to be available, and a lot of my friends agree,” said Dan Geneen, who has picked up a truck-driving certificate and is learning welding since he was let go by the paper mill last fall.

Trucker and welder are hardly glamorous careers to most Americans. But there is a new allure developing around jobs likely to keep a person employed, at reasonable pay, through a prolonged downturn. Government employment once offered that promise, certainly in the Great Depression. But government hiring is less than robust now, at 181,000 additions over the last year, mostly at the state and local level. That is far from offsetting the 2.5 million jobs lost in the 13 months of recession.

With his economic recovery package now before Congress, President Obama promises to generate thousands of steady jobs, some of them in government. Until those positions appear in abundance, however, the hunt for safe work is occurring mainly in the private sector — and the hunting is not easy.

“The companies doing the least hiring right now are very often the companies that offer the safest jobs,” said Susan Houseman, a senior economist and labor expert at the Upjohn Institute, a research group in Michigan.

With employers shedding half a million jobs a month, some economists, like Nancy Folbre of the University of Massachusetts in Amherst, liken safe jobs to high ground amid the turbulent flood waters of lost employment.

“There is a danger in using the term ‘safe jobs’ for this perch,” Ms. Folbre said. “That makes them sound like sinecures, and they are not.”

Such is certainly the case on Wall Street. The flow to the smaller boutique firms often involves top people at big but shaky investment banks. Fearful they will be laid off, they move on before the ax falls, said Cheryl Solit, a partner at Solit Tessler & Company, a placement firm in Short Hills, N.J., that helps such executives make the switch to jobs with less initial compensation but more security, although in these hard times, not that much more.

“The no-layoff clauses in the contracts they sign are usually for one or two years,” she said, “and usually in the form of guaranteed compensation. The new employer is not likely to lay you off when he has to pay you anyway.”

Community colleges are turning out to be a similar mecca as enrollment rises because of the recession. Laid-off workers are flocking to the schools to retrain for other occupations, and young people are enrolling in greater numbers to avoid the higher tuitions of a four-year college, said James Jacobs, president of Macomb Community College in Warren, Mich.

At 41,000 students, Macomb’s enrollment is up 10 percent from last year, Mr. Jacobs said. With the recession driving enrollment, he is adding to his staff of 220 full-time teachers and 750 adjuncts. Most of the new hires are adjuncts, though the courses they teach there and at another community college often add up to full-time work.

Since enrollment is rising, they are assured of work semester after semester, Mr. Jacobs said. The annual pay is $40,000 or less — usually less — and no benefits. Still, they are coming back.

“If you spent six or seven years and hundreds of thousands of dollars getting a graduate degree and you end up doing this, that is not a happy thought,” Mr. Jacobs said. “But it is steady work.”

That is precisely what Mr. Geneen, the displaced paper mill worker, seeks from his course work at Fox Valley Technical College in Appleton, Wis., where he earned a truck driver’s certificate in December and is now learning to be a welder.

He was laid off in September as an operator of a coating machine when the NewPage paper company in Kimberly, Wis., shut — a victim of plunging demand. Mr. Geneen, 47, had worked at the mill since high school. He says he is not even trying to match the $60,000, with overtime, he earned at NewPage.

Steady work, even in a recession, is his current goal, which makes him reluctant to exercise his recall rights even if NewPage reopens. “I don’t want to have the same thing happen to me again five years from now, when I’m older,” he said.

Taking advantage of a federal subsidy to train for what he considers a safer occupation, he completed a 10-week course to become a commercial truck driver. Even though truck shipments are off sharply and drivers’ employment has fallen, Mr. Geneen sees a need for truck drivers, in good times and bad. So do 34 others who were laid off at NewPage and took the same course.

“Two of my classmates just this week applied at a trucking company advertising for tractor-trailer drivers,” Mr. Geneen said. “They were hired on the spot and told to report for work on Feb. 1. They didn’t even meet with the personnel people.”

Mr. Geneen says he plans to drive a truck, preferably within Wisconsin. But with his wife, Kathy, earning $40,000 a year as a certified public accountant and with enough severance from his mill job to help carry the family for a while, Mr. Geneen has enrolled in a yearlong course to qualify as a welder. It is another occupation chronically short of qualified people, even in a recession. At $40,000 a year or so, welders’ work would not match his old pay but would provide a backup plan for the future.

“I want options that will hold up in a failing economy,” he said.

As the recession deepens, the only industry in the private sector adding jobs in significant numbers is health care, according to data from the Bureau of Labor Statistics, and it is doing so across the board, from physician to bed pan attendant.

Government used to be a refuge, particularly postal work and public school teaching. But the post office has been shrinking its payroll for several years. Public school employment — mainly kindergarten through high school — rose through August to nearly 8.1 million jobs, but it has fallen each month since as declining tax revenue forces cutbacks.

Those cutbacks rarely apply to math and science teachers, who are often in short supply. “Teaching math in a high school in an affluent suburb,” said Tom Geoghegan, a labor lawyer in Chicago and a Democratic candidate for Congress, “that is my idea of the ultimate safe job.”

    Bad Times Spur a Flight to Jobs Viewed as Safe, NYT, 25.1.2009, http://www.nytimes.com/2009/01/25/business/25safe.html?hp

Britain Is Officially in a Recession

January 24, 2009
The New York Times
By MATTHEW SALTMARSH

Britain officially entered a recession in the fourth quarter, data released Friday indicated, while other reports from Europe demonstrated the still feeble economy across region.

British gross domestic product fell 1.5 percent from the third quarter and was down 1.8 percent on a year earlier, the Office for National Statistics said in a preliminary estimate. Economists had predicted a 1.2 percent drop for the quarter.

The numbers confirmed what economists and consumers have known for some time: that the economy is in a recession.

The conventional definition of a recession is for two consecutive quarterly declines in the growth rate. The rate fell by 0.6 percent in the third quarter.

For all of 2008, growth domestic product rose 0.7 percent, the lowest rate since 1992, when it rose 0.1 percent. The increased rate of decline in output was the result of weaker services and industrial output; all sectors except agriculture contracted in the quarter.

The release is likely to add to the case for the central bank to enact unconventional measures to restore inter-bank lending and bolster consumer confidence, analysts said.

The report “adds some extra weight to the already compelling case for the Bank of England bringing rates down to near zero and shifting to unconventional policy measures with some considerable degree of alacrity,” a strategist at RBC Capital Markets in London, Richard McGuire, said.

Alistair Darling, the chancellor of the Exchequer, told Sky News after the release that the figure was “undoubtedly sharper than many people believed, partly because you’ve seen industrial production go down because the export markets have been badly affected.”

European shares fell after the report from Britain and other data from the Continent, as investors continued to worry about the heath of the financial sector. the FTSE in London was down 1.3 percent in early afternoon trading.

Prime Minister Gordon Brown of Britain announced a new bailout for the British financial system earlier in the week that increases the government’s control over lenders, saying it would offer banks insurance on troubled assets and take other measures to restore credit and support the foundering economy. The government also revised the terms of its bailout of Royal Bank of Scotland, raising its stake in the bank to 70 percent from 58 percent.

Governments in Belgium, France, Germany, Spain and the Netherlands have also announced new steps recently to bolster the capital of their lenders.

In Madrid, the government released gloomy economy data Friday. The National Statistics Institute said the jobless rate there increased to 13.9 percent from 11.3 percent in the third quarter. The number of unemployed workers in Spain rose by over 1.2 million in 2008 to end the year at 3.2 million, the highest number since the first quarter of 1998.

There was, however, a slightly more positive note from a survey of purchasing managers on euro-zone services and manufacturing activity. A composite index of both industries was at 38.5 in January from 38.2 in December, which was the lowest reading since the survey began in 1998.

Economists had forecast a decline to 37.4, according to a Bloomberg survey.

The index is based on a survey of purchasing managers by Markit Economics and a reading below 50 indicates contraction.

“It’s important not to get carried away,” the Italian bank Unicredit said of the data in a research note. It added the data suggested merely that the first quarter “will probably be a bit less negative” than the fourth quarter.

It added that the recession is “bound to last at least through mid-year,” and with the headline inflation rate heading toward zero, the case for further interest rate cuts by the European Central Bank, probably in March and again in June, remains strong.

There was also a more positive note from the British retail sector on Friday. The statistics office said sales volumes between December 2007 and December 2008 grew by 1.8 percent, based on non-seasonally adjusted data.

The office noted, however, that difficulties relating to a cut value-added tax, aggressive discounting and a longer than usual trading period challenge a meaningful interpretation of the data on a seasonally adjusted basis.

Final G.D.P. figures in Britain will be released in late February.

    Britain Is Officially in a Recession, NYT, 24.1.2009, http://www.nytimes.com/2009/01/24/business/24euecon.html?hp

As Bank Crisis Deepens,

Obama Has No Quick Fix

January 21, 2009
The New York Times
By EDMUND L. ANDREWS

WASHINGTON —Even before they have settled into their new jobs, President Obama’s economic team faces an acute crisis in the nation’s banking system that has no easy answers and that they are not yet prepared to address.

The president’s advisers watched most banking shares fall sharply on Tuesday, reinforcing what Obama officials have known for weeks: that their most urgent financial problem is an immense new wave of losses at banks and other lending institutions that threatens to further cripple their ability to resume normal lending.

But when Timothy F. Geithner, the president’s nominee to be the Treasury secretary, appears before the Senate Finance Committee on Wednesday for his confirmation hearing, he is not expected to have a detailed plan ready.

While Mr. Obama’s top advisers view the black hole in bank balance sheets as one of their most pressing problems, they cautioned that they would not be pressured into announcing a plan before they had carefully thought through all the options. Instead, they are scrutinizing an array of solutions, each of which has pitfalls and poses its own risks and dangers.

Obama officials are almost certain to intertwine help to the banks with Mr. Obama’s goal of providing up to $100 billion for reducing home foreclosures. The two goals are not necessarily in conflict. Subsidizing loan modifications so that people can keep their homes could relieve banks of the steep losses associated with foreclosures and also prevent further erosions in bank asset values by putting a floor under home prices. “Mortgages are still the underlying problem, and I really think we need to address that problem head-on,” said Christopher Mayer, vice dean at the Columbia University School of Business. “The foreclosure stuff is just trying not to have even bigger losses in mortgages than we have so far.”

Administration officials said they were determined not to repeat the mistakes of former President George W. Bush’s Treasury secretary, Henry M. Paulson Jr., who sold Congress on an elaborate strategy for shoring up banks and then shifted to an entirely different approach before he even got started.

Industry analysts said the Obama administration’s challenge would be to help banks get rid of severely devalued mortgage assets on their balance sheets — from nonperforming subprime mortgages to pools of mortgages and derivatives — without wasting taxpayer money or rewarding banks for bad practices.

If policy makers were even remotely honest, analysts said, they would force banks to take huge write-downs and insist on a high price in return for taking bailout money. For practical purposes, that could mean nationalization or partial nationalization for many banks.

One main difference between the options under consideration is how transparent the government would be about the ultimate costs to taxpayers and whether banks would be required to reveal the true magnitude of their likely losses.

The ultimate taxpayer cost could be very high. A new analysis from the Congressional Budget Office suggests that the taxpayer costs are highest when the government’s asset purchases involve opaque transactions that are difficult to understand.

When Mr. Paulson first pleaded with Congress to approve the $700 billion bailout program, known officially as the Troubled Asset Relief Program, he argued that the government might eventually recoup its entire investment because it would be able to resell its holdings when financial markets recovered.

But the Congressional Budget Office, analyzing the program’s $247 billion in bailout payments through December, estimated that taxpayers would end up absorbing $64 billion or 26 percent of that bill.

The nonpartisan Congressional agency estimated that taxpayers had already lost 53 percent of the government’s $40 billion investment in American International Group, the giant insurance company that had been insuring tens of billions of dollars in junk mortgage-backed securities against default. As part of the rescue, the government helped A.I.G. buy back billions in mortgage securities that it had insured.

As the new Obama economic team pondered a new approach, one alternative, though an unlikely one, would be to revive Mr. Paulson’s original idea of buying troubled assets through an auction process. The potential virtue of auctions is that they could get closer to establishing a true market value for the assets.

But the drawback is that many of the securities are so arcane and complex that they are unlikely to generate the volume of bidding needed to establish a real market price.

A second approach, which Mr. Paulson had already used in a second round of bailouts for Citigroup and Bank of America, is to “ring-fence” the bad assets by providing federal guarantees against losses, and separating the assets from the rest of a bank’s balance sheet.

The virtue of that approach is that it costs relatively little money up front, because the government is essentially providing insurance coverage.

The danger is that the potential cost to taxpayers of federal guarantees can be even less transparent than other approaches. As a result, the final costs to taxpayers could be huge. Indeed, the guarantees would put the government in the same business that led to immense losses from mortgage-backed securities: credit-default swaps.

In its recent report, the Congressional Budget Office estimated the $20 billion that the Treasury spent in November to guarantee $306 billion of toxic assets by Citigroup will cost taxpayers $5 billion — a 26 percent subsidy.

William Seidman, a former chairman of the Federal Deposit Insurance Corporation who was closely involved with the bailout of savings-and-loan institutions in the 1990s, said the government should simply take control of the banks it tries to rescue. “When we did things like this, we took the banks over,” Mr. Seidman. “This is a huge, undeserved gift to the present shareholders.”

One big difference between today and the 1990s is that the government back then was seizing entire failed institutions. On paper, at least, the banks in trouble today are still viable.

That leaves the third and increasingly talked-about approach — have the government buy up the toxic assets and put them into a government-financed “bad bank” or an “aggregator bank.”

The immediate virtue of the bad bank is that the remaining “good bank” would have a clean balance sheet, unburdened by the uncertainty of future losses from bad loans and securities.

Richard Berner, chief economist at Morgan Stanley, described the “bad bank” strategy as the “least bad” of available options. The main advantage, Mr. Berner said, was that the government would have to decide how much it was willing to pay for the toxic assets. In turn, that would make it easier for the public to figure out whether the government was overpaying.

Banks may not want that kind of openness, because accurately valuing the toxic assets could force many to book big losses, admit their insolvency and shut down.

Stephen Labaton contributed reporting.

    As Bank Crisis Deepens, Obama Has No Quick Fix, NYT, 21.1.2009, http://www.nytimes.com/2009/01/21/business/economy/21bailout.html?hp

Banks Foreclose

on Builders With Perfect Records

January 20, 2009
The New York Times
By JOHN COLLINS RUDOLF

TEMPE, Ariz. — Dave Brown, one of this city’s best-known home builders, had kept his head above water through the housing downturn, not missing a single interest payment on his loans.

So he was confounded a few months back when one of his banks, spooked by the decline in his company’s revenue, suddenly demanded millions of dollars in additional collateral to continue carrying loans on his projects.

He was unable to come up with the money, and in October, JPMorgan Chase foreclosed on five of his developments. Shortly thereafter, Brown Family Communities, 33 years in the business, decided to shut its doors.

“They treated me like a deadbeat who missed his car payment,” said an embittered Mr. Brown, 76. “They wanted their money now.”

After riding high on one of the greatest housing booms in American history, the nation’s home builders today face a devastating reversal of fortune.

Although the housing crisis is nearly two years old, many banks had refrained from cracking down on small home builders.

They are starting to do so, and a wide swath of the industry could be forced out of business in the next few years. The trouble is concentrated especially in the Sun Belt, the scene of so much overbuilding.

Not only have new-home sales stagnated, but builders confront a rising wave of foreclosed properties coming to market at prices below the cost of building a new home. To move houses, they have to mark them down to less than the cost of construction.

The convergence of these problems is bringing many small and medium-size builders — who account for about 70 percent of new-home construction in the United States — to their knees.

“The reality is, we’re seeing conditions in home construction and home finance that are the worst since the Depression,” said Steve Fritts, associate director of risk management policy at the Federal Deposit Insurance Corporation, the government agency that insures bank deposits.

Life has been difficult for large publicly traded home-building companies as well, where stock prices have collapsed and construction sharply cut back. Yet for now, many of the public companies can meet their obligations.

“They’re better capitalized and they have cash on hand,” said Ivy Zelman, a housing analyst. “They’re in a much better position than the private builders.”

No hard count exists of precisely how many builders have gone out of business since the downturn began. According to an estimate by the National Association of Home Builders, at least 20,000 builders — about a fifth of the total nationwide — have closed up shop in the last two years.

With the industry still owing hundreds of billions of dollars in loans made at the market peak, many more face insolvency in the coming months and years. “Probably north of 50 percent will fail,” Ms. Zelman said.

Much of that borrowed money went to finance land deals that now appear to have been catastrophic miscalculations. In cities like Phoenix, where housing starts are near record lows, demand for undeveloped land has plummeted, and prices have followed.

As defaults and delinquencies rise, home builders, once prized banking customers, have become pariahs. Even builders who are up to date on their interest payments or still managing to sell houses are getting trampled, as in the case of Mr. Brown.

“They’re not distinguishing the track records of one borrower against another,” said John Fioramonti, a real estate consultant in Scottsdale, Ariz. “If you’re a builder, you are a bad risk.”

With the pullback accelerating, complaints among builders of hardball tactics and shoddy treatment by banks are mounting, as is a general sense of betrayal.

“The behavior of the banks is unprecedented,” said Mick Pattinson, a home builder from Carlsbad, Calif. who has organized a national coalition of builders to draw attention to what they regard as unreasonable treatment. “Yes, there was overleveraging in the industry. But the aftermath doesn’t need to have been as brutal as it has been.”

Some experts defend the banks, saying they are starting to do what is necessary to come to grips with the turmoil in real estate. For months, they have been under pressure from federal bank regulators and their own shareholders to curtail lending to a faltering industry.

“The lenders are not operating irrationally or unfairly, generally speaking,” Mr. Fritts said. “They have to protect themselves.”

Access to credit is essential to builders, who rely heavily on borrowed money to finance land acquisitions and home construction.

More than 15 percent of loans for single-family home construction were in some form of default by September 2008, up from 10 percent in January of that year, according to figures from Foresight Analytics, a housing analysis firm. Still, until recently, banks had largely chosen to keep past-due borrowers afloat, in the hope that a housing recovery might pave the way for them to repay their debts in full.

Only now, with the economic outlook darkening, are lenders stepping up foreclosures of troubled loans. Zelman & Associates, a housing analysis firm, estimates that losses on land and construction loans could eventually reach $165 billion, one reason federal regulators are pushing banks to come to grips with the problem.

“When we talk to regulators now, they say they’ve lost patience,” said Ms. Zelman, who is chief executive of Zelman & Associates.

In this climate, keeping loan payments up to date — something many builders are struggling mightily to do — is not necessarily any protection.

Many loans in the building industry are of short duration, coming up for renewal at least once a year. This allows banks to take a fresh look at the financial health of a borrower, as well as the assets securing their debt. A steep fall in cash flow or a decline in the value of the collateral — usually building lots or half-built houses — can mean an automatic default, whether a borrower has missed payments or not.

It was a combination of these factors that put an end to Mr. Brown’s home-building company, Brown Family Communities.

In 2005 and 2006, with loans from JPMorgan Chase and the big finance company GMAC, Brown Family Communities bought hundreds of acres of land on the far outskirts of Phoenix, in towns like Goodyear and Buckeye, where development was rapidly transforming cotton and alfalfa fields into malls and upscale subdivisions.

The company was emerging from a record year in 2005, selling an average of 85 homes a month and booking revenues of $352 million.

Each succeeding year brought a decline in sales, and by 2008, the company was on pace to sell fewer than 300 homes. A glut of foreclosures on the market drove down prices, forcing Mr. Brown’s company to discount homes by as much as $100,000.

In early 2008, GMAC, citing the depreciating worth of assets the company had used as collateral, shut off construction loans for two subdivisions under development. Though Brown Family Communities had yet to miss a payment, renegotiating the debt proved impossible, and GMAC — struggling with huge problems of its own because of the global credit crisis — foreclosed on the neighborhoods.

“They were in chaos,” Mr. Brown said of GMAC. “We couldn’t even get them on the phone.”

In late July, JPMorgan Chase followed suit, freezing construction loans on five subdivisions it had financed. Again, a workout proved elusive. And this time, when the bank foreclosed, it delivered a fatal blow to Brown Family Communities.

Neither JPMorgan Chase nor GMAC would comment on their banking relationship with Mr. Brown’s company. “We have been and continue to work with our clients to find the best solution to manage risk for them and for us,” said Mary Jane Rogers, a spokeswoman for JPMorgan Chase.

In one otherwise finished subdivision, a half-dozen of Mr. Brown’s partially built homes stand amid weeds, their wooden frames slowly bleaching in the desert sun. In another, chain-link fences surround houses that appear only days from completion.

Buyers were lined up for several of the homes before the bank halted construction, Mr. Brown said. But they are long gone.

“Now you talk about good business sense — the bank wouldn’t allow us to finish them,” he said. “Did the bank get millions less than if they had handled it differently? Yes.”

With thousands of small and midsize builders facing similar circumstances, the outlook for the industry is dire. “The downturn that we’re experiencing right now is so unprecedented that there’s really no business model that works,” said Joel Shine, a real estate investor.

Some builders are now demanding federal relief. They want a tax credit of up to $22,000 for new-home purchases and they want the government to buy down interest rates on new mortgages, to 3 to 4 percent.

Some analysts, however, believe such a bailout would artificially re-inflate home prices and encourage further building in a saturated market. “What is the public good for that?” asked Thomas Lawler, a housing analyst and former vice president for risk analysis at Fannie Mae.

Meantime, new construction has collapsed, sending workers in search of employment. Brown Family Communities had a full-time staff of 160 at its peak, not including the thousands of subcontractors at work on hundreds of home sites. Now, only a handful of employees are left.

Mr. Brown found it excruciating to fire the people who had helped him build his business.

“They’d come in and say goodbye and we’d have a good cry and then they’d go on their way,” Mr. Brown said. “There’s nothing out there for them. The real estate market’s gone.”

    Banks Foreclose on Builders With Perfect Records, NYT, 20.1.2009, http://www.nytimes.com/2009/01/20/business/economy/20builders.html?hp

For the Jobless,

Hope and Fear for a New Day

January 20, 2009
The New York Times
By PETER S. GOODMAN

COLUMBIA, S.C. — Joe Lewis came to the local employment office on Friday in the hope of buying a little more time.

Four months had passed since he lost his job as a maintenance worker at a chain of convenience stores, trading a paycheck of $370 a week for an unemployment check of $180 a week. With those benefits about to expire, Mr. Lewis arrived to fill out the paperwork for an extension, weary and uncertain about the future.

A new president is about to take responsibility for the American economy — the first black president, which has a particular resonance for Mr. Lewis, 52, an African-American. That Barack Obama is promising to devote hundreds of billions of dollars toward creating jobs is interesting, too. Yet none of this gave Mr. Lewis comfort.

“I haven’t seen the change,” Mr. Lewis said. “Until he does something, he’s just like all the rest of them to me. He ain’t done nothing for me. Everybody’s making promises.”

Mr. Lewis’s job search has amounted to an in-depth tour of shrinking prospects in one of the worst economic downturns since the Depression. He has applied at warehouses, at a moving company, at a concrete plant. So far, nothing. The next stop: a poultry slaughterhouse on the outskirts of Columbia.

Variations on his story echoed through the employment office in downtown Columbia, whose economic experience traces the national trajectory of the last decade more than any other metropolitan area. The people who passed through on this recent morning provided a snapshot of the extraordinary economic challenges inherited by the new president, as well as the mixture of hope and skepticism that greets his arrival.

Hope, because Mr. Obama represents a distinct break from the past, armed with a mandate to unleash government largess toward putting millions of people back to work. Skepticism, because Washington seems a long way from where most Americans live, geographically and figuratively. At the employment office, sounds of frustration created the running soundtrack. “This is the issue ...” “I never got the call.” “The store has closed ...” “I just need this paper signed, showing that I been here.”

A lot of people have been here. In December, 23,029 people passed through here to arrange job training, seek a new job or arrange unemployment benefits, said Keith Lucas, area director of the Midlands Workforce center, the official name for the place. That was far more than the 13,698 who came in the final month of 2007.

Nationally, some 2.6 million jobs have disappeared since December 2007, when the recession began. Last week, 524,000 more Americans filed for unemployment benefits, amid forecasts that the number could spike as high as 750,000 by late this year.

The economy that Mr. Obama is supposed to somehow fix is gripped by fear and the deepening realization that, for many people, recovery will be an exercise in making do with less than they had before.

A year ago, people let go by area factories that had paid as much as $18 and $20 an hour generally balked at the idea of retraining for a job installing heating and air-conditioning gear at half that pay. Now, those training programs are packed.

“There was a lot of resistance before,” said Abby Linden, who oversees such programs. “People now seem to expect that they’re going to have to start over.”

Mr. Obama’s inauguration is like a palpable marker of a new beginning for many, an inarguable sign of change, she said. “There’s a lot of excitement and hope,” Ms. Linden said. “People have a lot of faith in him, and faith that he’s going to be able to turn it around.”

And yet, out in the lobby, where dozens of people sat quietly in plastic-backed chairs arrayed across the linoleum floor, waiting to apply for unemployment benefits, weariness and resignation carried as much weight as faith and hope.

“It’s got to be better, it can’t be worse,” said Charles English, 62, who lost his job at an asphalt plant two years ago and has not worked since, living on the good graces of his grown son. “Just to listen to Obama talk and see those kids of his, it just makes you stand up and feel proud.”

But the talk of big spending on public works projects to generate jobs seemed to exclude him. “I ain’t able to go out and get this construction work,” he said. “I’m too old for that. So what happens to me?”

As John Arnette sat beneath the pale glow of the fluorescent lights, waiting to inquire why his check had suddenly stopped, he worried that Mr. Obama was promising to spend money the country did not really have, adding to long-term debts.

“You’ve got all the money that’s been given to the financial sector, plus all the money that’s going to the Big Three auto companies,” he said. “Where’s the money going to come from?”

It was the same question being asked with increasing frequency in his own household: Despite his college degree, Mr. Arnette, 36, has been out of work since May, when he lost his job as a midlevel manager at a convenience store chain.

Looking for work has been a humiliating process of discovery. Fresh college graduates are working as waiters or stocking the shelves at Lowe’s, the home improvement store. Management positions there seem increasingly filled by people with graduate degrees.

His wife still works, at a Verizon Wireless call center, but their household income has dropped from $150,000 a year to about $65,000.

“I’m blessed that my wife has a good job,” Mr. Arnette said. “Without that, I’d be homeless.”

    For the Jobless, Hope and Fear for a New Day, NYT, 20.1.2009, http://www.nytimes.com/2009/01/20/business/economy/20columbia.html?hp

More Joining American Military

as Jobs Dwindle

January 19, 2009
The New York Times
By LIZETTE ALVAREZ

As the number of jobs across the nation dwindles, more Americans are joining the military, lured by a steady paycheck, benefits and training.

The last fiscal year was a banner one for the military, with all active-duty and reserve forces meeting or exceeding their recruitment goals for the first time since 2004, the year that violence in Iraq intensified drastically, Pentagon officials said.

And the trend seems to be accelerating. The Army exceeded its targets each month for October, November and December — the first quarter of the new fiscal year — bringing in 21,443 new soldiers on active duty and in the reserves. December figures were released last week.

Recruiters also report that more people are inquiring about joining the military, a trend that could further bolster the ranks. Of the four armed services, the Army has faced the toughest recruiting challenge in recent years because of high casualty rates in Iraq and long deployments overseas. Recruitment is also strong for the Army National Guard, according to Pentagon figures. The Guard tends to draw older people.

“When the economy slackens and unemployment rises and jobs become more scarce in civilian society, recruiting is less challenging,” said Curtis Gilroy, the director of accession policy for the Department of Defense.

Still, the economy alone does not account for the military’s success in attracting more recruits. The recent decline in violence in Iraq has “also had a positive effect,” Dr. Gilroy said.

