History > 2009 > USA > Economy (III)

Many series

have incorporated the recession into their plotlines,

including a recent episode of “The Simpsons.”

Fox

Times Are Tough on Wall Street and Wisteria Lane 

NYT

12.3.2009

http://www.nytimes.com/2009/03/12/arts/television/12plot.html

Consumer Spending Up

for Second Straight Month

March 27, 2009
Filed at 9:22 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- The government says consumers increased spending for a second straight month in February even though their incomes slipped due to continuing massive layoffs.

The Commerce Department reported Friday that consumer spending edged up 0.2 percent in February, in line with expectations. That follows a huge 1 percent jump in January that was even better than the 0.6 percent rise originally reported.

But the report says incomes fell by 0.2 percent in February, the fourth drop in the past five months, declines that reflected the sizable number of job layoffs that have been occurring because of the recession.

After-tax incomes also fell in February, edging down by 0.1 percent. With incomes down while spending rose, the personal savings rate dipped slightly to 4.2 percent in February, compared to 4.4 percent in January. Still, the latest two-month performance marked the first time that the savings rate has been above 4 percent in more than a decade.

Economists believe that the deep recession, already the longest in a quarter-century, will continue prompting consumers to do more to trim spending and boost their savings. However, that development could make it more difficult for the country to pull out of the recession since consumer spending accounts for about 70 percent of economic activity.

The back-to-back increases in consumer spending in January and February had followed six straight declines in spending that occurred from July through December. Consumer spending in the fourth quarter fell at an annual rate of 4.3 percent, the biggest decline in 28 years, and was the major factor pushing overall economic activity down by 6.3 percent during that period.

Many economists believe that the gross domestic product will drop by around that amount in the current January-March period and will continue falling in the spring although at a slower pace. Many analysts are not looking for the current recession, which began in December 2007, to end until the second half of this year.

A price gauge tied to consumer spending rose by 0.3 percent in February and was up 0.2 percent excluding food and energy, indicating that the recession has contributed to a significant moderate in inflation pressures.

Consumer Spending Up for Second Straight Month, NYT, 27.3.2009, http://www.nytimes.com/aponline/2009/03/27/washington/AP-Economy.html

A Downturn Wraps a City in Hesitance

March 27, 2009
The New York Times
By PETER S. GOODMAN

PORTLAND, Ore. — Over the last four decades, Powell’s Books has swelled into the largest bookstore in North America — a capacious monument to reading that occupies a full square block of this often-drizzly city. But this year, growth has given way to anxiety.

Michael Powell, the store’s owner, recently dropped plans for a $5 million expansion. An architect had already prepared the drawings. His bankers had signaled that financing was available. But the project no longer looked prudent, Mr. Powell concluded — not with sales down nearly 5 percent, stock markets extinguishing savings, home prices plunging and jobs disappearing.

“It’s going to take a period of time to recover,” Mr. Powell said. “Whether it’s 2 years or 10 years I don’t know, but I don’t think it’s going to be quick. People are nervous.”

Throughout the American economy, retrenchment is begetting retrenchment. Falling home prices, weak consumer spending, diminishing investment and a fresh reappraisal of risk are combining to bring more of each. Grim expectations about the future are becoming self-fulfilling prophesies, as nervous companies cancel investments and households defer purchases.

This vengeful dynamic was the main problem that policy makers failed to tame nearly 80 years ago, when a banking crisis swelled into the Great Depression. As the Obama administration confronts what some economists describe as perhaps the worst downturn since then, the same constellation of forces appears at play.

Even as stock markets have rallied in recent days on hopes that the latest government plan to rescue the banks can finally restore order to the financial system, this fundamental problem continues to constrict the economy. Credit remains tight for troubled households and businesses, while even those able to borrow often demur because they are afraid to invest and spend in the face of so much uncertainty.

The needed ingredients to change this psychology are unclear, and history underscores the difficulties. Economists suggest the same forces now pushing the economy into a downward spiral must be reversed; housing prices must level off, stock markets stabilize and consumers — now deferring purchases of items like cars and appliances — must start to replace older models.

Banks now confront accusations of clinging to their money, depriving the economy of growth, while the picture, as Mr. Powell attests, is more complicated. Even banks that are eager to lend find some of their best customers reluctant to extend themselves.

“The problem is trying to get qualified people to borrow,” said Raymond P. Davis, president and chief executive of Umpqua Bank, a regional lender based in Portland.

As goods pile up unsold, demand weakens and expectations of lean months ahead cause businesses to cut production, the downward spiral is prompting nervous comparisons with Japan’s so-called lost decade of the 1990s. Then, as now, a collapse in real estate prices left banks in tatters. Even as Japan’s central bank dropped interest rates to zero in a bid to spur growth, it had little effect because companies and households were too fearful to borrow. These days, the Fed’s target for interest rates is near zero, yet even healthy American companies are hunkered down. Even wealthy households are cutting back.

The $787 billion stimulus spending bill signed by President Obama last month is expected to generate fresh demand for goods and services. If the financial system plan is successful at removing the detritus of the real estate bust from bank balance sheets, this, too, could substantially alleviate the crisis. But the ultimate question is whether these measures can crystallize confidence in the future, so businesses and ordinary people resume transacting, generating fresh opportunities throughout the economy.

“You could fix all the problems in the financial system and we’d still spiral down because of the problem of expectations,” said Joe Cortright, an economist at a Portland-based consulting group, Impresa Inc.

Portland, a metropolitan area of 2.2 million people, affords an ideal window onto the spiral of fear and diminished expectations assailing the economy. The area has long attracted investment and talented minds with its curbs on urban sprawl, thriving culinary scene and life in proximity to the Pacific Coast and the snow-capped peaks of the Cascades. In good times, Portland tends to grow vigorously, elevated by companies like the computer chip maker Intel — which employs 15,000 people in the area — and the athletic clothing giant Nike.

But in recent months, Portland has devolved into a symbol of much that is wrong. Housing prices have fallen more than 14 percent since May 2007, according to the S.& P./Case-Shiller index. Foreclosures more than tripled last year, according to RealtyTrac. The unemployment rate for the metro area surged from 4.8 percent at the end of 2007 to 9.8 percent in January 2009, according to the Labor Department.

With a major deepwater port on the Columbia River, Portland has benefited from the growth of global trade, gaining jobs for stevedores, truckers and warehouse workers. But as the global recession tightens, Portland’s docks are a snapshot of diminishing fortunes.

On a recent day, parking lots at the port were full of 30,000 automobiles that had been shipped in from Japan and South Korea, yet sat unclaimed by dealerships as sales plummeted. Volumes of so-called bulk minerals — including potash, a fertilizer that arrives by rail from Canada and is then shipped to China — have fallen off by more than 12 percent over the past year. Docks once jammed with shipping containers showed gaps between the stacks, reflecting diminishing demand for Asian-made furniture and clothing.

“We’re going to have to recalibrate to a new normal, and it will be lower,” said Sam Ruda, the port’s director of marine and industrial development.

As trade slows, so does business for Greenbrier Companies, an Oregon-based manufacturer of rail cars. General Electric is seeking to renegotiate a huge order, an eight-year deal worth more than $1 billion.

Greenbrier relies upon a $100 million line of credit from Bank of America to buy raw materials and pay workers while it waits to collect from its customers. But with the potential loss of business from G.E., the company worries that the bank will view its credit line as a risk and demand significantly higher interest rates.

“If you had to go and renegotiate the terms of debt today, they’d rip your face off,” said William A. Furman, Greenbrier’s president and chief executive.

With that fear in mind, Mr. Furman has aggressively cut costs. Last month, Greenbrier laid off 150 workers at a local factory. It plans to lay off 150 more soon, spreading the wave of forced austerity.

“I’m not really spending anything because I don’t know what’s going to happen,” said Alrenzo Ferguson, who lost his job at the local Greenbrier plant last month.

Columbia Sportswear, a family-run business based in Portland that employs about 1,100 local people, seems immune to the credit crisis: It has zero long-term debt and $253 million in cash. But the company is losing sales as its customers sink into trouble. Columbia typically does not get paid for many months after it begins producing its orders, making it loath to sell to credit-risky companies.

“We’ve got customers we won’t sell to because their credit is now no good,” said the company’s president and chief executive, Timothy P. Boyle. “We’ve become more conservative.”

Columbia laid off more than 50 people in the area last year, contributing to a rollback of local spending power. Daria Colner took a voluntary layoff from a high-level marketing position at Columbia last May, gaining a severance package through the end of the year. She figured she would quickly find another job, but she remains without work.

Ms. Colner’s husband works at Oracle, the software giant. Together, they once enjoyed an annual household income exceeding $250,000, making it easy to pay the $3,000 monthly mortgage on their Arts and Crafts house with mahogany beams and stone fireplaces. They grew accustomed to far-flung vacations — to New York, Alaska, Hawaii and Europe.

They plan no vacation this year. When Ms. Colner’s BMW recently came due for its 90,000-mile service check, she deferred the work. When their front awning rotted away, they decided not to replace it, merely painting over the gap.

“It’s not like people have any confidence that we’re on the cusp of turning around,” Ms. Colner said.

That gnawing sense of not knowing the future is increasingly coloring the present.

“People are wondering, ‘Well, should I spend money on my house right now?’ ” said Debbie Kitchin, co-owner of InterWorks, a Portland-based general contractor. Her business has fallen by nearly half over the last year, prompting her to trim her work force to 7 from 11. She has put off the purchase of a new, $15,000 computer system.

With jobs, credit and confidence all tenuous, the problem is reverberating back to the initial source of trouble: real estate. Even in older, historic neighborhoods, sales are stalled.

“We’re off in terms of number of sales about 40 percent,” said Shannon Spence, principal broker at Remax Equity Group in Portland. “Job fears are keeping people from buying.”

Community Financial Corporation, a Portland-area mortgage lender owned by Banner Bank of Walla Walla, Wash., recently began offering 30-year, fixed-rate mortgages for less than 4 percent on new houses for which it extended a construction loan, in a bid to overcome anxiety with easy money.

“The people that want the money don’t deserve it, and the people that deserve it don’t want it,” said John B. Satterberg, president of Community Financial Corporation. “Everybody’s sitting on the fence.”

The cheap loans have generated sales, he said. Yet one recent refinance application could not be closed, because the bank could not verify the value of the house: With no sales of similar properties in the area, there was nothing to compare.

    A Downturn Wraps a City in Hesitance, NYT, 27.3.2009, http://www.nytimes.com/2009/03/27/business/economy/27portland.html

Cities Deal With a Surge

in Shanty Towns

March 26, 2009
The New York Times
By JESSE McKINLEY

FRESNO, Calif. — As the operations manager of an outreach center for the homeless here, Paul Stack is used to seeing people down on their luck. What he had never seen before was people living in tents and lean-tos on the railroad lot across from the center.

“They just popped up about 18 months ago,” Mr. Stack said. “One day it was empty. The next day, there were people living there.”

Like a dozen or so other cities across the nation, Fresno is dealing with an unhappy déjà vu: the arrival of modern-day Hoovervilles, illegal encampments of homeless people that are reminiscent, on a far smaller scale, of Depression-era shantytowns. At his news conference on Tuesday night, President Obama was asked directly about the tent cities and responded by saying that it was “not acceptable for children and families to be without a roof over their heads in a country as wealthy as ours.”

While encampments and street living have always been a part of the landscape in big cities like Los Angeles and New York, these new tent cities have taken root — or grown from smaller enclaves of the homeless as more people lose jobs and housing — in such disparate places as Nashville, Olympia, Wash., and St. Petersburg, Fla.

In Seattle, homeless residents in the city’s 100-person encampment call it Nickelsville, an unflattering reference to the mayor, Greg Nickels. A tent city in Sacramento prompted Gov. Arnold Schwarzenegger to announce a plan Wednesday to shift the entire 125-person encampment to a nearby fairground. That came after a recent visit by “The Oprah Winfrey Show” set off such a news media stampede that some fed-up homeless people complained of overexposure and said they just wanted to be left alone.

The problem in Fresno is different in that it is both chronic and largely outside the national limelight. Homelessness here has long been fed by the ups and downs in seasonal and subsistence jobs in agriculture, but now the recession has cast a wider net and drawn in hundreds of the newly homeless — from hitchhikers to truck drivers to electricians.

“These are able-bodied folks that did day labor, at minimum wage or better, who were previously able to house themselves based on their income,” said Michael Stoops, the executive director of the National Coalition for the Homeless, an advocacy group based in Washington.

The surging number of homeless people in Fresno, a city of 500,000 people, has been a surprise. City officials say they have three major encampments near downtown and smaller settlements along two highways. All told, as many 2,000 people are homeless here, according to Gregory Barfield, the city’s homeless prevention and policy manager, who said that drug use, prostitution and violence were all too common in the encampments.

“That’s all part of that underground economy,” Mr. Barfield said. “It’s what happens when a person is trying to survive.”

He said the city planned to begin “triage” on the encampments in the next several weeks, to determine how many people needed services and permanent housing. “We’re treating it like any other disaster area,” Mr. Barfield said.

Mr. Barfield took over his newly created position in January, after the county and city adopted a 10-year plan to address homelessness. A class-action lawsuit brought on behalf of homeless people against the city and the California Department of Transportation led to a $2.35 million settlement in 2008, making money available to about 350 residents who had had their belongings discarded in sweeps by the city.

The growing encampments led the city to place portable toilets and security guards near one area known as New Jack City, named after a dark and drug-filled 1991 movie. But that just attracted more homeless people.

“It was just kind of an invitation to move in,” said Mr. Stack, the outreach center manager.

On a recent afternoon, nobody seemed thrilled to be living in New Jack City, a filthy collection of rain- and wind-battered tents in a garbage-strewn lot. Several weary-looking residents sat on decaying sofas as a pair of pit bulls chained to a fence howled.

Northwest of New Jack City sits a somewhat less grim encampment. It is sometimes called Taco Flats or Little Tijuana because of the large number of Latino residents, many of whom were drawn to Fresno on the promise of agricultural jobs, which have dried up in the face of the poor economy and a three-year drought.

Guillermo Flores, 32, said he had looked for work in the fields and in fast food, but had found nothing. For the last eight months, he has collected cans, recycling them for $5 to $10 a day, and lived in a hand-built, three-room shack, a home that he takes pride in, with a door, clean sheets on his bed and a bowl full of fresh apples in his propane-powered kitchen area.

“I just built it because I need it,” said Mr. Flores, as he cooked a dinner of chili peppers, eggs and onions over a fire. “The only problem I have is the spiders.”

Dozens of homeless men and women here have found more organized shelter at the Village of Hope, a collection of 8-by-10-foot storage sheds built by the nonprofit group Poverello House and overseen by Mr. Stack. Planted in a former junkyard behind a chain-link fence, each unit contains two cots, sleeping bags and a solar-powered light.

Doug Brown, a freelance electrical engineer, said he had discovered the Village of Hope while unemployed a few years back and had returned after losing his job in October. Mr. Stoops, of the homeless coalition, predicted that the population at such new Hoovervilles could grow as those without places to live slowly burned through their options and joined the ranks of the chronically homeless, many of whom are indigent as a result of illiteracy, alcoholism, mental illness and drug abuse.

That mix is already evident in a walk around Taco Flats, where Sean Langer, 42, who lost a trucking job in December and could pass for a soccer dad, lives in his car in front of a sturdy shanty that is home to Barbara Smith, 41, a crack addict with a wild cackle for a laugh.

“This is a one-bedroom house,” said Ms. Smith, proudly taking a visitor through her home built with scrap wood and scavenged two-by-fours. “We got a roof, and it does not leak.”

During the day, the camp can seem peaceful. American flags fly over some shanties, and neighbors greet one another. Some feed pets, while others build fires and chat.

Daniel Kent, a clean-shaven 27-year-old from Oregon, has been living in Taco Flats for three months after running out of money on a planned hitchhiking trip to Florida. He did manage to earn $35 a day holding up a going-out-of-business sign for Mervyn’s until the department store actually went of out business.

Mr. Kent planned to attend a job fair soon, but said he did not completely mind living outdoors.

“We got veterans out here; we got people with heart, proud to be who they are,” Mr. Kent said. “Regardless of living situations, it doesn’t change the heart. There’s some good people out here, really good people.”

But the danger after dark is real. Ms. Smith, who lost an eye after being shot in the face years ago, said she had seen two people killed in New Jack City, prompting her to move to Taco Flats and try to quit drugs. Her companion, Willie Mac, 53, a self-described youth minister, said he was “waiting on her to get herself right with the Lord.”

Ms. Smith said her dream was simple: “To get out of here, get off the street, have our own home.”

    Cities Deal With a Surge in Shanty Towns, NYT, 26.3.2009, http://www.nytimes.com/2009/03/26/us/26tents.html

Latest Glimmer of Economic Hope:

Rise in Factory Orders

March 26, 2009
The New York Times
By JACK HEALY

In a glimmer of surprisingly upbeat economic data, manufacturing orders for goods like metals, machines and military equipment rose last month for the first time after six months of declines, the government reported on Wednesday.

The Commerce Department reported that orders for durable goods rose 3.4 percent in February following a downwardly revised 7.3 percent drop in January. Orders for machinery, transportation equipment and computers and electronics rose.

The monthly gain was better than economists’ expectations of a 2.5 percent decline, and represented the latest in a series of less-than-terrible reports that have offered a break from months of relentlessly bad economic news.

On Monday, an industry group reported that sales of previously owned homes rose 5 percent in February, and the government reported on Tuesday that its barometer of home prices rose in January after 10 months of declines. Earlier this month, the government reported that consumer prices were stabilizing slightly, cooling fears of deflation and that retail sales in February had fallen by less than expectations.

The recent spate of “bad but not terrible” economic reports — along with more optimistic profit outlooks from the country’s biggest banks — has kindled hopes in some investors that the economy may be searching for a bottom. And although the recession is still spreading, hopeful investors have lifted stock markets some 20 percent over the last two weeks.

“You don’t want to make a trend out of any one month,” said Adam York, an economist at Wachovia Economics. “But we’ll take the good news where we can get it, and here and there we’re seeing some smatterings of less-bad economic data.”

But details of the data on durable goods gave economists some pause, and Mr. York said the positive headline number was basically a head fake.

The bounce in durable-goods orders followed large downward revisions to January data, and that orders were rebounding from extremely depressed levels. And even with the 3.4 percent gain in February, orders for durable goods were down 28.4 percent from a year earlier, the government said.

And economists said that forward-looking indexes of manufacturing activity are still bracing for months more declines as businesses cut jobs and capital spending in an effort to survive the broad global downturn.

“The underlying state of industry is still deteriorating,” Ian Shepherdson, chief United States economist at High Frequency Economics, said in a note.

Excluding the military, new orders increased 1.7 percent last month.

Still, some economists say that depressed industrial activity will probably pick up later this year and into 2010 as projects from the government’s $787 billion stimulus package hit the ground.

“The February report on durable goods demand is the latest in a recent series of data releases which suggest that the recession-battered U.S. economy may be close to, or at, a business cycle bottom,” Cliff Waldman, economist for the Manufacturers Alliance, wrote in a note.

In another report, the government said that new single-family home sales rose 4.7 percent in February, but that it was still the second-worst month on record, and was down more than 40 percent from February a year ago. The median price of a new home fell to $200,900, down from a peak of $262,600 in March 2006.

Home builders have cut back significantly on new residential developments as they struggle with lower demand for housing, tighter credit and a flood of cheap foreclosure properties.

    Latest Glimmer of Economic Hope: Rise in Factory Orders, NYT, 26.3.2009, http://www.nytimes.com/2009/03/26/business/economy/26econ.html

U.S. February Durable Goods

Seen Falling 2 Percent

March 25, 2009
Filed at 6:12 a.m. ET
The New York Times
By REUTERS

WASHINGTON (Reuters) - New orders for U.S.-made durable goods likely fell in February aided by a sharp decline in civilian aircraft orders, according to a Reuters poll

The median forecast of 73 economists showed orders for durables, goods lasting three years or more, dropped for the seventh straight month, to 2.0 percent in February after a 4.5 percent January fall.

Stripping out transportation orders -- which are heavily skewed by aircraft -- new orders for durables are expected to fall 2.0 percent after a 3.0 percent decline in January.

In a sign investment growth slowed further, nondefense capital goods excluding aircraft -- a key component of the monthly report seen as a gauge of business spending -- likely fell 2.3 percent in February after a 5.7 percent January drop.

The expected decline in aircraft orders comes as U.S. plane maker Boeing Co <BA.N> reported that it won orders for four aircraft during February -- down from 18 orders for January.

And industry analysts say there are no signs the planemaker will soon return to the record number of orders it enjoyed before the economic downturn as the number of cancellations exceeded orders, so far this year.

The Commerce Department will release the report at 8:30 a.m. EDT on Wednesday.

The following is a selection of comments from economists:

FTN FINANCIAL

Forecast: -2.5 percent

"Companies across industries continue to scale back on costs and production, waiting for any sign of a sustainable recovery. We have seen a virtual collapse in demand, both in the US and overseas. As a result, output has not been slashed quickly enough. The decline in production and inventories has not been able to keep up with the decline in sales."

MOODY'S ECONOMY.COM

Forecast: -0.5 percent

"We expect orders and shipments of nondefense excluding aircraft (core) capital goods will have fallen further in February. A weighted index of capital spending plans from regional Fed surveys hit a new cycle low in the month, and the continued rise in jobless claims show business retrenchment remains fierce despite evidence that household spending has firmed."

RBS GREENWICH CAPITAL

Forecast: -0.5 percent

"The fall in durable goods orders in February could have been limited by a rebound in automotive bookings (corresponding with the sharp pickup in motor vehicle production in the month, following extended plant shutdowns in January).

WACHOVIA

Forecast: -4.1 percent

"Driven by slowing business and consumer demand, orders for durable goods could fall 4.1 percent in February. Vehicles and parts will likely continue to post significant declines. With corporate profits weakening and credit conditions exceptionally tight, business fixed investments will likely decline in the coming quarters. We do not expect business spending to add to GDP until late 2010.

 

(Polling by Bangalore Polling Unit)

(Reporting by Nancy Waitz. Editing by Walker Simon)

    U.S. February Durable Goods Seen Falling 2 Percent, NYT, 25.3.2009, http://www.nytimes.com/reuters/2009/03/25/business/business-us-usa-economy-durables.html

Top Hedge Fund Managers

Do Well in a Down Year

March 25, 2009
The New York Times
By LOUISE STORY

The financial crisis may have turned much of Wall Street’s wealth into dross, but a select group of hedge fund managers has managed to maintain a golden touch that might make King Midas blush.

As major markets and economies careened downward last year, 25 top managers reaped a total of $11.6 billion in pay by trading above the pain in the markets, according to an annual ranking of top hedge fund earners by Institutional Investor’s Alpha magazine, which comes out Wednesday.

James H. Simons, a former math professor who has made billions year after year for the hedge fund Renaissance Technologies, earned $2.5 billion running computer-driven trading strategies. John A. Paulson, who rode to riches by betting against the housing market, came in second with reported gains of $2 billion. And George Soros, also a perennial name on the rich list of secretive moneymakers, pulled in $1.1 billion.

Of course, their earnings were not unscathed by the extensive shakeout in the markets. In a year when losses were recorded at two of every three hedge funds, pay for many of these managers was down by several million, and the overall pool of earnings was about half the $22.5 billion the top 25 earned in 2007.

The managers’ compensation, which was breathtaking in the best of times, is eye-popping after a year when hedge funds lost 18 percent on average, and investors withdrew money en masse.

Government scrutiny, over Wall Street pay and the role all kinds of institutions play in the financial markets, is also mounting. Hedge funds are facing proposals for new taxes on their gains, and on Tuesday, Treasury Secretary Timothy F. Geithner said he would seek greater power to regulate hedge funds.

Some people on the list disputed Alpha’s calculations, which are estimates that include the increase in value of personal investments the managers made in their funds. But none offered different values for their bonuses or the soaring wealth in their funds.

To make the cut this year, a hedge fund hotshot needed to earn $75 million, down sharply from the $360 million cutoff for 2007’s top 25. Still, amid the financial shakeout, the combined pay of the top 25 hedge fund managers beat every year before 2006.

“The golden age for hedge funds is gone, but it’s still three times more lucrative than working at a mutual fund and most other places on Wall Street,” said Robert Sloan, managing partner of S3 Partners, a hedge fund risk management firm. “But this shouldn’t pop up on the greed meter. They made money. That’s what they’re supposed to.”

In an interview, Mr. Paulson — whose lofty 2008 earnings were down from the $3.7 billion that Alpha estimated he earned in 2007 — said his pay was high in large part because he is the biggest investor in his fund. In fact, he said he receives no bonus. The pensions, endowments and other institutions that invest in his fund do not mind the hefty cut of profits he and his team take, he said.

“In a year when all their other investments lost money, we’re like an oasis,” Mr. Paulson said.

“We have investors who were invested with Madoff, and they can’t thank me enough,” he added, referring to the disgraced financier Bernard L. Madoff.

Even as the spotlight intensifies, these hedge fund managers and others who made it through last year with cash on hand are the sort of investors the federal government hopes will step in and buy troubled assets from banks. The richest managers are also in the best position to take advantage of the distressed environment to build their wealth.

“The guys who own the future are the guys like John Paulson and the others on the Alpha list,” said Keith R. McCullough, the chief executive of Research Edge, a firm in New Haven that provides trading analysis for hedge funds. “Ironically enough, we’re going to go beg for capital from the very people we’ve been trying to vilify.” Mr. Paulson, though, said he did not plan to participate in the new public-private investment program.

One hedge fund manager on the list, Paul Touradji, said he understood the public outcry against people who are paid regardless of whether they earned money for their clients. “Wall Street should get paid only when they reward their clients,” he said. “For every dollar we made, our clients earned multiples.”

Mr. Touradji, $140 million richer than in 2007, according to Alpha, said he gave his investors advice by sharing strategies — something rare in the black-box hedge fund world. Last year, for instance, he spotted the commodities bubble early and warned his investors, which include pension funds and endowments, to reshuffle their other holdings, saving them from losses.

Some hedge funds made so much that they had two people on the list. While Mr. Simons of Renaissance Technologies landed the No. 1 spot, one of his partners, Henry B. Laufer, is also on the list with earnings of $125 million.

A spokesman for Mr. Simons declined to comment.

John D. Arnold, an energy trader in his early 30s who was third on the list, with $1.5 billion, did not respond to a request for comment. A spokesman for George Soros, Michael Vachon, said his boss gave away more than half his earnings in 2008. A spokesman for Raymond T. Dalio, who is said to have earned $780 million, said his boss had made so much money because he anticipated the crisis.

Two of the three managers who tied for ninth, at $250 million, are based in Britain: David Harding of Winton Capital and Alan Howard of Brevan Howard Asset Management. A second employee of Brevan Howard, Christopher Rokos, also made the list.

Mr. Harding, who runs Winton, said his success last year was part luck, part knowledge from 25 years of hard work in which he often struck a solitary path in a type of trading that had many naysayers. “It is nice to have a golden life and a purpose to engage in, a reason to go to work,” said Mr. Harding, who doubted that many people would be willing or able to do his job. “Obviously I wouldn’t have set out to be a futures trader if I hadn’t wanted to make a lot of money.”

John R. Taylor, the third hedge fund manager who tied as ninth on the list, said even winning hedge funds should acknowledge that they had benefited from the government’s bailout of the banking system. “Thank God for the government, because if they hadn’t intervened, we wouldn’t have had anybody to trade with,” said Mr. Taylor, who has run his currency fund, FX Concepts, since the 1980s.

But he said he was not grateful to be on Alpha’s list, which he said overestimated his pay by a multiple of five. The last time he received lots of publicity, Mr. Taylor said, was in 1993, and that preceded his worst year ever.

“This is bad luck with the trading gods,” Mr. Taylor said. “We’re doomed next year if you write about us.”

    Top Hedge Fund Managers Do Well in a Down Year, NYT, 25.3.2009, http://www.nytimes.com/2009/03/25/business/25hedge.html

Treasury Chief

Seeks Wider Power

to Seize Troubled Firms

March 25, 2009
The New York Times
By BRIAN KNOWLTON
and JACKIE CALMES

WASHINGTON — The Obama administration is renewing calls for Congress to provide new authority to take over financial institutions in distress, expanding its existing powers to include insurance companies and other less-regulated market players.

“The United States government does not have the legal means today to manage the orderly restructuring of a large, complex non-bank financial institution that poses a threat to the stability of our financial system,” the Treasury secretary, TimothyF. Geithner said in a statement prepared for delivery before the House Financial Services Committee.

The proposal could help deflect some criticism of the government’s handling of A.I.G., which is not a bank but an insurance company, including allowing the company to pay big bonuses to executives after receiving government financing as part of the bailout of financial institutions.

Had the Treasury Department had the expanded authority last fall, administration officials have said, the government could have seized A.I.G. and more efficiently wound down its operations in a less-costly manner. At the hearing, Ben S. Bernanke, the chairman of the Fed, said that he had wanted to sue A.I.G. to prevent the bonus payments but was talked out of it by lawyers who warned that if the lawsuit failed, the government might have to pay double or triple damages in addition to the bonus.

“We need resolution authority to go in and be able to change contracts, be able to change the business model, unwind what doesn’t work,” the White House press secretary, Robert Gibbs, told CNN on Tuesday.

The administration has been criticized for failing to provide sufficient detail of its financial-rescue proposals. But on Tuesday, Mr. Gibbs appeared on several television interviews to begin making the case for the new authority.

“This isn’t anything crazy. This is exactly what the Treasury Department needs to deal with things like A.I.G.,” he said. It would allow the administration to address systemic risk, he added, without having to place a failing financial firm into bankruptcy.

The resolution authority — to take over non-bank financial institutions that pose a systemic risk until problems are resolved — was intended to be part of the administration’s comprehensive overhaul of the government’s financial regulatory system, which has been delayed as the Treasury dealt with immediate crises.

White House and Treasury officials decided amid the recent furor over A.I.G.’s bonuses to push for the resolution authority now.

The government has such authority for banks; the Federal Deposit Insurance Corporation has power to step in to clean up a bank’s books and alter business practices like executive compensation. There is no such federal authority for non-bank entities, like A.I.G., that in recent years have become bigger players in the financial system.

Central to the A.I.G. controversy has been Mr. Geithner’s contention, based on lawyers’ advice, that the administration could not legally override contracts such as its bonus system for top employees that the insurance giant had entered into before its government bailout last September. The government now owns almost 80 percent of A.I.G.

Mr. Geithner met last week with Representative Barney Frank, a Democrat from Massachusetts who is chairman of the House Financial Services Committee, about the proposed legislation. Mr. Frank is holding a hearing on Thursday specifically about the resolution authority proposal, and the Treasury secretary is expected again to testify.

Mr. Geithner’s emphasis on the subject on Tuesday as well allows him to try to take the initiative and be proactive at what is certain to otherwise be a long and difficult hearing about why he was not aware sooner about the March 15 A.I.G. bonuses to more than 400 employees at the company’s Financial Products unit that was responsible for the risky and exotic derivatives that ultimately took the company down and threatened the global financial system with it.

Tuesday’s hearing, also before the House Financial Services Committee, will feature a rare joint appearance by the Treasury secretary and the chairman of the Federal Reserve, Ben S. Bernanke. They will doubtless be pressed not only on the A.I.G. bonuses but on the new plan, unveiled Monday, to relieve banks of their troubled assets.

At Thursday’s hearing, Mr. Geithner is expected to focus more explicitly on the administration’s plans for tightened financial regulation.

At a conference Monday evening, Mr. Geithner was asked about the resolution authority idea and suggested that expanded authority would be a “critical” part of working through the financial crisis.

“It is a terrible, tragic thing that this country came into this crisis with such limited tools for trying to protect the economy itself from the kind of distress that would come as the system came back down to Earth,” he said.

“The executive branch had very limited authority to do the things all governments have to do in a crisis,” which had been partially addressed by the bailout legislation last year. “Better resolution authority will be a critical complement of that.”

Mr. Geithner added that while a “very well-designed system” built up after the savings and loan crisis of the 1980s had given the F.D.I.C. the ability to adopt with banking crises. “No comparable framework exists for a range of other institutions, including those that are associated with banks, that can pose broader risk to the stability of the system.”

    Treasury Chief Seeks Wider Power to Seize Troubled Firms, NYT, 25.3.2009,
http://www.nytimes.com/2009/03/25/business/25web-bailout.html

February Existing Home Sales

Rise by 5.1 Percent

March 23, 2009
Filed at 1:03 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Sales of previously occupied homes jumped unexpectedly in February by the largest amount in nearly six years as first-time buyers took advantage of deep discounts on foreclosures and other distressed properties.

Economists said sales, while still at levels not seen since 1997, may finally be coming back to life after declining sharply following the stock market plunge last autumn.

Prices, however, are expected to keep falling well into the year. Tens of thousands of homes reman tied up in the foreclosure process and are not yet for sale. Plus, as the recession deepens and job losses mount, many buyers are likely to stay on the sidelines.

''The four-letter word in the housing market is 'jobs,''' said Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies. ''If you're worried about having a job tomorrow, you're not likely to buy a home now.''

The National Association of Realtors said Monday that sales of existing homes grew 5.1 percent to an annual rate of 4.72 million last month, from 4.49 million units in January.

It was the largest monthly sales jump since July 2003, with first-time buyers accounting for about half of all transactions. Sales had been expected to dip to an annual pace of 4.45 million units, according to Thomson Reuters. The results, which came after a steep decline in January, mean that sales activity has returned to December's levels, but still remains lower than most of last year.

''If January was a disaster for housing, February may be the rebound month,'' wrote Joel Naroff, president of Naroff Economic Advisors.

The sales figures don't yet reflect the new $8,000 tax credit designed to lure even more first-time buyers into the market. That should juice up early summer sales, but how much will depend on the overall condition of the U.S. economy.

''If the economy stabilizes around midyear and financial conditions improve, then sales will probably begin to slowly increase as buyers step back into the market,'' wrote JPMorgan Chase analyst Abiel Reinhart. ''An important reason for this is that affordability has already increased sharply, both as a result of lower prices and lower mortgage rates.''

The median sales price plunged to $165,400, down 15.5 percent from $195,800 a year earlier. That was the second-largest drop on record and prices are now off 28 percent from their peak in July 2006.

However, in a positive sign, seller asking prices are starting to rise in places like San Diego and Orange County, Calif., where declines have been severe, said Lawrence Yun, chief economist for the Realtors. That could be an early indication that prices are stabilizing in the most distressed parts of the country.

Meanwhile, in contrast with the housing boom, when buyers took out ever-riskier loans and maxed out their home equity lines, ''homebuyers are not over stretching'' Yun said. ''They want to stay within their budget.''

The number of unsold homes on the market last month rose 5.2 percent to 3.8 million, a typical increase for the winter months. At February's sales pace, it would take 9.7 months to rid the market of all of those properties.

''Inventories are still high relative to sales rates, and would probably be even more so if all those wishing to sell their home actually had the house on the market instead of pulling it off in the face of rapidly eroding prices,'' wrote Joshua Shapiro, chief U.S. economist at MFR Inc.

Sellers don't want to compete with foreclosures that have swamped the market, especially in California, Florida, Nevada and Arizona.

About 45 percent of sales nationwide are foreclosures or other distressed property sales, which typically sell at a 20 percent discount, according to the Realtors group.

That's great news for buyers, who are paying the most attractive prices in years. Plus, interest rates have sunk to historic lows.

The Federal Reserve last week moved to reduce already low rates by printing $1.2 trillion and pumping it into the economy through the purchases of mortgage-backed securities and Treasury debt.

The central bank also will double its purchases of debt issued by Fannie Mae and Freddie Mac to $200 billion.

----

AP Business Writer J.W. Elphinstone contributed to this report from New York.

    February Existing Home Sales Rise by 5.1 Percent, NYT, 23.3.2009, http://www.nytimes.com/aponline/2009/03/23/business/AP-Home-Sales.html

Treasury Details

Plan to Buy Risky Assets

March 24, 2009
The New York Times
By BRIAN KNOWLTON
and EDMUND L. ANDREWS

WASHINGTON — The Obama administration formally presented the latest step in its financial rescue package on Monday, an attempt to draw private investors into partnership with a new federal entity that could eventually buy up to $1 trillion in troubled assets that are weighing down banks and clogging up the credit markets.

The Dow Jones industrial average was up sharply early Monday, gaining more than 300 points by midday. When the Treasury secretary, Timothy F. Geithner, spoke on Feb. 10 of a bank rescue plan without offering much detail, investors took that as a worrying sign and the Dow fell sharply, losing 380 points.

The Treasury secretary did not deny the uncertainties inherent in the new program on Monday but defended it as a practical approach. “There is no doubt the government is taking a risk,” Mr. Geithner said, “the only question is how best to do it.”

President Obama said later that he and his economic advisers were “very confident” that the program outlined by Mr. Geithner would start to unclog the credit markets. “The good news is that we have one more critical element in our recovery,” the president said after meeting with his economic teams. “But we still have a long way to go, and we have a lot of work to do.”

The success or failure of the plan carries not only enormous stakes for the nation’s recovery but certain political risks for Mr. Geithner as well. At least two Republican senators have called for his resignation. And on Sunday, Senator Richard C. Shelby of Alabama, the ranking Republican on the Banking Committee, told Fox News that “if he keeps going down this road, I think that he won’t last long.” Initially, a new Public-Private Investment Program will provide financing for $500 billion in purchasing power to buy those troubled or toxic assets — which the government refers to more diplomatically as legacy assets — with the potential of expanding later to as much as $1 trillion, according to a fact sheet issued by the Treasury Department.

At the core of the financing package will be $75 billion to $100 billion in capital from the existing financial bailout known as TARP, the Troubled Assets Relief Program, along with the share provided by private investors, which the government hopes will come to 5 percent or more. By leveraging this program through the Federal Deposit Insurance Corporation and the Federal Reserve, huge amounts of bad loans can be acquired.

The private investors would be subsidized but could stand to lose their investments, while the taxpayers could share in prospective profits as the assets are eventually sold, the Treasury said. The administration said that it expected participation from pension funds to insurance companies and other long-term investors.

The plan calls for the government to put up most of the money for buying up troubled assets, and it would give private investors a clearly advantageous deal. In one program, the Treasury would match one-for-one every dollar of equity that private investors invest of their own money in each “Public Private Investment Fund.”

On top of that the F.D.I.C. — tapping its own credit lines with the Treasury — would lend six dollars for each dollar invested by the Treasury and private investors. If the mortgage pool turns bad and runs big losses, the private investors would be able to walk away from their F.D.I.C. loans and leave the government holding the soured mortgages and the bulk of the losses.

The Treasury Department offered this illustrative example of how the program would work: A pool of bad residential mortgage loans with a face value of, say, $100 is auctioned by the F.D.I.C. Private investors would submit bids. In the example, the top bidder, an investor offering $84, would win and purchase the pool. The F.D.I.C. would guarantee loans for $72 of that purchase price. The Treasury would then invest in half the $12 equity, with funds coming from the $700 billion bailout program; the private investor would contribute the remaining $6.

An attractive feature of the program is that it will allow the marketplace to establish values for the assets — based, of course, on the auction mechanism that will signal what someone is willing to pay for them — and thus might ease the virtual paralysis that has surrounded those assets up to now.

For a relatively small equity exposure, the private investor thus stands to make a considerable return if prices recover. The government will make a gain as well. In the worst case, the bulk of the risk would fall on the government. The presumption, of course, is that the auction will lead to realistic purchase prices.

One institutional investor said he was surprised that the government was lending so much of the money, saying that private investors have been willing to buy up pools of mortgage-backed securities with less “leverage” or outside borrowing than the Treasury proposed on Monday.

The true magnitude of the toxic-asset purchase program could amount to well over $1 trillion. Buried in Mr. Geithner’s announcement was the detail that the Treasury would dramatically revise and expand its joint venture with the Federal Reserve, known as the Term Asset-backed Secure Lending Facility, which was originally created to finance consumer lending and some forms of business lending.

Starting soon, the program will be expanded to finance investors who want to buy existing mortgages and mortgage-backed securities, including commercial real estate mortgages. By allowing the so-called TALF program to buy up older “legacy” assets, as well as new loans, the Treasury and Fed will be putting nearly an additional $1 trillion on the line — on top of all the money being provided through the F.D.I.C. program and the Treasury partnership programs announced on Monday.

The department defined three basic principles underlying the overall program. First, by combining government financing, involving the F.D.I.C. and the Federal Reserve, with private sector investment, “substantial purchasing power will be created, making the most of taxpayer resources,” the fact sheet said.

Second, private investors will share both in the risk and potential profits, the Treasury Department said, “with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.”

The third principle is the use of competitive auctions to help set appropriate prices for the assets. “To reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased,” the department said.

By emphasizing that private investors will share in the risk, the Treasury Department seemed to be seeking to reassure ordinary taxpayers that they will not be bear the entire downside burden of yet another $1 trillion program.

At the same time, administration officials strove over the weekend to reassure potential investors that they will not be subjected to the sort of pressures, criticism and public outrage that followed reports of the million-dollar bonuses to executives of the American International Group.

The Treasury Department defended its approach as a compromise that would avoid the dangers both of too gradualist an approach and of one in which taxpayers bear the entire risk.

“Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience,” the department said. “But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases — along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.”

The plan relies on private investors to team with the government to relieve banks of assets tied to loans and mortgage-linked securities of unknown value. There have been virtually no buyers of these assets because of their uncertain risk.

But some executives at private equity firms and hedge funds, who were briefed on the plan Sunday afternoon, are anxious about the recent uproar over millions of dollars in bonus payments made to executives of the American International Group.

Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations.

Mr. Geithner made it clear on Monday that no limits on executive compensation would be imposed on companies that invest — unless the companies are already subject to such limitations as recipients of TARP money — because the government does not want to discourage investor participation.