Another lure is the new G. I. Bill, which will significantly expand education benefits. Beginning this August, service members who spend at least three years on active duty can attend any public college at government expense or apply the payment toward tuition at a private university. No data exist yet, but there has traditionally been a strong link between increased education benefits and new enlistments.

The Army and Marine Corps have also added more recruiters to offices around the country in the past few years, increased bonuses and capitalized on an expensive marketing campaign.

The Army has managed to meet its goals each year since 2006, but not without difficulty.

As casualties in Iraq mounted, the Army began luring new soldiers by increasing signing bonuses for recruits and accepting a greater number of people who had medical and criminal histories, who scored low on entrance exams and who failed to graduate from high school.

The recession has provided a jolt for the Army, which hopes to decrease its roster of less qualified applicants in the coming year. It also has helped ease the job of recruiters who face one of the most stressful assignments in the military. Recruiters must typically talk to 150 people before finding one person who meets military qualifications and is interested in enlisting. Dr. Gilroy said the term “all-volunteer force” should really be “an all-recruited force.”

Now, at least, the pool has widened. Recruiting offices are reporting a jump in the number of young men and women inquiring about joining the service in the past three months.

As a rule, when unemployment rates climb so do military enlistments. In November, the Army recruited 5,605 active-duty soldiers, 6 percent more than its target, and the Army Reserve signed up 3,270 soldiers, 16 percent more than its goal. December, when the jobless rate reached 7.2 percent, saw similar increases in recruitments.

“They are saying, ‘There are no jobs, no one is hiring,’ or if someone is hiring they are not getting enough hours to support their families or themselves,” said Sgt. First Class Phillip Lee, 41, the senior recruiter in the Army office in Bridgeport, Conn.

The Bridgeport recruitment center is not exactly a hotbed for enlistments. But Sergeant Lee said it had signed up more than a dozen people since October, which is above average.

He said he had been struck by the number of unemployed construction workers and older potential recruits — people in their 30s and beyond — who had contacted him to explore the possibility. The Army age limit is 42, which was raised from 35 in 2006 to draw more applicants.

“Some are past the age limit, and they come in and say, ‘Will the military take me now?’ ” Sergeant Lee said. “They are having trouble finding well-paying jobs.”

Of the high school graduates, a few told him recently that they had to scratch college plans because they could not get students loans or financial aid. The new G. I. bill is an especially attractive incentive for that group.

The Army Reserve and the National Guard have also received a boost from people eager to supplement their falling incomes.

Sean D. O’Neil, a 22-year-old who stood shivering outside an Army recruitment office in St. Louis, said he was forgoing plans to become a guitar maker for now, realizing that instruments are seen as a luxury during a recession. Mr. O’Neil, a Texas native, ventured to St. Louis for an apprenticeship but found himself $30,000 in debt. Joining the Army, his Plan B, was a purely financial decision. With President-elect Barack Obama in office, he expects the troop levels in Iraq to be lowered.

Going to war, although likely, feels safer to him. “I’m doing this for eight years,” he said. “Hopefully, when I get out, I’ll have all my fingers and toes and arms, and the economy will have turned around, and I’ll have a little egg to start up my own guitar line.”

Ryen Trexler, 21, saw the recession barreling toward him as he was fixing truck tires for Allegheny Trucks in Altoona, Pa. By last summer, his workload had dropped from fixing 10 to 15 tires a day to mending two to four, or sometimes none. As the new guy on the job, he knew he would be the first to go.

He quit and signed up for the Jobs Corps Center in Pittsburgh, a federal labor program that would pay for two years of training, figuring he would learn to be a heavy equipment operator. When a local Army recruiter walked into the center, his pitch hit a nerve. Mr. Trexler figured he could earn more money and learn leadership skills in the Army. Just as important, he could ride out the recession for four years and walk out ready to work in civilian construction.

Although the other branches of the military have not struggled as much as the Army to recruit, they, too, are attracting people who would not ordinarily consider enlisting.

Just a few months ago, Guy Derenoncourt was working as an equity trader at a boutique investment firm in New York. Then the equity market fell apart and he quit.

Last week, he enlisted for a four-year stint in the Navy, a military branch he chose because it would keep him out of Afghanistan and offer him a variety of aviation-related jobs.

“I really had no intention to join if it weren’t for the financial turmoil, because I was doing quite well,” Mr. Derenoncourt, 25, said, adding that a sense of patriotism made it an easier choice.

The Army has struggled to attract the same caliber of enlistee that it did before the war. In 2003, 94 percent of new active-duty recruits had high school degrees. Last year, the number increased slightly from 2007, but it was still 82 percent. The percentage of new recruits who score poorly on the military entrance exam also remains comparatively high. The same is true for enlistees who need permission to enter the military for medical or “moral” reasons, typically misdemeanor juvenile convictions. Last year, 21.5 percent of the 80,000 new recruits in the Army required a so-called medical or moral waiver, 2 percent higher than in 2006. Fewer recruits needed waivers for felony convictions, though, compared with 2007.

Malcolm Gay and Sean Hamill contributed reporting.

    More Joining American Military as Jobs Dwindle, NYT, 19.1.2009, http://www.nytimes.com/2009/01/19/us/19recruits.html?hp

Hedge Funds, Unhinged

January 18, 2009
The New York Times
By LOUISE STORY

Chicago

LAST summer, Kenneth C. Griffin and his wife, Anne, hedge fund managers both, were so rich that they did something most wealthy couples don’t do until much later in life.

Still in their 30s, they hired a Ph.D. student in economics to help dole out their money to charities.

Fast-forward six months, and Mr. Griffin, who built the Citadel Investment Group into one of the largest hedge funds in the world, has seen the value of his funds plunge by roughly $10 billion — one of the biggest amounts lost in the hedge fund carnage last year.

He was down 55 percent while the average fund was down 18 percent. For Mr. Griffin, it is a failing as personal as they come. Sitting back in his chair, gazing uneasily at the skyline here, he points to a new patch of gray hair when asked about the toll of his losses.

“Last year was a dramatic year for the world’s largest financial institutions,” he says. “We were not immune.”

Mr. Griffin has basked in praise — whiz kid, wunderkind, the next Warren Buffett — ever since he began trading from his Harvard dorm room 20 years ago and then moved to Chicago to start his hedge fund. In recent years, his firm handily took in more than $1 billion annually.

But now, the whiz kid has lost so much money that it is unclear whether he can make it all back. That reality is playing out among thousands of troubled hedge funds drowning in losses.

Two out of three hedge funds lost money last year, and according to agreements with investors, their managers are supposed to recoup all losses before they start skimming fees from their profits again. That could take years.

And it’s unclear whether these traders, so accustomed to flush times, will stick it out long enough to make investors whole again.

Their decisions will reverberate beyond Greenwich, Conn., the New York suburb that is a haven for hedge fund honchos. Pension funds, endowments and charities — not just wealthy individuals — all invest in hedge funds.

Assets held by hedge funds surged to nearly $2 trillion as of the start of last year, from $375 billion in 1998, according to estimates from Hedge Fund Research, a Chicago firm. Along the way, hedge funds — once so few in number that they represented a boutique industry populated by a rarefied group of specialists — sprang up like kudzu.

Today, there are around 10,000 hedge funds, compared with around 3,000 a decade ago and just a few hundred two decades ago.

Little other than money unites hedge funds, which invest in areas as varied as bonds, aircraft and small-business loans. They even make bets on the weather.

What they have in common are lucrative fees: managers typically charge 20 percent of profits and 2 percent of total funds under management — the latter of which they earn regardless of performance.

The wealth and power of hedge funds, and those handsome fees, were predicated on what now sounds like a hollow promise: to make money year in and year out.

But the years of easy money are over.

Banks, pinioned by their own enormous mistakes and the economic slump, have cut back on hedge fund lending — essentially turning off a financial spigot that the funds relied upon to goose their returns.

Economic uncertainty makes it harder to predict market movements. And investors, burned by big losses in 2008, are either questioning hedge fund fees or simply avoiding putting more money into the funds.

The regulatory vise, meanwhile, is tightening around an industry that long enjoyed the freedom to trade and operate without the constraints imposed on more traditional firms.

On Thursday, Mary L. Schapiro, Barack Obama’s nominee to head the Securities and Exchange Commission, said during a confirmation hearing that she plans to more tightly regulate hedge funds as part of an effort to “bring transparency and accountability to all corners of the marketplace.”

Lawmakers are already considering new taxes and regulations that would require hedge funds to disclose more information about their secretive trading strategies.

Add it all up, and managing a hedge fund looks much less attractive than it used to.

“The magnitude of this current crisis and its effect on their business was a real shock for hedge fund managers,” said William N. Goetzmann, a professor who studies hedge funds at the Yale School of Management. “It will be a long-lasting effect because it’s caused customers to question the basic model.”

Mr. Griffin, fiercely competitive, says he is firmly in the camp of those trying to stay open. But he acknowledges that for several years, he will be working mostly for “psychic income.”

NOT everyone is rooting for Citadel. Call up nearly any hedge fund manager, and you will hear the stories about Mr. Griffin, now 40, poaching workers, landing a trade on the cheap and stalking wounded peers for deals. Mr. Griffin declined to comment on such stories.

His aggression has earned him admirers but has also created enemies. In the low-profile hedge fund industry, people shuddered at his brash claims that Citadel would become as powerful as investment banks like Morgan Stanley and Goldman Sachs.

His firm has become the fortress that many would love to see broken. Mr. Griffin knows that, but he chalks it up to his success. “Over the last 10 years we have been innovative and bold,” he says.

But in July, his magic touch deserted him. After reviewing the trading books at Kensington and Wellington, the two largest funds that Citadel manages, he decided to trim some holdings while bolstering an asset class he had traded since his early days: convertible bonds.

But the value of convertibles plummeted as banks, large issuers of such shares, went into a tailspin after the collapse of Lehman Brothers, the venerable investment bank.

Citadel made another large bet that the gap between corporate bonds and insurance bought on those bonds, known as credit-default swaps, would narrow. In essence, Mr. Griffin was betting that the economy would strengthen and that the price of insurance on debt would cheapen.

Others in the industry backed away from that particular gambit. Paul Touradji, who runs a fund associated with the veteran trader Julian Robertson, said his own digging indicated that more people would need to sell their bond positions than the number that were likely to buy in.

Still, Mr. Griffin stuck to his guns, even as his funds fell 16 percent in September. The loss put Citadel in the spotlight and generated speculation about its survival.

One day, the rumor was that Federal Reserve officials were trolling his Chicago headquarters; the next, that his funds were selling off troubled assets, or that banks were pulling credit. (Federal Reserve officials did in fact check up on Citadel. But since last spring, such inquiries have become routine at all large financial institutions. The other rumors were unfounded.)

Mr. Griffin says Citadel came under attack because it was a large and easy target — not because it was about to collapse.

By late October, Citadel was fighting for its life. At the end of the month, its funds were down an additional 20 percent and nearing 40 percent losses for the year. Mr. Griffin met with all of his employees and held a public conference call to reassure the world about Citadel’s financial footing.

Mr. Griffin calls that period “surreal” but says he never went to bed worried that Lehman’s fate would become his own. The difference with Citadel, Mr. Griffin says, is financing. He says he has arranged for credit lines at dozens of banks with durations as long as a year, buying him time. “Any firm that is a lasting, permanent institution goes through rough times,” he says. “In three years, they’ll write the story about how we came back, much like Goldman Sachs came back after 1929.”

Citadel, in fact, is different from many hedge funds that specialize only in trading. Mr. Griffin reinvested profits over the years into new service-based businesses. The management company, which is controlled solely by Mr. Griffin, also owns a firm that provides administrative services to other hedge funds, as well as the Citadel Derivatives Group, a major player in the options and stock markets. And Citadel recently hired a former Merrill Lynch executive to build a capital markets business, a mainstay of investment banking.

“Citadel is a diverse platform,” says Matt Andresen, who runs the Derivatives Group. “Our clients do not interact with the asset management side of the firm, and they’ve come to know us in an entirely different capacity.”

Mr. Griffin has full discretion over how much money he uses to subsidize his struggling funds. Last year, Citadel shouldered some of the funds’ operating costs, which are known to be among the largest in the industry.

At the same time, though, Citadel blocked investors in its two troubled hedge funds from withdrawing money at the end of last year. The company has told investors that they might be allowed to withdraw money at the end of March.

Mr. Griffin explains these decisions by saying that “it was the right thing to do,” because withdrawals by some investors might have disadvantaged other investors who remained in the funds. Citadel also canceled its holiday gathering because it was not “right,” he says, to celebrate last year.

But right and wrong in hedge fund land is a matter of debate. Industry veterans have been loudly criticizing fund managers who blocked investors from retrieving money. Leon Cooperman, for instance, who runs Omega Advisors, is suing another hedge fund, contending that it didn’t allow him to make withdrawals; he said his own fund would never block redemptions.

“You’d have to lower me into the ground before I’d put up a gate,” Mr. Cooperman says. “Clients deserve to be able to withdraw their money.”

Orin Kramer, another hedge fund manager, who also helps oversee the New Jersey pension fund, says that what bothers him most is that managers who are freezing their funds are still charging 2 percent management fees on money they have trapped.

“It’s like telling someone at a hotel that they can’t check out and then charging them for the privilege of staying,” Mr. Kramer says.

IN November, five of the country’s richest hedge fund managers filed solemnly into a Congressional hearing room to be grilled by lawmakers.

They made up a Who’s Who of their industry. In addition to Mr. Griffin, the group included James Simons, of Renaissance Technologies; Philip A. Falcone, an activist investor who has bought a large stake in The New York Times; John Paulson, who earned billions of dollars betting against mortgages before the crisis; and George Soros, the Hungarian trader who rode to fame on prescient currency trades in the early 1990s.

Unlike banks or brokerages, hedge funds do not have to reveal information on their financial condition to the government. That means the government has no way to know the value of funds’ assets, how much money they borrow, or even how many funds there are.

For years, the industry has argued that hedge funds should be allowed to operate under the radar because they serve sophisticated investors.

But by November, it had become apparent that too many hedge funds, crammed into too many of the same trades, had been forced to sell — and that they did not operate in some distant universe. Like mutual funds, they can roil the markets.

At the hearing, four of the managers surprised lawmakers and their peers by saying that more regulation of their business was needed.

Mr. Griffin was the lone holdout. He argued for private market solutions, but as the hearing proceeded, he conceded that he would “not be averse” to greater disclosure to the government, provided that it was not made public. He says now that he is working on providing more transparency to his investors.

Lawmakers proclaimed the day a victory.

“I believe there’s been a near-consensus that hedge funds can cause systemic risk,” said Representative Carolyn B. Maloney, a Democrat from New York and a member of the House Financial Services Committee.

Even without government intervention, the days of working behind a curtain may be ending. Investors are already demanding more information about hedge funds’ operations.

Eiichiro Kuwana, president of Cook Pine Capital, a firm in Greenwich, Conn., that helps wealthy people invest in hedge funds, says that investors once had so much money to invest that they became less circumspect — with many of them investing in hedge funds that refused to provide much information.

No longer.

“Why would I trust a fund with my money if they won’t trust me with information?” Mr. Kuwana says.

HEDGE FUNDS tend to close by choice; outright collapses are less common. Sometimes banks pull funds’ credit lines and managers are forced to shut down. But by and large, the end comes when a manager no longer sees a financial upside for himself or herself.

Few funds have actually shut their doors. The number of funds peaked early last year at 10,233, according to Hedge Fund Research, and fell just 4 percent during the year. And they still manage $1.6 trillion.

Of the funds that lost money last year, the average loss was 29 percent, according to estimates from HedgeFund.net, a research firm. It will take a few years of fairly robust gains — no easy feat in these markets — for funds to simply recoup those losses.

Until then, managers would earn only their 2 percent fee, chump change to most hedge funds. Some managers are already paying talented employees out of their own pockets to persuade them to stay, but it’s apparent that surviving this turbulence isn’t in the cards for scores of funds.

Mr. Touradji of Touradji Capital was one of the few managers to make money last year, up 13 percent. He says that most firms that call themselves hedge funds never really deserved the title.

“There’s any number of good violinists, but how many people are good enough to be considered to conduct the Philharmonic?” he says. “The whole concept of hedge funds was always and still is this very high bar, that you were never allowed to say it was a tough market. Come rain or shine, you were supposed to do well — even in tough markets.”

But he predicts a slow death for the poseurs. Hedge fund managers, he says, may behave like restaurateurs who keep the doors open long after losses mount, largely because they don’t want to work in someone else’s kitchen.

For his part, Mr. Griffin is not likely to be job-hunting any time soon.

While there is no way to calculate his net worth, it is thought to be at least hundreds of millions of dollars. In May, a monument to his riches will be unveiled at the Art Institute of Chicago. He and his wife donated $19 million for Griffin Court, part of a new modern wing that connects the museum to Millennium Park. And they are hoping they will have plenty of money for their Ph.D. graduate to give out by 2010.

As for Mr. Griffin’s troubled hedge funds, their survival will pivot on successful trading — they are up 6 percent this year — and on his willingness to use Citadel’s other units as a safety net.

Whatever happens, Mr. Griffin says he can handle the shakeout in the hedge fund industry. “It’s going to be fairly significant, “ he says, then pauses and grins. “It’s part of capitalism.”

    Hedge Funds, Unhinged, NYT, 17.1.2009, http://www.nytimes.com/2009/01/18/business/18hedge.html

Bailout Is a Windfall to Banks,

if Not to Borrowers

January 18, 2009
The New York Times
By MIKE McINTIRE

At the Palm Beach Ritz-Carlton last November, John C. Hope III, the chairman of Whitney National Bank in New Orleans, stood before a ballroom full of Wall Street analysts and explained how his bank intended to use its $300 million in federal bailout money.

“Make more loans?” Mr. Hope said. “We’re not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans.”

As the incoming Obama administration decides how to fix the economy, the troubles of the banking system have become particularly vexing.

Congress approved the $700 billion rescue plan with the idea that banks would help struggling borrowers and increase lending to stimulate the economy, and many lawmakers want to know how the first half of that money has been spent before approving the second half. But many banks that have received bailout money so far are reluctant to lend, worrying that if new loans go bad, they will be in worse shape if the economy deteriorates.

Indeed, as mounting losses at major banks like Citigroup and Bank of America in the last week have underscored, regulators are still searching for ways to stabilize the banking system. The Obama administration could be forced early on to come up with a systemic solution, getting bad loans off balance sheets as a way to encourage banks to begin lending, which most economists say is essential to get businesses and consumers spending again.

Individually, banks that received some of the first $350 billion from the Treasury’s Troubled Asset Relief Program, or TARP, have offered few public details about how they plan to spend the money, and they are not required to disclose what they do with it. But in conversations behind closed doors with investment analysts, some bankers have been candid about their intentions.

Most of the banks that received the money are far smaller than behemoths like Citigroup or Bank of America. A review of investor presentations and conference calls by executives of some two dozen banks around the country found that few cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future.

Speaking at the FBR Capital Markets conference in New York in December, Walter M. Pressey, president of Boston Private Wealth Management, a healthy bank with a mostly affluent clientele, said there were no immediate plans to do much with the $154 million it received from the Treasury.

“With that capital in hand, not only do we feel comfortable that we can ride out the recession,” he said, “but we also feel that we’ll be in a position to take advantage of opportunities that present themselves once this recession is sorted out.”

The bankers’ comments, while representing only a random sampling of the more than 200 financial institutions that have received TARP money so far, underscore a growing gulf between public expectations for how the $700 billion should be used and the decisions being made by many of the institutions that have taken part. The program does not dictate what banks should do with the money.

The loose requirements in the original plan have contributed to confusion over what the Treasury intended when it abruptly shelved its first proposal — to buy up bad mortgages — in favor of making direct investments in individual banks in return for preferred shares of stock.

The Treasury secretary, Henry M. Paulson Jr., said in October that banks should “deploy, not hoard” the money to build confidence and increase lending. He added: “We expect all participating banks to continue to strengthen their efforts to help struggling homeowners who can afford their homes avoid foreclosure.”

But a Congressional oversight panel reported on Jan. 9 that it found no evidence the bailout program had been used to prevent foreclosures, raising questions about whether the Treasury has complied with the law’s requirement that it develop a “plan that seeks to maximize assistance for homeowners.”

The report concluded that the Treasury’s top priority seemed to be to “stabilize financial markets” by simply giving healthy banks more money and letting them decide how best to use it. The report also said it was not clear how giving billions to banks “advances both the goal of financial stability and the well-being of taxpayers, including homeowners threatened by foreclosure, people losing their jobs, and families unable to pay their credit cards.”

For the banks, fearful that the economic downturn could deepen and wary of risking additional losses, the question of what to do with the bailout money comes down to self-preservation.

Mark Fitzgibbon, research director at Sandler O’Neill & Partners, which sponsored the Palm Beach conference, said banks seemed to be allocating the bailout money for four general purposes: increased lending, absorbing losses, bolstering capital and “opportunistic acquisitions.” He said those approaches made sense from a business perspective, even though they might not conform to popular expectations that the money would be immediately lent to consumers.

“For the banking industry, this isn’t a sprint, this is a marathon,” Mr. Fitzgibbon said. “I think over time there will be pressure to lend that capital out and get a return for their shareholders. But they’re not going to rush out and lend all that money tomorrow. If they did, they could lose it.”

For City National Bank in Los Angeles, the Treasury money “really doesn’t change our perspective about doing things,” said Christopher J. Carey, the bank’s chief financial officer, addressing the BancAnalysts Association of Boston Conference in November. He said that his bank would like to use it for lending and acquisitions but that the decision would depend on the economy.

“Adding $400 million in capital gives us a chance to really have a totally fortressed balance sheet in case things get a lot worse than we think,” Mr. Carey said. “And if they don’t, we may end up just paying it back a little bit earlier.”

In addition to wanting more lending, members of Congress have said TARP should not be used to fuel mergers and acquisitions, although Treasury officials say the financial system would be strengthened if healthy banks absorbed weaker ones. To that extent, bailout money has been useful for improving capital ratios — the amount of money available to absorb losses — for banks that merge.

On Friday, Bank of America said it would receive $20 billion more from the Treasury to help it digest losses it took on by acquiring Merrill Lynch, a process begun in September.

At least seven banks that received TARP money have since bought other companies, including one that had been encouraged to do so by federal regulators. That one, PNC Financial Services, took $7.7 billion from the Treasury and promptly acquired the struggling National City Bank for $5.2 billion in stock and $384 million in cash.

Among the others, PlainsCapital Bank of Dallas announced in November, not long after the bailout program began, that it planned to merge with a healthy investment bank, First Southwest. PlainsCapital received $88 million from the Treasury on Dec. 19, and the all-stock merger was completed two weeks later. PlainsCapital’s chairman, Alan B. White, insisted in an interview that the two events were not connected.

He said the bank had not yet decided what to do with its bailout money, which he called “opportunity capital.” Increased lending would be a priority, said Mr. White, who did not rule out using it for other acquisitions, adding that when regulators invited PlainsCapital to apply for federal dollars, there were no conditions attached.

“They didn’t tell me I had to do anything particular with it,” he said.

None of the bankers who appeared before recent investor conferences offered specific details about their intentions, but recurring themes emerged in their presentations. Two of the most often cited priorities were hanging on to the money as insurance against a prolonged recession and using it for mergers.

At the Sandler O’Neill East Coast Financial Services Conference in Florida, bankers mingled with investment analysts at an ocean-front luxury hotel, where the agenda featured evening cocktails by the pool and a golf outing at a nearby country club.

During his presentation, John R. Buran, the chief executive of Flushing Financial in New York, said the government money was a way to up the “ante for acquisitions” of other companies.

“We can get $70 million in capital,” he said. “So, I would say the price of poker, so to speak, has gone up.”

For Mr. Hope, the Whitney National Bank chairman, “the main motivation for TARP” was not more loans, but rather to safeguard against the “possibility things could get a lot worse.” He said Whitney would continue making loans “that we would have made with or without TARP.”

“We see TARP as an insurance policy,” he said. “That when all this stuff is finally over, no matter how bad it gets, we’re going to be one of the remaining banks.”

    Bailout Is a Windfall to Banks, if Not to Borrowers, NYT, 18.1.2009, http://www.nytimes.com/2009/01/18/business/18bank.html?hp

Fair Game

The End of Banking as We Know It

January 18, 2009
The New York Times
By GRETCHEN MORGENSON

THE concept of the financial supermarket — the all-things-to-all-people, intergalactic, behemoth banking institution — bit the dust last week.

The first death notice came on Tuesday, when Citigroup, Exhibit A for the failure of the soup-to-nuts business model, said it was dismantling. Just over a decade after the deal-maker Sanford I. Weill tried to meld insurance, investment banking, mortgage lending, credit cards and stock brokerage services, the dissolution began.

Citigroup, it turned out, was too big to manage, too unwieldy to succeed and too gigantic to sell to one buyer.

A few days later, Bank of America, another serial acquirer of troubled institutions —Merrill Lynch and Countrywide Financial most recently — fessed up that its deals now need taxpayer backing. The United States government invested an additional $20 billion in Bank of America (after $25 billion last fall) and agreed to guarantee more than $100 billion of imperiled assets.

Clearly, the entire financial industry is in the midst of a makeover. And while no one wants to call it nationalization, perhaps we can agree on this much: The money business as we have come to know it over the last two decades — with its lush salaries, big-swinging risk-takers and ultrathin capital cushions — is a goner.

Got that? Toast. Toe-tagged.

And that’s a good thing, because maybe we can go back to a banking model that is designed to do more than simply enrich the folks at the top of the enterprise while shareholders and taxpayers absorb all the hits.

Banking, because it oils the crucial wheels of commerce, has a special standing in our world. That will always be the case.

But in exchange for that role, our country’s leading bankers might have approached their jobs with a sense of prudence and duty. Instead, a handful of arrogant greedmeisters blew up their institutions and took our economy off the cliff along the way.

It’s too soon to say how much taxpayer money will be spent trying to rebuild banks hollowed out by bad lending practices. Paul J. Miller, an analyst at Friedman, Billings, Ramsey, thinks that the nation’s financial system needs an additional $1 trillion in common equity to restore confidence and to get lending — the lifeblood of a thriving and entrepreneurial free-market economy — moving again.

That $1 trillion would come on top of funds disbursed through the Troubled Asset Relief Program, which has tapped $700 billion, and the president-elect’s stimulus plan, clocking in at $825 billion.

Larger capital requirements, beefed up to serve as a proper buffer when lenders misfire, will be one change facing banks when we emerge from this mess, Mr. Miller said. He thinks regulators will require banks to hold tangible common equity of 6 percent of assets. Now many institutions hold under 4 percent.

Such a requirement will cut into earnings, of course. Toning down the risk-taking will also reduce the profitability — or the appearance of it — at these institutions.

“This industry made a lot of money by taking a business line with 20 percent return on assets and levering it up 30 times,” Mr. Miller said. “But no more. Banks are going back to being the boring companies they should be, growing roughly in line with gross domestic product.”

Clearly this means that the rip-roaring performance of financial services companies and their stocks isn’t likely to return anytime soon. Because these companies’ earnings fed both the economy and the stock market in recent years, a more muted performance has considerable implications for investors, consumers and the economy.

FOR example, since 1995, according to Standard & Poor’s, earnings of financial concerns have accounted for 22 percent of profits, on average, among the S.& P. 500 companies. That performance is almost double that of the next largest contributor — the energy industry. In 2003, earnings among financial companies peaked at 30 percent of total profits generated by the S.& P. 500; back in 1995, financial company earnings accounted for 18.4 percent of the total.

Of course, many of these earnings were ephemeral and have since turned to losses. But while the companies were reporting the profits, their stocks roared.

Between 2003 and the peak in 2007, the American Stock Exchange financial services index essentially doubled. At the peak, financial services companies dominated the S.& P. 500 index, accounting for 22 percent of its market value in 2007. With many of these stocks in free fall, that figure is now just 12.5 percent.