Administration officials took to the airwaves Sunday to reassure investors that the public would distinguish between companies like A.I.G., which are taking government bailout money, and private investment groups that, under this latest plan, would be helping the government take troubled assets off the books of some of the country’s biggest banks.

“What we’re talking about now are private firms that are kind of doing us a favor, right, coming into this market to help us buy these toxic assets off banks’ balance sheets,” Christina D. Romer, the White House’s chief economist, said in an interview on “Fox News Sunday.”

“I think they understand that the president realizes they’re in a different category,” she said, adding, “They are firms that are being the good guys here.”

 

Eric Dash and Rachel L. Swarns reported from Washington, and Andrew Ross Sorkin from New York.

    Treasury Details Plan to Buy Risky Assets, NYT, 24.3.2009, http://www.nytimes.com/2009/03/24/business/economy/24bailout.html

New Deficit Forecast

Casts Shadow on Obama Agenda

March 21, 2009
The New York Times
By JACKIE CALMES

WASHINGTON — The Congressional Budget Office placed a new hurdle in front of President Obama’s agenda on Friday, calculating that the White House’s tax and spending plans would create deficits totaling $2.3 trillion more than the president’s budget projected for the next decade.

The difference largely reflects the administration’s more optimistic forecasts of economic growth through 2019.

The budget office figures, which will guide Congress as it takes up Mr. Obama’s proposals in earnest next week, were worse than Democratic leaders expected and further complicated their job of achieving the president’s priorities on health care, energy policy and much more.

Moderate Democrats from competitive districts and states have already expressed nervousness about some of Mr. Obama’s plans, especially as Republicans have grown increasingly emboldened to stay on the attack.

Senator Judd Gregg of New Hampshire, the senior Republican on the Senate Budget Committee, said the new report “confirms that under the president’s plan, our debt will increase to shocking levels that are simply unsustainable and will devastate future economic opportunities for our children and grandchildren.”

The president, anticipating the report, referred to “the massive deficit we inherited and the cost of this financial crisis” in a speech to state legislators meeting in the capital. While he restated his vow to cut the deficit in half by the end of his term, Mr. Obama gave no ground on trimming his domestic agenda.

“What we will not cut are investments that will lead to real growth and real prosperity,” he said, citing his budget’s spending commitments for health care, energy alternatives to foreign oil, and education.

While long-term budget projections are notoriously unreliable, they help set the terms of the debate and provide political ammunition to both parties. In this case, the Congressional figures could make moderate Republicans and fiscally conservative Democrats less open to supporting Mr. Obama’s agenda because of concern about the nation’s long-term fiscal health.

Mr. Obama’s budget predicted total deficits for the next decade of nearly $7 trillion. The Congressional Budget Office analysis of his plan put the figure at nearly $9.3 trillion, or a third higher.

The House and Senate Budget Committees are planning to draft their versions of a budget next week, and both chambers expect to vote the following week before leaving for an Easter and Passover recess.

Congress’s budget resolutions do not require the president’s signature and do not have the force of law. But the blueprint that the House and Senate ultimately agree to will go far in determining the odds for success of Mr. Obama’s domestic program for this year and beyond.

To the extent that the nonpartisan budget office report made the administration’s sales job harder, it added to the determination of some Congressional Democrats — with White House coaxing — to use the budget process to authorize a controversial parliamentary maneuver to help the White House win passage of one of the president’s top priorities, health care legislation.

The maneuver, known as “reconciliation,” would allow the Senate to adopt a health care bill this year with 51 votes instead of the 60 that would normally be necessary. It takes 60 votes to shut off debate, but under reconciliation rules the Republicans would be unable to use the threat of filibuster to block the legislation.

That procedural question, as much as any issue of huge dollar figures and weighty policy proposals, is one that divides both chambers and parties as the budget debate gets under way. Senate Republicans, unwilling to lose their best leverage to shape or stop a health care bill, have served notice that they would consider the reconciliation tactic a breach of Mr. Obama’s promised spirit of bipartisanship.

Partly to avoid alienating potential Republican allies in the Senate, some influential Senate Democrats oppose using the reconciliation maneuver. Those opponents include the chairmen of the Budget and Finance Committees, Senators Kent Conrad of North Dakota and Max Baucus of Montana.

The tactic is “not the best way to write major substantive legislation” that should have bipartisan buy-in, Mr. Conrad said in an interview.

But House Democratic leaders argue that presidents from Ronald Reagan to George W. Bush have employed the reconciliation process to achieve their major campaign promises; Mr. Obama, they said, should be no different.

Democrats in both chambers say the House is likely to approve a budget resolution that authorizes the tactic for health care legislation, the Senate most likely will not, and the issue will have to be settled in negotiations between the chambers — with the result hinging on how hard the president wants to lean on Democratic senators to go along.

After initial soundings, Congressional Democrats and the White House decided not to seek the tactic for Mr. Obama’s equally controversial energy and climate change proposals because of opposition from within the party, especially among Democrats from manufacturing and coal-producing states.

Mr. Conrad said the budget office’s grim analysis merely “confirms what I’ve been saying for days, that we’re going to have to make adjustments in the president’s proposal,” especially to restrain spending.

“No one ever had an expectation that they would just take our budget, Xerox it and vote on it,” said Peter R. Orszag, director of the White House Office of Management and Budget.

The economy’s expected recovery after this year is projected to help bring in enough additional tax revenue to reduce future annual deficits. Mr. Obama’s budget shows a $533 billion deficit by fiscal 2013, the last of his term, which would mean more than a two-thirds reduction—more than meeting his pledge to shave the annual deficits in half.

Mr. Conrad predicted that Congress’s budget would project a similar two-thirds cut. The budget office analysis of Mr. Obama’s budget put the deficit in 2013 at $672 billion. The annual deficits for much of the next decade would range from more than 4 percent to more than 5 percent of the gross domestic product, a level that Mr. Orszag acknowledged would be unsustainable.

    New Deficit Forecast Casts Shadow on Obama Agenda, NYT, 21.3.2009, http://www.nytimes.com/2009/03/21/washington/21deficit.html?hp

AIG Bonus Payments $218 Million

March 21, 2009
Filed at 11:20 a.m. ET
The New York Times
By REUTERS

CHICAGO (Reuters) - Documents turned over to the Connecticut attorney general show that American International Group Inc paid out over $218 million in bonuses, more than the previously disclosed $165 million, published reports said on Saturday.

The reports said the documents were turned over to Attorney General Richard Blumenthal's office late on Friday in response to a subpoena.

The documents show that bonuses of at least $1 million were paid to 73 people, and five received more than $4 million.

The giant insurance company has been widely criticized for granting bonuses after receiving federal bailout funds exceeding $180 billion.

(Reporting by Jim Marshall +1 312-408-8717, editing by Alan Elsner)

    AIG Bonus Payments $218 Million, NYT, 21.3.2009, http://www.nytimes.com/reuters/2009/03/21/business/business-us-aig-bonuses.html

Talking Business

The Problem With Flogging A.I.G.

March 21, 2009
The New York Times
By JOE NOCERA

Can we all just calm down a little?

Yes, the $165 million in bonuses handed out to executives in the financial products division of American International Group was infuriating. Truly, it was. As many others have noted, this is the same unit whose shenanigans came perilously close to bringing the world’s financial system to its knees. When the Federal Reserve chairman, Ben Bernanke, said recently that A.I.G.’s “irresponsible bets” had made him “more angry” than anything else about the financial crisis, he could have been speaking for most Americans.

But death threats? “All the executives and their families should be executed with piano wire — my greatest hope,” wrote one person in an e-mail message to the company. Another suggested publishing a list of the “Yankee” bankers “so some good old southern boys can take care of them.”

Or how about those efforts to publicize names of individual executives who received bonuses — efforts championed by Attorney General Andrew Cuomo of New York and Barney Frank, chairman of the House Financial Services Committee. To what end?

How does outing these executives fix skewed compensation incentives, which have created that unjustified sense of entitlement that pervades Wall Street? No, it’s mostly about using subpoena power to satisfy the public’s thirst for blood. (In light of the death threats, when Mr. Cuomo received the list of A.I.G. bonus recipients on Thursday, he promised to consider “individual security” and “privacy rights” in deciding whether to publicize the names.)

Then there was that awful Congressional hearing on Wednesday, in which A.I.G.’s newly installed chief executive, Edward Liddy, was forced to listen to one outraged member of Congress after another rail about bonuses — and obsess about when Treasury Secretary Timothy Geithner learned about them — while ignoring far more troubling problems surrounding the A.I.G. rescue.

Oh, and let’s not forget the bill that was passed on Thursday by the House of Representatives. It would tax at a 90 percent rate bonus payments made to anyone who earned over $250,000 at any financial institution receiving significant bailout funds. Should it become law, it will affect tens of thousands of employees who had absolutely nothing to do with creating the crisis, and who are trying to help fix their companies.

Meanwhile, the real culprits — like Joseph J. Cassano, the former head of A.I.G.’s financial products division— are counting their money in “retirement.” Nobody on Capitol Hill seems much interested in getting that money back. (And the bill does nothing about bonuses that were paid before 2009, meaning that most of those egregious Merrill Lynch bonuses, paid at the end of last year, will not be touched.)

By week’s end, I was more depressed about the financial crisis than I’ve been since last September. Back then, the issue was the disintegration of the financial system, as the Lehman bankruptcy set off a terrible chain reaction. Now I’m worried that the political response is making the crisis worse. The Obama administration appears to have lost its grip on Congress, while the Treasury Department always seems caught off guard by bad news.

And Congress, with its howls of rage, its chaotic, episodic reaction to the crisis, and its shameless playing to the crowds, is out of control. This week, the body politic ran off the rails.

There are times when anger is cathartic. There are other times when anger makes a bad situation worse. “We need to stop committing economic arson,” Bert Ely, a banking consultant, said to me this week. That is what Congress committed: economic arson.

How is the political reaction to the crisis making it worse? Let us count the ways.

IT IS DESTROYING VALUE During his testimony on Wednesday, Mr. Liddy pointed out that much of the money the government turned over to A.I.G. was a loan, not a gift. The company’s goal, he kept saying, was to pay that money back. But how? Mr. Liddy’s plan is to sell off the healthy insurance units — or, failing that, give them to the government to sell when they can muster a good price.

In other words, it is in the taxpayers’ best interest to position A.I.G. as a company with many profitable units, worth potentially billions, and one bad unit that needs to be unwound. Which, by the way, is the truth. But as Mr. Ely puts it, “the indiscriminate pounding that A.I.G. is taking is destroying the value of the company.” Potential buyers are wary. Customers are going elsewhere. Employees are looking to leave. Treating all of A.I.G. like Public Enemy No. 1 is a pretty dumb way for a majority shareholder to act when he hopes to sell the company for top dollar.

IT IS, UNFORTUNATELY, BESIDE THE POINT Even on Wall Street this week, I didn’t hear anyone condoning the A.I.G. bonuses. They should never have been granted, and Mr. Liddy should have been tougher about renegotiating them. (A rich irony here is that any nonfinancial company in A.I.G.’s straits would be in bankruptcy, and contracts would have to be renegotiated. The fact that the government is afraid to force A.I.G. into bankruptcy, despite its crippled state, is the main reason Mr. Liddy felt he couldn’t try to redo the contracts.)

But there is a much bigger issue that has barely been touched upon by Congress: the way tens of billions of dollars of taxpayers’ money has been funneled to A.I.G.’s counterparties — at 100 cents on the dollar. How can it possibly make sense that Goldman Sachs, Bank of America, Citigroup and every other company that bought credit-default swaps from A.I.G. should be made whole by the government? Why isn’t it forcing them to take a haircut?

What’s worse, some of those companies are foreign banks that used credit-default swaps to exploit a regulatory loophole. Should the United States taxpayer really be responsible for ensuring the safety of European banks that were taking advantage of European regulations?

The person who has made this point most forcefully is Eliot Spitzer, of all people. In his column for Slate.com, he wrote: “Why did Goldman have to get back 100 cents on the dollar? Didn’t we already give Goldman a $25 billion cash infusion, and aren’t they sitting on more than $100 billion in cash?” Mr. Spitzer told me that while “there is a legitimate sense of outrage over the bonuses, the larger outrage should be the use of A.I.G. funding as a second bailout for the large investment houses.” Precisely.

IT IS DESTABILIZING How can you run a company when the rules keep changing, when you have to worry about being second-guessed by Congress? Who can do business under those circumstances?

Take, for instance, that new securitization program the government is trying to get off the ground, called the Term Asset-Backed Securities Loan Facility — or TALF. Although it is backed by large government loans, it requires people in the marketplace — Wall Street bankers! — to participate.

This program could help revive the consumer credit market. But at this point, most Wall Street bankers would rather be attacked by wild dogs than take part. They fear that they’ll do something — make money perhaps? — that will arouse Congressional ire. Or that the rules will change. “The constant flip-flopping is terrible,” said Simon Johnson, a banking expert who teaches at the M.I.T. Sloan School of Business.

A.I.G. offers another good example. Not all the employees who face the possibility of having their bonuses taxed out from under them work for the evil financial products division. Many of them work in insurance divisions. Very few of them pull down million-dollar bonuses, and none of them brought A.I.G. to its knees. (And employees who bought the company’s stock are already hurting financially, having seen its value virtually wiped out.) They are the ones the company badly needs to keep if it hopes to sell those units at a healthy price. Taking away their bonuses — after they’ve already put the money in their bank accounts — hardly seems like the right way to motivate them. And demonizing them in Congressional hearings doesn’t help either.

In previous columns, I have been an advocate of nationalizing big banks like Citigroup. But after watching Congress this week, I’m having second thoughts. If this is how Congress treats A.I.G., what would it do if it had a bank in its paws?

What the country really needs right now from Congress is facts instead of rhetoric. Instead of these “raise your hand if you took a private jet to get here” exercises of outraged populism, we need hearings that educate and illuminate. Hearings like the old Watergate hearings. Hearings in which knowledge is accumulated over time, and a record is established. Hearings that might actually help us get out of this crisis. It’s happened before. In 1932, Congress established the Pecora committee, named for its chief counsel, Ferdinand Pecora. It was an intense, two-year inquiry, and its findings — executives shorting their own company’s stock, for instance — shocked the country. It also led to the establishment of the Securities and Exchange Commission and other investor protections. One person who has been calling for a new Pecora committee is Senator Richard Shelby of Alabama, a Republican and key member of the Senate Banking Committee.

“As we restructure our regulatory system, we need to be thorough,” he told me. “We need to understand what caused it. We shouldn’t rush it.”

Meanwhile, the House Financial Services Committee has scheduled a hearing on Tuesday featuring Mr. Bernanke and Mr. Geithner. The hearing has been called to find out only one thing: what did the two men know about the A.I.G. bonuses, and when did they know it?

Is that Nero I hear fiddling?

    The Problem With Flogging A.I.G., NYT, 21.3.2009, http://www.nytimes.com/2009/03/21/business/21nocera.html?hp

Fed to Buy $1 Trillion in Securities

to Aid Economy

March 19, 2009
The New York Times
By EDMUND L. ANDREWS

WASHINGTON — The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities.

Having already reduced the key interest rate it controls nearly to zero, the central bank has increasingly turned to alternatives like buying securities as a way of getting more dollars into the economy, a tactic that amounts to creating vast new sums of money out of thin air. But the moves on Wednesday were its biggest yet, almost doubling all of the Fed’s measures in the last year.

The action makes the Fed a buyer of long-term government bonds rather than the short-term debt that it typically buys and sells to help control the money supply.

The idea was to encourage more economic activity by lowering interest rates, including those on home loans, and to help the financial system as it struggles under the crushing weight of bad loans and poor investments.

Investors responded with surprise and enthusiasm. The Dow Jones industrial average, which had been down about 50 points just before the announcement, jumped immediately and ended the day up almost 91 points at 7,486.58. Yields on long-term Treasury bonds dropped markedly, and analysts predicted that interest rates on fixed-rate mortgages would soon drop below 5 percent.

But there were also clear indications that the Fed was taking risks that could dilute the value of the dollar and set the stage for future inflation. Gold prices rose $26.60 an ounce, hitting $942, a sign of declining confidence in the dollar. The dollar, which had been losing value in recent weeks to the euro and the yen, dropped sharply again on Wednesday.

In its announcement, the central bank said that the United States remained in a severe recession and listed its continuing woes, from job losses and lost housing wealth to falling exports as a result of the worldwide economic slowdown.

“In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability,” the central bank said.

As expected, policy makers decided to keep the Fed’s benchmark interest rate on overnight loans in a range between zero and 0.25 percent.

But to the surprise of investors and analysts, the committee said it had decided to purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities on top of the $500 billion that the Fed is already in the process of buying.

In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months. That would tend to push down longer-term interest rates on all types of loans.

All these measures would come in addition to what has already been an unprecedented expansion of lending by the Fed. The central bank also said it would probably expand the scope of a new program to finance consumer and business lending, which gets under way this week.

In effect, the central bank has been lending money to a wider and wider array of borrowers, and it has financed that lending by using its authority to create new money at will.

Since last September, the Fed’s lending programs have roughly doubled the size of its balance sheet, to about $1.8 trillion, from $900 billion. The actions announced on Wednesday are likely to expand that to well over $3 trillion over the next year.

Despite a trickle of encouraging data in the last few weeks, Fed officials were clearly still worried and in no mood to cut back on their emergency efforts.

Fed policy makers sharply reduced their economic forecasts in January, predicting that the economy would continue to experience steep contractions for the first half of 2009, that unemployment could approach 9 percent by the end of the year and that there was at least a small risk of a drop in consumer prices like those that Japan experienced for nearly a decade.

The Fed rarely buys long-term government bonds. The last occasion was nearly 50 years ago under different economic circumstances when it tried to reduce long-term interest rates while allowing short term rates to rise.

Ben S. Bernanke, the Fed chairman, has been extremely cautious in recent weeks about predicting an end to the recession, saying that he hoped to see the start of a recovery later this year but warning that unemployment, a lagging indicator, would probably keep climbing until some time in 2010.

In contrast to several recent Fed decisions, with the presidents of some regional Fed banks dissenting, the decision at Wednesday’s meeting of the 10 members of the Federal Open Market Committee, the central bank’s policy making group, was unanimous.

Jan Hatzius, chief economist at Goldman Sachs, said the Fed had adopted a “kitchen sink” strategy of throwing everything it had to jolt the economy out of its downward spiral.

But while Mr. Hatzius applauded the decision, he cautioned that the central bank could not solve the economy’s problems by expanding cheap money.

“Even if the Fed could make interest rates negative, that wouldn’t necessarily help,” Mr. Hatzius said. “We’re in a deep recession mainly because the private sector, for a variety of reasons, has decided to save a lot more. You can have a zero interest rate, but if you just offer more money on top of the money that is already available, it doesn’t do that much.”

Fed officials have been wrestling for months with the fact that lenders remain unwilling to lend and borrowers are unwilling or unable to borrow. Even though the Fed has been creating money at the fastest rate in its history, much of that money has remained dormant.

The Fed’s action is an expansion of its effort to bypass the private banking system and act as a lender in its own right.

The Fed and the Treasury are starting a joint venture this week called the Consumer and Business Lending Initiative in their latest effort to thaw the still-frozen credit markets. The program will start out with $200 billion in financing for consumer loans, small-business loans and some corporate purposes.

Fed officials have said they hope to expand the program next month, possibly to include the huge market for commercial mortgages, and both the Fed and Treasury hope the program will eventually provide up to $1 trillion in total financing.

    Fed to Buy $1 Trillion in Securities to Aid Economy, NYT, 19.3.2009, http://www.nytimes.com/2009/03/19/business/economy/19fed.html?hp

A.I.G. Planning Huge Bonuses

After $170 Billion Bailout

March 16, 2009
The New York Times
By EDMUND L. ANDREWS
and PETER BAKER

WASHINGTON — The American International Group, which has received more than $170 billion in taxpayer bailout money from the Treasury and Federal Reserve, plans to pay about $165 million in bonuses by Sunday to executives in the same business unit that brought the company to the brink of collapse last year.

Word of the bonuses last week stirred such deep consternation inside the Obama administration that Treasury Secretary Timothy F. Geithner told the firm they were unacceptable and demanded they be renegotiated, a senior administration official said. But the bonuses will go forward because lawyers said the firm was contractually obligated to pay them.

The payments to A.I.G.’s financial products unit are in addition to $121 million in previously scheduled bonuses for the company’s senior executives and 6,400 employees across the sprawling corporation. Mr. Geithner last week pressured A.I.G. to cut the $9.6 million going to the top 50 executives in half and tie the rest to performance.

The payment of so much money at a company at the heart of the financial collapse that sent the broader economy into a tailspin almost certainly will fuel a popular backlash against the government’s efforts to prop up Wall Street. Past bonuses already have prompted President Obama and Congress to impose tough rules on corporate executive compensation at firms bailed out with taxpayer money.

“There are a lot of terrible things that have happened in the last 18 months, but what’s happened at A.I.G. is the most outrageous,” said Lawrence H. Summers, President Obama’s chief economic adviser, during an appearance Sunday on “This Week With George Stephanopoulos.” “What that company did, the way it was not regulated, the way no one was watching, what’s proved necessary — is outrageous.”

Mr. Summers, who also appeared on CBS’s “Face the Nation,” suggested, however, that the government’s ability to require the bonuses be scaled back was restricted by preexisting contracts, even though he did not specify what those restrictions may be.

“We are a country of law,” said Mr. Summers, one of several economic officials to hit the Sunday-morning talk show circuit. “There are contracts. The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system.”

“What the Obama administration has done, based on the advice of attorneys, is done everything that it can to, within the law and within the tradition of upholding law that we have in this country, to limit these bonuses,” he added.

“And they have as a result of Secretary Geithner’s efforts been scaled back. Obviously this whole area is something we have to look at as we think about regulation in the future.”

A.I.G., nearly 80 percent of which is now owned by the government, has defended its bonuses, arguing that they were promised last year before the crisis and cannot be legally canceled. In a letter to Mr. Geithner, Edward M. Liddy, the government-appointed chairman of A.I.G., said at least some bonuses were needed to keep the most skilled executives.

“We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he wrote Mr. Geithner on Saturday.

Still, Mr. Liddy seemed stung by his talk with Mr. Geithner, calling their conversation last Wednesday “a difficult one for me” and noting that he receives no bonus himself. “Needless to say, in the current circumstances,” Mr. Liddy wrote, “I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them.”

An A.I.G. spokeswoman said Saturday that the company had no comment beyond the letter. The bonuses were first reported by The Washington Post.

The senior government official, who was not authorized to speak on the record, said the administration was outraged. “It is unacceptable for Wall Street firms receiving government assistance to hand out million-dollar bonuses, while hard-working Americans bear the burden of this economic crisis,” the official said.

Of all the financial institutions that have been propped up by taxpayer dollars, none has received more money than A.I.G. and none has infuriated lawmakers more with practices that policy makers have called reckless.

The bonuses will be paid to executives at A.I.G.’s financial products division, the unit that wrote trillions of dollars’ worth of credit-default swaps that protected investors from defaults on bonds backed in many cases by subprime mortgages.

The bonus plan covers 400 employees, and the bonuses range from as little as $1,000 to as much as $6.5 million. Seven executives at the financial products unit were entitled to receive more than $3 million in bonuses.

Mr. Liddy, whom Federal Reserve and Treasury officials recruited after A.I.G. faltered last September and received its first round of bailout money, said the bonuses and “retention pay” had been agreed to in early 2008 and were for the most part legally required.

The company told the Treasury that there were two categories of bonus payments, with the first to be given to senior executives. The administration official said Mr. Geithner had told A.I.G. to revise them to protect taxpayer dollars and tie future payments to performance.

The second group of bonuses covers some 2008 retention payments from contracts entered into before government involvement in A.I.G. Indeed, in his letter to Mr. Geithner, Mr. Liddy wrote that he had shown the details of the $450 million bonus pool to outside lawyers and been told that A.I.G. had no choice but to follow through with the payment schedule.

The administration official said the Treasury Department did its own legal analysis and concluded that those contracts could not be broken. The official noted that even a provision recently pushed through Congress by Senator Christopher J. Dodd, a Connecticut Democrat, had an exemption for such bonus agreements already in place.

But the official said the administration will force A.I.G. to eventually repay the cost of the bonuses to the taxpayers as part of the agreement with the firm, which is being restructured.

A.I.G. did cut other bonuses, Mr. Liddy explained, but those were part of the compensation for people who dealt in other parts of the company and had no direct involvement with the derivatives.

Mr. Liddy wrote that A.I.G. hoped to reduce its retention bonuses for 2009 by 30 percent. He said the top 25 executives at the financial products division had also agreed to reduce their salary for the rest of 2009 to $1.

Ever since it was bailed out by the government last fall, A.I.G. has been defending itself against accusations that it was richly compensating people who caused one of the biggest financial crises in American history.

A.I.G.’s main business is insurance, but the financial products unit sold hundreds of billions of dollars’ worth of derivatives, the notorious credit-default swaps that nearly toppled the entire company last fall.

A.I.G. had set up a special bonus pool for the financial products unit early in 2008, before the company’s near collapse, when problems stemming from the mortgage crisis were becoming clear and there were concerns that some of the best-informed derivatives specialists might leave. It locked in a total amount, $450 million, for the financial products unit and prepared to pay it in a series of installments, to encourage people to stay.

Only part of the payments had been made by last fall, when A.I.G. nearly collapsed. In documents provided to the Treasury, A.I.G. said it was required to pay about $165 million in bonuses on or before Sunday. That is in addition to $55 million in December.

Under a deal reached last week, A.I.G. agreed that the top 50 executives would get half of the $9.6 million they were supposed to get by March 15. The second half of their bonuses would be paid out in two installments in July and in September. To get those payments, Treasury officials said, A.I.G. would have to show that it had made progress toward its goal of selling off business units and repaying the government.

The financial products unit is now being painstakingly wound down.

Mary Williams Walsh contributed reporting from Washington and A.G. Sulzberger contributed reporting from New York.

    A.I.G. Planning Huge Bonuses After $170 Billion Bailout, NYT, 16.3.2009, http://www.nytimes.com/2009/03/16/business/16aig.html
 

Big City

Victims Seek a Glimpse of the Schemer

March 13, 2009
The New York Times
By SUSAN DOMINUS

Debra Schwartz, 67, may be the one woman in New York City who feels compassion for Bernard L. Madoff. “I just pity him,” she said Thursday morning, while waiting in the line outside the courthouse where he later pleaded guilty to bilking investors. “I feel bad for this man who lost all sense of reality.”

Wherever one might expect to find sympathy for Mr. Madoff, it was not in that line, which the judge had anticipated might hold so many outraged investors that he set up a sign-up sheet to create some order.

By 7 a.m., a bustling line was indeed crowding Worth Street outside the courthouse, but it consisted mostly of bleary-eyed journalists hoping to identify, from a telltale cashmere scarf or well-preserved camel hair coat, a Madoff investor who might talk.

Ms. Schwartz, one of the very few Madoff investors who showed up early — she said she lost two-thirds of her retirement savings — was happy to oblige. Though she felt pity for Mr. Madoff, she clarified, she did not want leniency. “I would love for him to have nothing,” she said. “In jail, he’ll have food, clothing and shelter, and there will be people who are affected who are going to be out on the street.”

Ms. Schwartz, a professional organizer (of closets, not workers), had arranged to meet at the courthouse a new friend, Bennett Goldworth. They had been linked up through mutual acquaintances who thought, as fellow Madoff victims, they should talk. Mr. Goldworth, a formerly retired real estate broker with a master’s degree in business, said he had lost $2 million in savings, everything he had. Since the Madoff fiasco, he had put his home in Florida on the market and moved in with his 84-year-old father in New York.

Ahead of them in line was Helen Chaitman, a commercial litigator in her 60s who was hoping to retire in 10 years, but now, having lost all her savings with Mr. Madoff, said she was “looking forward to retiring at 95.”

Apparently, a vast majority of the estimated 13,000 bilked investors had decided they had endured enough already, and saw no need to add the hassle of an early-morning trip to the courthouse. Of the three victims who had shown up, none could articulate what compelled them to wake up so early — in Ms. Schwartz’s case, at 4 a.m. — to wait in that line on a 32-degree morning.

Mr. Goldworth said he just wanted to see Mr. Madoff go to jail; Ms. Chaitman, who carried with her letters from 30 clients who had also lost money with Mr. Madoff, wanted to see, in person, a man who had devastated so many.

Ms. Schwartz, for her part, said, “I didn’t want to wake up tomorrow morning and think, I should have gone.”

A professional organizer, a litigator and an M.B.A. — none of them the type very likely to miss a trick, which might explain why all three not only showed up, but did so three hours before Mr. Madoff was scheduled to appear. So much had already slipped out of their hands; they would not risk missing something that might bring them satisfaction.

REVELATIONS about Mr. Madoff’s scheme did not bring down the financial markets, but they did deepen the sense of crisis, financial and moral, citywide. It was not just that billions of dollars vaporized overnight — it was also that a crime so vast could go undetected. It came to symbolize an era of runaway wealth, a time when the golden coffers were so dazzling they apparently all but blinded the regulators supposed to be keeping guard.

Before investing with Mr. Madoff, Ms. Chaitman had told the friend who recommended it to her that the opportunity looked great — “and that the only risk is that he’s a fraud,” she recalled in line Thursday, a scarf wrapped around her head for warmth. “My friend laughed, and told me the S.E.C. had investigated the fund several times.”

That friend, too, lost a fortune — and yes, he recalled with great grief that prescient conversation. “The S.E.C.’s failure to ferret it out is incomprehensible,” Ms. Chaitman said.

Thursday morning, she stood patiently outside the courthouse, waiting to watch the law do its job. Since last weekend, there have been a few tentative signs of optimism — unseasonable snow replaced by soul-warming sun, a market edging its way upward, retail sales not as bad as some feared.

When Bernard Madoff takes up residence behind bars, rather than in his doorman-tended apartment off Lexington Avenue, New Yorkers will surely allow themselves another sigh of relief, one step closer to not only law, but also order.

    Victims Seek a Glimpse of the Schemer, NYT, 13.3.2009, http://www.nytimes.com/2009/03/13/nyregion/13bigcity.html

Household Wealth Falls by Trillions

March 13, 2009
The New York Times
By VIKAS BAJAJ

In the last few months, most Americans have felt poorer. Now they have the numbers to prove it.

The Federal Reserve reported Thursday that households lost $5.1 trillion, or 9 percent, of their wealth in the last three months of 2008, the most ever in a single quarter in the 57-year history of recordkeeping by the central bank.

For the full year, household wealth dropped $11.1 trillion, or about 18 percent. Though the numbers do not yet reflect it, the decline in the stock market so far this year has probably erased trillions more in the country’s collective net worth.

The next biggest annual decline in wealth came in 2002, when household net worth fell 3 percent after the collapse of the technology bubble. The most recent loss of wealth is staggering and will probably put further pressure on the economy because many people will have to spend less and save more.

Most of the wealth was lost in financial assets like stocks, which tumbled at the end of last year. The Standard & Poor’s 500-stock index, for instance, fell 23 percent in the fourth quarter. The value of residential real estate, the biggest asset for most families, fell much less — $870 billion, or about 4 percent.

Even the richest among us have become a lot poorer. This week, Forbes magazine published its list of the richest people in the world. At No. 1, Bill Gates, the founder of Microsoft, still had $40 billion to his name, but that was down $18 billion. The wealth of Warren E. Buffett, the investor whose company Berkshire Hathaway had a rare bad year, tumbled $25 billion, to $37 billion.

The loss of wealth is concentrated among the most affluent Americans, in large part because they own more stocks and bonds than the rest of the country. Only about 50 percent of households own stock, and many of them own relatively small sums in retirement accounts.

As a result of their greater wealth and higher incomes, the affluent tend to spend a lot more than their share of the population would imply. The top 20 percent of income earners spend more than the bottom 60 percent of income earners, according to calculations by Tobias Levkovich, the chief United States equity strategist at Citigroup.

“When their wealth is mauled, they are not particularly interested in spending,” Mr. Levkovich said.

The Fed report released on Thursday also showed that total borrowing and lending increased at an annual rate of 6.3 percent in the fourth quarter, mostly as a result of increased borrowing by the federal government to finance its operations and various bailouts of the financial system. The government’s borrowing increased at an annual rate of 37 percent.

But borrowing by households dropped 2 percent. Lending to businesses was up 1.7 percent. Recent surveys of loan officers by the Fed have shown that companies have been drawing down lines of credit that were established in the past, and that only a small fraction of the lending to the private sector is through new loans, which are much harder to obtain than in recent years.

    Household Wealth Falls by Trillions, NYT, 13.3.2009, http://www.nytimes.com/2009/03/13/business/economy/13wealth.html

Net Worth of Families Down Sharply

March 12, 2009
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) — The net worth of American households fell by the largest amount in more than a half-century of record keeping during the fourth quarter of last year.

The Federal Reserve said Thursday that household net worth dropped by a record 9 percent from the level in the third quarter.

The decline was the sixth straight quarterly drop in net worth and underscored the battering that families are undergoing in the midst of a steep recession with unemployment surging and the value of their homes and investments plunging.

Net worth represents total assets such as homes and checking accounts minus liabilities like mortgages and credit card debt.

Family net worth had hit an all-time high of $64.36 trillion in the April-June quarter of 2007 but has fallen in every quarter since that time.

The record 9 percent drop in the fourth quarter pushed total net worth down to $51.48 trillion, a level that is 20 percent below the third quarter 2007 peak.

After five straight years of sharp increases in home prices, the housing bubble burst in 2007, sending shockwaves through the financial system as banks were hit with billions of dollars of losses on mortgages and mortgage-backed securities.

The federal government created a $700 billion rescue fund for the financial system last October but so far that effort has shown only modest results in terms of getting banks to resume more normal lending patterns.

Households have also been battered by the recession that began in December 2006 and is already the longest in a quarter-century. That downturn has sent unemployment soaring to a 25-year high of 8.1 percent in February with 4.4 million jobs lost since the downturn began.

The Federal Reserve began keeping quarterly records on net worth in 1951.

    Net Worth of Families Down Sharply, NYT, 12.3.2009, http://www.nytimes.com/2009/03/12/business/13networth.html

Times Are Tough on Wall Street

and Wisteria Lane

March 12, 2009
The New York Times
By EDWARD WYATT

LOS ANGELES — Full-time moms are being forced to take part-time jobs, and corporate executives treat themselves to expensive wine after asking for a government bailout. Foreclosure signs are going up in the most familiar neighborhoods. Three neighbors, laid off and their houses foreclosed upon, take the chief executive of their mortgage company hostage, and out-of-work investment bankers have to stoop to low-level jobs as corporate interns.

The economic meltdown has come to prime time. While each of those situations seems real enough to have resulted from the global financial crisis, they are plotlines of recent or coming episodes of popular prime-time television series, including “Desperate Housewives” and “Ugly Betty” on ABC, “The Simpsons” on Fox, “Flashpoint” on CBS and “30 Rock” on NBC.

Popular entertainment often takes the form of escapism in tough economic times. But a growing number of broadcast network shows have recently incorporated more real-life issues into their stories — a reflection, producers say, of how widespread the current financial troubles are.

“If everyone in America is thinking about it, that means every writer in Hollywood is thinking about it,” said Marc Cherry, the creator and executive producer of “Desperate Housewives.” “I know people tune in to ‘Desperate Housewives’ for a bit of escapism and a bit of fun. But here you have fairly well-off people living in a fairly well-off neighborhood, and this time the financial crisis is hitting everyone.”

So, on Wisteria Lane, Susan Mayer has been forced to take a part-time job to help her ex-husband, a plumber who works 16-hour days, pay for their son’s private-school tuition, and the Scavos’ pizzeria is threatened because people are dining out less.

Although police dramas like “Law & Order” have long sought to present story lines that are “ripped from the headlines,” and medical dramas like “ER” have invoked actual cases as the basis for plots, those “actual” events — double murders or rare tropical diseases — are usually far removed from the daily lives of most viewers.

Now, however, the real-life financial situations being used for scripts stand out for their directness in addressing the economic plight of average Americans.

“We’ve never really been an issues-driven show,” said Mark Ellis, a creator and producer of “Flashpoint,” which follows the efforts of an urban police department’s elite Strategic Response Unit, a SWAT-like team that also employs the techniques of talk therapy in hostage negotiations.

“But we’ve all witnessed people close to us who have experienced the loss of their home or job or the depletion of their savings account, and seen how destructive that can be,” Mr. Ellis said. “These are tragic times, and we wanted to explore the repercussions of that on a personal basis.”

In the Feb. 27 episode, titled “Business as Usual,” a mortgage company executive who had received a $22 million bonus as his company foreclosed on hundreds of homes was taken hostage by three former customers.

It never hurts when there is a convenient villain, of course, and television writers have found plenty of them in the current crisis. On “Flashpoint” the mortgage company chief is described by one of his foreclosed-upon victims as “a guy who’s got four houses already who booked a five-star Caribbean resort with his buddies to brainstorm how to make the most of these troubled times.”

Two coming episodes of “Lie to Me,” the new Fox hit, fit the pattern. One focuses on a Bernard Madoff-like operator of a Ponzi scheme, and another features a contractor who, pinched by the slow economy, cuts corners on a construction project, resulting in a building collapse.

“What’s happening in the economy is very relevant to the substance of our show,” said Samuel Baum, the show’s creator and executive producer. “We’re looking at what lies people are willing to tell, and at what cost to their co-workers, to maintain their own financial security.”

Depictions of the financial crisis have seeped into comedy as well as drama. On an episode of “30 Rock” last month a fictional group of former Lehman Brothers investment bankers resorted to jobs as interns at NBC. And Sunday night on “The Simpsons” Homer Simpson faced foreclosure.

Because of the months-long delay between the genesis of a television plotline and its broadcast, fictional series rarely make direct reference to current events, lest they risk seeming stale by the time an episode makes it to air. The episodes being shown now were conceived last summer or fall and filmed early this year, meaning they have benefited from the extended economic downturn.

Networks are even considering entire series based on the recession. Fox is developing a comedy titled “Two-Dollar Beer” that features a group of friends living in Detroit who are trying to weather that city’s worsening financial condition, and ABC Studios is developing “Canned,” a situation comedy about a group of friends who all get fired on the same day.

“Television serves as a crucible for exploring and tapping into real emotions,” said Gary Newman, chairman of 20th Century Fox Television, the studio that produces “Lie to Me” and “The Simpsons.” “When our characters are dealing with things that are relatable to our own lives, it can become more meaningful.”

    Times Are Tough on Wall Street and Wisteria Lane, NYT, 12.3.2009, http://www.nytimes.com/2009/03/12/arts/television/12plot.html

Editorial

Mr. Obama’s Trade Agenda

March 11, 2009
The New York Times
 

In tough times, there is a strong temptation to turn inward. With so many Americans already out of work, why shouldn’t the country raise trade barriers to protect its workers from foreign competition?

The answer is clear: Trade will play an important role in the world’s eventual recovery, transmitting economic growth from one country to the next. Protectionism leads to further protectionism, and yielding to its temptation could unleash destructive trade wars that would crush any chance of recovery.

Unfortunately, few politicians are willing to tell their constituents that unpopular truth. Instead, governments are succumbing to protectionism’s dangerous lure. In recent months, Russia has jacked up import barriers on cars, farm machinery and other products. The European Union has reintroduced subsidies on dairy products. Europe, India and Brazil raised tariffs on imported steel.

Protectionism is also taking subtler forms, like Britain’s requirement that bailed-out banks favor domestic lending. The United States is not immune. The stimulus bill had a “Buy America” provision, and it made it more difficult for companies receiving stimulus dollars to hire foreign workers under the H-1B visa program.

President Obama’s choice for United States trade representative, Ron Kirk, appears ambivalent about the value of free trade. As part of his confirmation hearings this week, Mr. Kirk testified that he would work to expand trade but also argued “that not all Americans are winning from it and that our trading partners are not always playing by the rules.” He suggested that the administration could press ahead on the ratification of the trade agreement with Panama, which was negotiated by the Bush administration. But he said that Mr. Obama was prepared to walk away from the Bush administration’s agreement with South Korea, calling it “unfair.”

Mr. Obama’s annual trade report to Congress is similarly worrisome. It suggested opening a “discourse with the public” on whether the trade agreements awaiting ratification — with Colombia, South Korea and Panama — are a good idea. It committed the administration to “improving” the North American Free Trade Agreement, without saying how. And it poured cold water on efforts to restart the World Trade Organization’s round of international negotiations.

Those talks, which were supposed to open markets for the world’s poorest countries, are flawed. Still, the administration’s argument that negotiations are imbalanced because it is not clear what they offer to the United States is wrongheaded. The administration should press ahead on a deal and try to revive at least some of its original intent.

If ever there was a need for collective action — on fiscal stimuli, monetary policy, aid to the developing world, fighting protectionism — it is now. A place to start the rethinking is China and how to encourage increased domestic consumption and investment in China and other cash-rich Asian countries so they can start pulling the world out of recession.

China’s leaders, in particular, need to understand that export-led growth no longer works for them or for the world. The United States will have more influence if it stops beating on Beijing for its foreign-exchange policy and engages China’s leaders as partners, not rivals.

Vigorous trade will help the world recover. For that to happen, the United States will have to provide strong leadership and a clear commitment to fighting protectionism. Any sign of ambivalence from Washington will only make things worse.

    Mr. Obama’s Trade Agenda, NYT, 11.3.2009, http://www.nytimes.com/2009/03/11/opinion/11wed1.html

Op-Ed Columnist

This Is Not a Test. This Is Not a Test.