Will valuations on financial services stocks bounce back soon? Not in Mr. Miller’s view. “They are going to look more like the insurance industry, trading at book value or 1.5 times book,” he said. “That is, if you are really good.”

For financial services workers, of course, the inevitable downsizing has already begun. But there will be more. “The industry was way too big; too many people were not producing anything,” Mr. Miller said. “Jobs will be lost and not replaced. And financial industry salaries won’t be anywhere close to where they have been.”

The bright side is that all those displaced financial services professionals can now set their sights on doing something, well, truly useful.

Still, this adjustment will be painful for all those who have to carve out new careers, as well as for New York and other places these companies call home.

Finally, what will a humbled financial services industry mean for consumers? Higher borrowing costs, Mr. Miller said.

“The leverage that these companies were using allowed them to lower their rates,” he said. “Rates have to go higher for the banks to operate in a safe and sound manner and make money.”

Credit is also likely to remain tight, in Mr. Miller’s opinion. A result is that consumer spending won’t recover to bubble levels.

“It is going to be difficult to get credit, and that is something the system has to adapt to,” Mr. Miller said. “That is where the government is going to have to step in and replace that debt growth to make sure there is a smooth transition.”

In other words, Barack Obama’s first stimulus plan is not likely to be his last.

When a driving economic force takes a big dive, the ripples are far-reaching. Change is painful, there is no doubt. But American business can be awfully good at reinventing itself when it needs to.

And does it ever need to now.

    The End of Banking as We Know It, NYT, 18.1.2009, http://www.nytimes.com/2009/01/18/business/18gret.html?hp

Circuit City to Shut Down

January 17, 2009
The New York Times
By STEPHANIE ROSENBLOOM

Circuit City Stores, a bellwether American retailer, said Friday that it would go out of business, stripping the nation of its second-largest consumer electronics chain.

The company, which filed for bankruptcy protection in November but had hoped to emerge in a slimmed-down form, said instead that it would liquidate all its stores and assets.

Most of the chain’s 34,000 store employees will be laid off. Closing sales will begin as early as Saturday and will last until the merchandise is gone or about the end of March.

Just last week, Circuit City, with 567 stores, was in talks with two potential buyers, but it was unable to reach an agreement with its creditors and lenders.

“We are extremely disappointed by this outcome,” said James A. Marcum, acting president and chief executive of Circuit City Stores. He called the liquidation “the only possible path” for the 60-year-old company.

The demise of Circuit City, while not surprising given its declining sales, is part of a radical shift taking place in retailing. Weak chains — unable to weather the freeze-up in consumer spending and choked by tight credit markets — are closing.

The downturn comes after years of growth, when retailers — responding to a flood of demand from consumers spending borrowed money — opened thousands of stores. Now that the housing downturn and economic crisis have turned off the credit spigot and sent frightened consumers into hiding, it is becoming evident that many of those stores are not needed.

“We are incredibly over-stored in many sectors,” said Stacey Widlitz, an analyst with Pali Research. “If you don’t have the balance sheet to really weather the storm for a couple of years, then that’s it.”

Last year, a raft of retailers, including Boscov’s, Sharper Image, Mervyns, Linens ’n Things, Whitehall Jewelers and Steve & Barry’s, filed for bankruptcy protection. This week, Goody’s Family Clothing and Gottschalks also filed.

Many more retailers are expected to follow suit as they run out of working capital or are unable to refinance their debt.

Emerging from bankruptcy is harder than ever because of changes in the bankruptcy code and trouble in the credit markets, which are largely refusing to put new money into troubled companies.

Wall Street analysts said in November that the prospects of long-term survival for Circuit City were bleak. Months of declining sales sent the company over the edge, although its problems go back a decade. They include buying cheap real estate leases in inferior locations and laying off the company’s most experienced sales staff. The latter saved money, but at the price of employee morale and countless customers.

“They basically destroyed all their customer loyalty among all their best customers in one fell swoop,” said Britt Beemer, chief executive and founder of America’s Research Group.

“That was really the beginning of the end.”

The disappearance of the national chain means that in many markets consumers are running out of places to buy electronics, though shoppers are not the only ones being affected. The loss of Circuit City will probably be felt throughout the supply line as electronics manufacturers find themselves less able to negotiate prices.

The biggest electronics retailer left is Best Buy. Circuit City’s liquidation sales are likely to put pressure on Best Buy in the short run, but retailing analysts say the company will ultimately emerge with more market share.

“Even accounting for a softer economy,” said David A. Schick, an analyst at Stifel Nicolaus, “the business will go to specialty players in the sector and it will also go to mass merchant discounters.”

Analysts say they believe the biggest winner will not be Best Buy, but Wal-Mart.

Ms. Widlitz said consumers who shopped at Circuit City were more likely to defect to Wal-Mart than to Best Buy, especially at a time when Wal-Mart has aggressively built up its stable of name-brand electronics at low prices.

“This is perfect timing for them,” Ms. Widlitz said.

    Circuit City to Shut Down, NYT, 17.1.2009, http://www.nytimes.com/2009/01/17/technology/companies/17circuit.html

Outsourced Chores Come Back Home

January 17, 2009
The New York Times
By CATHERINE RAMPELL

A few months ago, as her family’s income fell, Laura French Spada, a real estate agent in Glen Rock, N.J., began dyeing her hair at home and washing the family cars herself. Her husband, Mark, started learning how to do electrical repairs.

Susan Todoroff, a personal trainer in Ann Arbor, Mich., has begun brewing espressos at home and cutting her hair and cleaning her house herself. And Tamar A. Zaidenweber, a health care market researcher in Astoria, Queens, is spending more time walking her dog instead of taking it to day care each week.

All of these consumers could praise themselves for their newfound frugality in the midst of an economic downturn. But every step they take toward self-reliance — each shrub they prune themselves, each cupcake they bake from scratch — hurts the people and small businesses that have long provided these services professionally.

These small, service-oriented businesses are run in storefronts on urban streets and in suburban strip malls, or sometimes just out of pickup trucks. Responsible for roughly 18 million jobs nationwide, according to 2006 Census Bureau data, these companies have long been seen as engines of America’s economic growth. Yet after years of explosive expansion, many beauty salons, dry cleaners, landscapers, dog walkers, nanny services and restaurants experienced slower sales growth or even decline in the final months of 2008.

Their services are suddenly, and painfully, being perceived as nonessential.

The question now for these businesses is whether demand will stabilize or, eventually, drop enough to force them to close. And the answer may depend on whether consumers’ new penchant for self-service is temporary or permanent.

After all, as incomes rose and gender roles changed over the last 50 years, families have become accustomed to outsourcing more and more of their household chores. No longer was it just the very rich who had “servants,” said Jan de Vries, an economic historian at the University of California, Berkeley.

“Household members, particularly women, have been working more in the market,” said Mr. de Vries. “They have had less time and higher money income, and they have been spending a lot of that money income on services they once provided themselves.”

Still, he said, even before the recession, some families had already cited moral reasons for reverting to domestic self-sufficiency, to those good old days when families grew their own food and burped their own babies.

“Families have been creating a discussion over the past decade about value-driven concerns that are now being reinforced by forces in the economy,” he said. As a result of this confluence of moral and financial incentives, “The way households function 20 years from now will probably be sort of surprising to us.”

Indeed, after decades of spendthrift subcontracting, many consumers now say they view such specialist services as indulgences rather than necessities.

“A lot of the way we’d been living was all an illusion, a fantasy,” said Ms. Spada, who has also been cooking more and bathing the family dog instead of going to the groomer. “We’ve been asking ourselves: Can we replicate some of those specialized services, which normally we would outsource, ourselves?”

Even as Americans cut back on restaurant dining, pet care services, professional hair and nail services, house cleaners and landscapers, companies producing some of the do-it-yourself products are seeing higher sales.

According to Information Resources Inc., a market research firm in Chicago, sales of products used in home manicures, home cooking and home medical treatments, among others, have experienced healthy growth in the last year. Dollar sales of cold-allergy-sinus tablets, for example, increased 17.2 percent in 2008. Meanwhile, according to Sageworks, a company that tracks sales at privately held businesses, revenue at physicians’ offices fell by 0.06 percent.

“They’re reducing doctor visits, and trying to treat themselves at home,” says Thom Blischok, president of global innovation and consulting at Information Resources.

Big-box stores that sell these products have been capitalizing on the return to a self-service mentality. Target, for example, recently began its “New Day” marketing campaign, which glorifies the family-friendly, do-it-yourself alternatives to activities households used to outsource. Against upbeat lyrics about how things are “getting better every single day,” the ads show dismal economic headlines, followed by scenes of a father buzzing the hair of his smiling sons (“the new barber shop”) and a child eagerly eyeing his mother’s cookie-filled oven (“the new bakery”).

At the same time, the service providers have been hurting.

“From the moment that the stock market collapsed and the TARP was being talked about, in September, it was like someone turned the switch off for nanny demand,” said Steve Lampert, the president of eNannySource.com, making a reference to the Troubled Asset Relief Program. Family subscriptions to eNannySource.com, a national nanny placement company based in West Hills, Calif., are down to 150,000, about a third of the site’s peak in 2007, he said.

James Erath, owner of Puppy Love & Kitty Kat in Manhattan, said, “Business is definitely down, about 25 or 50 percent down.” He has been offering steep discounts on grooming to attract customers who might bathe their pets at home.

Similarly, Rhonda Coop-Piraino, a hair stylist in Dallas, said about 10 percent of her clients had started coloring their hair at home to save money. Many of these clients, she said, return to her salon for color correction when their home kits disappoint.

“They do come in sometimes with some pretty orange hair,” she said. “I have a hard time charging the same amount I once charged for color correction, though. I have clients who have been with me for so many years, and it’s hard for me to charge them $200 in this economy.”

Like Ms. Coop-Piraino’s clients, some consumers say that doing things for themselves has not been as easy as they thought.

After letting their maid go last October, Chris DeCarlo said he and his partner, Chris Toland, realized they had a lot to learn about keeping their Manhattan apartment tidy. Their biggest challenge has been laundry.

“No mishaps yet,” said Mr. DeCarlo, a Web site designer, “but my partner is proud to report that somebody in our laundry room who was watching him struggle felt the need to intervene and show him the proper way to fold a fitted sheet.”

And there are some services that consumers now have trouble duplicating themselves because of technological advances.

When it comes to cars, for example, consumers might be able to refresh their memories about how to change a car’s oil — and some mechanics report a rise in such self-service. Faisal Akram, the owner of service stations in Irvington, Tarrytown and Cortlandt Manor, all in New York, said that for the first time in recent memory customers were bringing in waste oil from home.

But beyond oil changes, there is little most car owners can do themselves because automobiles have become so sophisticated.

Aaron Clements, the owner of C & C Automotive and host of a car-repair radio show in Augusta, Ga., said that in recent months twice as many customers had been calling and asking for advice on how to service their cars themselves. But usually, once they learn what equipment, training and effort would be necessary for self-service, he said, they opt to take the car to a shop.

“Two cars ago, I was able to rebuild the entire engine,” said Vicki Robin, the co-author of “Your Money or Your Life,” a book praising the financial virtues of self-service. “But back then a car was a car. Now a car is a computer with wheels.”

As their former nannies, stylists, landscapers, dry cleaners and maids languish, consumers report mixed feelings. They say they sometimes feel guilty about the ripple effects their penny-pinching is having on the livelihoods of others, but at the same time they feel unexpectedly empowered by their rediscovered self-reliance.

Many say that even when their financial worries abate, they will probably remain self-service converts.

“After doing it yourself, it’s like, ‘Why was I ever spending $200 to pay someone else to do it for me?’ ” said Ms. Zaidenweber, who recently dyed her hair for the first time from an $8 home coloring kit. “It was kind of fun, even if it didn’t turn out exactly as I expected, and even it took a couple tries to get it done right.”

Caitlin Kelly contributed reporting.

    Outsourced Chores Come Back Home, NYT, 17.1.2009, http://www.nytimes.com/2009/01/17/business/17services.html

Bush Claims

Economy on Track to Recovery

January 16, 2009
Filed at 12:52 p.m. ET
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- President George W. Bush said Friday that while the current economic crisis has sent shock waves around the world, he believes steps taken by his administration have ''laid the groundwork for a return to economic growth and job creation'' early in the administration of President-elect Barack Obama.

''The American economy has consistently proven its strength and resilience'' Bush wrote in his final economic report to the nation.

He said this resilience has continued despite multiple blows to the economy.

Bush's statement came at the beginning of the annual report of the White House Council of Economic Advisers.

Those advisers predicted ''a strong economic recovery early in the term of the next administration.''

Bush said that a combination of factors rose to ''threaten the entire financial system and generated a shock so large that its effects have been felt throughout the global economy.''

''Under ordinary circumstances, it would be preferable to allow the free market to take its course and correct over time,'' he said. But, Bush added, the potential financial damage to households and businesses was so severe that ''unprecedented government response was the only responsible policy option.''

''A measure of stability has returned to the financial system,'' Bush said.

He warned that ''temporary government programs'' established to deal with the crisis ''must remain temporary and be unwound in an orderly manner as soon as conditions warrant.''

In the underlying economic report, Bush's economic advisers said that while the economy had in fact proven itself '' remarkably resilient'' over Bush's two-term presidency, there is a ''risk that recent events may overshadow the many positive developments of the past eight years.''

The advisers suggested that the economic downturn, reflected in the half-percentage-point contraction in the gross domestic product in the final quarter of 2008, will likely continue in the first half of 2009. The White House panel noted that ''most market forecasts'' suggested a recovery beginning in the second half of 2009 ''that will gain momentum in 2010 and beyond.''

Looking ahead, the president's economic advisers said the global financial crisis presents several remaining challenges for the U.S. government: the need to modernize financial regulation, unwind temporary programs, and develop a long-term solution for dealing with mortgage giants Fannie Mae and Freddie Mac, now essentially under control of the government.

And Bush's advisers didn't miss an opportunity to put in a final political plug for the president's unfinished agenda, just five days before he leaves office.

''There remains considerable opportunity to strengthen our economic position by eliminating the uncertainty surrounding tax relief that is scheduled to expire.''

It was a pitch to make permanent the Bush tax cuts that expire at the end of next year.

    Bush Claims Economy on Track to Recovery, NYT, 16.1.2009, http://www.nytimes.com/aponline/2009/01/16/washington/AP-Meltdown-Bush-Economy.html

Stocks Tumble

as Retail Sales Report

Shows Sharp Decline

January 15, 2009
The New York Times
By JACK HEALY

Retail sales fell in December for a sixth consecutive month, the government reported on Wednesday, as Americans holstered their credit cards and cut back on spending, even as stores offered discounts of 80 percent to entice shoppers.

Sales at department stores, restaurants, gas stations and a host of other retail businesses fell 2.7 percent last month — nearly double what economists had been expecting — and were 9.8 percent lower than sales last December, the Commerce Department reported.

Wall Street fell sharply on the report with the Dow Jones industrial average dropping more than 220 points after about an hour of trading. The broader Standard & Poor’s 500 index was down 3 percent.

The new retail numbers offered an epitaph for what economists and retailers called the worst holiday shopping season in decades: Electronics sales were down 1 percent in December from a month earlier; food and drinks fell by 1.4 percent, and sales at clothing stores were 2.5 percent lower, the Commerce Department said.

“People hunkered down pretty dramatically,” said John Silvia, chief economist at Wachovia. “Yes, everybody celebrated the holidays, but there was far less spending than in prior years.”

Consumer spending, which accounts for more than two-thirds of the economy, has virtually dried up since mid-September as the problems on Wall Street began to spread. With the uncertainty of jobs weighing on consumers, economists do not expect a turnaround anytime soon. The recession, which began in December 2007 and is already the longest on record, is expected to last into the second half of 2009.

In help spur the economy and restore confidence, President-elect Barack Obama has promised to push a stimulus package of about $800 billion, which he is pressing Congress to pass in the weeks ahead.

According to the Commerce Department, retail sales for 2008 fell 0.1 percent from 2007, with most of the losses coming from a 7.7 percent drop during the last three months of the year.

Much of December’s drop in retail sales came from falling gasoline prices, which have tumbled to a nationwide average of $1.79 a gallon from their peaks of $4.11 in July. Sales at gas stations fell 15.9 percent from November to December, and were down more than 35 percent from December 2007.

But even excluding gasoline and automobiles, retail sales dropped by 1.5 percent for the month, said James O’Sullivan, senior economist at UBS.

“It was a pretty broad-based decline,” he said.

The government’s figures were the latest confirmation of a bleak holiday shopping season.

Sales for retailers during the holidays were particularly weak, reflected in the wave of retail bankruptcies in the last few weeks.

Last week, an industry group reported that retail sales had fallen 2.2 percent in November and December from a year earlier, and that some of the most widely known brands in America had suffered even worse declines.

Department stores including Nordstrom, Sak’s and Nieman Marcus reported double-digit percentage drops since last year. Abercrombie and Fitch was down by 24 percent and J.C. Penney by 8.1 percent, and even Wal-Mart missed analysts’ expectations and cut its outlook for the months ahead.

And the months ahead will be difficult. January is typically a slow month for retailers, and the significance of a December sales decline is far greater than a drop-off in January because sales in November and December account for 25 to 40 percent of many retailers’ annual sales, according to the National Retail Federation, an industry group.

    Stocks Tumble as Retail Sales Report Shows Sharp Decline, NYT, 15.1.2009, http://www.nytimes.com/2009/01/15/business/economy/15econ.html?hp

Retail Sales

Plummet 2.7 Percent in December

January 14, 2009
Filed at 9:08 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- Retail sales plunged far more than expected in December, a record sixth straight monthly decline as consumers were battered by a recession, a severe credit crisis and soaring job losses, none of which are likely to ease anytime soon.

The Commerce Department reported Wednesday that retail sales dropped 2.7 percent last month, more than double the 1.2 percent decline that Wall Street expected.

For the entire year, retail sales were down 0.1 percent, a sharp turnaround after a 4.1 percent gain in 2007. It was the first time the annual retail sales figure has fallen on government records going back to 1992. Before 2008, the weakest year for retail sales had been an increase of 2.4 percent in 2002, the year after the 2001 recession.

The weakness in consumer spending has been a prime contributing factor to the economy's current swoon and analysts say they don't see that turning around soon. They predict the current recession, already the longest in a quarter-century, will continue at least until the second half of this year.

The 2.7 percent December plunge in sales, which followed a November drop revised upward to 2.1 percent, confirmed private sector reports that retailers had suffered their worst holiday shopping season since at least 1969.

Since consumer spending accounts for about two-thirds of total economic activity, the weakness is a major factor depressing overall economic activity. The country fell into a recession in December 2007, reflecting a severe slump in housing.

The economy's weakness intensified in the fall when the financial system was engulfed in its biggest crisis since the 1930s as billions of dollars of losses on mortgages and other types of loans forced the government to put together a massive rescue effort to try to get banks to resume more normal lending.

President-elect Barack Obama has promised to push a sweeping economic stimulus program of around $800 billion through Congress in the next few weeks, but even with that assistance, economists say the country is facing a prolonged period of weakness.

Many analysts believe the overall economy, as measured by the gross domestic product, plunged at an annual rate of 6 percent in the just-completed fourth quarter after dropping by 0.5 percent in the third quarter.

For December, virtually all areas of retail sales showed declines. Auto sales fell by 0.7 percent and are down a huge 22.4 percent from a year ago.

Excluding autos, retail sales were down a record 3.1 percent. This reflected declines at department stores, specialty clothing stores, furniture stores, hardware stores, restaurants and service stations. The 15.9 percent drop at service stations was heavily influenced by the steep decline in gasoline prices during the month.

Automakers closed out a dismal 2008 with General Motors Corp. having its worst year in nearly a half-century and both GM and Chrysler LLC having to take emergency loans from the government's bailout fund.

Last week, the nation's major chain stores reported dismal sales results for December. Even Wal-Mart Stores Inc. reported smaller gains than economists expected. Among the retailers reporting big declines were Sears Holdings Corp., which operates Sears and Kmart stores, luxury retailer Saks Inc. and Gap Inc.

Departing Wal-Mart Chief Executive Lee Scott on Monday told the annual National Retail Federation convention that while a new economic stimulus package from the government will have ''some impact'' on the economy, he doesn't expect a quick rebound since ''fundamental changes'' in consumer behavior -- an increased focus on saving and less buying -- will likely linger.

Scott, who was making his last public speech as CEO and president of the world's largest retailer, predicted that the first half of 2009 will be ''extremely challenging,'' and said he hopes the second half would be a little easier.

    Retail Sales Plummet 2.7 Percent in December, NYT, 14.1.2009, http://www.nytimes.com/aponline/2009/01/14/washington/AP-Economy.html

News Analysis

Banks Are in Need

of Even More Bailout Money

January 14, 2009
The New York Times
By EDMUND L. ANDREWS and ERIC DASH

WASHINGTON — Even before word came on Tuesday that Citigroup might split into pieces to shore up its finances, an unpleasant message was moving through Congress and President-elect Barack Obama’s transition team: the banks need more taxpayer money.

In all likelihood, a lot more money.

Mr. Obama seems to know it; a week before his swearing-in, he is lobbying Congress to release the other half of the financial industry bailout fund. Democratic leaders in Congress seem to know it, too; they are urging their rank and file to act quickly to release the rescue money. And Ben S. Bernanke, the chairman of the Federal Reserve, certainly knows it.

On Tuesday, Mr. Bernanke publicly made the case that one of the most unpopular and most scorned programs in Washington — the $700 billion bailout program — needs to pour hundreds of billions more into the very banks and financial institutions that already received federal money and caused much of the credit crisis in the first place.

The most glaring example that the banking system needs even more help is Citigroup. Though it already has received $45 billion from the Treasury, it is in such dire straits that it is breaking itself into parts.

Like many banks, Citi is finding that its finances keep deteriorating as the economy continues to weaken.

Even some of the bailout program’s harshest critics acknowledge that things most likely would be even worse without it, and that the bailout had accomplished its most important goal, which was to prevent a complete collapse of the financial system.

Since last September, no major banks have failed and the credit markets have thawed somewhat.

But analysts said the problems are still acute, if less apparent on the surface. Banks have received $200 billion in fresh capital from the Treasury since last fall and have borrowed hundreds of billions of dollars more from the Fed. But in the meantime, the economy fell into a severe downturn last fall that is likely to continue until at least this summer.

Industry analysts estimate rising unemployment and business failures will lead to another $500 billion to $750 billion of losses in coming months. That could bring total losses from the credit crisis to $1.5 trillion to $1.8 trillion, twice as high as earlier estimates.

Citigroup is not alone. JPMorgan Chase, Bank of America, Wells Fargo and most other big banks all expect enormous losses as millions of consumers default on their mortgages, credit cards and automobile loans. Other losses are expected on loans made to commercial real estate developers, small businesses and for highly leveraged corporate buyout deals.

Mr. Bernanke bluntly warned on Tuesday that the government would probably have to infuse more money into financial institutions in the months ahead.

“More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets,” Mr. Bernanke said in a speech to the London School of Economics.

Mr. Bernanke, tacitly acknowledging the unpopularity of the bailout program, said the public was “understandably concerned” about pouring hundreds of billions of taxpayer dollars into financial companies — especially when other industries were getting the cold shoulder.

But, he insisted, there was no escape. “This disparate treatment, unappealing as it is, appears unavoidable,” Mr. Bernanke said. “Our economic system is critically dependent on the free flow of credit.”

Mr. Obama and his economic team have assured Congress that they would use a sizable chunk of the new money from the Troubled Asset Relief Program to help distressed homeowners refinance mortgages and escape foreclosure. That would be a big shift from the Bush administration, which refused to use TARP for reducing foreclosures.

Lawrence H. Summers, Mr. Obama’s choice to head the White House National Economic Council, assured Democratic lawmakers in writing on Monday that the administration would use some of the money to help reduce foreclosures.

But Mr. Bernanke appears to be warning Mr. Obama and Congressional Democrats that most of the remaining $350 billion — and possibly more — has to go to shoring up banks if they are to resume lending at normal levels.

During the first three quarters of 2008, banks were able to raise enough capital to offset more than their hundreds of billions in losses by tapping the giant government bailout fund as well as some early private investors.

But that was only a stopgap.

“The capital raises finally caught up with the losses,” said Michael Zeltkevic, a partner at Oliver Wyman, a consulting firm specializing in the finance industry. “It doesn’t make the situation better, but at least we caught up.”

The new tidal wave of losses stems from the worsening economy and rising unemployment, and analysts say it will take several quarters before it peaks.

Regulators require banks to keep a healthy cushion of capital. But this time around, the banks are struggling to plug their deepening holes. Private investors are scarce. For all but a small group of healthy banks, bankers and analysts say, the government may be the only investor left.

“Most banks are going to be in a defensive posture,” said Christopher Whalen, a managing partner with Institutional Risk Analytics. “You are probably not going to see the industry expand its overall balance sheet until 2010 or 2011.”

Mr. Obama’s economic team is planning a broad overhaul of the program to impose more accountability and more restrictions on executives at companies that receive government money.

Policy makers are also looking at reviving the original idea of TARP — have Treasury buy up unsalable mortgage-backed securities from financial entities.

Henry M. Paulson Jr., the Treasury secretary, had dropped the idea, concluding it would be more efficient to inject capital directly into banks by buying preferred shares.

Mr. Bernanke revived the idea, along with several other approaches, in his speech in London. So did Donald L. Kohn, vice chairman of the Federal Reserve, in a hearing on Tuesday before the House Financial Services Committee. He suggested the Treasury could buy the unwanted securities directly, or set up special banks to buy them.

Some analysts, even those who agree that the government needs to prop up the banking system with more taxpayer money, were skeptical about TARP.

Adam S. Posen, deputy director of the Peterson Institute for International Economics, said that the Bush administration had been right to inject capital into banks but wrong in not pushing banks hard enough to fix their problems or accounting.

“The problem isn’t that we’ve wasted money,” Mr. Posen said. “The problem is that we’ve put too few conditions on the banks.”
 

Eric Dash reported from New York.

    Banks Are in Need of Even More Bailout Money, NYT, 14.1.2009, http://www.nytimes.com/2009/01/14/business/economy/14fed.html?hp

In Michigan,

Bank Lends Little of Its Bailout Funds

January 14, 2009
The New York Times
By ERIC LIPTON and RON NIXON

TROY, Mich. — The bad bets made by executives at Independent Bank of Michigan are on display in spots across the state: a defunct bowling alley, a new but never occupied shopping center and the luxurious Whispering Woods Estates, which offers prime lots for never-constructed dream homes.

Now it is the federal government making the big bet here.

The Treasury Department has invested $72 million out of the $700 billion in federal bailout funds to help prop up this community bank, which traces its roots back 144 years in Michigan. It is a small chunk of the giant rescue fund being wagered by Washington to encourage banks like Independent to resume lending and jump-start the frozen economy.

But Independent, hard put to find good borrowers in a suffering economy, and fearful of making the kind of mistakes that got it into trouble in the first place, is not doing much lending these days. So far it is using all of the government’s money to shore up its own weak finances by repaying short-term loans from the Federal Reserve. “It is like if you are in an airplane and the oxygen mask comes down,” said Stefanie Kimball, the bank’s chief lending officer. “First thing you do is put your own mask on, stabilize yourself.”

This is not what the Treasury Department had in mind when it started this program, saying it would give the nation’s “healthy banks” enough money to start lending again, so that people could buy homes and businesses could invest and create jobs, thereby invigorating a disintegrating economy.

A close look at Independent Bank’s handling of its government money demonstrates just how much harder this has turned out to be, and the conflicting challenges that banks across the United States are confronting in the new bailout era. Like hundreds of other banks, it is caught between the government’s push to increase lending and its own caution.

As of Tuesday, 257 financial institutions in 42 states had received $192 billion in capital injections from the Treasury’s Troubled Asset Relief Program, or TARP, out of $250 billion set aside for this purpose. Seven giant banks — like JPMorgan Chase and Citigroup — have received more than 62 percent of the total so far, and have gotten most of the attention.

But it is the smaller community banks like Independent that are seeing the largest number of investments, with 186 banks so far getting allocations of less than $100 million. With little public attention, this money in recent weeks has been streaming out to community banks across the nation, in dollops as small as $1 million — the amount set aside for Independent Bank of East Greenwich, R.I. Ultimately, more than 1,000 banks are expected to take part in the program.

While most of the banks that have received money appear to be relatively healthy, dozens of other banks that received federal funds are, like Independent Bank of Michigan, financially stressed by a high volume of delinquent loans.

Bailout Is Questioned

Economists say the decision by banks like Independent to use the federal money for purposes other than lending, while perhaps disappointing, is not surprising, given that the Treasury Department did not honor its plan to give the money only to healthy banks.

“It’s a matter of logic — when you are in a perilous position, like many of them are, you try to bolster your balance sheet,” said Alan S. Blinder, a monetary policy economics professor at Princeton. “But this is a real flaw in the program.”

Some banking experts are even questioning if the bailout may be doing more harm than good, in some cases, by giving banks like Independent a cushion as they struggle to fix their problems, rather than forcing them to sink or swim on their own. It could also delay mergers of weaker banks with healthier ones.

“You are keeping a lot of troubled institutions in kind of a status quo state,” said Eric D. Hovde, the chief executive of a Washington-based hedge fund that invests in the banking industry. “They can continue on their merry ways.” In Congress, anger over the management of the TARP program runs deep. Many lawmakers say that there is little oversight, and that they can see no evidence that the taxpayer money is making its way from the coffers of banks to businesses and consumers. The program is likely to be fundamentally changed under the administration of Barack Obama, who on Monday asked President Bush to request that Congress release the remaining $350 billion.

Some lawmakers have criticized the Treasury for allowing banks to use the government’s bailout money to acquire rival banks.

As additional evidence of the growing anxiety, bank regulators on Monday sent a notice to banks receiving federal money ordering them to disclose how they are using it. It also pushed them to emphasize new loans. “A lot of the money is already out there and the inspector general needs to get up to speed on how banks are using it,” said Senator Claire McCaskill, Democrat of Missouri. “We need to make sure we get this money back and the only way we can do that is with strong oversight on how this money is spent.”

Neel Kashkari, the interim assistant secretary at Treasury running the bailout program, said he was convinced that it was delivering the promised results by stabilizing banks while also encouraging them to help out their communities. Even if overall lending is not up, it is higher than it would have been without the program, he said.

“We’re still in a period of fairly low confidence,” he said. “So, banks are understandably nervous about extending a lot of new credit. And consumers are nervous about taking on new credit.”

Independent, which has 106 branches and $3.1 billion in assets, illustrates all of these complexities.

By no means is Independent the worst off among the country’s community banks. Some banks that sought TARP funds were considered so weak that Washington officials discouraged them from even applying. Other banks were rated slightly stronger but still were required to raise private capital before they were approved for federal help.

When it applied, Independent was considered “well capitalized” by federal standards. It had not been subject to any recent regulatory orders to change management or lending practices, for example.

But it was struggling nonetheless. Indeed, of all the banks that received bailout money as of Jan. 6, it had the second-highest ratio of bad loans, when compared with its capital and its cushion of reserves in case of further loan losses. Its assets are shrinking and it lost money in the third quarter. It began cutting its dividend last year, when it stood at 21 cents a share. It is now a penny a share. And it had lost millions of dollars from bad stock market investments.

But Independent is hardly a high roller plagued by gold-plated executive perks, and it was not a big subprime lender, as many banks were.

Disappearing Dreams

Based in Ionia, Mich., 30 miles east of Grand Rapids, it is the kind of local institution that foots the bill so the state’s high school bands can march in the annual Grand Rapids Santa Claus Parade. This month it has George Foreman grills stacked up in its lobbies to reward customers who bring in friends and neighbors to open new accounts. Independent is one of the biggest employers in Ionia, a city of 10,000 with classic, turn-of-the-century storefronts dominating its main street. Driving across suburban Detroit in his black Mercedes sedan, Keith Lightbody, a senior vice president at Independent Bank, said it was easy, in retrospect, to see how banks like his ended up where they are today.

Mr. Lightbody, a former JPMorgan Chase bank executive hired almost two years ago by Independent, tours the sites of the bank’s many broken dreams, like the Whispering Woods residential subdivision in Farmington Hills. The bank financed the construction of roads and utilities for the subdivision, only to see the developer go belly up before most of the lots were sold. Snowdrifts now nearly cover the “for sale” signs.

Perhaps even more distressing are the empty storefronts in Shelby Township, Mich., where a developer backed by the bank built what was supposed to be a vibrant streetscape, bustling with shops and shoppers.

Instead, other than a restaurant at the front of the complex, there is only a row of darkened windows, with the work halted on the would-be stores even before their floors were built, leaving the insides looking like a sandbox filled with random construction debris.

As of the end of September, the bank was burdened by $115 million in bad debts, or nearly 5 percent of its overall loan portfolio, compared with less than 1 percent in 2005. Each of these failed projects has something essential in common, Mr. Lightbody said.

“We didn’t step back and look at the big picture, asking ourselves, are we really doing the right thing with this loan?” he said. “Everyone was making a lot of money.”

Independent is publicly traded and under pressure from investors to shrink its troubled loan portfolio before lending anew. Yet it still very much wants to make loans, said Robert N. Shuster, Independent’s chief financial officer.

In normal times, Independent would lend up to $8 for every $1 in bank capital. The $72 million in federal money, therefore, could generate up to $576 million in loans — a powerful leveraging effect that was the goal of the TARP program.

“Our whole business is predicated on making loans — that is what we do, that is the mission of the bank,” he said. But the bank cannot afford to simply pass out money, Mr. Shuster said, or everyone involved will lose — the borrower, who would probably default on the loan; the bank, which would experience bigger losses; and the federal government, which is counting on Independent to pay back the $72 million, along with 5 percent dividend payments.

“That is what got us where we are today,” Mr. Shuster said, of the bank’s past easy-lending practices. “You can’t put consumers in a position where they aren’t going to be successful.”

Making Loan Decisions

Ms. Kimball, the chief lending officer, comes face to face with this debate each day.

She has continued to tighten lending standards, generally turning away applications, for example, for single-use commercial buildings, like restaurants, because of the difficulty in selling the properties if the bank needed to foreclose on the loan, she said. Independent is also taking a more critical look at appraisals submitted to justify housing loans, which is considered a necessity now, because national companies that buy up mortgages from banks like Independent are demanding such scrutiny.

“We are not going to lower our credit standards at this point to make a whole bunch of extra loans just to deploy the money,” Ms. Kimball said. “We need to make loans that are reasonable in this day and age.”

Working from the Troy office, Ms. Kimball, who has a cool, stern tone, and a self-confidence that comes from 25 years in the financial services business, is overseeing this effort as the bank moves, in particular, to cut the size of its real estate loan portfolio.

“It is not something that changes overnight,” she said from her corner office overlooking Troy. “It is like turning a ship around in the ocean.”

She knows many of the bank’s big commercial borrowers personally — taking the time to go out on the road and visit their factories or businesses to get a better sense of just how well positioned they are to repay their loans.

One manufacturer from western Michigan, a customer of another bank, came to Independent looking for a business loan. Her examination of the company’s books showed that its sales were slipping and, worse, that it was having a hard time collecting on bills it had sent to its remaining customers, who also were suffering from the economic downturn.

So the bank had to make the hard choice of turning the company down.

“That is just not something we can do,” Mr. Shuster said, declining to name the company. “We just can’t lend there.”

With the tighter lending standards and the damage the miserable Michigan economy has done to so many of its businesses, the pool of eligible borrowers has shrunk considerably. The net result is that the overall balance of outstanding commercial loans the bank carries — which was about $1 billion as of last June — has shrunk by $50 million and will most likely continue to shrink through much of the first half of this year, Ms. Kimball said.

There are, of course, exceptions.

Ultimate Hydroforming of Sterling Heights, Mich., which makes prototypes for the aviation and automobile industry, like the battery casing for the new Chevrolet Volt, a planned electric car, has been able to obtain new credit recently and will probably get even more from Independent.

A Growing Business

The company’s manufacturing plant is only a few miles from a half-dozen giant automobile assembly plants. But Ultimate Hydroforming had started several years ago to look for ways to diversify, so its business is still growing, even as the automobile industry goes into a deep slump.

Ms. Kimball, on a recent visit, was greeted by the plant operations manager, Shane Klyn, and then given a tour of the factory, which is installing towering new hydraulic presses — thanks to loans from Independent — as part of an expansion that it hopes will lead the company into profitable work making parts for solar energy devices.

“This will allow us to move into new projects and markets,” Mr. Klyn said as he walked through the plant with Ms. Kimball, who by then had a big smile on her face, despite the freezing winds and piles of snow just outside. “The bank is giving us the opportunity to expand.”

But companies like Ultimate Hydroforming are extremely hard to find, particularly in Michigan, where the unemployment rate is far above the national average.

With no surge in lending taking place right away — and the bank very much looking for a way to improve its own balance sheet — Independent took the $72 million check that arrived from Treasury in mid-December and immediately transferred it to the Federal Reserve to pay down short-term loans it had taken out.

This month, the bank is planning to leverage that bailout money to buy about $160 million in mortgage-backed securities from institutions like Fannie Mae, an investment that it hopes will produce enough interest income to pay the dividend it owes the federal government. Again, this will bring little immediate benefit to Michigan businesses and residents. In essence, the $72 million has been stuffed into Treasury’s own mattress.

Mr. Hovde, the hedge fund investor who says he believes the bailout program is putting off judgment day for many banks, said his fear was that many of the banks would burn through their federal money only to face a squeeze again. And they will never have made the extra loans that the Treasury had hoped would jump-start the economy.

Treasury officials remain confident that the investments are wise ones.

“There’s going to be more lending than had we not done this,” Mr. Kashkari said. “Even if the overall numbers are down year-over-year, it’s going to be a lot more than if we had not put the capital in the system.”

And Mr. Shuster, back in Michigan, said he was determined to prove that Mr. Kashkari — whom he has never spoken to or met — is right.

“Even if things get tougher, I am confident we can work our way through this and pay every dime back to the U.S. Treasury,” he said. “There is no stone we won’t turn over to make sure we are good stewards of this money. We feel an enormous responsibility to this Treasury. I am a taxpayer too.”

Eric Lipton reported from Troy, Mich., and Washington, and Ron Nixon from Washington.

    In Michigan, Bank Lends Little of Its Bailout Funds, NYT, 14.1.2009, http://www.nytimes.com/2009/01/14/business/economy/14bank.html?hp

Bernanke Says Stimulus Alone

Won’t End the Credit Crunch

January 14, 2009
The New York Times
By JULIA WERDIGIER

LONDON — The chairman of the Federal Reserve, Ben S. Bernanke, said Tuesday in London that a fiscal stimulus package being discussed by the incoming administration would help revive the economy but would not be enough to lead to a lasting recovery.

“The incoming administration and the Congress are currently discussing a substantial fiscal package that, if enacted, could provide a significant boost to economic activity,” Mr. Bernanke said.

But “Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” Mr. Bernanke said in a speech at the London School of Economics on Tuesday. “A modern economy cannot grow if its financial system is not operating effectively.”

President-elect Barack Obama is developing an $800 billion recovery plan that is a mixture of increased government spending, including infrastructure projects, as well as tax cuts.

While Mr. Bernanke said the Federal Reserve has already done a great deal to help stimulate the economy — like lowering its benchmark interest rate to virtually zero in December — it still has “powerful tools” at its disposal.

As the economic outlook continues to worsen even after the Treasury’s injection of about $250 billion into the banking sector, Mr. Bernanke said more capital injections and guarantees might become necessary.

He outlined several options to help financial institutions with their troubled and hard-to-value assets that continue to be a barrier to private investment in the companies.

He mentioned public purchase of troubled assets, providing asset guarantees and the creation of a so-called bad bank among the options.

Mr. Bernanke reiterated the need for “stronger supervisory and regulatory systems” while being careful not to introduce rules that would “forfeit economic benefits of financial innovation and market discipline.”

“Even as we strive to stabilize financial markets and institutions worldwide, however, we also owe the public near-term, concrete actions to limit the probability and severity of future crises,” he said.

Among those, he said, were stronger supervisory and regulatory systems with clear lines of responsibility, as well as oversight powers to curb excessive leverage and risk-taking.

“Particularly pressing is the need to address the problem of financial institutions that are deemed ‘too big to fail,’ ” Mr. Bernanke said. “It is unacceptable that large firms that the government is now compelled to support to preserve financial stability were among the greatest risk-takers during the boom period.”

“In the future,” he said, “financial firms of any type whose failure would pose a systemic risk must accept especially close regulatory scrutiny of their risk-taking.”

In addition, he said, “We should revisit capital regulations, accounting rules, and other aspects of the regulatory regime to ensure that they do not induce excessive procyclicality in the financial system and the economy.” The Fed chairman also called for a renewed effort to cooperate across borders, saying “the world is too interconnected for nations to go it alone in their economic, financial, and regulatory policies.”

His comments came a day after President Bush formally requested, at the urging of Mr. Obama — that Congress release the second half of the $700 billion financial system bailout fund that it passed earlier. Republican and Democratic Senate leaders have signaled that they would support the release of the $350 billion, despite anger among many rank-and-file lawmakers over the Bush administration’s management of the program.

    Bernanke Says Stimulus Alone Won’t End the Credit Crunch, NYT, 14.1.2009, http://www.nytimes.com/2009/01/14/business/economy/14bernanke.html?hp

Oil Falls to Near $37

on Gloomy Demand Outlook

January 13, 2009
Filed at 1:02 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

SINGAPORE (AP) -- Oil prices fell to near $37 a barrel Tuesday in Asia on expectations crude demand will weaken amid a severe global economic slowdown.

Light, sweet crude for February delivery was down 45 cents at $37.14 a barrel by midday in Singapore in electronic trading on the New York Mercantile Exchange.

Crude prices have fallen more than 25 percent since reaching just above $50 a barrel last week as traders returned from the holiday break to find evidence of falling manufacturing and consumer spending across the globe.

The February contract fell 8 percent on Monday, or $3.24, to settle at $37.59 after Alcoa Inc., the world's third-largest aluminum company, reported a quarterly loss of $1.19 billion.

Alcoa, the first component of the Dow Jones industrial average to post results, said last week it plans to lay off about 13 percent of its global work force by the end of 2009 amid sinking prices and demand for the metal.

The Dow fell 1.5 percent Monday and has dropped 3.5 percent this year.

''The negative sentiment we're seeing reflects the broad international macroeconomic outlook, which is considerably weaker, and what that means for energy consumption,'' said David Moore, commodity strategist at Commonwealth Bank of Australia in Sydney.

Prices have fallen despite continued fighting between Israel and Hamas in Gaza. Israeli troops advanced into Gaza suburbs for the first time Tuesday, after Prime Minister Ehud Olmert warned Islamic militants of an ''iron fist'' unless they agree to Israel's terms to end the fighting.

About 900 Palestinians and 13 Israelis have died since the conflict started on Dec. 27.

After initially spurring a jump in oil prices, the Gaza conflict has been largely ignored by traders because it hasn't affected major supplies and no oil-rich Middle East neighbors have become directly involved.

''The impact on oil supply is obviously limited,'' Moore said.

Prices of futures contracts for later this year are higher than the February contract on investor expectations that announced production cuts of 4.2 million barrels a day since September by the Organization of Petroleum Exporting Countries will begin to reduce global supply.

The May contract trades at $49.50 a barrel.

''There's some wariness that the OPEC actions may cause markets to tighten up,'' said Moore, who expects oil to average $55 a barrel this year.

In other Nymex trading, gasoline futures were steady at $1.08 a gallon. Heating oil gained 0.51 cent to $1.48 a gallon while natural gas for February delivery was steady at $5.54 per 1,000 cubic feet.

In London, February Brent crude rose 4 cents to $42.95 a barrel on the ICE Futures exchange.

    Oil Falls to Near $37 on Gloomy Demand Outlook, NYT, 13.1.2009, http://www.nytimes.com/aponline/2009/01/13/world/AP-Oil-Prices.html

Op-Ed Columnist

Where the Money Is
 

January 13, 2009
The New York Times
By BOB HERBERT

A trillion here, a trillion there ...

President-elect Barack Obama is warning us to expect trillion-dollar budget deficits “for years to come.”

The economy is in a precipitous downturn and no one, on the left or right, is advocating tax increases that would jeopardize a recovery.

In the meantime, we’re spending money as fast as we can: the Troubled Asset Relief Program ($700 billion and counting); Mr. Obama’s proposed stimulus program ($800 billion and counting); and important initiatives still to come, like an overhaul of the way we pay for health care.

China, which has purchased more than $1 trillion of American debt, is getting antsy. As Keith Bradsher of The Times has reported, the global downturn has prompted Beijing “to keep more of its money at home, a move that could have painful effects for U.S. borrowers.”

Mr. Obama has tried to assure the public that his administration will be as careful as possible with its monumental spending, promising to invest wisely and manage the expenditures well. And he has made it clear that he is aware of the minefields that accompany mammoth long-term deficits.

At some point, however, someone is going to have to talk about raising revenue. The dreaded T-word is going to come up: taxes.

Well, there’s a good idea floating around that takes its cue from the legendary Willie Sutton. Why not go where the money is?

The economist Dean Baker is a strong advocate of a financial transactions tax. This would impose a small fee — ranging up to, say, 0.25 percent — on the sale or transfer of stocks, bonds and other financial assets, including the seemingly endless variety of exotic financial instruments that have been in the news so much lately.

According to Mr. Baker, the co-director of the Center for Economic and Policy Research in Washington, the fees would raise a ton of money, perhaps $100 billion or more annually — money that the government sorely needs.

But there’s another intriguing element to the proposal. While the fees would be a trivial expense for what the general public tends to think of as ordinary traders — people investing in stocks, bonds or other assets for some reasonable period of time — they would amount to a much heavier lift for speculators, the folks who bring a manic quality to the markets, who treat it like a casino.

“It raises money in a way that comes primarily at the expense of speculation,” said Mr. Baker. “The fees would be a considerable expense for someone who is buying futures, or a stock, or any asset at 2 o’clock and then selling it at 3. The more you trade, the more you pay.

“For the typical person holding stock, who is planning to hold it for a long period of time, paying the quarter of one percent on a trade is just not that big a deal.”

The fees, though small, could amount to a big deal for speculators because in addition to the volume of their trades they often make their money on very small margins. Someone who buys an asset and then sells it an hour later at a one percent appreciation might feel quite pleased. He or she would be less pleased at having to pay a quarter-percent fee to purchase the asset in the first place and then another quarter percent to sell it.

This, according to Mr. Baker, is part of the beauty of the transfer tax; it tends to curb at least some speculation. “It’s a very progressive tax,” he said, “that discourages nonproductive activity.”

A hallmark of the Bush years has been the rampant irresponsibility — by the White House, Congress and the general public — when it comes to matters of finance. The costs of the wars in Iraq and Afghanistan were placed on credit cards and off the books. Their ultimate overall costs will be in the trillions.

Incredibly, President Bush and Congress cut taxes in wartime, which is insane.

Budget deficits and the national debt are streaking toward the moon. And the only remedy anyone has come up with for fending off Great Depression II has been deficit spending on a scale reminiscent of World War II.

Excuse me, but did somebody say the baby boomers are about to start retiring?

Maybe the piper will never have to be paid. Maybe the deficits will someday magically right themselves. Maybe some prosperous future generation will be more than happy to clean up the mess we left behind.

If none of that is true, we should start looking now for some real money somewhere. A stock transfer tax is not a bad place to start.

    Where the Money Is, NYT, 13.1.2009, http://www.nytimes.com/2009/01/13/opinion/13herbert.html

Adding to Recession’s Pain,

Thousands to Lose Jobless Benefits

January 12, 2009
The New York Times
By PATRICK McGEEHAN
and MATHEW R. WARREN

Just as the recession is throwing people out of work at an alarming rate, the unemployment insurance system in New York and many other states will start cutting off benefits this week for thousands of people who have been unable to find jobs since early last year.

About 50,000 New Yorkers who had been collecting unemployment checks for 11 months — the longest stretch that benefits have been available since the last recession eight years ago — will stop receiving weekly payments this week, according to the State Labor Department.

In normal circumstances, people laid off from full-time jobs can collect benefits for up to 26 weeks, after which they fall off the rolls. But some of the people who will lose benefits this week have been on unemployment for 46 weeks because Congress approved extensions of jobless benefits twice last year.

This will be the first time since the early 1990s that workers are exhausting benefits that have been extended twice because of an economic downturn. The inability of those people to find work after so many months provides a stark reminder of the weakness of the job market, officials and experts say.

For many of those facing the loss of that lifeline, the next step may be welfare, experts say.

Julio Ponce, a 55-year-old chef, has been using his weekly $352 unemployment check to pay the rent on his apartment in the Bushwick section of Brooklyn since he lost his job at a center for the elderly more than a year ago. But he said he did not know how he would cover the $800 monthly rent after his unemployment benefits lapsed this week.

“No one is helping me,” said Mr. Ponce, who was faxing his résumé to hotels and restaurants from an employment office in Downtown Brooklyn on Thursday. “I’ve applied for public assistance, but I don’t think I’m going to get it.”

Extended benefits are also about to expire over the next week or two in Massachusetts, Texas, Virginia, Pennsylvania and at least 20 other states, according to the National Employment Law Project, a nonprofit organization that advocates for lower-wage workers. No official estimates exist for how many people would lose their benefits in those states, but experts said it was likely to exceed 200,000.

In Philadelphia, Tony Green, 38, said he was due to collect the last of his checks by Jan. 25. His twice-extended benefits have amounted to $470 a month after taxes, forcing him to give up a rented house in the Fox Chase section of the city and move with his two teenage children to a place in North Philadelphia that he described as “drug-infested and dirty.”

Mr. Green said he had sold his car and borrowed more than $10,000, mostly on “maxed-out” credit cards. He has been taking construction jobs to supplement his benefits, but said he feared the extra income would dry up as the economy contracted.

“People are really tapped out,” he said.

Unemployment insurance, a federal system that is administered by the states, was intended as a stopgap, half-year source of relief, not a long-term source of income. But last year, as the economy slumped and the unemployment rate rose, Congress approved two extensions of jobless benefits, one for 13 weeks and the second for up to 20 additional weeks. The national unemployment rate rose again in December to 7.2 percent, a 16-year high, the government reported Friday.

However, New York and about two dozen other states have not yet qualified for the full 20 weeks of the second extension, because their jobless rates have been lower than other states. The latest extension was limited to seven weeks in states where the unemployment rate had not averaged at least 6 percent for three consecutive months. New Jersey and Connecticut have already qualified for the full extension.

New York’s unemployment rate has been rising in recent months, surpassing 6 percent in November. But the rate will have to jump again this month for workers in the state to qualify for the full 13-week extension.

The formula for triggering the availability of more emergency benefits has left New York’s commissioner of labor, M. Patricia Smith, in the odd position of rooting for a higher jobless rate.

“We’ve seen over the last year a large jump in the number of people who do exhaust benefits because, as the economic climate gets worse and worse, it becomes harder to become re-employed,” Ms. Smith said Thursday.

The program providing the additional 33 weeks of benefits is scheduled to expire March 31, meaning no extended benefits would be available after that date. But Congress is considering legislation supported by President-elect Barack Obama that would continue the program until the end of the year.

Each month, about 18,000 state residents use the last of their regular benefits, and most of them immediately seek to start collecting extended benefits, according to the Labor Department. About 116,000 New Yorkers are collecting extended benefits now, including those who will receive their final checks this week.

Unemployed workers in New York not only receive fewer weeks of extended benefits than jobless residents of neighboring states, they also receive smaller checks. The maximum weekly benefit in New York is $405, a limit that has not changed in more than eight years because state lawmakers have been unwilling to raise the payroll tax that finances unemployment benefits. In New Jersey, the top rate for unemployment benefits is $584; Connecticut’s is $576.

Paulette Walker, 45, said she had depleted almost all of her savings since she lost a job as an employee-benefits representative for Cigna Healthcare, where she had worked for 17 years. She has been renting a room from her ex-husband’s family in Crown Heights, Brooklyn, but fears she will not be able to afford even those humble lodgings if her $331 weekly benefits run out in three weeks, as scheduled.

“I worked all my life and there’s nothing wrong with me,” Ms. Walker, a Jamaican immigrant, said, as she broke down crying. “I’m living with my ex-in-laws because I don’t have any family here. When my benefits finish, I don’t know how I’m going to pay for that room.”

Emanuel During, 55, whose extended benefits expired last week, said he had resorted to substituting a bottle of soda for a meal at dinnertime. Mr. During, who lives alone in Flatbush, Brooklyn, and does not qualify for food stamps, said he had been searching for work since he was dismissed a year ago by the school-bus company he drove for.

“I feel hopeless. I’ve been applying for all different types of jobs,” said Mr. During, who said he applied for more than 20 jobs in the last few months and was considering training to drive a tractor-trailer. “What I was doing, there’s nothing. It’s dead, it’s dead.”

Running out of unemployment benefits “can become a real breaking point for families,” said Andrew Stettner, deputy director of the National Employment Law Project. “You’ll see a big increase in poverty among these families. Some people will have to go on welfare. It’s very destabilizing. In less than a year, they’ve gone from working class to poor.”

The first step for many people whose benefits lapse is to take “survival jobs,” low-paying positions that do not make use of their skills, Mr. Stettner said. Several New Yorkers who were at or near the end of their unemployment benefits said that they might have to resort to menial jobs rather than continue pursuing the sort of work they were trained for.

Eric Mio, 40, who has been working sporadically as a driver for a moving company, said his benefits would run out in a few weeks. He is receiving assistance from the state to study to become an electrician, but he said he might have to settle for a lower-paying job in the meantime.

“I’ve been lucky, things come through,” said Mr. Mio, who lives alone in the Williamsbridge section of the Bronx. “It’s just enough. I’m keeping a roof over my head and food in my belly. But I don’t go out anymore.”

If he can no longer collect unemployment, he said, “I guess I’ll go to the supermarket and bag groceries.”

Jon Hurdle contributed reporting from Philadelphia.

    Adding to Recession’s Pain, Thousands to Lose Jobless Benefits, NYT, 12.1.2009, http://www.nytimes.com/2009/01/12/nyregion/12benefits.html

Economy prompts

more calls to suicide hotlines

11 January 2009
USA Today
By Marilyn Elias

Many mental-health crisis and suicide hotlines are reporting a surge in calls from Americans feeling despair over financial losses.

It's unknown if the economic meltdown will lead to more suicides, says Lanny Berman, executive director of the Washington-based American Association of Suicidology. "Maybe the fact that so many are calling is a positive sign. They're seeking help."

Although suicides spiked during the Great Depression, they didn't increase in subsequent recessions, which lasted an average of 10 months, according to the suicidology group's website. The current recession is 13 months long and counting.

Concern centers on rising unemployment, Berman says, because the unemployed have two to four times the suicide rate of employed adults.

Also, there's a strong link between humiliating losses and committing suicide. "Losing your job, losing your home — these are such major losses," Berman says. Although the majority can cope, adults who already have mental health problems or lack supportive relationships are most vulnerable, he says.

Calls to the National Suicide Prevention Lifeline jumped 36% from 2007 to 2008, totaling 545,000 last year, says director John Draper. But callers were increasing before the economic collapse, and about half of the added calls in 2008 came from taking over a veterans' suicide line, Draper says.

He is worried because a lot of adults phoning a hotline with resources for those facing foreclosure (888-995-HOPE ) say they feel isolated, as if they're the only one facing this problem.

"This sense of aloneness is part of suicidal thinking," Draper says.

Among areas with suicide hotlines reporting increases in callers since the economy slid: Dallas; Pittsburgh; suburban San Francisco; Hyattsville, Md.; Georgia; Delaware; Detroit.