March 11, 2009
The New York Times
By THOMAS L. FRIEDMAN

It’s always great to see the stock market come back from the dead. But I am deeply worried that our political system doesn’t grasp how much our financial crisis can still undermine everything we want to be as a country. Friends, this is not a test. Economically, this is the big one. This is August 1914. This is the morning after Pearl Harbor. This is 9/12. Yet, in too many ways, we seem to be playing politics as usual.

Our country has congestive heart failure. Our heart, our banking system that pumps blood to our industrial muscles, is clogged and functioning far below capacity. Nothing else remotely compares in importance to the urgent need to heal our banks.

Yet I read that we’re actually holding up dozens of key appointments at the Treasury Department because we are worried whether someone paid Social Security taxes on a nanny hired 20 years ago at $5 an hour. That’s insane. It’s as if our financial house is burning down but we won’t let the Fire Department open the hydrant until it assures us that there isn’t too much chlorine in the water. Hello?

Meanwhile, the Republican Party behaves as if it would rather see the country fail than Barack Obama succeed. Rush Limbaugh, the de facto G.O.P. boss, said so explicitly, prompting John McCain to declare about President Obama to Politico: “I don’t want him to fail in his mission of restoring our economy.” The G.O.P. is actually debating whether it wants our president to fail. Rather than help the president make the hard calls, the G.O.P. has opted for cat calls. It would be as if on the morning after 9/11, Democrats said they wanted no part of any war against Al Qaeda — “George Bush, you’re on your own.”

As for President Obama, I like his coolness under fire, yet sometimes it feels as if he is deliberately keeping his distance from the banking crisis, while pressing ahead on other popular initiatives. I understand that he doesn’t want his presidency to be held hostage to the ups and downs of bank stocks, but a hostage he is. We all are.

Great and difficult crises are what produce great presidents, so one thing we know for sure: Mr. Obama’s going to have his shot at greatness. This crisis is uniquely difficult in four respects.

First, to get out of a crisis like this you need to let markets clear. You need to let failed companies, or homeowners, go bankrupt, unlock their dead capital and reapply it to thriving entities. That is how the dot-com bust ended, and out of that carnage emerged a whole new set of companies. The problem with this crisis is that A.I.G., Citigroup and General Motors — and your neighbor’s subprime mortgage — are not Dogfood.com. You let the market clear them away, and we could all be wiped out with them. Therefore, the president has to find a way to punish bad financial actors without setting off another Lehman Brothers domino effect.

Second, we need to get a market going that would bring fair value and clarity to the “toxic mortgages” crippling the balance sheets of our major banks. This will likely require some degree of government subsidy to private equity groups and hedge funds to get them to make the first bids for these toxic assets by guaranteeing they will not lose. This could make great policy sense, but be a nightmare to sell politically. It will strike many as another unfair giveaway to Wall Street.

Unfortunately, the president may have to look the American people in the eye and explain that “fairness is not on the menu anymore.” All that’s on the menu now is whether or not we avoid a system meltdown — and this will require rewarding some new investors.

Third, the president may have to make some trillion-dollar decisions — like nationalizing major banks or doubling the economic stimulus — with no real precedent and without knowing all the long-term ramifications.

Finally, to do all this, the president has to make us realize how dangerous a moment we’re in, without creating a panic that will prompt Americans to put every dime in their mattresses and undermine the economy even more.

All this will require leadership of the highest order — bold decisions, persistence and persuasion. There is a huge amount of money on the sidelines eager to bet again on America. But right now, there is too much uncertainty; no one knows what will be the new rules governing investments in our biggest financial institutions. If President Obama can produce and sell that plan, private investors, big and small, will give us a stimulus like you’ve never seen.

Which is why I wake up every morning hoping to read this story: “President Obama announced today that he had invited the country’s 20 leading bankers, 20 leading industrialists, 20 top market economists and the Democratic and Republican leaders in the House and Senate to join him and his team at Camp David. ‘We will not come down from the mountain until we have forged a common, transparent strategy for getting us out of this banking crisis,’ the president said, as he boarded his helicopter.”

Maureen Dowd is off today.

    This Is Not a Test. This Is Not a Test., NYT, 11.3.2009, http://www.nytimes.com/2009/03/11/opinion/11friedman.html

Bernanke Says Financial Rules

Need an Overhaul

March 11, 2009
The New York Times
By JACK HEALY

The Federal Reserve chairman, Ben S. Bernanke, on Tuesday called for a broad reworking of how the government regulates the financial system to prevent future financial meltdowns.

In a speech before the Council on Foreign Relations in Washington, Mr. Bernanke said the financial system needed to be regulated “as a whole, in a holistic way” and that stricter oversight of banks would not be enough to guard against future crises.

“Strong and effective regulation and supervision of banking institutions, although necessary for reducing systemic risk, are not sufficient by themselves to achieve this aim,” Mr. Bernanke said.

He said that the failures of government oversight systems and private risk management helped to precipitate the economic crisis by not ensuring that a flood of foreign money into the United States was prudently invested. Credit markets seized up and global economies began contracting in what Mr. Bernanke called the worst financial crisis since the 1930s.

Even as the Fed and other central banks scramble to rebuild confidence in the financial system and free up credit, Mr. Bernanke said that policymakers needed to look ahead to long-term changes in the financial system.

Mr. Bernanke said that policy makers also needed to examine the problem of institutions deemed “too big to fail” because of the role they played in the broader system. Huge institutions like Citigroup and the insurer American International Group have received billions in bailout aid as the government sought to ward off a collapse in the financial system.

“In the present crisis, the too-big-to-fail issue has emerged as an enormous problem,” Mr. Bernanke said.

Specifically, he called for “especially close” oversight of firms whose collapse would pose a systemic threat to the broader economy, and said that regulators need to zealously monitor the risk-taking and financial stability of major financial institutions, and that they must be held to high standards of liquidity.

He called for a review of the accounting rules that govern how companies value assets — a crucial issue as banks struggle under the weight of mortgage-related debts whose underlying values have fallen as housing prices crumbled. Mr. Bernanke said accounting rules and other financial regulations should not amplify the natural ups and downs in market cycles.

“Further review of accounting standards governing valuation and loss provisioning would be useful, and might result in modifications to the accounting rules that reduce their pro-cyclical effects without compromising the goals of disclosure and transparency,” he said.

In a question-and-answer session after the speech, Mr. Bernanke said he did not favor a suspension of the mark-to-market accounting standards, but said that the weakness in current rules should be identified and corrected.

Mr. Bernanke also called for the creation of an authority to monitor and oversee broad, systemic risks, and said that policy makers need to add muscle to the rules governing payment and trading so that the financial markets perform better under stress.

He said the United States could take a “macroprudential” approach — surveying the breadth of markets and financial institutions for signs of bubbles, growing risks like the subprime mortgage market, or risks shared by interconnected markets. Congress could empower a government agency like the Fed to take on that task.

“The policy actions I’ve discussed would inhibit the buildup of risks within the financial system and improve the resilience of the financial system to adverse shocks,” Mr. Bernanke said.

    Bernanke Says Financial Rules Need an Overhaul, NYT, 11.3.2009, http://www.nytimes.com/2009/03/11/business/economy/11fed.html?hp

Op-Ed Columnist

Reviving the Dream

March 10, 2009
The New York Times
By BOB HERBERT

Working families were in deep trouble long before this megarecession hit. But too many of the public officials who should have been looking out for the middle class and the poor were part of the reckless and shockingly shortsighted alliance of conservatives and corporate leaders that rigged the economy in favor of the rich and ultimately brought it down completely.

As Jared Bernstein, now the chief economic adviser to Vice President Joseph Biden, wrote in the preface to his book, “Crunch: Why Do I Feel So Squeezed? (And Other Unsolved Economic Mysteries)”:

“Economics has been hijacked by the rich and powerful, and it has been forged into a tool that is being used against the rest of us.”

Working people were not just abandoned by big business and their ideological henchmen in government, they were exploited and humiliated. They were denied the productivity gains that should have rightfully accrued to them. They were treated ruthlessly whenever they tried to organize. They were never reasonably protected against the savage dislocations caused by revolutions in technology and global trade.

Working people were told that all of this was good for them, and whether out of ignorance or fear or prejudice or, as my grandfather might have said, damned foolishness, many bought into it. They signed onto tax policies that worked like a three-card monte game. And they were sold a snake oil concoction called “trickle down” that so addled their brains that they thought it was a wonderful idea to hand over their share of the nation’s wealth to those who were already fabulously rich.

America used to be better than this.

The seeds of today’s disaster were sown some 30 years ago. Looking at income patterns during that period, my former colleague at The Times, David Cay Johnston, noted that from 1980 (the year Ronald Reagan was elected) to 2005, the national economy, adjusted for inflation, more than doubled. (Because of population growth, the actual increase per capita was about 66 percent.)

But the average income for the vast majority of Americans actually declined during those years. The standard of living for the average family improved not because incomes grew but because women entered the workplace in droves.

As hard as it may be to believe, the peak income year for the bottom 90 percent of Americans was way back in 1973, when the average income per taxpayer, adjusted for inflation, was $33,000. That was nearly $4,000 higher, Mr. Johnston pointed out, than in 2005.

Men have done particularly poorly. Men who are now in their 30s — the prime age for raising families — earn less money than members of their fathers’ generation did at the same age.

It may seem like ancient history, but in the first few decades following World War II, the United States, despite many serious flaws, established the model of a highly productive society that shared its prosperity widely and made investments that were geared toward a more prosperous, more fulfilling future.

The American dream was alive and well and seemingly unassailable. But somehow, following the oil shocks, the hyperinflation and other traumas of the 1970s, Americans allowed the right-wingers to get a toehold — and they began the serious work of smothering the dream.

Ronald Reagan saw Medicare as a giant step on the road to socialism. Newt Gingrich, apparently referring to the original fee-for-service version of Medicare, which was cherished by the elderly, cracked, “We don’t get rid of it in Round One because we don’t think it’s politically smart.”

The right-wingers were crafty: You smother the dream by crippling the programs that support it, by starving the government of money to pay for them, by funneling the government’s revenues to the rich through tax cuts and other benefits, by looting the government the way gangsters loot legitimate businesses and then pleading poverty when it comes time to fund the services required by the people.

The anti-tax fanatic Grover Norquist summed the matter up nicely when he famously said, “Our goal is to shrink the government to the size where you can drown it in a bathtub.” Only they didn’t shrink the government, they enlarged it and turned its bounty over to the rich.

Now, with the economy in free fall and likely to get worse, Americans — despite their suffering — have an opportunity to reshape the society, and then to move it in a fairer, smarter and ultimately more productive direction. That is the only way to revive the dream, but it will take a long time and require great courage and sacrifice.

The right-wingers do not want that to happen, which is why they are rooting so hard for President Obama’s initiatives to fail. They like the direction that the country took over the past 30 years. They’d love to do it all again.

    Reviving the Dream, NYT, 10.3.2009, http://www.nytimes.com/2009/03/10/opinion/10herbert.html

Conspicuous Consumption,

a Casualty of Recession

March 10, 2009
The New York Times
By SHAILA DEWAN

ATLANTA — It is a sign of the times when Sacha Taylor, a fixture on the charity circuit in this gala-happy city, digs out a 10-year-old dress to wear to a recent society party.

Or when Jennifer Riley, a corporate lawyer, starts patronizing restaurants that take coupons.

Or when Ethel Knox, the wife of a pediatrician, cleans out her home and her storage unit, gives away an old car to a needy friend and cancels the family Christmas. “I just feel so decadent with all the stuff I’ve got,” she explained.

In just the seven months since the stock market began to plummet, the recession has aimed its death ray not just at the credit market, the Dow and Detroit, but at the very ethos of conspicuous consumption. Even those with a regular income are reassessing their spending habits, perhaps for the long term. They are shopping their closets, downscaling their vacations and holding off on trading in their cars. If the race to have the latest fashions and gadgets was like an endless, ever-faster video game, then someone has pushed the reset button.

“I think this economy was a good way to cure my compulsive shopping habit,” Maxine Frankel, 59, a high school teacher from Skokie, Ill., said as she longingly stroked a diaphanous black shawl at a shop in the nearby Chicago suburb of Glenview. “It’s kind of funny, but I feel much more satisfied with the things money can’t buy, like the well-being of my family. I’m just not seeking happiness from material things anymore.”

To many, the adjustment feels less like a temporary, emergency response than a permanent recalibration, one they view in terms of ethics rather than expediency.

“It’s kind of like we all went overboard,” said Ms. Taylor, 33. “And we’re trying to get back to where we should have been.”

Not everyone thinks the new restraint will last. Ms. Riley, 37, who lives in Atlanta, said she doubted it would extend beyond the recession.

“I do think that maybe now it’s a little bit chic or something to save money, or to be pinching pennies,” she said.

Just as she stopped carpooling when gas prices went down, Ms. Riley said, she predicted that people would start buying again when the economy rebounded. “That’s just my own, maybe, cynical belief,” she said.

Still, economists point out that the Great Depression created a generation of cautious savers. The longer the downturn this time, they say, the more likely it is to change financial habits permanently.

Holly Moreno, 30, a part-time Web site manager in the Dallas suburb of Rowlett, Tex., whose husband is a business analyst, said she had been taking their 2-year-old son to indoor playgrounds at the mall and free story-times at the library instead of paying to get into the children’s museum, their favorite wintertime haunt.

“Even though we’re secure with our jobs, you’ve still got to plan for just-in-case,” Ms. Moreno said, “especially because we have a kid.”

As many economists have noted, cutting spending is the worst thing people with means can do for the economy right now. But that argument seems to have little traction, especially because even those with steady paychecks and no fear of losing their job have seen their net worth decline and their retirement savings evaporate.

“I don’t think there’s been any other period in modern history where appeals to people to spend the economy back into health have worked,” said Ethan S. Harris, a co-chief of United States economics research at Barclays Capital. “The only time I’ve ever seen where that kind of urging people to spend worked was after 9/11, and I did think at the time that there was some patriotic buying going on.”

After the attacks of Sept. 11, though, President George W. Bush urged Americans to go shopping. President Obama has taken a different tack, issuing a budget whose very title, “A New Era of Responsibility,” strives for an austere tone. On Inauguration Day, the first daughters, Sasha and Malia, dressed not in designer labels but clothing from J. Crew. On television, the insurance giant Allstate is running a sepia-toned “back to basics” advertising campaign, and in Target’s “new day” commercials, the “new pedicure” is administered by a spouse and the “new vacation glow” comes from a spray bottle.

“Though the recession was always talked about in economic terms, we felt really strongly that, in fact, it was a crisis of culture,” said Tracy Johnson, research director for the Context-Based Research Group, a market research firm in Baltimore that views the recession as a rite-of-passage that will reorder consumer priorities.

Ms. Johnson has advised clients to focus on quality rather than quantity. Malls redecorated in screaming red “sale” signs are not the way to go, she said, because “if you just give people the opportunity to buy more, you’re not matching up to where their minds are.”

Carol Morgan, who teaches law at the University of Georgia and whose husband has a private law practice, said she felt a responsibility to cut needless spending. “That is probably something that is a prudent thing to do in any event, but particularly now I see it as the right thing, as the moral thing to do,” she said, adding that she also hoped to increase her charitable giving. “Before, extravagance and opulence was the aspiration, and if we can replace that with a desire to live more simply — replace that with time with family, or time for spirituality — what a positive outcome to a very negative situation.”

Kim Gatlin, a novelist who lives in Park Cities, in the Dallas area, said some of her friends had urged their husbands not to give them jewelry over the holidays. “They were like, you know, ‘There’s nothing I’m dying for right now — let’s just wait,’ ” she said. “It makes them feel like they’re participating, although they don’t contribute to the income stream.”

Even some of the very affluent said they were reluctant to be conspicuous in their spending.

“It’s disrespectful to the people who don’t have much to flaunt your wealth,” said Monica Dioda Hagedorn, 40, a lawyer in Atlanta who is married to an heir of the Scotts Miracle-Gro fortune. “I have plenty of dresses to last me 10 years.”

Ms. Hagedorn said she did not hold herself apart from the rest of society because of her money. “Everyone’s going to pull through together, or everyone’s going to sink together,” she said.

Fear and uncertainty have paralyzed even the most insulated clients, said Jack Sawyer Jr., who manages money for some of Atlanta’s wealthiest families. “I have clients who have $20 million, young grandparents, and they’re concerned about whether they can continue to pay tuition for their grandchildren. It’s not a rational process.”

Any sharp decline in consumer spending will feed on itself, said Juliet B. Schor, an economist at Boston College and the author of “The Overspent American: Upscaling, Downshifting and the New Consumer” (Basic Books, 1998). Typically, people spend when those around them are spending, but in a downturn, the need to compete evaporates. “You can stay right where you are without falling behind,” Ms. Schor said.

Consumers’ focus may have shifted, she said, from striving to catch up to those above them to contemplating the fates of those below them.

Craig Robinson, 34, a manager at a real estate investment firm in Atlanta, agreed, saying that he was not tempted to join those who were scooping up deals at department stores. “There’s one guy to the right of me showing me this great deal he got on his tie,” he said, “and there’s four guys to the left of me who got laid off and can’t find a job.”

 

Karen Ann Cullotta contributed reporting from Chicago, Gretel C. Kovach from Dallas, and Rebecca Cathcart from Los Angeles.

    Conspicuous Consumption, a Casualty of Recession, NYT, 10.3.2009, http://www.nytimes.com/2009/03/10/us/10reset.html?hp

A Zealous Watchman

to Follow the Money

March 10, 2009
The New York Times
By SCOTT SHANE

WASHINGTON — There is an alligator head in Earl E. Devaney’s office, with a tiny camera concealed inside. The covert pictures it snapped in a Louisiana bayou caught an Interior Department official on a fishing trip he had accepted as a bribe, but today the stuffed gator lives on as a toothy deterrent to corruption.

“When an assistant secretary comes in and asks about it, I tell that story and they get a little unnerved,” said Mr. Devaney, the inspector general for the Interior Department and the man President Obama has chosen to police the spending of the $787 billion stimulus package.

In 38 years of government service, Mr. Devaney, a hulking former college football lineman and Secret Service man, has been unnerving would-be miscreants. But now the Big Man, as Mr. Devaney’s colleagues call him, is taking on an incomparably bigger job, tracking a sum 50 times the agency’s annual budget as chairman of the Recovery Accountability and Transparency Board — or as the irresistible acronym has it, RAT Board.

Squeezed with other honorees into the box of the first lady, Michelle Obama, for the president’s address to Congress on Feb. 24, Mr. Devaney looked uneasy in the spotlight, a deadpan Joe Friday at a political spectacle. But he likes the assignment.

“It’s sort of the Super Bowl of oversight,” said Mr. Devaney, 61, in an interview between hunting for office space and recruiting staff members. He has $84 million to run his office through September 2011, out of some $350 million for oversight.

The stimulus is a bet-the-farm wager on the economy with few precedents in American history, and Mr. Devaney’s appointment has been widely praised for assuring tough scrutiny.

“He’s out of central casting as the old-time street cop who’s seen it all,” said Danielle Brian, executive director for the Project on Government Oversight, an advocacy group in Washington.

Unlike inspectors general who soft-pedal criticism of agency brass, Ms. Brian added, Mr. Devaney “never got the memo that said he wasn’t supposed to be a junkyard dog.”

The job, however, comes with a glaring contradiction. Speedy spending is considered critical to jump-starting the economy. Still, Mr. Devaney must make sure the billions shoveled out the Treasury door in such a hurry are neither wasted nor stolen. He said he was aware of the tension and hoped to deter waste and fraud not with an alligator head, but with a Web site, Recovery.gov, with voluminous details on every dollar spent.

“I want to make it possible for Mr. and Mrs. Smith in Ohio to see exactly how the money is spent,” Mr. Devaney said.

If a project that promised to create 1,000 jobs only creates 100, the failure will be recorded, he said: “The good, the bad and the ugly will all be on that Web site.”

Not all believe the federal government is capable of such candor, and so far, an independent site, StimulusWatch.org, easily outclasses Recovery.gov. Senator Charles E. Grassley, Republican of Iowa, called Mr. Devaney “independent and highly effective” but said the RAT board “puts another layer of bureaucracy between taxpayers and the truth” about how the money is spent.

The only child of a middle-class couple in Reading, Mass., Mr. Devaney studied government at Franklin and Marshall College in Pennsylvania. The quarterback he helped protect, D. J. Korns, recalls Mr. Devaney’s steady leadership in a fraternity and stoicism on the football field, where his bad shoulder would pop out of joint, a trainer would snap it back in, and he would return to the fray. “It was so painful I couldn’t watch,” Mr. Korns said.

Hooked on law enforcement after working summers as a police officer on Cape Cod, Mr. Devaney went directly from graduation to the Secret Service in 1970. He protected presidents — he liked the recent film “Frost/Nixon” for its portrait of that president — and once was shot at by a disturbed woman who mistook him for President Gerald R. Ford. She missed, and he went on to build a new fraud division in the Secret Service.

In 1991, he was hired to create a criminal enforcement division for the Environmental Protection Agency. Felicia Marcus, who worked with him as a regional administrator at that agency in the 1990s — and whom he once saved from a purse-snatcher — said he was tough but reasonable with polluters.