In Boston, more hotline callers with mental health problems mention job losses, evictions or fear that they'll lose their homes, says Roberta Hurtig, executive director at Samaritans Inc.

In Kalamazoo, Mich., and other locales, callers with mental illnesses such as bipolar disorder say loss of insurance and cutbacks in public health programs are preventing them from getting medications.

At the Gary, Ind., Crisis Center, suicidal callers with economic worries are increasing, and their depression is more severe, says Willie Perry, program coordinator for the hotline.

"There's more hopelessness. They don't see a way out," she says. "We try to help pull them up by the bootstraps, but the bootstraps are a lot lower than they used to be."

    Economy prompts more calls to suicide hotlines, UT, 11.1.2009, http://www.usatoday.com/news/health/2009-01-11-suicide-hotlines_N.htm

Off the Charts, in the Wrong Direction

January 11, 2009
The New York Times
By CONRAD DE AENLLE

THE devastating declines in most investments last year were relentless and persistent and set off by no single trigger, so it seems wrong to call what happened a crash. It may be fair to say, though, that these worst markets in at least two generations succumbed to the effects of a financial crash diet.

Credit is the nourishment that keeps markets and economies functioning. Too much of it created bloated, unhealthy expansions in preceding years, and the sharp reduction in its availability in 2008 resulted in plunges in domestic and foreign stocks, real estate, commodities and corporate bonds — almost any asset not considered free of risk.

No stock market escaped. The research firm MSCI Barra compiles indexes for 67 markets around the world, and not even one showed a gain last year. Tunisia, with a loss of 8.7 percent, came closest to breaking even.

It may seem hard to believe — and small consolation when fund shareholders open their year-end statements and survey the damage — but American stocks were among the standouts. The Standard & Poor’s 500-stock index lost 38.5 percent, compared with a decline of 45.2 percent for an MSCI index of global stocks that excludes the United States.

Most of the year’s decline here was in the fourth quarter, as investors concluded that government efforts to rescue the financial system and economy were insufficient, and insufficiently thought out, to get the job done and prevent a severe recession. The S.& P. 500 fell 22.5 percent in the quarter.

That sent the domestic equity funds in Morningstar’s database to an average loss of 22.6 percent for the quarter and brought the full-year decline to 36.7 percent. The average foreign stock fund fell 21.1 percent during the final quarter and 42.9 percent for the year, dragged down especially by the performance of emerging markets.

There was at least one place to hide last year, and it became awfully crowded. Treasury securities soared in an overbooked flight to safety as yields descended to their lowest levels in more than a half-century.

Funds specializing in long-term government bonds had an average gain of 17.5 percent in the fourth quarter and 20.4 percent for all of 2008. It was the best performance by far among the 50 or so asset classes that Morningstar follows, other than funds that bet on a declining stock market, and one of the few that ended ahead for the year.

The extreme market action and the uncertainties hanging over the economy and the financial system have made strategists and portfolio managers more circumspect than usual when issuing forecasts. Getting a handle on 2009 is tricky because they are still trying to make sense of 2008.

“No one has ever seen these kinds of readings,” said James Swanson, chief investment strategist for MFS, the Boston fund manager.

He and other advisers highlighted one reading that would be encouraging under normal conditions: the waves of urgent selling have left stocks remarkably cheap by longtime benchmarks.

“Every single traditional measure shows that the stock market is ridiculously undervalued,” said Jonathan Golub, who runs an investment strategy firm, Golub Market Insights.

Mr. Golub is reluctant to proclaim the market a bargain, however, because growing concern about the most insidious economic plague — deflation — could keep the public from investing, borrowing or spending.

“The deflationary psychology hasn’t played through yet,” he said. “Once you get into that negative spiral, it’s extraordinarily difficult to break it.”

Investors often bank on the future as soon as they see a glimmer of clarity and hope, so stocks may rally when the economic backdrop offers little reason for it. James Margard, chief investment officer of Rainier Investment Management, expects another expedition up the wall of worry this year.

“Unemployment will get worse, we will continue to see more bankruptcies, and the consumer will continue to be stressed,” he said, but he predicted that the market would be increasingly upbeat nonetheless.

Mr. Margard highlighted “certain signs of encouragement” already, including the improved affordability of housing and the savings for motorists now buying gasoline for a fraction of its summer 2008 cost. The impact of near-zero interest rates after Federal Reserve cuts should help, too, he said, along with the hundreds of billions the Treasury has spent or will spend to stimulate the economy.

“There hasn’t been a recession in modern history where the markets didn’t bottom in the middle of it,” he said.

The middle of a recession is where Mr. Margard expects certain stocks to come into their own, including the Apollo Group, a provider of adult education, and a consultancy — Watson Wyatt Worldwide — whose services should be in demand among nervous, befuddled employers.

Two companies in the railroad industry, Norfolk Southern and Westinghouse Air Brake Technologies, or Wabtec, should do well “if we’re within a year of the end of the recession,” he said.

As it turns out, we’re no longer within a year of the start of the recession. The National Bureau of Economic Research determined only last month that the economy was in recession — and that it began in December 2007.

Bob Turner, chief investment officer of Turner Investment Partners, is willing to bet that times have been hard enough for long enough to make it worthwhile to return to stocks. He thinks the market has already hit bottom and that, if the historical pattern holds, it will bounce about 40 percent from the low.

HE recommends “high-quality growth companies at bargain-basement prices,” like the tech blue chips Apple, Qualcomm and Google. He also likes several industries — retailing, homebuilding, financial services and semiconductor manufacturing — that are highly sensitive to economic conditions and are thus potentially big beneficiaries of a recovery.

Robert Arnott, chairman of the asset management firm Research Affiliates, is far less confident about the stock market’s prospects. He warns of a further decline and sees a better buying opportunity in 6 to 12 months.

While he is avoiding stocks, he finds investment-grade corporate bonds a worthwhile middle ground for investors looking to assume a bit of risk. With recent yields roughly six percentage points above those of Treasury bonds, he wondered, “How on earth could they have defaults large enough to make that 6 percent spread reasonable?”

For his part, Mr. Swanson at MFS suggests taking the long view. With the outlook for the economy and corporate earnings so iffy, he says that he doesn’t know if stocks are a short-term bargain, but that they look cheap to him for anyone who can hold on for, say, a decade. He called stocks and high-quality corporate bonds “two glaring opportunities to ride out the storm.”

The short-term outlook for some investors is so up in the air in this perilous economy that they don’t have the luxury of considering the long term, Mr. Golub said.

“If you have a cyclical job, you don’t have the ability to take on a lot of stock market and economic risk, and you should be much more conservative,” he advised.

Patient investors with more secure circumstances and an appetite for risk, meanwhile, stand a good chance of getting fat again after such a lean year.

“If you’re a tenured professor, a physician at a hospital or a fireman, you should be looking at these opportunities in the market and think: ‘This is fantastic, I can buy cheap inventory. Time is on my side.’ ” Mr. Golub said. “Your goal should be taking the most risk you can as long as you can survive the worst possible outcome.”

    Off the Charts, in the Wrong Direction, NYT, 11.1.2009, http://www.nytimes.com/2009/01/11/business/mutfund/11lede.html

A Plan to Jump-Start Economy

With No Instruction Manual

January 10, 2009
The New York Times
By EDMUND L. ANDREWS
and DAVID M. HERSZENHORN

WASHINGTON — The fresh evidence on Friday of the economy’s downward spiral focused even more attention on two questions: Is the stimulus package being pushed by President-elect Barack Obama big enough? And will the component parts being assembled by Congress provide the most bang for the buck?

With the Federal Reserve having just about reached the limit of how much it can help the economy with cuts in the interest rate, Washington’s ability to end or at least limit the recession depends in large part on the effectiveness of the big package of additional spending and tax cuts that Mr. Obama has made the centerpiece of his agenda.

And with the economy facing what now seems sure to be the sharpest downturn since the 1930s, the financial system balky and the government facing towering budget deficits, economists and policy makers acknowledge that there is no playbook.

“We have very few good examples to guide us,” said William G. Gale, a senior fellow at the Brookings Institution, the liberal-leaning research organization. “I don’t know of any convincing evidence that what has been proposed is going to be enough.”

In part because Mr. Obama wants and needs bipartisan support, the package is being shaped by political as well as economic imperatives, complicating the process by putting competing ideological approaches into the mix.

It includes $300 billion in temporary tax cuts for individuals and businesses, in part to attract Republican support. It includes a big expansion of safety-net programs like unemployment insurance, which Democrats say makes both economic and social sense. It includes more money for highways, schools and other public infrastructure; more money for “green” energy projects; and more money to help state governments pay for health care and education.

Republicans, as always, are advocating for more and broader tax cuts. But the evidence is ambiguous about whether tax cuts will really spur economic activity at a time when consumers and businesses alike are frozen in fear and reluctant to let go of their money.

The risk is that Mr. Obama and the Congress will weigh down their effort with measures that cost many billions of dollars but may not have much impact on economic activity.

Tax breaks, for example, usually produce less than $1 of stimulus for every dollar they cost, economists say. Spending on public construction projects, like highways and bridges, produces the most economic activity — but there is a limit to how many projects are “shovel-ready,” and even those take time to generate jobs and ripple through the economy.

Christina Romer, whom Mr. Obama has designated to be his chief economist, concluded in research she helped write in 1994 that interest-rate policy is the most powerful force in economic recoveries and that fiscal stimulus generally acts too slowly to be of much help in pulling the economy out of recessions, though associates said she now supports a big stimulus package if policy makers roll it out early enough in the recession.

The goal behind all those ideas is to jump-start economic activity by getting as much money as possible as quickly as possible into the hands of consumers and businesses, trying to make up for the falling demand in the private sector that is leading to higher unemployment. And although the package includes a big dose of tax cuts, it represents a big departure from President Bush’s playbook by relying heavily on direct government spending.

“This is not an intellectual exercise, and there’s no pride of authorship,” Mr. Obama told a news conference in Washington on Friday. “If members of Congress have good ideas, if they can identify a project for me that will create jobs in an efficient way — that does not hamper our ability to, over the long term, get control of our deficit; that is good for the economy — then I’m going to accept it.”

Mr. Obama’s aides said he did not intend to unveil a detailed formal proposal but rather to allow Congress to fill in the outline that he has proposed.

Given the recent scale of the downturn — the nation lost 1.5 million jobs in the last three months of 2008, and economic output during those months shrank by 6 percent compared with same period in 2007 — economists were highly uncertain about whether the economic plan would provide enough firepower.

Adam Posen, the deputy director of the Peterson Institute for International Economics in Washington, said Mr. Obama’s plan could provide just the right boost — if it was carried out properly.

But as the Federal Reserve has been learning for months now, the biggest obstacle to economic activity right now is not a shortage of money. The real obstacle is pervasive fear, which has made banks reluctant to lend and companies reluctant to invest in expansion.

Alan J. Auerbach, an economist at the University of California, Berkeley, said the overall scale of the program looked “reasonable” at $800 billion over two years.

“It’s much bigger than anything that’s been tried in my lifetime, but this is scarier than anything we’ve seen in my lifetime,” Professor Auerbach said.

Left to their own devices, many Congressional Democrats would prefer to focus almost entirely on spending projects and avoid tax incentives.

“One thing we learned from the Depression is marginal, incentive changes don’t work very well when the economy is falling away from you very rapidly,” said Senator Kent Conrad, Democrat of North Dakota and chairman of the Senate Budget Committee. “And that’s what’s occurring here.”

But Republicans have been adamant about the need for tax breaks, and Mr. Obama has made it clear he would like to bring as many members on board as possible.

Representative Paul D. Ryan, Republican of Wisconsin, said in an interview, “I really do believe that if you combine the evidence of history along with the psychological concerns about making investments in the economy today, the better bang for your buck is lower taxes that are certain and permanent and lasting.”

The Democratic plan would direct much of the stimulus money to low-income and middle-income families. That reflects both traditional Democratic concerns about helping lower-income households, as well as the view of economists who say that people with lower incomes are more likely to spend rather than save any money they receive from the government.

Mark M. Zandi, chief economist at Moody’s Economy.com, a forecasting firm, told a forum of House Democrats this week that the “bang for the buck” — the additional economic activity generated by each dollar of fiscal stimulus — was highest for increases in food and unemployment benefits. Each dollar of additional money for food stamps yields $1.73 in additional economic activity, Mr. Zandi estimated, and each extra dollar in unemployment benefits yields about $1.63.

By contrast, Mr. Zandi estimated, most tax cuts produce less than a dollar for each dollar of stimulus, especially if the tax cuts are temporary, because people save at least some of their extra money.

One of the few tax cuts that economists say can generate a positive bang for the buck is a reduction in payroll taxes for Social Security and Medicare.

Mr. Obama wants to offer a tax credit of $500 for individuals, and up to $1,000 for families, which they would receive through a temporary reduction in payroll tax withholdings. The idea, known as the Making Work Pay credit, was part of Mr. Obama’s economic platform during the presidential campaign. As originally envisioned, it would have been available to households with annual incomes as high as $200,000.

But economists said the tax credit could have drawbacks as an economic stimulus measure, mainly because people usually save part of the money or use it to pay down debt. That makes good sense from an individual’s standpoint but does nothing to increase economic activity.

Joel Slemrod, a professor of tax policy at the University of Michigan, said, “The research I’ve done on the 2001 and 2008 tax rebates suggests that the proportion of the rebates that went to spending was rather small, about one-third.”

After Congress approved Mr. Bush’s tax rebate to individuals and families last spring, economic activity jumped fleetingly during the summer, and then stalled out again in the fall.

Some Democratic officials were also skeptical.

“It’s not that rebates don’t work under normal conditions,” said one senior Democratic aide in the Senate. “It’s that current conditions are not normal and are not favorable to rebates or broad tax relief.”

Jackie Calmes contributed reporting.

    A Plan to Jump-Start Economy With No Instruction Manual, NYT, 10.1.2009, http://www.nytimes.com/2009/01/10/washington/10stimulus.html?ref=opinion

China Losing Taste

for Debt From the U.S.

January 8, 2009
The New York Times
By KEITH BRADSHER

HONG KONG — China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.

The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last two weeks, with official statistics due for release in the next few days, comes at an inconvenient time.

On Tuesday, President-elect Barack Obama predicted the possibility of trillion-dollar deficits “for years to come,” even after an $800 billion stimulus package. Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasuries, which are government i.o.u.’s.

In the last five years, China has spent as much as one-seventh of its entire economic output buying foreign debt, mostly American. In September, it surpassed Japan as the largest overseas holder of Treasuries.

But now Beijing is seeking to pay for its own $600 billion stimulus — just as tax revenue is falling sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and medium-size enterprises, many of which are struggling with lower exports, and to local governments to build new roads and other projects.

“All the key drivers of China’s Treasury purchases are disappearing — there’s a waning appetite for dollars and a waning appetite for Treasuries, and that complicates the outlook for interest rates,” said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland.

Fitch Ratings, the credit rating agency, forecasts that China’s foreign reserves will increase by $177 billion this year — a large number, but down sharply from an estimated $415 billion last year.

China’s voracious demand for American bonds has helped keep interest rates low for borrowers ranging from the federal government to home buyers. Reduced Chinese enthusiasm for buying American bonds will reduce this dampening effect.

For now, of course, there seems to be no shortage of buyers for Treasury bonds and other debt instruments as investors flee global economic uncertainty for the stability of United States government debt. This is why Treasury yields have plummeted to record lows. (The more investors want notes and bonds, the lower the yield, and short-term rates are close to zero.) The long-term effects of China’s using its money to increase its people’s standard of living, and the United States’ becoming less dependent on one lender, could even be positive. But that rebalancing must happen gradually to not hurt the value of American bonds or of China’s huge holdings.

Another danger is that investors will demand higher returns for holding Treasury securities, which will put pressure on the United States government to increase the interest rates those securities pay. As those interest rates increase, they will put pressure on the interest rates that other borrowers pay.

When and how all that will happen is unknowable. What is clear now is that the impact of the global downturn on China’s finances has been striking, and it is having an effect on what the Chinese government does with its money.

The central government’s tax revenue soared 32 percent in 2007, as factories across China ran at full speed. But by November, government revenue had dropped 3 percent from a year earlier. That prompted Finance Minister Xie Xuren to warn on Monday that 2009 would be “a difficult fiscal year.”

A senior central bank official, Cai Qiusheng, mentioned just before Christmas that China’s $1.9 trillion foreign exchange reserves had actually begun to shrink. The reserves — mainly bonds issued by the Treasury, Fannie Mae and Freddie Mac — had for the most part been rising quickly ever since the Asian financial crisis in 1998.

The strength of the dollar against the euro in the fourth quarter of last year contributed to slower growth in China’s foreign reserves, said Fan Gang, an academic adviser to China’s central bank, at a conference in Beijing on Tuesday. The central bank keeps track of the total value of its reserves in dollars, so a weaker euro means that euro-denominated assets are worth less in dollars, decreasing the total value of the reserves.

But the pace of China’s accumulation of reserves began slowing in the third quarter along with the slowing of the Chinese economy, and appeared to reflect much broader shifts.

China manages its reserves with considerable secrecy. But economists believe about 70 percent is denominated in dollars and most of the rest in euros.

China has bankrolled its huge reserves by effectively requiring the country’s entire banking sector, which is state-controlled, to take nearly one-fifth of its deposits and hand them to the central bank. The central bank, in turn, has used the money to buy foreign bonds.

Now the central bank is rapidly reducing this requirement and pushing banks to lend more money in China instead.

At the same time, three new trends mean that fewer dollars are pouring into China — so the government has fewer dollars to buy American bonds.

The first, little-noticed trend is that the monthly pace of foreign direct investment in China has fallen by more than a third since the summer. Multinationals are hoarding their cash and cutting back on construction of new factories.

The second trend is that the combination of a housing bust and a two-thirds fall in the Chinese stock market over the last year has led many overseas investors — and even some Chinese — to begin quietly to move money out of the country, despite stringent currency controls.

So much Chinese money has poured into Hong Kong, which has its own internationally convertible currency, that the territory announced Wednesday that it had issued a record $16.6 billion worth of extra currency last month to meet demand.

A third trend that may further slow the flow of dollars into China is the reduction of its huge trade surpluses.

China’s trade surplus set another record in November, $40.1 billion. But because prices of Chinese imports like oil are starting to recover while demand remains weak for Chinese exports like consumer electronics, most economists expect China to run average trade surpluses this year of less than $20 billion a month.

That would give China considerably less to spend abroad than the $50 billion a month that it poured into international financial markets — mainly American bond markets — during the first half of 2008.

“The pace of foreign currency flows into China has to slow,” and therefore the pace of China’s reinvestment of that foreign currency in overseas bonds will also slow, said Dariusz Kowalczyk, the chief investment officer at SJS Markets Ltd., a Hong Kong securities firm.

Two officials of the People’s Bank of China, the nation’s central bank, said in separate interviews that the government still had enough money available to buy dollars to prevent China’s currency, the yuan, from rising. A stronger yuan would make Chinese exports less competitive.

For a combination of financial and political reasons, the decline in China’s purchases of dollar-denominated assets may be less steep than the overall decline in its purchases of foreign assets.

Many Chinese companies are keeping more of their dollar revenue overseas instead of bringing it home and converting it into yuan to deposit in Chinese banks.

Treasury data from Washington also suggests the Chinese government might be allocating a higher proportion of its foreign currency reserves to the dollar in recent weeks and less to the euro. The Treasury data suggests China is buying more Treasuries and fewer bonds from Fannie Mae or Freddie Mac, with a sharp increase in Treasuries in October.

But specialists in international money flows caution against relying too heavily on these statistics. The statistics mostly count bonds that the Chinese government has bought directly, and exclude purchases made through banks in London and Hong Kong; with the financial crisis weakening many banks, the Chinese government has a strong incentive to buy more of its bonds directly than in the past.

The overall pace of foreign reserve accumulation in China seems to have slowed so much that even if all the remaining purchases were Treasuries, the Chinese government’s overall purchases of dollar-denominated assets will have fallen, economists said.

China’s leadership is likely to avoid any complete halt to purchases of Treasuries for fear of appearing to be torpedoing American chances for an economic recovery at a vulnerable time, said Paul Tang, the chief economist at the Bank of East Asia here.

“This is a political decision,” he said. “This is not purely an investment decision.”

    China Losing Taste for Debt From the U.S., NYT, 8.1.2009, http://www.nytimes.com/2009/01/08/business/worldbusiness/08yuan.html?hp

Bank of America Raises $2.8 Billion

January 8, 2009
The New York Times
By REUTERS

HONG KONG — The Bank of America raised $2.83 billion from selling part of its holding in China Construction Bank, and Hong Kong’s richest tycoon followed by selling a $500 million stake in its rival, Bank of China.

Shares in China’s big banks skidded on Wednesday after Bank of America’s early-morning sale, with investors expecting further sell-downs in the face of slowing earnings growth at mainland lenders and the lapse of lock-up provisions on stake holdings.

China’s three largest banks attracted big strategic investments from western financial giants at the time of their initial offerings. Some investors, including Royal Bank of Scotland, are under pressure to sell as the global financial crisis ravages the banking industry.

Bank of America sold more than 5.62 billion Construction Bank shares at 3.92 Hong Kong dollars each, according to a term sheet obtained by Reuters, in a deal that had been widely anticipated by the market.

Bank of America realizes a profit of about $1.13 billion on the stake sale, based on Construction Bank’s initial offering price. It sold the stake at a 12 percent discount to the stock’s Tuesday close.

“The news has been expected but investors will still take it hard because BoA will most definitely sell more,” said Francis Lun, general manager with Fulbright Securities in Hong Kong. “They need the money. ”

The stake sold represents about 2.5 percent in Construction Bank, and will leave Bank of America with a 16.6 percent holding in the Beijing-controlled lender.

Bank of America bought its initial stake in Construction Bank ahead of the mainland lender’s 2005 offering and built its holding up to just over 19 percent.

Later Wednesday, an investor identified as a foundation controlled by the tycoon Li Ka-shing sold Bank of China shares worth up to $524 million.

Mr. Li, who is chairman of Hutchison Whampoa and the property developer Cheung Kong (Holdings), was selling two billion shares, according to a term sheet.

The shares were being sold at a discount of 5 to 7.5 percent to Wednesday closing price in Hong Kong.

A spokeswoman for Mr. Li was not immediately available to comment.

In another Chinese sell-down by a western bank, Switzerland’s embattled UBS recently sold its holding in Bank of China.

Citigroup said Bank of China might see further stake sales this year by Royal Bank of Scotland, which holds 8.3 percent, and Singapore’s state investment agency, Temasek Holdings, which owns 4.1 percent. Lockups on those stakes lapsed last month, it said.

Industrial and Commercial Bank of China could also come under sale pressure this year.

Goldman Sachs, Allianz and American Express Company own a combined 7.3 percent in Industrial and Commercial Bank of China, with lockups that will lapse in April and October, Citigroup said in a note.

    Bank of America Raises $2.8 Billion, NYT, 8.1.2009, http://www.nytimes.com/2009/01/08/business/08chinabank.html?hp

$1.2 Trillion Deficit Forecast

as Obama Weighs Options

January 8, 2009
The New York Times
By DAVID STOUT
and EDMUND L. ANDREWS

WASHINGTON — Changes in Social Security and Medicare will be central to efforts to bring federal spending in line, President-elect Barack Obama said Wednesday, as the Congressional Budget Office projected a $1.2 trillion budget deficit for the fiscal year.

“We expect that discussion around entitlements will be a part, a central part” of efforts to curb federal spending, Mr. Obama said at a news conference. By February, he said, “we will have more to say about how we’re going to approach entitlement spending.”

Alluding to the projected deficit, which was accompanied by grim unemployment predictions, Mr. Obama said: “And we know that our recovery and reinvestment plan will necessarily add more. My own economic and budget team projects that, unless we take decisive action, even after our economy pulls out of its slide, trillion-dollar deficits will be a reality for years to come.”

Mr. Obama did not offer specifics on how he would address Social Security and Medicare, nor was there any hint that he anticipates asking Congress to approve draconian cuts in benefits. The programs are vital to millions of Americans, and talk of cutting benefits has long been considered politically explosive. On the other hand, both programs face long-range problems, given the growing legions of baby-boomers and, in the case of Medicare, the ever-rising cost of health care.

The demographic problems have been recognized for years. Social Security was adjusted in the early 1980s, with people born later having to wait longer to begin collecting all of their benefits. (Social Security is financed through payroll taxes, as is Medicare, although the latter program also depends on general tax revenues and premiums from beneficiaries.) Mr. Obama faces a confluence of bad economic news and problems. Tax revenues are declining, public confidence in the financial system is shaky and the president-elect has called for spending close to $800 billion to stimulate the economy and create some three million jobs. The budget office predicted that the unemployment rate, which was 6.7 percent in November, would climb above 9 percent by the end of 2009. “If we do nothing,” Mr. Obama said, “then we will continue to see red ink as far as the eye can see.” And the underlying problem, he said, “is not just a deficit of dollars, it’s a deficit of accountability and a deficit of trust.”

Part of his approach, the president-elect pledged, would be to eliminate wasteful spending. As expected, he announced the appointment of Nancy Killefer to the post of chief performance officer to head a “line by line” scrutiny of federal spending.

“For nearly 30 years — as a leader at McKinsey & Company and as assistant secretary for management, chief financial officer, and chief operating officer at Treasury under President Clinton — Nancy has built a career out of making major American corporations and public institutions more effective, more efficient and more transparent,” Mr. Obama said.

Ms. Killefer said she would “do my best to create a government that works better for its citizens,” and that government employees “will be central to this effort.”

As for the startling estimate from the nonpartisan Congressional Budget Office, if it proves accurate, the budget deficit would be nearly two and a half times bigger than the previous record shortfall of $455 billion reached in 2008.

The estimate was far higher than most other analysts have predicted. If combined with the gigantic stimulus package of tax cuts and new spending that Mr. Obama is preparing, which could amount to nearly $800 billion over two years, the shortfall this year could hit $1.6 trillion.

But Mr. Obama and Democratic leaders in Congress said they were more determined than ever to pass a stimulus package by Feb. 16.

“This is one of the worst budget forecasts I have seen in my lifetime,” said Senator Kent Conrad, Democrat of North Dakota and chairman of the Senate Budget Committee.

But Mr. Conrad said the forecast merely highlighted the urgency of enacting a stimulus program to prevent the recession from getting worse.

“We must act quickly to pass an economic recovery package that will create jobs and jump-start economic growth,” he said. “While it is understandable that this package will worsen our near-term budget picture, we should not enact provisions that will exacerbate our long-term deficits and debt.”

The House Republican leader, Representative John A. Boehner of Ohio, said the budget office estimate “makes it clearer than ever that we cannot borrow and spend our way back to prosperity,” and that he hoped Republicans and Democrats could join in cutting wasteful spending.

The budget office said its grim budget projection stemmed from the severe plunge of the economy, which it predicted would contract 2.2 percent in 2009 and register anemic growth in 2010.

The agency warned the budget would be pummeled by both falling tax revenues and rising costs for unemployment benefits, food stamps and other social programs that kick in as shock absorbers during a recession.

It estimated that tax revenues will sink by $166 billion, or 6.6 percent.

But one reason that the agency’s deficit estimate was higher than those of outside analysts was that it added in hundreds of billions of dollars in spending tied to the government’s existing bailout programs, which the Bush administration has thus fare treated as “investments” it would recoup rather than “spending” or “costs” that are down the drain.

For example, the budget office estimated that the present-value cost of the Treasury Department’s $700 billion bailout program for financial institutions — known as the Troubled Assets Relief Program — would be $180 billion in 2009. The agency said that estimate was based on its judgment of the program’s risks and probable losses over time.

In addition, the budget office said it included all the money used in propping up Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies that the Treasury seized in September and put into a conservatorship. Those costs would add $240 billion to the deficit in 2009.

If the forecasts are remotely accurate, the deficit would obliterate all previous postwar deficit records not only in nominal dollar amounts but also in the way economists consider most accurate: the deficit as a share of the nation’s economic output.

The agency said the deficit would equal 8.3 percent of gross domestic product, obliterating previous postwar record of 6 percent, reached in 1983 under President Ronald Reagan.

    $1.2 Trillion Deficit Forecast as Obama Weighs Options, NYT, 8.1.2009, http://www.nytimes.com/2009/01/08/business/economy/08deficit.html?hp

Letters

How Do We Fix the Financial Mess?

January 7, 2009
The New York Times

To the Editor:

Re “The End of the Financial World as We Know It” and “How to Repair a Broken Financial World,” by Michael Lewis and David Einhorn (Op-Ed, Jan. 4):

We may, as a country, feel that we are partly to blame for this national financial crisis, but much of this is misplaced guilt.

Sure, many of us borrowed money against our houses, but not just to buy big TVs. Many families were working two or more jobs with stagnant salaries that couldn’t keep up with inflation.

As a nation, we have virtually no savings, not only because we consumed too much, but also because we were just getting by. This, despite the fact that we work longer hours than our parents did.

We needed money wherever we could get it just to keep up with the rising cost of living. The banks, led by the government, offered to step in with loans, and we took them. What were we supposed to do?

Mr. Lewis and Mr. Einhorn make an excellent, common-sense argument for some simple but radical reforms in Washington. What I would add is the outrage.

Michael Walker
Bellport, N.Y., Jan. 6, 2009

•

To the Editor:

It is unfortunate that so many fiduciaries (including managers of foundations, endowments and funds) could invest so much money with Bernard L. Madoff apparently without performing fundamental, common-sense due diligence. The red flags were numerous, including a serious lack of transparency, a tiny storefront auditor and uncannily smooth and consistent returns.

The whole affair confirms what Stephen J. Brown, Bing Liang and I conclude in a paper published recently in The Journal of Investment Management: basic due diligence on the operations of a money manager is a fundamental part of a fiduciary’s duties and can have a direct impact on investment return.

Thomas L. Fraser
New York, Jan. 6, 2009

The writer is a lawyer.

•

To the Editor:

I find the proposal by Michael Lewis and David Einhorn on foreclosures to be irresponsible. After suggesting that making payments on mortgages greater than the current values of homes “doesn’t make sense,” they propose a universal plan for requiring banks to accept the current value in the form of a new taxpayer-provided loan to the homeowner.

They would also void second mortgages, subordinate home equity loans and allow this to apply to all, wealthy speculators included, by not requiring bankruptcy of the recipient of this taxpayer largess.

“Moral hazard” is not an empty phrase. Its avoidance preserves the values of fairness that a government and economic system rest upon. What we really need is a serious discussion of housing policy, now and in the future.

Al Rodbell
Encinitas, Calif., Jan. 5, 2009

•

To the Editor:

The fact that the current appraised value of a home is less than its mortgage isn’t reason to default. A homeowner will default if he took out a teaser rate mortgage that reset or speculated by buying various “investment” properties. Shouldn’t he suffer the consequences of his poor decisions?

If someone was misled into taking a teaser loan but did so in good faith, intending to make payments, and was then unable to do so because of an unexpected jump in monthly payments, maybe that person should be eligible for a loan modification. But are there really 20 million such families out there?

House prices will stop declining when you can buy a house, rent it and carry it for free. When that price is reached, capitalists will rush in and start buying properties again, creating a bottom. Why shouldn’t the market be allowed to clear itself?

Marcelo P. Lima
Miami, Jan. 5, 2009

•

To the Editor:

Michael Lewis and David Einhorn write that the Securities and Exchange Commission has proposed “measures that fail to address the central problem: that the raters are paid by the issuers.” They say, “There should be a rule against issuers paying for ratings.”

It would be a great mistake for the S.E.C., in its enthusiasm for taking corrective action, to end the official status of certain rating agencies, for such an action would result in the elimination of any standards for rating agencies, thereby encouraging the proliferation of unregulated rating agencies and contributing to the problem of credit ratings quality.

Egan-Jones is a nationally recognized statistical rating organization (the official status that the authors would like to end) that rates a wide range of corporate and other issuers of debt obligations. Our revenues are entirely derived from institutional investors, rather than issuers, and thus avoid irreconcilable conflicts of interest.

Sean J. Egan
President
Egan-Jones Ratings Company
Haverford, Pa., Jan. 5, 2009

•

To the Editor:

I disagree that employees of the Securities and Exchange Commission should be barred from accepting jobs at Wall Street firms. Such a prohibition would deeply harm the S.E.C.’s ability to attract top legal talent. Any law student who can secure an S.E.C. position undoubtedly had offers to make three times as much from a large law firm.

I worked as a legal intern for a summer at the Federal Trade Commission, a federal agency where young lawyers left almost weekly to go to large law firms through a similar revolving door. They did so not because they were greedy, but because their law school debt was so high — often $200,000 — that staying in the job meant choosing between paying only interest on their debt or living in their parents’ house.

If the government is serious about retaining talent at its agencies, it should use the carrot, not the stick. For starters, employees should be able to make no student loan payments for the first few years of service (interest free) and receive complete loan forgiveness after a set period (say, five years). This would enable idealistic regulators to stay.

Timothy J. DeLizza
Brooklyn, Jan. 5, 2009

•

To the Editor:

I hope President-elect Barack Obama pays heed to the thoughtful advice of Michael Lewis and David Einhorn. How can we recover economically if the government keeps trying to treat the symptoms and not the disease itself?

Nancy Egan
Whitehouse Station, N.J., Jan. 4, 2009

    How Do We Fix the Financial Mess?, NYT, 7.1.2009, http://www.nytimes.com/2009/01/07/opinion/l07econ.html

Obama Warns of Prospect

for Trillion-Dollar Deficits

January 7, 2009
The New York Times
By JEFF ZELENY
and EDMUND L. ANDREWS

WASHINGTON — President-elect Barack Obama on Tuesday braced Americans for the unparalleled prospect of “trillion-dollar deficits for years to come,” a stark assessment of the budgetary outlook that he said would force his administration to impose tighter fiscal discipline on the government.

Mr. Obama sought to distinguish between the need to run what is likely to be record-setting deficits for several years and the necessity to begin bringing them down markedly in subsequent years. Even as he prepares a stimulus plan that is expected to total nearly $800 billion in new spending and tax cuts over the next two years, he said he would make sure the money was wisely spent, and he pledged to work with Congress to enact spending controls and efficiency measures throughout the federal budget.

“We’re not going to be able to expect the American people to support this critical effort unless we take extraordinary steps to ensure that the investments are made wisely and managed well,” Mr. Obama said, speaking about the dire fiscal outlook after meeting with his economic team for a second straight day.

In his most explicit language on the subject since winning the election, Mr. Obama sought to reassure lawmakers and the financial markets that he was aware of the long-term dangers of running huge deficits and would take steps to limit and eventually reduce them.

Big deficits force the government to borrow more money, saddling future generations with large financial burdens and leaving the nation reliant on foreign governments and other big investors to lend cash. The problem is even more acute now because credit markets, which in recent months have made it much harder and more expensive for businesses and individuals to borrow, could be further strained by financing a huge government deficit.

On Wednesday, Mr. Obama plans to name a chief performance officer with the task of finding government efficiencies. He has chosen Nancy Killefer, who is director of McKinsey & Company, a management consulting firm, and was an assistant secretary of the Treasury in the Clinton administration. The Congressional Budget Office will also release its latest budget estimates, providing the first official predictions of the shortfalls tied to the economic slowdown and the fallen financial markets.

Mr. Obama has made the economy virtually the sole public focus of his first full week in Washington since winning the election. He called on Tuesday for the creation of an economic recovery oversight board that would include outside advisers to monitor spending — and find abuses — of the economic stimulus plan. He also said earmarks for lawmakers’ special projects would be banned from the bill.

“When the American people spoke last November, they were demanding change — change in policies that helped deliver the worst economic crisis that we’ve see since the Great Depression,” Mr. Obama told reporters at his transition offices. He added, “They were demanding that we restore a sense of responsibility and prudence to how we run our government.”

But Republicans and some fiscally conservative Democrats have expressed concern that the need for a substantial economic stimulus plan could sweep away for years any serious effort to bring government spending into line with its revenues.

While economists almost universally support running large deficits to combat the kind of steep recession the country is grappling with now, they are increasingly expressing alarm at the prospect of sustained fiscal imbalances heading into a period in which the aging of the population will create huge budgetary strains because of the growing costs of the Medicare and Social Security programs.

Still, the deficit now seems likely to be so large that it will inevitably constrain Mr. Obama’s administration to some degree. At a minimum, it seems sure to force him to walk a line between maintaining the confidence of the financial markets, which could drive interest rates up sharply if they doubt his will or ability to improve the government’s financial condition in the long run, and various constituencies that will be pressing him to make good on his campaign promises.

Mr. Obama has so far not backed away from any of the big initiatives he ran on, including his plan to expand health insurance. On that issue, as on others, he has begun making a case that the economically prudent course is to invest now in addressing the nation’s big challenges rather than avoiding them in the name of saving money in the short run.

Mr. Obama was not specific about the size of the deficit he expects, beyond his reference to “a trillion-dollar deficit or close to a trillion-dollar deficit” for the fiscal year that ends Sept. 30. Aides said later that the estimate — in line with what economists have been anticipating given the economy’s rapid deterioration — did not include the costs of the proposed stimulus package, which could add hundreds of billions of dollars more to the red ink.

At $1 trillion, the deficit would not only shatter the largest previous shortfall in dollar terms — $455 billion last year — but it could also exceed the post-World War II-era record by the measure more meaningful in economic terms, the deficit as a percentage of total economic activity.

Diane Rogers, chief economist at the Concord Coalition, a nonpartisan organization that supports fiscal discipline, estimated that the deficit this year would hit 7 percent of the gross domestic product. The largest previous record in those terms was in 1983, when it hit 6 percent.

Mr. Obama declined to say on Tuesday whether the budget that his administration submits to Congress in February would be larger than the $3.1 trillion budget that President Bush submitted for the current fiscal year. He also did not offer any specific examples of how spending could be controlled, saying only that his advisers had been scouring the budget looking for programs that could be eliminated.

“I’m going to be willing to make some very difficult choices in how we get a handle on his deficit,” Mr. Obama said. “That’s what the American people are looking for and, you know, what we intended to do this year.”

But the short-term budget shortfalls are big enough to pose serious headaches in themselves, especially if bond investors start demanding higher interest rates.

In just the first three months of the 2009 fiscal year, which began on Oct. 1, the government spent $408 billion more than it took in. About one-third of that shortfall stemmed from the Treasury Department’s rescue program of injecting capital into banks, which the government will book as an “investment” rather than “spending.”

The recession itself will add hundreds of billions of dollars to the deficit. Even before Congress adds any new stimulus measures, higher outlays will climb for existing unemployment benefits, food stamps and other social programs. Tax revenues will fall because of rising unemployment, falling corporate profits and huge investment losses in the stock and bond markets. Mr. Obama’s stimulus program could add another $400 billion in each of the next two years.

“One thing investors have to be thinking is, what’s the exit strategy? How do we unwind this stuff?” said Robert Bixby, director of the Concord Coalition. “I would analogize it to what the government is doing with the auto companies. Congress said, we’ll give you the money but you have to show us a plan for sustainability.”

Mr. Bixby added, “Now the government is in the same position of the auto companies, but they haven’t come up with any plan for sustainability.”

As the latest budget estimates are released on Wednesday, the good news, at least for the moment, is that the Treasury’s borrowing costs are as almost as low as they have ever been. Short-term Treasury rates are hovering just above zero, but the rates on 10-year Treasury bonds are about 2.5 percent.

    Obama Warns of Prospect for Trillion-Dollar Deficits, NYT, 7.1.2009, http://www.nytimes.com/2009/01/07/us/politics/07obama.html?hp

Factory Orders

Drop More Than Expected in Nov.

January 6, 2009
Filed at 11:12 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- Orders to factories fell for a record fourth straight month in November, and analysts believe manufacturing will continue to suffer in coming months as the country slogs through a recession entering its second year.

The Commerce Department said Tuesday that orders declined by 4.6 percent in November, nearly double the 2.5 percent drop economists expected. Orders have been falling since August, including a 6 percent plunge in October, the biggest setback in eight years.

The weakness in November reflected a big drop in demand for commercial aircraft. Weakness also was seen in autos, primary metals such as steel, and defense communications equipment.

Separately, the Institute for Supply Management reported Tuesday that a closely watched gauge of activity in the services sector rose slightly in December but still remained at recessionary levels. The services sector index rose to 40.6 from 36.3 in November. Any reading below 50 signals contraction.

The factory orders report showed that demand for durable goods, items expected to last three or more years, fell by 1.5 percent in November, even worse than the government's initial estimate two weeks ago that durable goods had fallen 1 percent.

Demand for nondurable goods, items such as food, paper and petroleum products, dropped by 7.4 percent in November following a 3.8 percent decline in October. The declines for nondurable goods reflect falling demand and a big drop in prices, particularly for energy products.

The declines in November were led by a 37.7 percent plunge in demand for commercial aircraft, an extremely volatile series. Boeing Co. has been seeking to resume normal operations following the interruptions caused by a strike last year.

Demand for autos slipped by 0.1 percent following an even larger 4.1 percent fall in October as automakers continue to struggle with the economic downturn.

The Bush administration last month announced that it would lend $17.4 billion to General Motors Corp. and Chrysler LLC from the government's $700 billion rescue fund in an effort to buy them time to reorganize and avoid having to file for bankruptcy.

Excluding transportation, orders would have posted a 4.2 percent decline in November. Demand for primary metals such as steel fell by 2.7 percent, while orders for defense communications equipment were down 12.1 percent.

Demand for heating and air conditioning products fell by 11.6 percent in November, reflecting in part the hard times the nation's homebuilders are enduring.

The National Association of Realtors said Tuesday that pending home sales in November fell to the lowest level in the eight-year history of its index. The trade group said its seasonally adjusted index of pending sales for existing homes fell to 82.3 from a downwardly revised October reading of 85.7. That was far worse than the reading of 88 that economists expected, according to a survey by Thomson Reuters.

Economists are concerned that the manufacturing sector is being hit not only by a recession in the United States but spreading weakness overseas which has pushed many of America's major trading partners into downturns and cut into domestic export sales.

    Factory Orders Drop More Than Expected in Nov., NYT, 6.1.2009, http://www.nytimes.com/aponline/2009/01/06/washington/AP-Economy.html

Op-Ed Contributors

How to Repair a Broken Financial World

January 4, 2009
The New York Times
By MICHAEL LEWIS and DAVID EINHORN

Continued from "The End of the Financial World As We Know It"

Mr. Paulson must have had some reason for doing what he did. No doubt he still believes that without all this frantic activity we’d be far worse off than we are now. All we know for sure, however, is that the Treasury’s heroic deal-making has had little effect on what it claims is the problem at hand: the collapse of confidence in the companies atop our financial system.

Weeks after receiving its first $25 billion taxpayer investment, Citigroup returned to the Treasury to confess that — lo! — the markets still didn’t trust Citigroup to survive. In response, on Nov. 24, the Treasury handed Citigroup another $20 billion from the Troubled Assets Relief Program, and then simply guaranteed $306 billion of Citigroup’s assets. The Treasury didn’t ask for its fair share of the action, or management changes, or for that matter anything much at all beyond a teaspoon of warrants and a sliver of preferred stock. The $306 billion guarantee was an undisguised gift. The Treasury didn’t even bother to explain what the crisis was, just that the action was taken in response to Citigroup’s “declining stock price.”

Three hundred billion dollars is still a lot of money. It’s almost 2 percent of gross domestic product, and about what we spend annually on the departments of Agriculture, Education, Energy, Homeland Security, Housing and Urban Development and Transportation combined. Had Mr. Paulson executed his initial plan, and bought Citigroup’s pile of troubled assets at market prices, there would have been a limit to our exposure, as the money would have counted against the $700 billion Mr. Paulson had been given to dispense. Instead, he in effect granted himself the power to dispense unlimited sums of money without Congressional oversight. Now we don’t even know the nature of the assets that the Treasury is standing behind. Under TARP, these would have been disclosed.

THERE are other things the Treasury might do when a major financial firm assumed to be “too big to fail” comes knocking, asking for free money. Here’s one: Let it fail.

Not as chaotically as Lehman Brothers was allowed to fail. If a failing firm is deemed “too big” for that honor, then it should be explicitly nationalized, both to limit its effect on other firms and to protect the guts of the system. Its shareholders should be wiped out, and its management replaced. Its valuable parts should be sold off as functioning businesses to the highest bidders — perhaps to some bank that was not swept up in the credit bubble. The rest should be liquidated, in calm markets. Do this and, for everyone except the firms that invented the mess, the pain will likely subside.

This is more plausible than it may sound. Sweden, of all places, did it successfully in 1992. And remember, the Federal Reserve and the Treasury have already accepted, on behalf of the taxpayer, just about all of the downside risk of owning the bigger financial firms. The Treasury and the Federal Reserve would both no doubt argue that if you don’t prop up these banks you risk an enormous credit contraction — if they aren’t in business who will be left to lend money? But something like the reverse seems more true: propping up failed banks and extending them huge amounts of credit has made business more difficult for the people and companies that had nothing to do with creating the mess. Perfectly solvent companies are being squeezed out of business by their creditors precisely because they are not in the Treasury’s fold. With so much lending effectively federally guaranteed, lenders are fleeing anything that is not.

Rather than tackle the source of the problem, the people running the bailout desperately want to reinflate the credit bubble, prop up the stock market and head off a recession. Their efforts are clearly failing: 2008 was a historically bad year for the stock market, and we’ll be in recession for some time to come. Our leaders have framed the problem as a “crisis of confidence” but what they actually seem to mean is “please pay no attention to the problems we are failing to address.”

In its latest push to compel confidence, for instance, the authorities are placing enormous pressure on the Financial Accounting Standards Board to suspend “mark-to-market” accounting. Basically, this means that the banks will not have to account for the actual value of the assets on their books but can claim instead that they are worth whatever they paid for them.

This will have the double effect of reducing transparency and increasing self-delusion (gorge yourself for months, but refuse to step on a scale, and maybe no one will realize you gained weight). And it will fool no one. When you shout at people “be confident,” you shouldn’t expect them to be anything but terrified.

If we are going to spend trillions of dollars of taxpayer money, it makes more sense to focus less on the failed institutions at the top of the financial system and more on the individuals at the bottom. Instead of buying dodgy assets and guaranteeing deals that should never have been made in the first place, we should use our money to A) repair the social safety net, now badly rent in ways that cause perfectly rational people to be terrified; and B) transform the bailout of the banks into a rescue of homeowners.

We should begin by breaking the cycle of deteriorating housing values and resulting foreclosures. Many homeowners realize that it doesn’t make sense to make payments on a mortgage that exceeds the value of their house. As many as 20 million families face the decision of whether to make the payments or turn in the keys. Congress seems to have understood this problem, which is why last year it created a program under the Federal Housing Authority to issue homeowners new government loans based on the current appraised value of their homes.

And yet the program, called Hope Now, seems to have become one more excellent example of the unhappy political influence of Wall Street. As it now stands, banks must initiate any new loan; and they are loath to do so because it requires them to recognize an immediate loss. They prefer to “work with borrowers” through loan modifications and payment plans that present fewer accounting and earnings problems but fail to resolve and, thereby, prolong the underlying issues. It appears that the banking lobby also somehow inserted into the law the dubious requirement that troubled homeowners repay all home equity loans before qualifying. The result: very few loans will be issued through this program.

THIS could be fixed. Congress might grant qualifying homeowners the ability to get new government loans based on the current appraised values without requiring their bank’s consent. When a corporation gets into trouble, its lenders often accept a partial payment in return for some share in any future recovery. Similarly, homeowners should be permitted to satisfy current first mortgages with a combination of the proceeds of the new government loan and a share in any future recovery from the future sale or refinancing of their homes. Lenders who issued second mortgages should be forced to release their claims on property. The important point is that homeowners, not lenders, be granted the right to obtain new government loans. To work, the program needs to be universal and should not require homeowners to file for bankruptcy.

There are also a handful of other perfectly obvious changes in the financial system to be made, to prevent some version of what has happened from happening all over again. A short list:

Stop making big regulatory decisions with long-term consequences based on their short-term effect on stock prices. Stock prices go up and down: let them. An absurd number of the official crises have been negotiated and resolved over weekends so that they may be presented as a fait accompli “before the Asian markets open.” The hasty crisis-to-crisis policy decision-making lacks coherence for the obvious reason that it is more or less driven by a desire to please the stock market. The Treasury, the Federal Reserve and the S.E.C. all seem to view propping up stock prices as a critical part of their mission — indeed, the Federal Reserve sometimes seems more concerned than the average Wall Street trader with the market’s day-to-day movements. If the policies are sound, the stock market will eventually learn to take care of itself.

End the official status of the rating agencies. Given their performance it’s hard to believe credit rating agencies are still around. There’s no question that the world is worse off for the existence of companies like Moody’s and Standard & Poor’s. There should be a rule against issuers paying for ratings. Either investors should pay for them privately or, if public ratings are deemed essential, they should be publicly provided.

Regulate credit-default swaps. There are now tens of trillions of dollars in these contracts between big financial firms. An awful lot of the bad stuff that has happened to our financial system has happened because it was never explained in plain, simple language. Financial innovators were able to create new products and markets without anyone thinking too much about their broader financial consequences — and without regulators knowing very much about them at all. It doesn’t matter how transparent financial markets are if no one can understand what’s inside them. Until very recently, companies haven’t had to provide even cursory disclosure of credit-default swaps in their financial statements.

Credit-default swaps may not be Exhibit No. 1 in the case against financial complexity, but they are useful evidence. Whatever credit defaults are in theory, in practice they have become mainly side bets on whether some company, or some subprime mortgage-backed bond, some municipality, or even the United States government will go bust. In the extreme case, subprime mortgage bonds were created so that smart investors, using credit-default swaps, could bet against them. Call it insurance if you like, but it’s not the insurance most people know. It’s more like buying fire insurance on your neighbor’s house, possibly for many times the value of that house — from a company that probably doesn’t have any real ability to pay you if someone sets fire to the whole neighborhood. The most critical role for regulation is to make sure that the sellers of risk have the capital to support their bets.

Impose new capital requirements on banks. The new international standard now being adopted by American banks is known in the trade as Basel II. Basel II is premised on the belief that banks do a better job than regulators of measuring their own risks — because the banks have the greater interest in not failing. Back in 2004, the S.E.C. put in place its own version of this standard for investment banks. We know how that turned out. A better idea would be to require banks to hold less capital in bad times and more capital in good times. Now that we have seen how too-big-to-fail financial institutions behave, it is clear that relieving them of stringent requirements is not the way to go.

Another good solution to the too-big-to-fail problem is to break up any institution that becomes too big to fail.

Close the revolving door between the S.E.C. and Wall Street. At every turn we keep coming back to an enormous barrier to reform: Wall Street’s political influence. Its influence over the S.E.C. is further compromised by its ability to enrich the people who work for it. Realistically, there is only so much that can be done to fix the problem, but one measure is obvious: forbid regulators, for some meaningful amount of time after they have left the S.E.C., from accepting high-paying jobs with Wall Street firms.

But keep the door open the other way. If the S.E.C. is to restore its credibility as an investor protection agency, it should have some experienced, respected investors (which is not the same thing as investment bankers) as commissioners. President-elect Barack Obama should nominate at least one with a notable career investing capital, and another with experience uncovering corporate misconduct. As it happens, the most critical job, chief of enforcement, now has a perfect candidate, a civic-minded former investor with firsthand experience of the S.E.C.’s ineptitude: Harry Markopolos.

The funny thing is, there’s nothing all that radical about most of these changes. A disinterested person would probably wonder why many of them had not been made long ago. A committee of people whose financial interests are somehow bound up with Wall Street is a different matter.

    How to Repair a Broken Financial World, NYT, 4.1.2009, http://www.nytimes.com/2009/01/04/opinion/04lewiseinhornb.html?ref=opinion

Op-Ed Contributors

The End of the Financial World

as We Know It

January 4, 2009
The New York Times
By MICHAEL LEWIS
and DAVID EINHORN

AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.

This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?

Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?

To that end consider the strange story of Harry Markopolos. Mr. Markopolos is the former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to the Securities and Exchange Commission that Bernard L. Madoff couldn’t be anything other than a fraud. Mr. Madoff’s investment performance, given his stated strategy, was not merely improbable but mathematically impossible. And so, Mr. Markopolos reasoned, Bernard Madoff must be doing something other than what he said he was doing.

In his devastatingly persuasive 17-page letter to the S.E.C., Mr. Markopolos saw two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, and Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of the customer order. If I.B.M.’s shares rose, Mr. Madoff kept them; if they fell he fobbed them off onto the poor customer.

In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.

Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999. He had no direct financial interest in exposing Mr. Madoff — he wasn’t an unhappy investor or a disgruntled employee. There was no way to short shares in Madoff Securities, and so Mr. Markopolos could not have made money directly from Mr. Madoff’s failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might happen to him and his family if anyone found out he had written it. And yet the S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.

What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.

The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.

A lot has been said and written, for instance, about the corrupting effects on Wall Street of gigantic bonuses. What happened inside the major Wall Street firms, though, was more deeply unsettling than greedy people lusting for big checks: leaders of public corporations, especially financial corporations, are as good as required to lead for the short term.

Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he’d be replaced by someone willing to make money from the credit bubble.

OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.

The credit-rating agencies, for instance.

Everyone now knows that Moody’s and Standard & Poor’s botched their analyses of bonds backed by home mortgages. But their most costly mistake — one that deserves a lot more attention than it has received — lies in their area of putative expertise: measuring corporate risk.

Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky asset on your balance sheet, you will face a serious downgrade.”

The American International Group, Fannie Mae, Freddie Mac, General Electric and the municipal bond guarantors Ambac Financial and MBIA all had triple-A ratings. (G.E. still does!) Large investment banks like Lehman and Merrill Lynch all had solid investment grade ratings. It’s almost as if the higher the rating of a financial institution, the more likely it was to contribute to financial catastrophe. But of course all these big financial companies fueled the creation of the credit products that in turn fueled the revenues of Moody’s and Standard & Poor’s.

These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.

This is a subject that might be profitably explored in Washington. There are many questions an enterprising United States senator might want to ask the credit-rating agencies. Here is one: Why did you allow MBIA to keep its triple-A rating for so long? In 1990 MBIA was in the relatively simple business of insuring municipal bonds. It had $931 million in equity and only $200 million of debt — and a plausible triple-A rating.

By 2006 MBIA had plunged into the much riskier business of guaranteeing collateralized debt obligations, or C.D.O.’s. But by then it had $7.2 billion in equity against an astounding $26.2 billion in debt. That is, even as it insured ever-greater risks in its business, it also took greater risks on its balance sheet.

Yet the rating agencies didn’t so much as blink. On Wall Street the problem was hardly a secret: many people understood that MBIA didn’t deserve to be rated triple-A. As far back as 2002, a hedge fund called Gotham Partners published a persuasive report, widely circulated, entitled: “Is MBIA Triple A?” (The answer was obviously no.)

At the same time, almost everyone believed that the rating agencies would never downgrade MBIA, because doing so was not in their short-term financial interest. A downgrade of MBIA would force the rating agencies to go through the costly and cumbersome process of re-rating tens of thousands of credits that bore triple-A ratings simply by virtue of MBIA’s guarantee. It would stick a wrench in the machine that enriched them. (In June, finally, the rating agencies downgraded MBIA, after MBIA’s failure became such an open secret that nobody any longer cared about its formal credit rating.)

The S.E.C. now promises modest new measures to contain the damage that the rating agencies can do — measures that fail to address the central problem: that the raters are paid by the issuers.

But this should come as no surprise, for the S.E.C. itself is plagued by similarly wacky incentives. Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.

Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)

The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.

IT’S not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.