“He listens, but no one pushes this guy around,” Ms. Marcus said.

Arriving at the Interior Department in 1999, Mr. Devaney found a “broken” inspector general’s office, said Mary Kendall, his deputy there. Senior officials told him they had never before met any of his predecessors and that they threw out reports unread because they were so dense.

Mr. Devaney created a special unit to focus on the most serious cases, which had routinely languished, created a system for identifying the programs at highest risk of failure, and ordered that reports no longer be written in “auditese or cop talk,” as he called it. When programs worked, he praised them, to build trust with the work force.

The 2004 investigation of the official photographed in the bayou, a Louisiana regional supervisor who accepted fishing trips from a contractor, was one in a parade of Interior Department scandals involving drugs and sex, free-spending lobbyists and unpaid oil royalties. Mr. Devaney speaks of his beat at the department with a mix of relish and dismay.

“Everything everyone would want is here,” he said. “Water, land, minerals, oil and gas and the ever-popular Indian gaming.”

The job has proved frustrating at times. In 2004, his first report on J. Steven Griles, the deputy secretary who was close to the lobbyist Jack Abramoff, documented 25 ethical lapses, he said. But the interior secretary, Gale A. Norton, shrugged it off.

“She said she’d talked to him, and he wouldn’t do it again,” Mr. Devaney said. “Three years later, he was in jail.” (Ms. Norton, now at the oil giant Royal Dutch Shell, declined to comment.)

That frustration was on display at a 2006 hearing when Mr. Devaney declared, “Simply stated, short of a crime, anything goes at the highest levels of the Department of the Interior.”

Jeff Ruch, who runs the whistle-blower group Public Employees for Environmental Responsibility, is a rare critic, calling Mr. Devaney “the deflector general” for emphasizing sensational corruption cases over more fundamental change.

But Ms. Brian of the Project on Government Oversight said a little showmanship was useful. “He’s figured out that a lot of his impact is deterrence, and that means making a splash,” she said.

Nearly three years ago, Mr. Devaney told Federal Times in a rare interview that he was “in the fall of my career” and had “no aspirations other than to play more golf.” Now, contemplating the stimulus job, he said that was a miscalculation.

“It turned out to be early fall,” Mr. Devaney said. “Or maybe late summer.”

    A Zealous Watchman to Follow the Money, NYT, 10.3.2009, http://www.nytimes.com/2009/03/10/us/politics/10devaney.html?hp

24 million

go from 'thriving' to 'struggling'

9 March 2009
USA Today
By Susan Page

EXTON, Pa. — Casualties of the economic downturn include easy credit, rising home values, stable retirement investment accounts and 4.4 million jobs.

Some fear that the American dream may be in peril as well.

The aspirations that have defined the American experience — that those who work hard and play by the rules can get ahead, and that the next generation will have a better life than this one — have been battered by a devastating recession that shows few signs of having hit bottom.

"Maybe we were dreaming the American dream, you know what I mean?" says David McLimans, a steelworker. The mill he works for in suburban Philadelphia temporarily shut down last week amid the credit crunch. "I'm 63, so I'm not dreaming it anymore. I have what I have and I hope I can keep what I have, but my kids, I worry about. They're struggling."

His four grown children have a lot of company. More than 24 million Americans shifted in 2008 from lives that were "thriving" to ones that were "struggling," according to a massive study by Gallup and Healthways, a Tennessee health management company. Results from its Well-Being Index — including physical and mental health as well as personal finances and job satisfaction — are being released Tuesday.

For the project, Gallup has been surveying about 1,000 people every day except major holidays since January 2008.

At the start of 2008, as the recession was beginning, slightly more people were "thriving" than "struggling." By the end of the year, after an economic meltdown that began with the subprime mortgage crisis, Americans by an overwhelming 20 percentage points were "struggling" rather than "thriving," 58%-38%.

The remaining 4% were "suffering," in more dire straits.

The index categorizes respondents based on how they rate their current lives as well as their expectations of where they will be in five years. Among those showing the steepest drop were African Americans, business owners and executives, and people who were 35-39 years old — a stage in life when many are building careers, expanding families and buying homes.

Among those with the smallest decline were Hispanics, seniors 65 and older, and repair workers, whose skills suddenly may be more in demand as Americans try to make do with what they have.

No group was immune, however. High levels of education and income have protected many workers during previous downturns, but the Well-Being Index shows declines in 2008 across all age groups and income levels, among both men and women and in every major racial and ethnic group.

In Chester County, south of Philadelphia, the downturn has been felt not only by steelworkers in Coatesville but also investment bankers in Exton and among immigrants who toil on the mushroom farms in Kennett Square.

"People have lost their jobs and they're in the unemployment lines," says James Kennedy, the 91-year-old mayor of South Coatesville. Even so, he recalls, the Great Depression was worse.

"The current recession hits everyone and spares no one," says Andrew Dinniman, the local state senator and a professor of global studies at West Chester University of Pennsylvania. "The bottom line is: industrial worker, professional worker — we're all in this together."

The wide reach of hard times has made it difficult for Americans to use some traditional strategies to cope.

Get training for a new job? The index shows declines in every occupation, from business managers and professionals to clerical staff and service workers. Move to a different part of the country? The percentage of those "thriving" fell by double digits in the West, South and Midwest and by more than 9 percentage points in the East.

The findings underscore the enormous task the United States faces in pulling out of the worst downturn since the Depression and in maintaining the sense of possibility that has marked the nation since its founding.

Optimism that individuals could reach better days ahead fueled the westward expansion, waves of innovation and the country's continued draw for immigrants from around the world.

The concept of the American dream reflects aspirations for the long term that have endured through good times and bad, but it is not indestructible, says Claudia Goldin, an economic historian at Harvard.

"What people mean by the 'American dream' is something that is not a snapshot; it's something that is played out over time and not just in their lifetime, but the lifetimes of their children," she says.

"It may be impervious to a short-term job loss, to a short-run health problem, but it's not going to be impervious to a slowdown of the entire economy that lasts for a very long period of time," especially if traditional gains in education are stalled.

In a USA TODAY/Gallup Poll taken last week, Americans by about 3-to-1 said they believed that with hard work they could achieve the American dream. Even so, one tenet of that dream — faith that the next generation will have a better life than their parents — is eroding.

Ten years ago, during an economic boom, 71% of Americans said it was likely that those in the next generation would be better off than their parents.

One year ago, 66% agreed.

Now, 59% do.

The pursuit of happiness

The groundbreaking Gallup-Healthways index makes clear how intertwined individual lives are with the nation's well-being. Dramatic shifts in the stock market and the jobless rate often correlated with changes in Americans' assessments of where their lives stood now and where they would be in the future.

Consider the Declaration of Independence's assertion of a natural-born right to pursue happiness.

The survey lists several emotions, including happiness, and asks if respondents experienced them the previous day. Weekends tended to have the highest percentage of those reporting happiness or enjoyment without much stress or worry — no surprise there — and Thanksgiving was the happiest day of the year, when 68% were upbeat.

The five days with the lowest levels of happiness all coincided with awful economic news.

Just 37% of Americans said they felt a lot of happiness and not a lot of stress on four downbeat days: Sept. 17, when the Dow fell 449 points; Sept. 29, when the Dow dropped 778 points and the House rejected President Bush's Wall Street bailout plan; Nov. 20, when new jobless claims hit the highest level since 1992; and Dec. 2, one day after the nation officially was declared in recession, pushing down the Dow by 680 points.

The unhappiest day of all was Dec. 11, when new jobless claims reached a 26-year high. A record-low 35% of Americans reported that day as a happy one.

For Amy Beers, the past year has been trying.

The 36-year-old woman from Perkasie, in Bucks County, had been on a fast track. She built a career in direct marketing, worked with an inventor who had developed a handheld device that could neutralize land mines without detonation, attended a land-mine conference in Croatia to promote it, then started her own firm to help local companies develop customer loyalty.

Last year, her business dried up. She tends bar at night to help pay the bills for her and her 7-year-old son, Zack, while she looks for a job in her field by day.

"I've gone from corporate America to the top of Comcast's shut-off list," she says ruefully. "It's been a truly humbling experience, and for a very long time I was embarrassed not to have a job. You go through the emotional loss. In some ways, it's like mourning. I've had those doubts and depression: 'Oh my goodness, my life is falling apart in front of my eyes!'

"But at the end of the day, I know who I am. I know that this isn't permanent, and I really have belief that things are going to get better."

Even Beers' job at a Bennigan's restaurant in Montgomeryville is an opportunity, she says. The traveling business executives who stay in the adjoining hotel and come in for a nightcap might have a job at their companies.

Her pitch: "Hi, is anyone out there looking for an employee?"

Obama: Keep 'the dream alive'

President Obama regularly talks about the American dream as threatened and its restoration as a central goal. "We have begun the essential work of keeping the American dream alive in our time," he said when he signed the $787 billion stimulus bill.

White House press secretary Robert Gibbs ticks off what the White House sees as elements of the American dream: "That you could get a job that pays a living wage, that if you got sick you wouldn't go bankrupt, that you don't have to be rich to send your kids to college, that you could have a secure retirement."

Safire's New Political Dictionary puts it this way: "The American System is considered the skeleton and the American Dream the soul of the American body politic." Author William Safire adds that the phrase "defies definition as much as it invites discussion."

Karen Beltran's family epitomizes one classic version of the American dream.

Her father came to southern Pennsylvania from Mexico to work on the mushroom farms and as a dishwasher, eventually bringing his wife and their two young daughters here. At first illegal immigrants, Jose and Martha Beltran eventually gained legal status and last month became U.S. citizens.

An organization in Kennett Square called La Comunidad Hispana helped them gain their high-school equivalency diplomas. They own their home now — he is a mechanic; she is employed at a potato-chip factory — and have sent their two older daughters to college.

Karen, 25, who graduated from Penn State in 2005, now works as a social worker at the same community center that helped them.

The downturn has postponed her father's hopes of moving to a new job and reduced their ability to contribute toward college expenses for their youngest, American-born daughter, who is now in high school. Still, ask Karen Beltran about the American dream and she plays down financial strains to boast about how close-knit her family remains: "We're still together."

In the face of a faltering economy, some analysts say, Americans may be redefining some fundamental ambitions. A study sponsored by Northwestern Mutual and being released today asked Americans to define "success." Topping the list were spending time with family, having a good relationship with a spouse or partner, being healthy and maintaining a good work/life balance.

Ranked near the bottom were such material goals as owning "the home of your dreams" and earning a high income.

Still, three of four in the nationwide poll ranked financial security as important — and only 12% said they felt secure in their finances these days.

Chris Connell, 50, owner of the Pig & Whistle Deli in Havertown, in Pennsylvania's Delaware County, has cut back on hours for his employees and stopped drawing a salary for himself as he struggles to deal with a cash-flow squeeze.

His wife's paycheck as an emergency-room nurse is keeping the family afloat for now.

Connell feels confident the economy will be better by the time his 11-year-old twin daughters, head into the workforce, but he worries about his three older children, including two who are now in college.

"The twins, we don't want to scare them. We don't want them to think someone is going to come along and take the house away," he says. "But we at least want to let them know that things are very, very tight and we have to work at this together. …

"I do still want the same things for them. Never going to stop the dream, absolutely. Never lower my standard of dreaming."

    24 million go from 'thriving' to 'struggling', UT, 9.3.2009, http://www.usatoday.com/money/economy/2009-03-09-americandream_N.htm

At Foreclosure Auction,

Houses Sell, in a Frenzy

March 9, 2009
The New York Times
By FERNANDA SANTOS

In rapid-fire speech that resembled a horse-race announcer’s, an auctioneer introduced the first of the day’s 375 properties: a seven-bedroom, five-bathroom home in Roselle, N.J., with an estimated value of $565,000 and a starting bid of $129,000. (Final sale price: $245,000.)

On the floor, four men called the bids, screaming, blowing whistles, thrusting their arms into the air and using their fingers to signal how much more was being offered over the last bid.

“One man’s misery is another man’s fortune,” the saying goes, and perhaps nowhere was it more true than at the Jacob K. Javits Convention Center on Sunday, where a mob of potential buyers convened for an auction of foreclosed homes, a fast-paced and somewhat unusual happening in a place more used to trade shows and corporate events.

Some 1,400 people were there, a crowd twice as large as the one last year, when the California-based Real Estate Disposition Corporation held its first foreclosure auction in the city, in a conference room at a Midtown hotel. But there were not nearly as many foreclosed houses then as there are now, said the corporation’s chairman, Robert Friedman.

“The economy is much more severe these days,” Mr. Friedman added. “We’re seeing more foreclosures than any other time in the 19 years we’ve been in business, and we have auctions almost every day all across the country, sometimes more than one auction a day.”

Outside the Javits Center, some 20 protesters — among them labor leaders, antiwar activists and someone from City Councilman Charles Barron’s office in Brooklyn — were critical of both the auction and the billions of dollars the federal government has devoted to bailing out financial institutions. One protester held a sign that read: “R.E.D.C. made $3 billion last year by auctioning off working people’s homes. Bail out the people — not the corporate predators.”

The corporation does not have any role in foreclosing on homes; it is simply hired by banks to sell the foreclosed homes they own at auction, Mr. Friedman said. Last year, it held 300 auctions. This year, it expects to hold about 100 more than that.

From a dais that rose before packed rows of aluminum chairs, the company’s vice president, Todd Gladis, greeted the audience with a mix of lament and rallying cry. “Nobody likes the foreclosure crisis that’s going on,” he bellowed into a microphone. “But we believe that everybody here in this room will play a role in turning things around by turning houses into homes.”

Then, the auction began.

“I pray that God will help me find a place I will like and can afford,” said Letisha Jones, 28, a nurse who lives with her parents and two sisters in East New York, Brooklyn. Ms. Jones said that she planned to spend no more than $100,000 on a home for herself, or maybe a bigger home for her family.

She left empty-handed. “Maybe I’ll have better luck next time, now that I know how it works,” she said.

The audience was roughly divided into three categories. There were experienced bidders, many of them investors who have made careers of buying, fixing up and selling foreclosed homes for below-market prices — and quick profits. There were the novices, who looked at once lost and awestruck, their eyes darting between the booklet listing the houses that were up for grabs and the screens that showcased them as the bidding went on. Finally, there were the curious, like Ashley Durham and her fiancé, Darnell Smith, who plan to marry in May.

“We might come back to an auction after the wedding to see if we can buy a place for us, but for now, we’re just looking,” said Ms. Durham, 25.

“And laughing,” Mr. Smith, 32, added. “This is crazy.”

The auction’s rules were simple. Buyers were required to pay 5 percent of a house’s sale price on the spot, so the bidders had to come with a $5,000 cashier’s check and the ability to cover the remaining balance of a down payment with cash or a personal check. The rest of the sale could be financed; mortgage specialists were posted at desks behind the stage.

The properties included a weathered two-family home in Jamaica, Queens, offered for $500 and sold for $125,000; and a two-bedroom, one-bathroom house in Hampton Bays, on Long Island, offered for $89,000 and sold for $185,000.

The corporation adds a 5 percent fee to the final price of each house.

Beth Kaplan Bongar, 54, a writer and performer who also works as a real estate agent, bought the Hampton Bays house with part of the money she received in the sale of a loft in TriBeCa that she had owned for 30 years, she said.

Ms. Bongar said that she visited the house on Saturday. She noted that it had a fenced-in front yard, where her two dogs could run free, and that outside of windows that had to be replaced, it did not require substantial repair work.

“I need a place to call home,” she said. “And in the long run, this will cost me a little more than the storage bin I have down in Jersey, which is costing me $300 a month.”

    At Foreclosure Auction, Houses Sell, in a Frenzy, NYT, 9.3.2009, http://www.nytimes.com/2009/03/09/nyregion/09foreclosure.html

651,000 Jobs Lost in February;

Rate Rises to 8.1%

March 7, 2009
The New York Times
By JACK HEALY

Another 651,000 jobs were lost in February, adding to the millions of people who have been thrown out of work as the economic downturn deepens.

In a stark measure of the recession’s toll, the Bureau of Labor Statistics reported on Friday that the national unemployment rate surged to 8.1 percent last month, its highest in 25 years. The economy has now shed more than 4.4 million jobs since the recession started in December 2007.

And economists expect that unemployment will continue to rise for the rest of the year and into early 2010, with the unemployment rate reaching 9 to 10 percent by the time a recovery begins. Even then, with so many job losses centered in manufacturing, economists say that many positions devoured during this recession will not be coming back.

“This is not people being on furlough for six weeks or a month or two — this is permanent job losses, and that is what makes this so difficult,” said John Silvia, chief economist at Wachovia. “That is very telling in terms of how we’re really restructuring the overall economy.”

Although the tally of February’s losses was grim, the 651,000 jobs lost last month were actually fewer than the number in each of the last two months, according to revisions reported Friday. Some 655,000 jobs were lost in January, when the unemployment rate rose to 7.6 percent. December’s decline was revised to 681,000, from 577,000.

On Wall Street, financial markets initially seized on the fact that monthly job losses had not increased in February, and stocks rose in early trading. But shares gave up their gains and were lower in late morning trading.

February marked the fourth consecutive month that the economy has shed more than 500,000 jobs, a pace that underscores the magnitude of the problems facing the Obama administration as it promises to save or create 3.5 million jobs over the next two years.

Last month, President Obama signed a $787 billion stimulus package of tax cuts, infrastructure spending and emergency aid. The first tax credits, in the form of reduced payroll withholdings, are expected to appear on paychecks beginning April 1.

But in testimony this week before Congress, federal officials again cautioned that even with the stimulus spending, a recovery will take time.

The package “should provide a boost to demand and production over the next two years as well as mitigate the overall loss of employment and income,” the Federal Reserve chairman, Ben S. Bernanke, told the Senate Budget Committee, but the timing is “subject to considerable uncertainty.”

The pace of job losses has only increased since the credit crisis shook financial markets last autumn, spawning a vicious circle of economic contraction that dragged down corporate earnings, consumer spending and overall growth. And Mr. Bernanke said in testimony this week that the labor market “may have worsened further in recent weeks.”

“It just feels like we’re in the teeth of the recession, and the bite is still very hard,” said Stuart Hoffman, chief economist at PNC Financial. “This is economywide, industrywide. It just shows the severity and the breadth of the job losses.”

Economists worry that mounting job losses could make it harder for homeowners to make their mortgage payments, igniting another wave of home foreclosures, which would further depress home values and the mortgage-related securities owned by major banks.

“We’re feeling the negative fallout from the intensification of the financial crisis,” Mickey Levy, chief economist at Bank of America, said. “We’re in the middle of the worst stage of job losses as well as the speed of contraction of gross domestic product.”

Workers from New York to Florida, from the Rust Belt to the Sun Belt, and across nearly every sector of the economy are being affected as employers reduce costs by slashing their payrolls and cutting their capital investment.

“There’s been no place to hide,” Mr. Hoffman said. “Everybody in every industry has lost jobs or is feeling insecure about whether they’re going to keep their jobs or how their company’s going to do.”

Retailers cut 39,500 jobs, and the construction industry cut 104,000 jobs as the housing market remained in the doldrums and home builders all but halted new-home construction.

Manufacturers alone slashed a seasonally adjusted 168,000 jobs in February, cutting payrolls in factories that produce machinery, electronics, furniture and metals. In Michigan, where the unemployment rate of 10.6 percent is the nation’s highest, the downward spiral of the automobile industry has left thousands of workers like Kim Allgeyer, a machine toolmaker, looking for steady work.

After 20 years working for a company that built manufacturing assembly lines for the Big Three automakers, Mr. Allgeyer said he lost his job in January and has been unable to find full-time work. He has worked day jobs and one week-long stint for contractors, but said there are so few jobs available that he is thinking of moving to Mississippi or Louisiana to work as a shipbuilder.

“The people who do what I do in the Detroit area are a dime a dozen,” Mr. Allgeyer said. “Who’s going to put me to work? Where’s the work at? It’s just a great big black hole.”

Mark Ortiz was one of those who joined the ranks of the unemployed in February. Mr. Ortiz lost his job at the art-framing company where he had worked for 11 years, most recently as the production manager.

“You spend all this time doing this, and now what?” he said. “It’s almost like I’ve gotten divorced and I’ve got to find a new wife.”

He has plastered his résumé across the Internet and searches for jobs every day from his home on Long Island, but his search for a good-paying job has been hampered by the fact that he went straight to work when he was younger, and never got a college degree.

“I was a guy who worked his whole life,” Mr. Ortiz said. “That was a major strike against me, a major strike.”

The jobless rate for people with a bachelor’s degree or beyond is 4.1 percent — its highest point in years, but still lower than the unemployment rate for people with less education. Of workers with only a high-school diploma, 8.3 percent were unemployed, and 12.6 percent of people who did not graduate from high school were unemployed.

Still, years of professional experience and multiple degrees, including one in law, have not sheltered people like Jeffrey Green, 53, of Placentia, Calif.

Mr. Green said he had sent out 1,000 résumés and posted his credentials on more than 100 job boards since he was laid off from his management position at a data-analysis firm in January. With no immediate prospects in sight, he is considering going to Japan to teach English, reprising his Japanese studies from his years as a college undergraduate.