The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street.

At the back of the version of Harry Markopolos’s brave paper currently making the rounds is a copy of an e-mail message, dated April 2, 2008, from Mr. Markopolos to Jonathan S. Sokobin. Mr. Sokobin was then the new head of the commission’s office of risk assessment, a job that had been vacant for more than a year after its previous occupant had left to — you guessed it — take a higher-paying job on Wall Street.

At any rate, Mr. Markopolos clearly hoped that a new face might mean a new ear — one that might be receptive to the truth. He phoned Mr. Sokobin and then sent him his paper. “Attached is a submission I’ve made to the S.E.C. three times in Boston,” he wrote. “Each time Boston sent this to New York. Meagan Cheung, branch chief, in New York actually investigated this but with no result that I am aware of. In my conversations with her, I did not believe that she had the derivatives or mathematical background to understand the violations.”

How does this happen? How can the person in charge of assessing Wall Street firms not have the tools to understand them? Is the S.E.C. that inept? Perhaps, but the problem inside the commission is far worse — because inept people can be replaced. The problem is systemic. The new director of risk assessment was no more likely to grasp the risk of Bernard Madoff than the old director of risk assessment because the new guy’s thoughts and beliefs were guided by the same incentives: the need to curry favor with the politically influential and the desire to keep sweet the Wall Street elite.

And here’s the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place.

SAY what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers.

When Bear Stearns failed, the government induced JPMorgan Chase to buy it by offering a knockdown price and guaranteeing Bear Stearns’s shakiest assets. Bear Stearns bondholders were made whole and its stockholders lost most of their money.

Then came the collapse of the government-sponsored entities, Fannie Mae and Freddie Mac, both promptly nationalized. Management was replaced, shareholders badly diluted, creditors left intact but with some uncertainty. Next came Lehman Brothers, which was, of course, allowed to go bankrupt. At first, the Treasury and the Federal Reserve claimed they had allowed Lehman to fail in order to signal that recklessly managed Wall Street firms did not all come with government guarantees; but then, when chaos ensued, and people started saying that letting Lehman fail was a dumb thing to have done, they changed their story and claimed they lacked the legal authority to rescue the firm.

But then a few days later A.I.G. failed, or tried to, yet was given the gift of life with enormous government loans. Washington Mutual and Wachovia promptly followed: the first was unceremoniously seized by the Treasury, wiping out both its creditors and shareholders; the second was batted around for a bit. Initially, the Treasury tried to persuade Citigroup to buy it — again at a knockdown price and with a guarantee of the bad assets. (The Bear Stearns model.) Eventually, Wachovia went to Wells Fargo, after the Internal Revenue Service jumped in and sweetened the pot with a tax subsidy.

In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway.

It’s hard to know what Mr. Paulson was thinking as he never really had to explain himself, at least not in public. But the general idea appears to be that if you give the banks capital they will in turn use it to make loans in order to stimulate the economy. Never mind that if you want banks to make smart, prudent loans, you probably shouldn’t give money to bankers who sunk themselves by making a lot of stupid, imprudent ones. If you want banks to re-lend the money, you need to provide them not with preferred stock, which is essentially a loan, but with tangible common equity — so that they might write off their losses, resolve their troubled assets and then begin to make new loans, something they won’t be able to do until they’re confident in their own balance sheets. But as it happened, the banks took the taxpayer money and just sat on it.
 

Continued at "How to Repair a Broken Financial World."
 

Michael Lewis, a contributing editor at Vanity Fair and the author of “Liar’s Poker,” is writing a book about the collapse of Wall Street. David Einhorn is the president of Greenlight Capital, a hedge fund, and the author of “Fooling Some of the People All of the Time.” Investment accounts managed by Greenlight may have a position (long or short) in the securities discussed in this article.

    The End of the Financial World as We Know It, NYT, 4.1.2009, http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html?ref=opinion


 

Desperate Retailers

Try Frantic Discounts and Giveaways

January 3, 2009
The New York Times
By JACK HEALY

At a dealership on the outskirts of Miami, people who agree to buy one Dodge Ram truck can get a second truck or car — free. In 415 supermarkets across the East, customers who bring in a prescription can walk out with free antibiotics. And one clothing chain, not to be outdone, has started offering three suits for the price of one.

An era of desperation marketing is at hand, with stores and automobile dealerships adopting virtually any tactic that might grab the attention of frightened consumers.

After one of the worst holiday seasons in decades, businesses are doing whatever they can to clear their shelves and make way for spring merchandise. Sales of 50 percent off stopped capturing the attention of customers weeks ago, so stores are layering discounts on top of discounts, and trying to lure shoppers with promises of giveaways, bulk bargains and other gimmicks.

“Retailers are trying everything in the book,” said C. Britt Beemer, chairman of America’s Research Group, a consumer research firm. “You’re seeing things like, ‘Buy one, get two free.’ That’s just unheard of, and the item you’re buying isn’t even full price.”

He added, “When you’re advertising those sorts of price points, you’re just trading trash for cash. There’s no strategy. You’re just trying to get rid of it.”

For stores, offers like free antibiotics, three-for-one sweaters and 90-percent-off Sony PlayStations are usually “loss leaders,” a retailing term for sweet deals meant to drive traffic. The stores hope not only to clear out merchandise that is not moving, but also to draw in customers who will spend money on other items.

With sales of clothing, electronics, luxury goods and more down by double digits in the dismal economy, these loss leaders are more important than ever, analysts said. Stores began discounting long before the holiday season and slashed prices even more as Christmas approached, but the sales alone were not enough to clear away winter inventory.

“Fear is very high right now,” said Dan de Grandpre, editor of the Web site DealNews. “What you’re going to see is retailers do as much as they can to be as creative as possible. You’re going to see more of this aggressive and sometimes panicky discounting from apparel stores and electronics stores.”

At the Samsonite outlet in Castle Rock, Colo., two free pairs of boots come with the purchase of one pair; similarly, at the home furnishings store Domestications, three throw rugs go for the price of one. Toys “R” Us had three-for-one Crayola products, and there were three-for-one cashmere sweaters at Off Fifth, the Saks outlet chain, according to news reports.

“They had so many freebies,” said Carrie Koors, who lives in Cincinnati and writes a blog about bargain-hunting. “It was really a great holiday season to shop and get stuff for next season.”

Of course, selling items at two- or three-for-the-price-of-one is effectively just a fat discount on each item.

But Dan Ariely, a professor of behavioral economics at Duke University, says the word “free” can work psychological magic on reluctant consumers.

“When you offer something for free it’s more exciting,” said Mr. Ariely, the author of “Predictably Irrational.” “We don’t think of it in the same way. We just get tempted, because we think of it as only having pluses and no negatives. Free is like a whole new category.”

And so the deals keep multiplying. The clothing company PacSun is offering a $10 discount coupon that allows customers to buy $9.99 T-shirts and slippers for only the cost of shipping. A Ford dealership in San Mateo, Calif., is offering a free scooter with the purchase of every 2009 Ford F-150. And shoppers at Jos. A. Bank can buy three suits for the price of one, while customers at Stop & Shop and Giant Food supermarkets can get free antibiotics to treat their winter ailments — with a doctor’s prescription, of course.

“We’re going to take a leadership role in the industry, and we’re going to be different,” said Faith Weiner, Stop & Shop’s director of public affairs.

In Davie, Fla., University Dodge dreamed up a “Buy 1 ... Get 2!” deal to attract the attention of potential customers and whittle excess inventory, which had spilled onto the lot next door. So far, the dealership has sold 40 vehicles under the promotion, which promises customers a free Dodge Ram, Dodge Caliber or PT Cruiser if they buy a 2008 Ram.

“Most people think we’re crazy,” said Ali Ahmed, the sales manager. “More than anything, it’s a way to catch the customer’s interest than to just offer a percentage or dollar amount off. They’ve heard that before.”

The dealership has advertised its two-for-one car sale online and in newspapers, Mr. Ahmed said, and customers have been calling and showing up to see whether the sale is a gag. But it is no joke from Mr. Ahmed’s point of view: an estimated 900 auto dealerships out of 20,770 nationwide went out of business in 2008, according to industry estimates, and Mr. Ahmed said he did not want to join the thousands likely to close this year.

“It’s a tough environment,” he said. “Of the dealers around you now, you know some of them aren’t going to be on the map next year. If you can steal a little bit of market share now, you’re not going to be one of those.”

    Desperate Retailers Try Frantic Discounts and Giveaways, NYT, 3.1.2009, http://www.nytimes.com/2009/01/03/business/media/03marketing.html

Credit Card Companies

Willing to Deal Over Debt

January 3, 2009
The New York Times
By ERIC DASH

Hard times are usually good times for debt collectors, who make their money morning and night with the incessant ring of a phone.

But in this recession, perhaps the deepest in decades, the unthinkable is happening: collectors, who usually do the squeezing, are getting squeezed a bit themselves.

After helping to foster the explosive growth of consumer debt in recent years, credit card companies are realizing that some hard-pressed Americans will not be able to pay their bills as the economy deteriorates.

So lenders and their collectors are rushing to round up what money they can before things get worse, even if that means forgiving part of some borrowers’ debts. Increasingly, they are stretching out payments and accepting dimes, if not pennies, on the dollar as payment in full.

“You can’t squeeze blood out of a turnip,” said Don Siler, the chief marketing officer at MRS Associates, a big collection company that works with seven of the 10 largest credit card companies. “The big settlements just aren’t there anymore.”

Lenders are not being charitable. They are simply trying to protect themselves.

Banks and card companies are bracing for a wave of defaults on credit card debt in early 2009, and they are vying with each other to get paid first. Besides, the sooner people get their financial houses in order, the sooner they can start borrowing again.

So even as many banks cut consumers’ credit lines, raise card fees and generally pull back on lending, some lenders are trying to give customers a little wiggle room. Bank of America, for instance, says it has waived late fees, lowered interest charges and, in some cases, reduced loan balances for more than 700,000 credit card holders in 2008.

American Express and Chase Card Services say they are taking similar actions as more customers fall behind on their bills. Every major credit card lender is giving its collection agents more leeway to make adjustments for consumers in financial distress.

Debt collectors, who are typically paid based on the amount of money they recover, report that the number of troubled borrowers getting payment extensions has at least doubled in the last six months. In other cases, borrowers who appear to be pushed to the brink are being offered deals that forgive 20 to 70 percent of credit card debt.

“Consumers have never been in a better position to negotiate a partial payment,” said Robert D. Manning, the author of “Credit Card Nation” and a longtime critic of the credit card industry. “It’s like that old movie ‘Rosalie Goes Shopping.’ When it’s $100,000 of debt, it’s your problem. When it’s a million dollars of debt, it’s the bank’s problem.”

The recent wave of debt concessions is a reversal from only a few years ago, when consumers usually lost battles with their credit card companies. Now, as bad debts soar, it is the lenders who are crying mercy.

Credit card lenders expect to write off an unprecedented $395 billion of soured loans over the next five years, according to projections from The Nilson Report, an industry newsletter. That compares with a total of about $275 billion in the last five years.

All that bad debt is getting harder to collect. In the past, troubled borrowers might have been able to pay down card loans by tapping the equity in their homes, drawing on retirement savings, taking out a debt consolidation loan, or even calling a relative for help. But with credit tight, consumers are maxed out.

“Knowing that the sources of funding have dried up, having someone pay the balance in full isn’t a viable strategy,” said Tim Smith, a senior executive at Firstsource, one of the biggest debt collection companies.

Lenders are reluctant to admit they will accept less than full payment, lest they encourage good customers to stop paying what they can. Industrywide data is scarce.

Unlike the huge mortgage loan modification programs that are taking place, which address thousands of mortgages at once, workouts for credit card customers are still being handled on a case-by-case basis.

In addition to debt forgiveness, debt collectors are allowing many delinquent borrowers to pay down their debt over the course of a year rather than the standard six months.

Paul Hunziker, the chairman of Capital Management Services, said that before this downturn, his firm put only about a quarter of all borrowers into longer-term repayment plans. Now, it puts about half on such plans.

Some lenders are also reaching out to borrowers shortly after they fall behind on their payments to try to avoid having to write off the account. Others are reaching out to customers who seem likely to fall behind. Just as lenders competed for years to be the first card to be taken out of the wallet, they are now competing to be the first ones paid back.

And realizing that millions more consumers are likely to default on their credit card bills in the coming months, the banking industry has started lobbying regulators to make it more advantageous to lenders to extend payment terms or forgive debt.

In an unusual alliance, the Financial Services Roundtable, one of the industry’s biggest lobbyists, and the Consumer Federation of America recently proposed a credit card loan modification program, which was rejected by regulators.

Under the plan, lenders would have forgiven about 40 percent of what was owed by individual borrowers over five years. Lenders could report the loss once whatever part of the debt was repaid, instead of shortly after default, as current accounting rules require. That would allow them to write off less later. Borrowers would have been allowed to defer any tax payments owed on the forgiven debt.

Landmark changes to bankruptcy legislation passed in 2005, for which the industry aggressively lobbied, seem to have hurt card debt collections. Credit card industry data indicate the average debt discharged in Chapter 7 bankruptcy has nearly tripled since 2004. And in Chapter 13 bankruptcies, secured lenders like auto finance companies routinely elbow out unsecured lenders like card companies, trends that have contributed to the card lenders’ willingness to settle.

Borrowers should not expect sweetheart deals. Card companies will offer loan modifications only to people who meet certain criteria. Most customers must be delinquent for 90 days or longer. Other considerations include the borrower’s income, existing bank relationships and a credit record that suggests missing a payment is an exception rather than the rule.

While a deal may help avoid credit card cancellation or bankruptcy, it will also lead to a sharp drop in the borrower’s credit score for as long as seven years, making it far more difficult and expensive to obtain new loans. The average consumer’s score will fall 70 to 130 points, on a scale where the strongest borrowers register 700 or more.

For the moment, it may be easier for troubled borrowers to start negotiating a modification by contacting the card company or collection agency directly. Credit counselors can help borrowers consolidate their debts and get card companies to lower their interest payments and other fees, but they currently cannot get the loan principal reduced.

Another option is for a borrower to sign up a debt settlement company to negotiate on her behalf. But regulation of this business is loose, and consumer advocacy groups warn that some firms prey on troubled borrowers with aggressive marketing tactics and exorbitant upfront fees.

    Credit Card Companies Willing to Deal Over Debt, NYT, 3.1.2009, http://www.nytimes.com/2009/01/03/business/03collect.html?hp

Madoff Trustee

Seeks Wide Power to Subpoena

January 3, 2009
The New York Times
By DIANA B. HENRIQUES

The trustee overseeing the bankruptcy of Bernard L. Madoff’s trading firm has made an urgent request to the court for unusually broad authority to subpoena witnesses and documents, citing the vast scale of what is alleged to be a $50-billion Ponzi scheme.

While not unprecedented, the request from the trustee, Irving H. Picard, is far from routine, and it illustrates how much Mr. Picard’s burdens have expanded beyond a trustee’s traditional tasks of identifying assets and selling them to satisfy claims.

Noting that “the debtor’s operations were allegedly a massive fraudulent enterprise,” Mr. Picard said he needed the authority to issue expedited subpoenas to investigate those allegations — and that his need was “most urgent.”

The request was filed Wednesday amid new allegations that Mr. Madoff had been pulling in fresh investors — and at least $10 million in cash — within a week of his arrest on Dec. 11 on federal fraud charges.

The trustee is just one of several investigators trying to determine what Mr. Madoff did with investors’ money. Federal prosecutors are conducting a criminal investigation, while the Securities and Exchange Commission continues its regulatory inquiry.

The S.E.C. is also conducting an internal examination of why it failed to respond aggressively to previous warnings about Mr. Madoff, going back several years. And the House Financial Services Committee will hold a hearing on Monday to explore the regulatory implications of the Madoff case, with a witness list that includes the S.E.C.’s inspector general.

According to his lawyers, Mr. Madoff — free on a $10 million bond but confined to his Manhattan apartment — is cooperating with federal authorities.

Few details have emerged about the case beyond those included in the earliest complaints: That Mr. Madoff’s sons questioned him on Dec. 10 about his plan to distribute several hundred million dollars in bonuses two months ahead of schedule; when confronted, he confessed that his business was a fraud whose losses could run as high as $50 billion. His sons promptly reported the confession to federal authorities, and their father was arrested the next day.

In a case where so much remains unknown, the new complaint filed this week by one of Mr. Madoff’s final investors offers a small glimpse into his dealings with his customers in the days just before he was arrested.

The accusation was made by a family corporation set up by Martin Rosenman, a resident of Great Neck, N.Y., and the president of Stuyvesant Fuel Service, a heating oil distributor in the New York area.

According to his lawyer, Howard Kleinhendler of Wachtel & Masyr, Mr. Rosenman had been referred to Mr. Madoff by a friend who invested successfully with him over many years — “the usual story, unfortunately,” he added.

Around Dec. 3 — about the time Mr. Madoff was expressing some concern to colleagues about getting $7 billion in redemption demands, according to other court filings — Mr. Rosenman called Mr. Madoff at his office, Bernard L. Madoff Investment Securities.

Mr. Rosenman wanted to invest $10 million with Mr. Madoff, according to the complaint, filed in federal bankruptcy court on Wednesday.

“Mr. Madoff stated that the fund was closed until Jan. 1, 2009, but that Mr. Rosenman could wire money to a BMIS account where it would be held until the fund opened after the New Year,” the complaint continued. The money was wired to a Madoff bank account at JPMorgan Chase on Dec. 5.

On Dec. 9 — the day Mr. Madoff proposed the early bonus payments and two days before he was arrested — Mr. Rosenman was notified by the Madoff firm that his money had been received and invested.

No record of that transaction has been found, Mr. Kleinhendler said. “We don’t think it happened — we don’t think any securities were bought or sold,” he added.

“To the contrary, we think he was deliberately collecting money,” he continued. “He was trying to get more money in the door for this final distribution he wanted to make.”

Although Mr. Madoff reportedly told his sons he had $100 million and $200 million to distribute, it is up to Mr. Picard, the bankruptcy trustee, to determine what assets can be recovered for the benefit of customers of the firm.

Besides his investigative efforts, Mr. Picard is seeking a buyer for the separate proprietary and wholesale stock-trading operations that, before this scandal, were the foundation of Mr. Madoff’s reputation. Those operations have been suspended since the scandal broke, and Lazard Frères & Company has been hired by the trustee to help find a buyer for them.

In an exclusive interview on Friday, Mr. Picard said he was hopeful that those stock-trading businesses would be sold quickly, “perhaps by the end of next week.”

It is not clear what the businesses will fetch. Greg LaRoche of LaRoche Research in Providence, R.I., said that one rule of thumb would value them at about three times their net income, which would yield a price of about $200 million based on an audit from late 2007 — a substantial discount from the firm’s reported net worth of roughly $670 million at that time.

Other investment bankers were reluctant to put a price on the Madoff operations, citing the uncertain market environment and the cloud the firm is now under, although one said the range could be $200 million to $400 million.

Mr. Picard was named bankruptcy trustee at the request of the Securities Investor Protection Corporation, the federal agency that oversees the liquidation of failed brokerage firms. On Friday, he sent SIPC claims applications to every customer who had an open account at Madoff within 12 months of the bankruptcy filing, regardless of when the customer last made a deposit or withdrawal.

Even an investor who closed a Madoff account during the last year should be on the mailing list, he said.

People who believe they had a Madoff account but who do not get a claims package can print out the documents from the trustee’s Web site, madofftrustee.com, or from the SIPC site, sipc.org.

    Madoff Trustee Seeks Wide Power to Subpoena, NYT, 3.1.2009, http://www.nytimes.com/2009/01/03/business/03madoff.html?hp

Some Forecasters

See a Fast Economic Recovery

January 3, 2009
The New York Times
By LOUIS UCHITELLE

Economics as the dismal science? Not in some quarters.

In the midst of the deepest recession in the experience of most Americans, many professional forecasters are optimistically heading into the new year declaring that the worst may soon be over.

For this rosy picture to play out, they are counting on the Obama administration and Congress to come through with a substantial stimulus package, at least $675 billion over two years.

They say that will get the economy moving again in the face of persistently weak spending by consumers and businesses, not to mention banks that are reluctant to extend credit.

If the dominoes fall the right way, the economy should bottom out and start growing again in small steps by July, according to the December survey of 50 professional forecasters by Blue Chip Economic Indicators. Investors seemed to be in a similarly optimistic mood on Friday, bidding up stocks by about 3 percent.

But in the absence of that government stimulus, the grim economic headlines of 2008 will probably continue for some time, these forecasters acknowledge.

“Without this federal largess, the consensus forecast for 2009 is for the recession to continue through most of the year,” said Randell E. Moore, executive editor of Blue Chip Economic Indicators, which conducts the monthly survey of forecasters.

Many economists are more pessimistic, of course. Nouriel Roubini at New York University, who called the 2008 market disaster correctly, wrote in a recent commentary on Bloomberg News that he foresees “a deep and protracted contraction lasting at least through the end of 2009.”

Even in 2010, he added, the recovery may be so weak “that it will feel terrible even if the recession is technically over.”

But Mr. Roubini is not among the economists surveyed by Blue Chip Economic Indicators. These professional forecasters are typically employed by investment banks, trade associations and big corporations.

They base their forecasts on computer models that tend to see the American economy as basically sound, even in the worst of times. That makes these forecasters generally a more optimistic lot than the likes of Mr. Roubini.

Their credibility suffered for it last year. They did not see a recession until late summer. One reason they were blindsided: their computer models do not easily account for emotional factors like the shock from the credit crisis and falling housing prices that have so hindered borrowing and spending.

Those models also take as a given that the natural state of a market economy like America’s is a high level of economic activity, and that it will rebound almost reflexively to that high level from a recession.

But that assumes that banks and other lenders are not holding back on loans, as they are today, depriving the nation of the credit necessary for a vigorous economy.

“Most of our models are structured in a way that the economy is self-righting,” said Nigel Gault, chief domestic economist for IHS Global Insight, a consulting and forecasting firm in Lexington, Mass.

Even if the economy begins to right itself by this summer, the recession would still be the longest since the 1930s, which was the last time the government engaged in widespread public spending to overcome the persistent inertia in consumer and business spending.

“The consensus says we are in the deepest part of the recession now,” Mr. Moore said. “But the stimulus package and much lower gasoline prices are expected to somewhat restore consumer confidence and personal spending and that will put us on the road back.”

There is a psychological factor that Robert Shiller, a Yale economist, hopes will come into play.

“If we have massive infrastructure spending and people feel that it is working, it could create a sense that we are O.K. and people will go back to normal,” he said. “The real problem is that we are on hold. Everyone is.”

The expectation of most forecasters, several report, is that most of the Obama administration’s stimulus will go for public works projects and tax cuts.

With this sort of stimulus, the gross domestic product, the chief measure of the nation’s output, should begin to rise — if not in the third quarter, then certainly in the fourth, the forecasters say, and the unemployment rate will finally peak at 8 to 9 percent by early next year.

“The job insecurity is very serious; that is the worst aspect of all this,” said Albert Wojnilower, a consulting forecaster at Craig Drill Capital. “But most upturns in the economy have begun with upturns in consumption, when people who still have jobs stop worrying about losing them.”

Like other forecasters, Mr. Wojnilower expects the just-ended fourth quarter to be the recession’s worst, with the G.D.P. having contracted at a 4 or 5 or even 6 percent annual rate. Also like the others, he expects the economy to be growing again by the end of the year, although at an annual rate of 1 percent or less, which feels like a recession and is not enough to generate new jobs.

But the economy will no longer be contracting, and the recession that started in December 2007 will end at 18 or 21 months of age. The previous record holders, severe recessions in the mid-1970s and early 1980s, each lasted 16 months.

“I think that consumers are certainly in a state of shock right now, but their behavior is fundamentally rational,” said Martin Regalia, chief economist at the United States Chamber of Commerce. “They want to work, they want to make money and they want to spend that money. Above all they are resilient. They lick their wounds and with some help from government, they start back again and we come out of this quickly.”

A key to the revival, in every forecast, is home construction and home prices. The latter are still falling, at an even faster pace, adjusted for inflation, than in the Great Depression, according to the S.& P./Case-Shiller Home Price Indices.

That has the knock-on effect of multiplying foreclosures and trapping millions of people in homes that are worth less than their outstanding mortgages. Such circumstances inevitably depress spending and business investment.

But housing will probably bottom out by spring, many forecasters now argue. The Federal Reserve will play a role in making this happen by buying mortgage-backed securities and, in doing so, lowering the rate on 30-year mortgages to less than 5 percent, which is roughly the present level. That will encourage not only home buying, but also refinancing.

“In the midst of recession, with very sour moods, housing activity begins to improve because we get a big decline in mortgage rates,” said Robert Barbera, chief economist for ITT Investment Technology Group.

Then, too, the basic demographic demand for new homes, the forecasters say, is 1.7 million units a year. That many are not being built today, but with inventories shrinking and prices stabilizing, home construction will revive, many forecasters argue, contributing once again to economic growth.

“It is not fun to be a portent of doom,” Mr. Barbera said. “And even now in these doomlike times, we in the forecasting profession say it won’t last.”

    Some Forecasters See a Fast Economic Recovery, NYT, 3.1.2009, http://www.nytimes.com/2009/01/03/business/economy/03econ.html?hp

A Nevada Town Escapes the Slump,

Thanks to Gold

January 2, 2009
The New York Times
By STEVE FRIESS

BATTLE MOUNTAIN, Nev. — Hundreds of revelers crammed into this small town’s community center on a recent Saturday night to celebrate the marriage of Bianca Hernandez and Jose Lomeli.

Throngs danced to Spanish folk music well into the wee hours. Beer, wine and laughter were abundant, and several tables were piled high with gifts. “It’s not just the wedding,” said a friend of the newlyweds, Jesse Dias, 34. “Times are good around here. People are happy.”

Good times? Happy people? Hasn’t word of the national economic anxiety and resultant austerity made it to this remote high-desert capital of Lander County, 215 miles east of Reno?

Yes, it has, but the economic meltdown in much of the country has been a boon to the county and its 5,000 residents, 4,000 of whom live in the Battle Mountain area.

The reason: They mine gold in Lander County, a mineral-rich area that is a major reason Nevada, nicknamed the Silver State, is also the world’s fourth biggest producer of gold.

And when the broader economy declines and the value of the dollar fluctuates, people buy gold. At current prices — gold hit $892 an ounce on Monday, its highest price in three months and not that far off its record high of more than $1,000 an ounce in March — places like Battle Mountain hum with good-paying jobs and rising home values, making the financial woes of the rest of the country a distant concern.

“I don’t know of anybody who is getting foreclosed on; it’s just not something that’s an issue out here,” Charlotte Thompson, 56, said, shrugging as she seated diners on a frigid, wind-swept evening at the Owl Club Casino and Restaurant, the main attraction of Battle Mountain’s four-block main thoroughfare, Front Street. “That’s the way it usually goes, though. We’re always opposite of the rest of the country.”

To grasp how anomalous Battle Mountain is now, consider the data. Home foreclosures, as Ms. Thompson noted, are unheard of here, even though November was the 23rd consecutive month that Nevada had the nation’s highest foreclosure rate.

Unemployment in Lander County was 4.8 percent in November, while the statewide rate of 8 percent was the state’s highest since 1984. Two goldless counties bordering Lander, Nye and Pershing, had unemployment rates in November of 10.5 percent and 8 percent, respectively.

Even with annual salaries for average mining jobs starting at more than $60,000, the two largest mining companies in the area, Barrick and Newmont, cannot find enough qualified workers to fully staff their operations round-the-clock. Mr. Dias, the friend of the newlyweds, is working six days a week.

Robert Perry, a shift supervisor at Barrick’s Pipeline Mine, a 12-year-old facility near Battle Mountain that yields about a million ounces of gold a year and is expected to continue to produce until 2014, said the mine was always interviewing and hiring people.

“Our housing market, I would say, is better than most, just because there are jobs around here,” Mr. Perry said. “My house I bought five years ago for $134,000, and right now it’s worth about $300,000.”

The gold-mining business is doing so well that industry lobbyists did not complain when the Nevada Legislature passed a measure in early December requiring mining companies to pay $28 million in 2009 taxes early to help the state patch a $340-million shortfall in revenue.

And Barrick is set to spend nearly $500 million to open a new mine near Pipeline, provided it wins a legal challenge by the Western Shoshone Indians, who assert that the mine would disturb the tribe’s most sacred religious site.

“In tough times, people need a backup for their money, and that backup is gold,” said Omar Jabara, a spokesman for the Newmont Mining Corporation, which operates eight Nevada mines that yielded 2.3 million ounces of gold in 2007.

Battle Mountain residents are clearly enjoying the upswing, just as they clearly suffered through the high-tech boom of the late 1990s that brought prosperity to much of the rest of the nation. During that time, gold fell to about $215 an ounce, the local economy was moribund and several mines laid off workers. The Owl closed for four years, during which Ms. Thompson worked as a truck driver.

“We went 11 years without a new business really opening up here, but now we’re getting a new furniture store, and there are some new commercial businesses opening that are mining-related,” said Sarah Burkhart, director of the Battle Mountain Chamber of Commerce. “We’re getting a Family Dollar, and that’s kind of a biggie for us because it’s like a mini-Wal-Mart.” (The nearest Wal-Mart is about 50 miles away in Winnemucca.)

These signs of prosperity are especially gratifying to residents who took umbrage at a 7,000-word cover article in The Washington Post Magazine in December 2001 in which the writer, Gene Weingarten, went searching for the “armpit of America,” and found it in Battle Mountain. Some town boosters, like Ms. Burkhart, used the national notoriety to organize three annual Armpit Festivals, sponsored by the deodorant-maker Old Spice, but others were insulted by the article and glad when the festivals were abandoned.

“I think we ought to have a little more pride than that,” said Kimberlie Davis, owner of Sage Homes, a company here that builds about 25 homes a year in Lander and neighboring counties. “If that’s all we have to market, then don’t market it.”

There is so little to see in Battle Mountain that the state’s promotional map, Nevada Wide Open, designed to generate interest in tourism in the sparser, less-known regions of the state, does not highlight it. The town has no traffic lights. Besides two small casinos and one legal brothel that caters almost exclusively to truckers who crisscross the nation on Interstate 80, there is a pizza place, a coffee shop, a McDonald’s and a Super 8 motel.

“Oh, we’ll drive 75 miles to go get Chinese food,” said Ms. Davis, 39, who moved here from Portland, Ore., in 1989 after visiting a childhood friend who had come here to be with her miner boyfriend. “If you’re going to the movies, that’s 55 miles. It’s an event. You make a big deal out of it. You give up conveniences of the big urban areas for a great deal of safety and comfort and a really nice place to raise your families.”

The town’s isolation and its dominant, blue-collar industry propel many of its disaffected young people to pursue college degrees.

“It’s too small — there’s not enough opportunity as there is in a big city,” said Ed Figueroa, 20, home for a holiday visit from the University of Nevada at Reno, where he is studying international business administration. “There’s nothing to do here. All our parents work at mines. I like to come back and see friends, but the town itself is ... whatever, you know?”

Both Ms. Davis and Ms. Burkhart shrugged off such statements, citing numerous examples of Battle Mountain natives who do return, as Ms. Davis noted, “after they swear they never will.”

Most everyone here is concerned that a national economic recovery could drive gold prices down again. A Barrick spokesman, Louis A. Schack, agreed that it was a danger, but he noted that in the decade since the last major slump, gold had become a staple as an electrical conductor in things like cellphones and most high-tech wiring, boosting its value considerably.

Yet Mr. Schack acknowledged that commodity markets were unpredictable, so Ms. Davis and the rest of Battle Mountain know that slow times could return and are determined to enjoy their good fortune while it lasts.

“It’s a very unique economy that exists out here,” Ms. Davis said. “I don’t want the national economy to be awful by any stretch. I like a happy medium. There is a point when everything’s even, when it’s good here and good everywhere else, too, but it’s very short lived.

“More than likely, gold’s going to devalue and the cycle will start all over again.”

    A Nevada Town Escapes the Slump, Thanks to Gold, NYT, 2.1.2009, http://www.nytimes.com/2009/01/02/us/02nevada.html

Steel Industry, in Slump,

Looks to U.S. Stimulus

January 2, 2009
The New York Times
By LOUIS UCHITELLE

The steel industry, having entered the recession in the best of health, is emerging as a leading indicator of what lies ahead. As steel production goes — and it is now in collapse — so will go the national economy.

That maxim once applied to Detroit’s Big Three car companies, when they dominated American manufacturing. Now they are losing ground in good times and bad, and steel has replaced autos as the industry to watch for an early sign that a severe recession is beginning to lift.

The industry itself is turning to government for orders that, until the September collapse, had come from manufacturers and builders. Its executives are waiting anxiously for details of President-elect Barack Obama’s stimulus plan, and adding their voices to pleas for a huge public investment program — up to $1 trillion over two years — intended to lift demand for steel to build highways, bridges, electric power grids, schools, hospitals, water treatment plants and rapid transit.

“What we are asking,” said Daniel R. DiMicco, chairman and chief executive of the Nucor Corporation, a giant steel maker, “is that our government deal with the worst economic slowdown in our lifetime through a recovery program that has in every provision a ‘buy America’ clause.”

Economists in the Obama camp said the president-elect’s proposals to Congress will include significant infrastructure spending that draws on heavy industry.

New spending should provide an immediate jolt to the steel business, which has already gone through the painful makeover now demanded of automakers. Steel mills were closed, companies were consolidated, hundreds of thousands lost their jobs and the survivors agreed to concessions. As a result, productivity shot up and so did profits, to record levels in the first nine months of this year. Even as the economy wobbled, steel held its own.

But then the recession hit in force. Steel goes into nearly everything made in America, from homes and office buildings to cars, appliances and light bulb sockets, and as construction and manufacturing wound down, so did the output of steel, plunging 50 percent since September.

The steel industry’s collapse closely tracks the alarming late-autumn swoon in the national economy, as the housing bust and the credit crisis converted a mild downturn into “a severe one that has much further to run,” says Nigel Gault, chief domestic economist at IHS Global Insight, offering a view increasingly shared by forecasters.

Through August, steel production was actually up slightly for the year. The decline came slowly at first, and then with a rush in November and December. By late December, output was down to 1.02 million tons a week from 2.1 million tons on Aug. 30, the American Iron and Steel Institute reported. The price of a ton of steel is also down by half since late summer.

“We are making our steel at four mills instead of six,” said John Armstrong, a spokesman for the United States Steel Corporation, adding that two mills were recently idled and the four still operating are running at less than full capacity.

“The third quarter was one of the best in U.S. Steel’s history,” Mr. Armstrong added. “And it has been a very precipitous drop from there.”

The cutback has been particularly hard on workers at the big integrated mills like those at U.S. Steel and Arcelor Mittal USA, with their blast furnaces and coke ovens converting iron ore and other materials into steel. Operated at less than full capacity, these mills are less efficient than the equally large “minimills,” like Nucor, whose electric arc furnaces can be operated efficiently at lower speeds.

So the plant closings have been mostly at the integrated mills, whose 50,000 workers — roughly 40 percent of the nation’s steelworkers — are represented by the United Steelworkers. The union says that early this year it expects 20,000 workers to be on furlough.

Ten thousand already have been. Kathleen Loepker, a millwright and mechanic, is among the most recent to join their ranks. She was laid off on Dec. 19 from the U.S. Steel plant in Granite City, Ill., which shut, putting more than 2,000 employees out of work. With nearly 30 years seniority, Ms. Loepker, 48, has worked through bankruptcies, union concessions and consolidations during which her mill was acquired by U.S. Steel in 2003.

Her income today is tied more to incentive bonuses than in the past. On layoff, she is collecting $20 an hour, which is 80 percent of her base pay of $25.12 an hour. That base pay, rather than rising significantly, is fattened by incentive bonuses tied to amounts of steel produced and to profits. It had been averaging an additional $7 an hour — money now gone until the mill reopens.

“No one knows when that will happen,” said Ms. Loepker, who lives by herself in a four-bedroom home she bought in nearby Belleville, three blocks from a married sister. “The company tells us the end of March, but they don’t know either,” Ms. Loepker said. “The uncertainty has everyone fearful.”

Not since the 1980s has American steel production been as low as it is today. Those were the Rust Belt years when many steel companies were failing and imports of better quality, lower cost steel were rising.

Foreign producers no longer have an advantage over the refurbished American companies. Indeed, imports, which represent about 30 percent of all steel sales in the United States, also are hurting as customers disappear.

The industry, in response, is lobbying the Obama transition team for infrastructure projects that would require big amounts of steel. Mass transit systems are high on the list, and so is bridge repair.

“We are sharing with the president-elect’s transition team our thoughts in terms of the industry’s policy priorities,” said Nancy Gravatt, a spokeswoman for the American Iron and Steel Institute.

The Obama team has not yet revealed details of the president-elect’s soon-to-be-announced recovery plan other than to indicate that most of the package will probably go into infrastructure spending rather than tax breaks.

“If the president-elect really follows through, he’ll fund a lot of mass transit projects,” said Wilbur L. Ross Jr., the Wall Street deal maker who put together the steel conglomerate known as Arcelor Mittal USA. “All the big cities have these projects ready to go.”

The sharp slide in steel production has several causes. Construction and auto production have fallen sharply; between them, they account for 57 percent of the steel bought each year in the United States, according to the Iron and Steel Institute. Appliances, machinery and other electrical equipment account for an additional 13 percent, and the fall-off in production of these goods has also reduced steel orders.

Then there are the wholesalers, known in the steel industry as service centers. They buy in huge quantities from the mills, building up inventories and selling to customers like a construction company that needs I-beams to build a shopping center, or a manufacturer of auto parts in need of steel tubing.

Until recently, the inventories were bought on credit, and the service centers constantly replenished these stockpiles as steel was sold to end users. But now the service centers, unable to borrow money easily and reluctant to borrow anyway in these hard times, have stopped buying from the steel mills. They are selling off their inventories instead, raising cash in the process. It is a tactic that annoys Mr. DiMicco, the Nucor chief, no end.

“They don’t want to be without cash when they go into whatever the black hole is that is being created by the financial crisis,” he said, and faulted the nation’s lenders for collecting billions in government bailout money and then, in his view, refusing to lend it to the service centers on reasonable terms. “Credit completely dried up,” Mr. DiMicco said, “and it is still hard to get.”

    Steel Industry, in Slump, Looks to U.S. Stimulus, NYT, 2.1.2009, http://www.nytimes.com/2009/01/02/business/02steel.html?hp

Editorial

In the Cold

January 1, 2009
The New York Times

This winter day begins a new year of the mortgage crisis. Nothing is certain about the miseries ahead except that they are growing. It is, for example, a freezing morning on Long Island — a national symbol of the single-family suburb. Its two counties, Nassau and Suffolk, boast well-run governments, an educated work force and a long history of stability and affluence. Comfort and consumption are the twin strands of their DNA. But the struggle there is acute.

In Nassau County, New York State’s richest one, the foreclosure whirlwind hit hard. Shelters are filling up and food pantries are emptying. More than 500 people sought emergency housing from the county in a recent December week. Most were families with children.

Connie Lassandro, Nassau’s director of housing and homeless services, said the need had risen 30 percent to 40 percent over 2007, as the face of poverty changed. More overburdened homeowners and the elderly are coming forward now — often bewildered and ashamed.

Private outreach organizations, too, are buried under an avalanche of need. Alric Kennedy, director of community resources for the Long Island Council of Churches, said the council used to be able to help some clients with a month’s rent or mortgage but the money ran out last October. It referred people to other agencies until those funds dried up, too. More people than ever are coming to its emergency food centers — 40 to 60 on a typical day in Freeport, in Nassau; 100 or more seek help in Riverhead, in eastern Suffolk. They are desperate for food, diapers, cooking oil and baby formula.

These are not the chronic homeless. “Our donors are now our clients,” Mr. Kennedy said. “People who gave us food are now asking us to help them.”

As people lose not only homes but also jobs, pain is cascading to the bottom rungs of the economy. The Workplace Project, a longstanding defender of immigrant workers’ rights in Hempstead, has seen an alarming rise in reports of unpaid wages, said Nadia Marin-Molina, its executive director. Contractors are cutting costs by missing payrolls and are counting on an undocumented work force not to complain.

Domestic workers are seeing wages cut in half, Ms. Marin-Molina said, as their bosses tell them to come back to clean house every other week.

When the undocumented lose their jobs and homes, there is no government agency they can turn to. Some of that need is being met by charitable organizations. The Huntington Interfaith Homeless Initiative is a network of church volunteers who give homeless men, mostly Latino immigrants, an alternative to sleeping — and freezing — in the woods. In cold months, they take them into church halls and basements, offering meals, winter coats and hot showers. They do this into the spring. But this economic chill won’t be gone by then.

Nassau County’s comptroller announced this week that sales taxes — a mainstay of county revenue — could fall for the first time in nearly 20 years, which would blow a $24 million hole in the 2008 budget. Other local governments and nonprofits are looking to the federal government for help and for billions that might refill empty coffers and loosen tightened belts. But there are no assurances that the aid will be enough — only uncertainty in a place that has been shaken to the core.

“I’ve been doing this for over 30 years, and I’ve never seen it like this,” Ms. Lassandro of Nassau County said. “Nobody’s exempt from it.”

Ms. Marin-Molina was astounded by the turnout for The Workplace Project’s annual Christmas party. “An incredible number of people came,” she said. “At least a hundred.” Most were men who needed help and were grateful to go home after a hot meal with donated sweatshirts, hats and gloves.

    In the Cold, NYT, 1.1.2009, http://www.nytimes.com/2009/01/01/opinion/01thu1.html

Markets Limp Into 2009

After a Bruising Year

January 1, 2009
The New York Times
By VIKAS BAJAJ

There was almost no place to hide from the crash of 2008.

When the New York Stock Exchange bell rang out the year on Wednesday, it tolled for virtually anyone with money in the stock market.

The final, grim tally only confirmed what investors had known for months: it was a very bad year to own stocks, any stocks — indeed, one of the worst ever.

In a mere 12 months, the Dow Jones industrial average plunged 4,488.43 points, or 33.8 percent, its most punishing loss since 1931. Blue chips like Bank of America, Citigroup and Alcoa lost more than 65 percent of their value. The broader Standard & Poor’s 500-stock index sank 39.5 percent, almost exactly matching its decline in 1937.

All told, about $7 trillion of shareholders’ wealth — the gains of the last six years — was wiped out in a year of violent market swings.

But what is striking is not just the magnitude of the declines, staggering as they are, but also their breadth. All but two of the 30 Dow industrials, Wal-Mart and McDonald’s, fell by more than 10 percent. Almost no industry was spared as the crisis that first emerged in the subprime mortgage market metastasized and the economy sank into what could be a long recession.

As the new year dawns, Wall Street is looking to Washington, where the balance of financial power has tipped in recent months. Analysts and investors are focusing on what the incoming Obama administration and the Federal Reserve will do to revive the economy and the financial system.

It is a remarkable turnabout from the mid-1990s, when Wall Street traders helped drive economic policy. Back then, bond investors flexed their financial muscle and urged the Clinton administration and a Republican Congress to reduce the federal budget deficit.

These days, the market in ultra-safe United States Treasury securities seems like a refuge, even as the deficit balloons from the cost of bailing out banks, insurers and the Detroit auto companies. Many investors, having lost stocks and other investments, are buying up Treasuries that offer little or no return. They are content simply to get their money back.

“The only willing risk taker is the government,” said William H. Gross, the chief investment officer of the Pacific Investment Management Company, or Pimco, the giant bond trading firm. Speaking of the epicenter of the financial world, he added: “It is no longer New York, it’s Washington.”

Like many money managers, Mr. Gross is a conservative — he describes himself as a “Reagan fan from way back” — who generally prefers limited government involvement in the markets. But he and others say that the government’s sweeping intervention into private industry and in the markets, though sometimes flawed, is necessary to prevent a collapse of the financial system. They are hoping that policy makers do even more to stimulate the economy and revive moribund financial markets.

Given the damage in the markets, however, policy makers face daunting challenges.

“When we have bear markets, they usually take twice as long to get down this far,” said Robert C. Doll, vice chairman of BlackRock, the big investment firm.

The markets have become incredibly volatile, especially since Lehman Brothers sank into bankruptcy in September. Since then, the S.& P. has moved more than 5 percent in either direction on 18 days. There were only 17 such days in the previous 53 years, according to calculations by Howard Silverblatt, an index analyst at S.& P.

Diversification — the idea that it is unwise to put all your eggs in one basket — did not pay off for investors in 2008, casting doubt over this cornerstone of modern investing. The American market was far from the worst hit in 2008. Stocks fell 55 to 72 percent in the so-called BRIC economies — Brazil, Russia, India and China — that were darlings of the late, great boom. Stocks in developed European and Asian markets also fell sharply, though less than their emerging counterparts. Many commodities like oil and copper crashed.

Losses in the credit markets, which are at the heart of this financial crisis, appear small relative to the devastation in other markets. The International Monetary Fund estimated in October that banks and other investors would suffer $1.4 trillion in losses on loans and securities, a loss of just 6 percent. Financial institutions globally have already reported $1 trillion in write-downs, according to Bloomberg.

The I.M.F.’s estimate, however, does not count losses on derivatives, those complex instruments that derive their value from other assets. Losses on these instruments could outstrip those in the so-called cash markets because they are much bigger than their underlying assets.

A spokeswoman for the I.M.F. said the fund’s estimates did not include those losses because they were transfers of wealth from one party of a transaction to another. For example, when the insurer American International Group loses $1 billion on a credit-default swap, a type of derivative, it makes payments to customers like investment banks.

These complex financial instruments will pose one of the biggest challenges to policy makers in the year ahead. Many investors have lost confidence in banks, insurers and other financial intermediaries, in part because they do not know whether these companies are valuing opaque instruments properly. Some firms may be carrying enough toxic sludge to sink them, while others may be relatively unscathed.

“Until those assets can be removed from the balance sheets of the bank, or until the owners get a better understanding of what these assets are worth, we will have uncertainty,” said Douglas M. Peta, an independent market analyst.

A broader focus for policy makers will be reviving the economy. Most financial and political analysts expect the Obama administration to enact a stimulus package that could approach $1 trillion. The effort will aim to create three million jobs by spending money on infrastructure, green energy technology, aid to states and other initiatives.

Many analysts say such an effort will help revive the economy, but not immediately. Infrastructure spending, for instance, can have a powerful impact by stimulating demand and creating jobs but, like much else in the economy, it often takes years to work.

Some are looking to efforts by the Treasury and Fed to jump-start lending by lowering mortgage rates and improving the market for bonds backed by small-business, auto and credit card loans. A recent drop in mortgage rates has already set off a refinance boom, but analysts say home prices in many parts of the country are still too high for many would-be buyers. Furthermore, employment and household savings will most likely have to climb for some time before consumers have enough confidence to buy homes and enough money for down payments.

“Across the board, they can potentially prevent a further slide, and they deserve a lot of credit if they achieve that,” Martin S. Fridson, chief executive of Fridson Investment Advisors, a bond trading firm, said about policy makers. “I just don’t think that they can push a button and have the economy and the stock market turn around.”

Thomas J. Lee, the chief equity strategist at JPMorgan Chase, said a recovery early in the year could give way to another sell-off before the stock market finally bottoms later in the year. Mr. Lee said his forecast reflected “how unconventional the current recession is.” Unlike in the past, policy makers cannot rely on consumers to push the economy ahead by borrowing and spending, he said.

“This is a recession where households are net debtors,” he said. “They have lost money on houses and equities. That has rarely happened, at least since the 1950s.”

Mr. Doll of BlackRock agreed that consumers would not “run back and power the economy ahead.” But he nonetheless contends that several important markets, including stocks, may be close to their bottom. The Fed, he argued, has taken on a more activist role in the markets and the new administration is likely to push through a huge stimulus.

Such sentiments have probably helped drive the S.& P. 500 index up by 20 percent since Nov. 20 and investment-grade corporate bonds up by nearly 10 percent since October.

“Perhaps we have seen a bottom,” Mr. Doll said. But he added that like the economy, “the stock market recovery will be more muted as well.”

    Markets Limp Into 2009 After a Bruising Year, NYT, 1.1.2009, http://www.nytimes.com/2009/01/01/business/economy/01markets.html?hp

The Debt Trap

Unspoken Link

Between Credit Cards and Colleges

January 1, 2009
The New York Times
By JONATHAN D. GLATER

EAST LANSING, Mich. — When Ryan T. Muneio was tailgating with his parents at a Michigan State football game this fall, he noticed a big tent emblazoned with a Bank of America logo. Inside, bank representatives were offering free T-shirts and other merchandise to those who applied for credit cards and other banking products.

“They did a good job,” Mr. Muneio, 21 and a junior at Michigan State, said of the tactic. “It was good advertising.”

Bank of America’s relationship with the university extends well beyond marketing at sports events. The bank has an $8.4 million, seven-year contract with Michigan State giving it access to students’ names and addresses and use of the university’s logo. The more students who take the banks’ credit cards, the more money the university gets. Under certain circumstances, Michigan State even stands to receive more money if students carry a balance on these cards.

Hundreds of colleges have contracts with lenders. But at a time of rising concern about student debt — and overall consumer debt — the arrangements have sounded alarm bells, and some student groups are starting to push back.

The relationships are reminiscent of those uncovered two years ago between student loan companies and universities. In those, some lenders offered universities an incentive to steer potential borrowers their way.

Here at Michigan State, the editors of the student newspaper wrote this fall that “it doesn’t take a giant leap for someone to ask why the university should encourage responsible spending when it receives a cut of every purchase.”

At Arizona State University, students set up a table on campus last spring to warn of the danger of debt and urge students to support limits on on-campus marketing.

The contracts, whose terms vary but usually involve payments to colleges or alumni associations that agree to provide lists of students’ names, have come under harsh criticism in Washington.

“That is absolutely outrageous, the sharing of students’ information with the banks,” Representative Carolyn B. Maloney, Democrat of New York, who oversaw a June hearing on campus credit card marketing, said in a recent interview. “That should be outlawed.”

College campuses are one place that young Americans are introduced to credit and the possibility of spending beyond their means, a problem now confronting the nation as a whole. For banks, the relationships are a golden marketing opportunity. For colleges, they are a revenue source at a time of declining public funding. And for students, they help pay the bills and allow more shopping.

But debt incurred in college becomes a serious burden at graduation, especially in a recession in which jobs are scarce. A survey of more than 1,500 college students by US PIRG in Washington found that two-thirds had at least one credit card. Seniors with balances had an average debt of $2,623 on their cards.

University officials say that their agreements with card issuers comply with the law and bring in valuable revenue.

“It provides money for scholarships and other programs,” said Terry R. Livermore, manager of licensing programs at Michigan State. He said that the program was aimed primarily at alumni and the university would not include sharing student information in future credit card contracts. “The students are such a minuscule portion of this program.”

Jennifer Holsman, executive director of the alumni association at Arizona State, said the association tried to teach students about responsible uses of credit. “We work closely with Bank of America to provide educational seminars to students in terms of being able to get information about how to pay off credit cards, how not to keep balances,” she said.

Credit card issuers say that they try to educate students to use cards responsibly and that the cards they offer on campus have more restrictive terms than cards offered to alumni.

“The available credit for undergraduates is capped at $2,500,” said Betty Riess, a spokeswoman for Bank of America. “We want to take a fair and responsible approach to lending because we want to build the foundation for a longer-term banking relationship.”

Ms. Riess said the bank had agreements with about 700 colleges and alumni associations, making it one of the biggest, if not the biggest, card issuer on campuses. She said that only 2 percent of the open accounts under those agreements belonged to students, but also said it was not possible to determine what percentage of program revenue resulted from fees and charges on those student cards.

Stephanie Jacobson, a spokeswoman for JPMorgan Chase, wrote in an e-mail message that the bank had fewer than 25 contracts with colleges or alumni associations and that while some of the contracts gave it the right to ask for and use lists of student names and addresses, the bank had not done so since 2007.

That may be because football games present a marketing opportunity that requires no address information. Abigail D. Molina, a second-year law student at the University of Oregon, applied in 2007 for a Chase Visa offered at a tent outside a football game. In exchange, she received a blanket.

“I mostly wanted the blanket,” Ms. Molina said. She added that this was her second university credit card. In 1994, when she was an undergraduate at the university, she applied for a card at a booth on campus and then accumulated about $30,000 in debt, almost all of it on the card. In 2001 she filed for bankruptcy. Looking back, she said it was “shockingly easy” to get the card, even as a first-year student.

Mr. Muneio, the Michigan State student, said he did not apply for a Bank of America card because he already had two Visa cards. “The last thing I need is another account to keep track of.”

Many students are unaware of the contracts that universities have with credit card issuers and do not question the presence of marketers on campus or applications in their mailboxes, despite recent protests on a few campuses.

Sometimes, the contracts have confidentiality provisions. Universities may try to distance themselves, stating that the contracts are only between alumni associations and banks. But the universities provide alumni groups with lists of current students’ names, addresses and telephone numbers, which the groups pass on to banks.

The New York Times obtained information about and, in some cases, copies of contracts between lenders, public colleges and their alumni associations using open records requests. Because private colleges are not subject to open records laws, they are not included.

While most universities contacted for this article did not provide detailed financial information on the contracts — the University of Pittsburgh, for example, confirmed only that it had an agreement — two did share numbers.

The alumni association of the University of Michigan is guaranteed $25.5 million over the term of its 11-year agreement with Bank of America. Under the agreement, the association agreed to provide lists of names and addresses of students, alumni, faculty, staff, donors and holders of season tickets to athletic events.

Much of the money goes toward scholarships, said Jerry Sigler, vice president and chief financial officer of the alumni association. He was unsure what students were told about the program.

“Students are generally told how they can opt out of having their information publicly displayed in directories or provided in response to requests like this,” Mr. Sigler added. “But it’s not to my knowledge specific to the credit card program.”

Michigan State University gets $1.2 million a year but is guaranteed at least $8.4 million over seven years, according to its agreement. The contract calls for a $1 royalty to the university for every new card account that remains open for at least 90 days, $3 for every card whose holder pays an annual fee, and a payment of a half percent of the amount of all retail purchases using the cards.

For cards that do not have an annual fee, the bank pays $3 if the holder has a balance at the end of the 12th month after opening an account, a provision that appears to give the university an incentive to get cardholders into debt.

A few schools have adopted policies that prohibit sharing student contact information.

Ball State University’s alumni association, which has a contract with JPMorgan Chase, does not provide information on students, said Ed Shipley, executive director of the association. “Who we market to is our alumni because that’s our purpose,” he said. However, the bank is permitted to set up marketing tables at athletic events.

The University of Oregon, whose alumni association also has a marketing agreement with Chase, stopped providing student addresses as concern grew about student debt, according to Julie Brown, a university spokeswoman. The university still permits marketing booths at athletic events.

Some research suggests that students may be using credit cards less frequently, in favor of debit cards linked to their bank accounts. A survey last spring by Student Monitor, a Ridgewood, N.J., company that tracks trends on campus, found that 59 percent of undergraduate students had debit cards, up from 51 percent in 2000.

But universities have arrangements with banks that offer debit cards too, perhaps raising some of the same issues that the credit card deals do.

At New Mexico State University, for example, students are given the option of opening a bank account with Wells Fargo if they want to convert their campus identification into a debit card.

The accounts are not mandatory, said Angela Throneberry, assistant vice president for auxiliary services at the university. But, she said, “There’s some revenue sharing that happens as part of this.”

    Unspoken Link Between Credit Cards and Colleges, NYT, 1.1.2009,
    http://www.nytimes.com/2009/01/01/business/01student.html