“I’m just resigned,” he said. “I’m thinking, if I’m not going to make a lot of money I may as well have fun doing it.”

    651,000 Jobs Lost in February; Rate Rises to 8.1%, NYT, 7.3.2009, http://www.nytimes.com/2009/03/07/business/economy/07jobs.html

Patient Money

Hanging On to Health Coverage,

if the Job Goes Away

March 7, 2009
The New York Times
By WALECIA KONRAD
 

If you’re fortunate to still have your job, but aren’t sure how much longer that will be the case, lost income may not be your only worry. Your medical insurance is at risk, too.

“When you’re still on the job, even if it’s just for a little while longer, you’re in a slightly better position to make the most of the benefits you have now and to figure out your options,” said the Oklahoma insurance commissioner, Kim Holland, a longtime promoter of affordable health insurance.

She and other experts offer the following advice about girding for the worst case.

Use it before you lose it. “My clients wouldn’t want to hear me say this,” said Tom Billet, a senior executive with the corporate benefits consulting firm Watson Wyatt. “But if you feel a layoff is pending, now is the time for you and your family to get physicals, dental check-ups, eye exams and prescriptions filled.”

That’s what Denise Young Farrell is doing. Ms. Farrell, the mother of two children in Park Slope, Brooklyn, lost her job early this year when her department at the Lifetime Networks cable channel moved to California. Her husband lost his job at Bear Stearns last year. Ms. Farrell’s severance package included two months of paid health care.

Check your benefits handbook to see how long your health care coverage will last if you do lose your job. Often, employers will continue coverage until the last day of the month in which the employee worked. So if your last day at work was March 5, for example, you may have coverage until March 31, giving you a few extra days for those doctor visits.

Sign onto your spouse’s plan. If your spouse has employer-sponsored family health insurance benefits, he or she can add you and your dependents anytime during the year. But do be aware of the deadlines. Most companies require any changes to be filed within 30 or 60 days of the “qualifying event.” Depending on your spouse’s company, that could mean the day you were laid off or your last day of coverage.

In addition, some companies require written proof from your former employer that you were laid off. To avoid snags, try to arrange this before your last day of work. And be sure to check when the new coverage takes effect. If your spouse’s plan has a three-month waiting period, for example, you’ll need to find temporary coverage elsewhere.

Get to know Cobra. If you have health benefits in your current job, odds are you’ll be eligible to continue purchasing that coverage temporarily under the 1986 law known by its acronym, Cobra.

Cobra requires employers with 20 or more workers to make health insurance available to a former employee for up to 18 months after leaving the job — regardless of whether you quit or were laid off. But because the former worker must pay the full cost of that insurance, the premiums can easily exceed $1,000 a month for family coverage.

The new federal stimulus plan that President Obama recently signed into law does provide some temporary relief for laid-off workers. But even if you qualify for the subsidy, you’ll still pay 35 percent of the total health premium, compared to the 10 or 15 percent you paid as an employee. So you might be paying $300 to $400 or more a month. And that is for only the first 9 months of the 18-month Cobra coverage. For the second nine months you’ll be paying full fare.

For fuller details on the new Cobra provisions, see this Congressional Web page.If you do choose Cobra, pace yourself. Time it right, and you can essentially get two months of free Cobra coverage.

After your last day of coverage under your employer’s plan, you have 63 days to sign up to extend that coverage under Cobra. If you think you’re on the verge of getting a new job, or if you’re trying to find a more affordable insurance option, you can put off paying two months of Cobra premiums until you approach the deadline. If the new job or alternate insurance works out, you will have avoided those hundreds of dollars in Cobra premiums. But if you do fall ill or get in an accident in the interim, you will be covered — as long as you pay those back premiums.

Do be vigilant, though, about that 63-day deadline. Miss it, and you lose your Cobra eligibility.

Try to negotiate health care as part of your severance. If you are eligible for any type of severance, consider asking for an extension of health insurance in exchange for a smaller cash payout. That will give you more time to research your health insurance options and help you avoid a gap in coverage.

There is one caveat, said Kathryn Bakich, national health care compliance director for the Segal Company, a benefits consulting firm: Avoid having your company pay part or all of your Cobra premiums as part of a severance agreement. Employers are still waiting for guidance on this point from the Department of Labor and other government agencies, but if your former employer pays your Cobra premiums directly, you may be ineligible for the new Cobra subsidy, according to Ms. Bakich and other benefits experts. You’d be better off trying get a lump sum payment that you could use to pay Cobra premiums, if extending your current coverage isn’t an option.

When Cobra is not an option ... If you work for a small company (fewer than 20 employees) that doesn’t offer Cobra, 40 states offer what’s called mini-Cobra continuation coverage that allows you to stay in your group plan. Some states may offer the new Cobra subsidy in these plans. (Check with your state’s insurance department.) If you do not have access to Cobra or a state continuation plan, or if those benefits are close to running out, it’s important to find insurance of some kind, whether it is group or individual.

Federal law mandates that at least one nongroup insurer in your state must provide coverage to everyone, regardless of health issues. In many cases this is your state’s high-risk insurance pool, but there are no limits on how much insurers can charge for this coverage, so premiums can be extremely expensive. For more information on what your state offers, go to the National Association of Insurance Commissioners’ Web site, naic.org, to link to your state’s insurance department.

If you have a flexible spending account — use it. Here’s a little known bonus in the employee’s favor:

Let’s say you signed up to contribute $1,000 this year through payroll deductions to your health care flexible spending account. So far you’ve only put in about $200. No matter. “Companies must still reimburse you for the full amount you’ve elected even if you haven’t contributed the total to the account yet,” Mr. Billet said.

In this example, if you file claims for $1,000 of eligible health care expenses before your last day on the job, you will get the full reimbursement — not just the $200 you’ve paid in.

    Hanging On to Health Coverage, if the Job Goes Away, NYT, 7.3.2009, http://www.nytimes.com/2009/03/07/health/policy/07patient.html?hp

Recession Job Losses Top Four Million

MARCH 6, 2009
11:19 A.M. ET
The Walll Street Journal
By BRIAN BLACKSTONE

WASHINGTON -- The U.S. economy continues to hemorrhage jobs at monthly rates not seen in six decades, a government report showed, signaling that there's still no end in sight to the severe recession that has already cost the U.S. over four million jobs.

The report suggests that households, already seeing the value of their homes and investments plunge, face added headwinds from the labor market, which could put more pressure on consumer spending in coming months.

Nonfarm payrolls, which are calculated by a survey of companies, fell 651,000 in February, the U.S. Labor Department said Friday, in line with economist expectations. However, December and January were revised to show much steeper declines. In the case of December, the revision was to a drop of 681,000, the most since 1949 when a huge strike affected half a million workers. However, the labor force was smaller then than it is now.

The economy has shed 4.4 million jobs since the recession began in December 2007, with almost half of those losses occurring in the last three months alone. And unemployment is lasting much longer. As of last month, 2.9 million people were unemployed more than six months, up from just 1.3 million at the start of the recession.

"The sharp and widespread contraction in the labor market continued in February," said Keith Hall, Commissioner of the Bureau of Labor Statistics. Layoffs announcements continued last month across industries including Macy's Inc., Time Warner Cable Inc., Estee Lauder Cos., Goodyear Tire & Rubber Co. and General Motors Corp.

The unemployment rate, which is calculated using a survey of households, jumped 0.5 percentage point to 8.1%, the highest since December 1983 and slightly above expectations for an 8% rate. Some economists think it could hit 10% by the end of next year. For many industries including manufacturing, construction, business services and leisure, the jobless rate is already in double digits.

"It is hard to see where the bottom is," said Sung Won Sohn, a professor at California State University.

By some broader measures, labor-market conditions are much worse than the overall jobless rate suggests. When marginally attached and involuntary part-time workers are included, the rate of unemployed or underemployed workers actually reached 14.8% last month, up almost six percentage points from a year earlier.

Average hourly earnings increased a modest $0.03, or 0.2%, to $18.47. That was up 3.6% from one year ago, as the recession has made it harder for workers to bid up wages. According to the Fed's latest economic summary known as the beige book, "a number of reports pointed to outright reductions in hourly compensation costs."

Friday's numbers suggest that the economy hasn't stabilized in the wake of the fourth quarter's 6.2% slide in gross domestic product, which was the steepest since 1982. Economists expect a decline of similar or even greater magnitude this quarter.

One risk is that the stepped-up pace of layoffs may snuff out tentative signs of stabilization in consumer spending, which accounts for about 70% of GDP. Consumer spending rose in January, and retailers last month posted their first monthly rise in sales since September.

"Consumers and businesses are likely to become even more cautious after a bleak report such as this, and if they stop spending, the economy cannot get going again," said Chris Rupkey, economist at Bank of Tokyo-Mitsubishi.

There's little Fed policymakers can do on the monetary policy side to stem the slump, given that official rates are already near zero. But the Fed has created a number of credit programs -- financed through an expansion of its balance sheet -- aimed at spurring new lending. Officials this week unveiled a long-awaited initiative aimed at stimulating consumer lending.

Ironically, some of the pressure on labor markets appears to be a byproduct of robust productivity, which is actually a big plus for the economy over the long run. But in the current environment, it seems to be making things worse for workers as nimble businesses shed labor in anticipation of falling demand, which could become a self-fulfilling prophesy.

Hiring last month in goods-producing industries fell by 276,000. Within this group, manufacturing firms cut 168,000 jobs bringing the total since the recession began to 1.3 million.

Construction employment was down 104,000 last month. The unemployment rate in that sector is now 21.4%, almost double where it was this time last year.

Service-sector employment tumbled 375,000. Business and professional services companies shed 180,000 jobs, the fourth-straight six-figure loss, and financial-sector payrolls were down 44,000.

Retail trade cut almost 40,000 jobs, while leisure and hospitality businesses shed 33,000 as households curtail nonessential spending.

Temporary employment, a leading indicator of future job prospects, fell by almost 80,000.

The sole bright spot among private sector industries was health care, which tends to be more labor intensive and less productive than manufacturing and other services. Health care payrolls rose 26,900.

The government added 9,000 jobs.

The average workweek was unchanged at 33.3 hours. A separate index of aggregate weekly hours fell 0.7 point to 101.9.

    Recession Job Losses Top Four Million, WSJ, 6.3.2009, http://online.wsj.com/article/SB123634566437552601.html

Economists React:

‘Staring Into the Abyss’

March 6, 2009
10:07 am
The Wall Street Journal

Economists and others weigh in on the sharp drop in nonfarm payrolls and increase in the unemployment rate to 8.1%.

The recession is intensifying and the economy is rapidly shrinking. We are staring into the abyss. –Stephen A. Wood, Insight Economics

We suspect that the employment outcome would have been even worse in February were it not for unusual mild weather conditions across much of the country. Our favorite proxy for weather-related influences on employment — the “not at work due to bad weather” component of the household survey — came in at a much lower than normal reading of 199,000. There have only been three occasions in the past twenty years that showed a lower result for the moth of February. –David Greenlaw, Morgan Stanley

Is this good news or bad news? On the one hand, the new estimates suggest that the contraction in employment peaked in December with a 681,000 decline, followed by a 655,000 loss in January. In other words, the worst could be behind us. On the other hand, it turns out that the labor market was in an even worse state than we previously thought and any improvement over the past couple of months is marginal at best. –Paul Ashworth, Capital Economics

Job declines were widespread with losses in manufacturing and construction. The only bright spots remaining are health care & education, which reflect demographic trends. In contrast to the broad trend of declines in the private sector, government employment continues to grow. This suggests a change in the composition of the job market and economy. –John Silvia, Wachovia Economics Group

There is nothing redeeming about this employment report. The 0.5 percentage point increase in the unemployment rate is a fairly solid barometer of what is occurring in the economy. These job losses for February and the downward revisions are a function of sharp decline in economic activity in the final three months of 2008. Given the continuing slide in economic activity in the first quarter of 2009 there is a strong probability that over the next three months we will see a slow bleed in employment as the retail, financial and business services sector of the economy continue to shed jobs. –Joseph Brusuelas, Moody’s Economy.com

The new headline GDP number Within the major private sectors only education and health jobs rose, as usual, but the 29,000 gain was trivial compared to the losses elsewhere. Manufacturing and construction both lost fewer jobs than in Jan but services were worse, down 375,000 compared to 276,000. Retail losses have slowed to 40,000 average in the past two months, down from 90,000 in the previous two but the trend is still awful; business services losses are rising. Wage gains finally slowing; year-to-year down to a five-month low of 3.6%. Long way to go. –Ian Shepherdson, High Frequency Economics

Sharp, broad-based job losses continued into February, compounded by net downward revisions of 161,000 to December-January tallies. Manufacturing industries, which make up only 12.5% of private sector employment, accounted for 30% of the 2 million jobs shed from nonfarm payrolls over the past three months. For those looking for any signs of “second derivative” stabilization — in which the rate of decline stops increasing — nonmanufacturing employment offers a glimmer. The pattern of job loss has been relatively stable since November, and rising productivity suggests that this pace of job losses may prove sufficient to restore profitability. –Alan Levenson, T. Rowe Price

Of those who lost jobsin February, 50.2% are not on temporary layoff, the highest share on record, while those on temporary layoff accounted for only 12.0% of those who lost their jobs. These percentages are a sign that businesses do not expect any improvement in the outlook any time soon. The median duration of unemployment held at 19.8 weeks in February, but the mean duration did increase to 11 weeks, and 41.7% of the unemployed have been so for 15 weeks or more. –Richard F. Moody, Mission Residential

The massive hemorrhage of jobs is reminiscent of the 1982 recession when the jobless rate hit 10.8%. Unfortunately, it will get much worse. It is hard to se where the bottom is. The layoffs are spreading to all sectors of the economy. Those lucky enough to have jobs are facing wage freezes and reduction in work hours… The $787 billion economic stimulus program won’t have immediate effect on job creation even though some planned layoffs could be cancelled. The bulk of the positive benefit on jobs will come in 2010 creating about 2 million jobs over a two-year period. For the next two years, the unemployment rate will be lower by one percentage point. –Sung Won Sohn, Smith School of Business and Economics

Horrendous! There can be no other word to describe this employment report. Adding in the revisions to December and January, there are more than 800,000 fewer jobs in February than were previously reported for January, while the unemployment rate is higher than at any time since December 1983. Unfortunately, the weekly jobless claims data suggest more of the same is coming for March. It appears that the economy is contracting at a 6% or so pace in the first quarter following a 6.2% drop in the fourth quarter. It is unlikely to be long before we hear calls for more stimulus in Washington. –RDQ Economics

Although the result was worse than median expectations in our view, markets appear to have been braced for downside surprises (consensus payroll forecasts ranged from -500k to -800k). For the outlook, today’s report makes clear that the recent improvement in consumer spending will be difficult to sustain given the weakness in labor income. –Zach Pandl, Nomura Global Economics

A turn in employment is unlikely until consumption stabilizes. January consumption gains were encouraging, but could have been a one-month bounce. February results and aid for consumer loans via TALF are encouraging early signals to stop the hemorrhaging of jobs. –Stephen Gallagher, Societe Generale

Even if February marked the biggest payroll decline since 1949, at least it wasn’t a million man month. February tends to be the month worst impacted by post-holiday company closings, and given the weak state of this year’s retail spending season, many investors were braced for the worst. Clearly “the worst” doesn’t seem to be coming true, which, if you look at the data, is a trend which has repeated a number of times in the last few weeks. Still, it’s worth cautioning that, while it appears the rate of job losses is starting to stabilize, there are numerous one-off events that could trigger a sharp further decline in payrolls before this ongoing mess resolves itself. –Guy LeBas, Janney Montgomery Scott

We expect labor market conditions to remain dreadful for many months to come, which will reinforce the decline in consumer spending that is occurring for other reasons as well. –Joshua Shapiro, MFR Inc.

Compiled by Phil Izzo

    Economists React: ‘Staring Into the Abyss’, WSJ, 6.3.2009, http://blogs.wsj.com/economics/2009/03/06/economists-react-staring-into-the-abyss/

Jobless rate jumps to 8.1%

as 651,000 jobs slashed

6 March 2009
USA TODAY
By Sue Kirchhoff

WASHINGTON — U.S. businesses slashed 651,000 jobs in February, pushing the unemployment rate to a 25-year high of 8.1%, the Labor Department said Friday. Job loss was widespread as the deepest, longest recession in decades affected a broad swath of industries from construction to trucking to hotels.

While the February numbers were in line with analysts' projections, the Labor Department said job losses in previous months were sharply higher than previously reported, with business payrolls down another 161,000 in December and January.

Overall, companies have shed about 4.4 million jobs since the recession started in December 2007, with more than half the job loss coming in the past four months. The unemployment rate, 7.6% in October, has spiked by 3.3 percentage points in the past 12 months.

"We are staring into the abyss," says Steven Wood of Insight Economics. "The recession is intensifying and the economy is rapidly shrinking."

President Obama said Friday that he won't accept a future of job losses for the United States.

Addressing a graduating class of new police officers in Ohio, Obama said the job numbers underscore the importance of his economic stimulus package that Congress passed with just a few Republican votes.

Obama said the nation has met every challenge with bold action and big ideas and "that's what fueled a shared and lasting prosperity."

The Obama administration has pushed a series of radical steps to bolster the economy. Obama recently signed the $787 economic stimulus bill designed to save 3.5 million jobs, and this week unveiled the details of a plan to restructure mortgages for millions of homeowners. The Fed and the Treasury Department this week initiated a program to spur up to $1 trillion in small business and consumer lending on autos, student loans and other products.

But the administration has yet to come up with a workable solution for shoring up the nation's largest banks, which has pushed their stock prices into the basement. General Motors' (GM) auditors this week issued a report making it clear that the auto giant may not be able to avoid bankruptcy. Big name companies like Sears (SHLD) and General Electric (GE) have run into difficulty.

Lawmakers, labor and industry leaders are starting to call for more aggressive action as the economy craters. Noting that unemployment in the construction industry is now 21.4% the Laborers' International Union of North America said the stimulus bill was only a first start, and that hundreds of thousands of workers would still be without jobs even if it met its employment goals.

"The construction industry is in a near depression," says LIUNA General President Terry O'Sullivan.

As has been the case for months, the construction and manufacturing industries were battered in February. Professional and business services also recorded large job losses, as did media, trucking, retail and hospitality. The health care sector was one of the few bright spots, adding 27,000 workers during the month.

The top line numbers tell only part of the story, however, The number of long-term unemployed, those out of work for six months or more, rose by 270,000 to 2.9 million in February, and has increased by 1.6 million in the past year. The slice of people working part time for economic reasons jumped 787,000, to 8.6 million, and has increased by 3.7 million in the past year.

Richard Moody, chief economist of Mission Residential, noted that the Labor Department's broader measure of underemployment in the economy rose to 14.8%, due to the sharp rise in the number of people working part time for economic reason.

"Combing the details of the employment report offers little hope of improvement any time soon," Moody said, adding that the number of hours worked also dropped sharply in February. He predicted the economy was currently contracting even more dramatically than during the final months of 2008.

About 2 million people were marginally attached to the labor force in February, meaning they wanted to work and had been looking for work in the past year, but weren't counted as unemployed because they hadn't been job hunting in the past month

The unemployment rate for men was 8.1% in February, while the female jobless rate was 6.7%. There were big differences among racial groups, with the white unemployment rate at 7.3%, the black jobless rate at 13.4% and Hispanic unemployment jumping to 10.9%.

Professional and business service employment fell by 180,000 during February, with the temporary help sector losing 78,000 jobs. Architectural and engineering firms, business support centers and related companies took a hit.

The manufacturing sector lost another 168,000 jobs in February, mostly in plants that produce long-lasting durable goods, including metal products and machinery. Construction payrolls fell by 104,000 jobs, and are down by 1.1 million from the peak in January 2007. About 40% of construction job loss has taken place in the past four months, with reductions at both homebuilders and firms involved in commercial construction.

The trucking industry also took a blow, with a 33,000 job reduction in February. With less freight to move as demand wanes, the trucking sector has lost 138,000 jobs since December 2007 and 88,000 in just the past for months.

The information industry, including media, lost 15,000 jobs. Employment has plunged by 76,000 since October, with about 40% of the drop in publishing.

The financial sector lost 44,000 jobs for total losses of 448,000 since its peak in December 2006.

Contributing: Associated Press

    Jobless rate jumps to 8.1% as 651,000 jobs slashes, UT, 6.3.2009, http://www.usatoday.com/money/economy/2009-03-06-jobs_N.htm

Op-Ed Columnist

The Big Dither

March 6, 2009
The New York Times
By PAUL KRUGMAN

Last month, in his big speech to Congress, President Obama argued for bold steps to fix America’s dysfunctional banks. “While the cost of action will be great,” he declared, “I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade.”

Many analysts agree. But among people I talk to there’s a growing sense of frustration, even panic, over Mr. Obama’s failure to match his words with deeds. The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern.

Here’s how the pattern works: first, administration officials, usually speaking off the record, float a plan for rescuing the banks in the press. This trial balloon is quickly shot down by informed commentators.

Then, a few weeks later, the administration floats a new plan. This plan is, however, just a thinly disguised version of the previous plan, a fact quickly realized by all concerned. And the cycle starts again.

Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away.

Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the “basic inherent economic value” of troubled assets and the “artificially depressed value” that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think they’re worth much, much more.

And the government’s job, he declared, is to “provide the financing to help get those markets working,” pushing the price of toxic waste up to where it ought to be.

What’s more, officials seem to believe that getting toxic waste properly priced would cure the ills of all our major financial institutions. Earlier this week, Ben Bernanke, the Federal Reserve chairman, was asked about the problem of “zombies” — financial institutions that are effectively bankrupt but are being kept alive by government aid. “I don’t know of any large zombie institutions in the U.S. financial system,” he declared, and went on to specifically deny that A.I.G. — A.I.G.! — is a zombie.

This is the same A.I.G. that, unable to honor its promises to pay off other financial institutions when bonds default, has already received $150 billion in aid and just got a commitment for $30 billion more.

The truth is that the Bernanke-Geithner plan — the plan the administration keeps floating, in slightly different versions — isn’t going to fly.

Take the plan’s latest incarnation: a proposal to make low-interest loans to private investors willing to buy up troubled assets. This would certainly drive up the price of toxic waste because it would offer a heads-you-win, tails-we-lose proposition. As described, the plan would let investors profit if asset prices went up but just walk away if prices fell substantially.

But would it be enough to make the banking system healthy? No.

Think of it this way: by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they’re needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who don’t need or deserve to be rescued.

And this means that the government would have to lay out trillions of dollars to bring the financial system back to health, which would, in turn, both ensure a fierce public outcry and add to already serious concerns about the deficit. (Yes, even strong advocates of fiscal stimulus like yours truly worry about red ink.) Realistically, it’s just not going to happen.

So why has this zombie idea — it keeps being killed, but it keeps coming back — taken such a powerful grip? The answer, I fear, is that officials still aren’t willing to face the facts. They don’t want to face up to the dire state of major financial institutions because it’s very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable.

But this refusal to face the facts means, in practice, an absence of action. And I share the president’s fears: inaction could result in an economy that sputters along, not for months or years, but for a decade or more.

    The Big Dither, NYT, 6.3.2009, http://www.nytimes.com/2009/03/06/opinion/06krugman.html

Editorial

Helping the House Poor

March 6, 2009
The New York Times
 

President Obama’s anti-foreclosure plan, which took effect on Wednesday, is better than anything attempted by the Bush administration, but it is at best one step forward and, unfortunately, may prove to be fundamentally flawed.

The program’s success ultimately will rest on whether the administration is willing to intensify its efforts and, as needed, shift gears. Congress also has to bolster the plan with a new anti-foreclosure law.

The bulk of Mr. Obama’s plan is aimed at about four million borrowers who are in default or at risk of default — people who cannot afford their monthly mortgage payments and cannot refinance, generally because they owe more on their loans than their homes are worth.

The idea is to lower the monthly payment on a loan by modifying its terms, which is the right goal. The problem lies in the way loans will be modified. Mr. Obama’s plan emphasizes lowering monthly payments by reducing a loan’s interest rate, which certainly will allow many people to stay in their homes, in the near term at least. What it won’t do is make staying there a wise move. And it’s not the best way to guard against re-default.

Remember that most delinquent and high-risk borrowers are “under water.” Reducing the interest would make their monthly payments more affordable, but their loan balance would still be higher than the value of the property — in many cases much, much higher. Essentially, they would be renting their homes from the lender.

In the short run, and perhaps even in the long run, many troubled borrowers will be relieved to qualify for a lower interest rate. But the fact is that being under water is itself a big risk factor for default, even if the payment has been cut. One reason is that there is no equity cushion to fall back on in the event that job loss or any other financial setback — illness, divorce, major repairs — make it impossible to keep up with the payments. Currently, some 13.6 million homeowners are under water. While most are current in payments, many of them are just one unfortunate event away from default.

A better way to lower the monthly payments for these people is to reduce the principal remaining on the loan. That way, the payments become affordable and, as equity is rebuilt, the borrower has both an incentive and the means to keep current. The Obama plan provides subsidies for lenders to reduce principal balances, but the option is not promoted as prominently as simply reducing the interest rate. That’s a shame. It is a better way to go, but lenders prefer interest-rate reduction to principal reduction, in part, because it appears to minimize the loss they have to recognize upfront.

This is where Congress can make a difference. On Thursday, the House passed a bill that would allow bankrupt homeowners to have their loans modified in bankruptcy court, where the most common solution is to reduce the principal. The bill is overly restrictive, but if passed — and if the Senate doesn’t weaken it any further from the House’s version — it could give underwater homeowners another way to keep their homes.

Perhaps more important, lenders are more likely to pursue sound modifications if the alternative is to face the borrower in court. Best of all, modifying loans via bankruptcy proceedings costs the taxpayer nothing. The costs are borne by the borrowers and the lenders.

Homeowners — like the banks, much of corporate America and the government itself — are suffering under the weight of excessive debt. The Obama plan will make mortgage indebtedness more manageable, but ultimately the debt itself needs to be greatly reduced. The sooner we as a nation move in that direction, the better.

    Helping the House Poor, NYT, 6.5.2009, http://www.nytimes.com/2009/03/06/opinion/06fri1.html

Quiet Layoffs

Sting Workers Without Notice

March 6, 2009
The New York Times
By STEVE LOHR

With the economy weakening, chief executives want Wall Street to see them as tough cost-cutters who are not afraid to lay off workers. But plenty of job cuts are not trumpeted in news releases.

Big companies also routinely carry out scattered layoffs that are small enough to stay under the radar, contributing to an unemployment rate that keeps climbing, as Friday’s monthly jobs report is likely to show.

I.B.M. is one such company. It reported surprisingly strong quarterly profits in January, and in an e-mail message to employees, Samuel J. Palmisano, the chief executive, said that while other companies were cutting back, his would not. “Most importantly, we will invest in our people,” he wrote.

But the next day, more than 1,400 employees in I.B.M.’s sales and distribution division in the United States and Canada were told their jobs would be eliminated in a month. More cuts followed, and over all, I.B.M. has told about 4,600 North American employees in recent weeks that their jobs are vanishing.

J. Randall MacDonald, I.B.M.’s senior vice president for human resources, said it was routine for the company to lay off some employees while hiring elsewhere. “This business is in a constant state of transformation,” he said. “I think of this as business as usual for us.”

These unannounced cuts, labor experts say, raise issues of disclosure and the treatment of workers. They argue that the federal law requiring warning of certain kinds of layoffs should be overhauled to cover smaller job cuts. That would give people more time to seek new jobs, career counseling and retraining.

“The twin goals are transparency and decency,” said Harley Shaiken, a labor economist at the University of California, Berkeley. “The issue becomes all the more pressing in this downward economic spiral.”

The notification law, known as the WARN Act, is a legacy of an era when the economy was more dependent on manufacturers and legislators were concerned about blue-collar workers being locked out of their factory. That kind of shutdown is hard to hide, while white-collar layoffs spread across many locations are not.

The WARN Act requires 60 days’ notice, but the events that require notification are site-specific — a plant closing, a layoff of 500 or more people at one location, or a cut of at least one-third of the work force at a site.

If notification is not required, the standard practice at large companies is to give 30 days’ notice before a layoff. Some states have passed their own WARN Acts to cover more layoffs. California, for example, now requires a WARN notice when a company cuts 50 or more workers in one place. Last month, New York enacted a law requiring 90 days’ notice when laying off 250 or more workers at a site.

Companies sometimes have good reason for dismissing workers quietly. Depending on how the businesses want to portray themselves to investors and the public, layoffs might not fit the message.

Most companies today, of course, are not hesitating to make layoff announcements. Managers are straining to demonstrate that they are taking forceful action on expenses, the one front where they have some control amid economic turmoil and uncertainty.

Two days after I.B.M.’s report, Microsoft said that its quarterly profits were disappointing. It declared it would cut annual operating expenses by $1.5 billion, lopping off up to 5,000 jobs over the next 18 months, including 1,400 immediately.

Labor experts advise taking near-term cuts seriously and being skeptical about intentions several months down the road. “The most effective job-cutting is done on a short timetable, clearly explained inside and outside the company, and grafted tightly to the business strategy,” said Peter Cappelli, director of the Center for Human Resources at the University of Pennsylvania. “Plans for cuts 12 and 18 months in the future are mostly irrelevant, even if the companies are sincere at the time.”

At I.B.M., the layoffs are coming swiftly, if with less disclosure. The estimate of 4,600 job cuts comes from adding up the itemized headcounts in information packages given to employees in each of the businesses. Some of them were supplied by Alliance@IBM, a small but active unit of the Communications Workers of America union, and some by I.B.M. workers directly.

The cutbacks surfaced only because of their size and timing, with word spread through blogs, employee message boards and the union group.

In its financial statements, I.B.M. does report the cost of severance payments and outplacement counseling for layoffs — about $400 million annually in the last five years — but not head counts.

I.B.M. says it remains the largest high-tech employer in the nation, with 115,000 workers. The company is adding jobs as well as slicing, in a cycle that it says has helped make it increasingly global and successful as it shifts toward higher-profit software and technology services businesses.

In January, for example, it said it would open a call center in Dubuque, Iowa, for corporate customers. It is to employ up to 1,300 people. And Mr. MacDonald, the human resources executive, said I.B.M. was hiring analysts and engineers to work on Internet software, health technology and smart electrical grids.

But I.B.M.’s American employment has declined steadily, down to 29 percent of its worldwide payroll of 398,445 at the end of 2008. The cuts have also come sooner and deeper in North America this year than in recent years.

As part of a government filing last week, I.B.M. said its work force in Brazil, Russia, India and China had climbed to 113,000. These are markets with faster growth than the United States, and less expensive skilled labor.

In interviews, I.B.M. workers whose jobs are being eliminated were mainly chagrined that the undisclosed cuts, and the timing, seemed to contradict the company’s public statements.

Rick Clark, 50, an engineer in East Fishkill, N.Y., had worked for I.B.M. for 11 years. He said he was disappointed in I.B.M. this time because the job cuts were deep and spread across so many businesses and came at a time when I.B.M. has been proclaiming its success. “I do think I.B.M., like other companies, has used this recession as an excuse to lay people off,” he said.

I.B.M. has had to issue two WARN Act notices recently under the tighter state laws of California and New York. The company is cutting 141 jobs in San Jose and 295 jobs in East Fishkill.

To strengthen the federal layoff-warning law, labor experts make a few suggestions. They include adopting the California threshold of 50 people let go at one site, or a national standard, requiring 60 days’ notice if a company lays off at least 1,000 workers nationally or at least 10 percent of its work force.

Some labor experts would also like to see a requirement for large corporations to report employment country by country annually.

“All our multinational companies are increasingly less American, except when they are asking for tax breaks and increased government spending in their industries,” said Ross Eisenbrey, a labor researcher at the Economic Policy Institute, a labor-oriented research organization in Washington. “Knowing where their employment really is would be useful information for policymaking.”

    Quiet Layoffs Sting Workers Without Notice, NYT, 6.3.2009, http://www.nytimes.com/2009/03/06/business/06layoffs.html?hp

Most foreclosures

pack into a few counties

5 March 2009
USA TODAY
By Brad Heath

WASHINGTON — More than half of the nation's foreclosures last year took place in 35 counties, a sign that the financial crisis devastating the national economy may have begun with collapsing home loans in only a few corners of the country.

Those counties, spread over a dozen states, accounted for more than 1.5 million foreclosure actions last year, a USA TODAY analysis of figures compiled by the real estate listing firm RealtyTrac shows — more than were recorded in the entire United States just two years earlier. They were the epicenter of a wave of foreclosures that have left leading banks teetering and magnified the nation's economic problems.

"This crisis was triggered by foreclosures, and a lot of those were in a very small number of areas," says William Lucy, a University of Virginia professor who has studied the link between lenders and faltering home loans. Banks spread the risk and "it became like a car with no reverse gear. Once it starts to go over the cliff, it's gone."

In other parts of the country, the foreclosure wave was barely a ripple — at least until it started swamping major banks that had invested heavily in mortgages. Banking giant Wachovia Corp., for example, was hammered after California and Florida customers of one mortgage firm it bought began defaulting at high rates. The risks of such lending were spread so broadly among financial institutions that, when the loans went bad, it drove the national credit crisis, says Christopher Mayer, who studies real estate at Columbia Business School.

A few of the 35 counties leading the foreclosure boom are in already-distressed areas around Detroit and Cleveland. But most are clustered in places such as Southern California, Las Vegas, Phoenix, South Florida and Washington, where home values shot up dramatically in the first half of the decade, then began to crumble.

RealtyTrac's counts of foreclosure actions include default notices, auctions and repossessions by lenders, and can sometimes count the same property twice. As a result, they tend to be higher than estimates from other tracking firms. But they remain one of the best geographic measures of the nation's housing collapse.

The Obama administration on Wednesday detailed a $75 billion plan to keep more homeowners from slipping into foreclosure by helping them refinance loans or reduce their monthly payments. But that effort could face political challenges because most of the foreclosure problem has been so concentrated in a few areas, says Brookings Institution researcher Alan Mallach.

The worst-hit counties are home to about 20% of U.S. households, but accounted for just over 50% of the nation's foreclosure actions last year, driving most of the national increase. And even among those places, a few stand out: Eight counties in Arizona, California, Florida and Nevada were the source of about a quarter of the nation's foreclosures last year.

In more than 650 other counties — about a fifth of the nation — the number of foreclosure actions actually dropped since 2006.

    Most foreclosures pack into a few counties, 5.3.2009, http://www.usatoday.com/money/economy/housing/2009-03-05-foreclosure_N.htm

U.S. Sets Big Incentives

to Head Off Foreclosures

March 5, 2009
The New York Times
By EDMUND L. ANDREWS

WASHINGTON — The Obama administration on Wednesday began the most ambitious effort since the 1930s to help troubled homeowners, offering lenders and borrowers big incentives and subsidies to try to stem the wave of foreclosures.

People with mortgages as high as $729,750 could qualify for help, and there is no ceiling on how high their income can be as long as they are in danger of losing their homes. Interest rates on loans could go as low as 2 percent for some. Many homeowners could see their mortgage payments drop by several hundred dollars a month, and some could save more than $1,000 a month.

Administration officials estimate that the plan will help as many as four million people avoid foreclosure, at a cost to taxpayers of about $75 billion. In addition, the Treasury Department said it intended to follow up with a plan to help troubled borrowers with second mortgages, which many homebuyers used as “piggyback” loans to buy houses with no money down.

The plan is bolder and more expensive than any of the Bush administration’s programs, which were based almost entirely on coaxing lenders to voluntarily modify loans. While the number of loan modifications has climbed sharply, the number of foreclosures skyrocketed to 2.2 million at the end of 2008, a record.

The new plan, which takes effect immediately, is intended to win much bigger concessions from lenders by offering a mix of generous financial incentives and regulatory arm-twisting. The final impact will depend on how both lenders and the investors who own mortgages respond, but housing experts said the administration had a good chance of achieving its goal.

The eagerness with which lenders agree to modify loans is likely to be affected by a bill that the House is expected to take up on Thursday.

It would give bankruptcy judges the power to order changes in mortgages on primary residences and would protect loan-servicing companies from lawsuits by investors.

Several of the nation’s biggest mortgage-servicing companies, overseeing two-thirds of all home loans in the country — Citigroup, JPMorgan Chase, Bank of Amer ica and Wells Fargo &#151; are expected to participate in the plan.

In addition, any bank that receives additional federal money under the Treasury Department’s $700 billion financial rescue program will be required to take part. But many lenders are expected to participate voluntarily, because the government would be absorbing much of the cost of resolving their bad loans.

“I predict this program will be extremely effective at reducing foreclosures,” said Eric Stein, senior vice president at the Center for Responsible Lending, a nonprofit advocacy group for homeowners.

Administration officials have similar expectations.

“It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets,” said Timothy F. Geithner, the Treasury secretary.

In releasing detailed guidelines on the plan, first unveiled Feb. 17, the Treasury Department made it clear that the program would not help every homeowner in trouble. It will do little to help families whose income has evaporated because one or more breadwinners have lost their jobs, nor will it save those swamped by big debts beyond their mortgages. It will not do much for homeowners who are current on their loans but “upside down” — owing more than their houses are worth.

Still, the program, when combined with a separate effort to help homeowners refinance their loans even if they are not in distress, could help put a floor under home prices.

The Treasury has instructed Fannie Mae and Freddie Mac, the two government-controlled mortgage-finance companies, to refinance homeowners at today’s low market rates even if the owners have less than the standard 20 percent equity that is usually required.

This second program applies to about 30 million people with mortgages owned or guaranteed by Fannie or Freddie, but will not be available to people whose mortgages are much higher than their home’s market value.

Administration officials said it could lower monthly payments for as many as five million homeowners. To finance that effort, the Treasury is providing the two companies with up to $200 billion in additional capital, on top of $200 billion that it had already pledged to them.

Under the new loan modification guidelines, the Treasury will offer mortgage-servicing companies upfront incentive payments of $1,000 for every loan they modify and additional payments of $1,000 a year for the first three years if the borrower remains current. The Treasury will also chip in $1,000 a year to directly reduce the borrower’s loan amount, if the borrower stays up to date on payments.

But the biggest subsidies are in reducing the size of a person’s monthly payment. If the lender reduced the borrower’s monthly housing payment to 38 percent of the household’s gross monthly income, the Treasury Department would match, dollar for dollar, the lender’s cost in reducing payments down to 31 percent of monthly household income.

The program calls on lenders first to reduce interest rates to as low at 2 percent for the next five years to hit the monthly income target. After five years, some borrowers would start to pay gradually higher rates, but their rates could not exceed the market rate at the time they renegotiated.

That would be a favorable deal for many people. At the moment, the market rate for such loans is just over 5 percent — very low by historical standards.

The key to determining whether a person receives help will be a so-called net present value calculation by the mortgage company.

In essence, a lender will first have to calculate how much it would cost to reduce a person’s monthly payments to an “affordable” range, 31 to 38 percent of the borrower’s monthly income.

If the calculation shows that the lender’s cost in modifying the loan, after receiving the taxpayer subsidy, would be lower than the cost of foreclosing, the lender would be required to offer a borrower the new deal. If the estimated cost of the concessions appeared to be higher than the cost of foreclosure, the decision would be voluntary.

Housing experts estimate that lenders lose about half the outstanding loan amount if they pursue foreclosure, and those losses are climbing as the resale value of houses continues to fall. As a result, the program could lead to millions of loan modifications.

Borrowers cannot be charged any modification fees, the Treasury Department said. Lenders will have to bear the administrative expense of reviewing the loans and making their cost estimates. Treasury officials said they were trying to warn consumers against fraud artists and consultants who are seeking to collect fees for helping homeowners negotiate with lenders.

There is no ceiling on how much a person can earn and still qualify for help, but the size of the mortgage to be modified cannot be higher than $729,750 for a single-family home, or $1.4 million for the mortgage on a four-unit condominium or cooperative.

The program is open only to borrowers who live in the homes at issue, and not to investors or people with mortgages on second or third homes. It is open to people who obtained a mortgage before Jan. 1, 2009. Borrowers can apply for loan modifications until the end of 2012.

Tara Siegel Bernard contributed reporting from New York.

    U.S. Sets Big Incentives to Head Off Foreclosures, NYT, 5.3.2009, http://www.nytimes.com/2009/03/05/business/05housing.html

Unlucky or Unwise,

Some Borrowers Are Left Out

March 5, 2009
The New York Times
By JOHN LELAND

Chadi Moussa lives in a house valued at more than $1 million in Dublin, Calif., in the desirable East Bay area. Unfortunately, he owes nearly twice that much on his mortgage. Mr. Moussa, who runs a used luxury car dealership, is by any definition a troubled homeowner.

But when he looked at President Obama’s housing rescue plan, he saw nothing for him because his mortgage was too high.

“You give $25 billion to a bank, at least they should help people stay in their homes,” Mr. Moussa said. “But once you get to big loans, nobody’s doing anything about it.”

Administration officials say the plan, the details of which were released Wednesday, is intended to help as many homeowners as possible and could prevent three million to four million foreclosures through loan modifications and help four million to five million through low-cost refinancing.

But it does little for borrowers who have had significant jolts to their income, or who owe more than their home’s value on loans that exceed $729,750. In boom-and-bust housing markets like Florida, Las Vegas, Phoenix or California, where values have fallen 30 percent to 40 percent, the plan leaves many in homes they cannot afford — some because they borrowed recklessly, others because they were buffeted by the market swings.

About 20 percent of the country’s 50 million mortgage holders owe more than 105 percent of their house’s value, and so do not qualify for refinancing under the plan, according to J.P. Morgan.

“The refinance portion of the plan is set up so it provides the least help for the people who need it most,” said Christopher J. Mayer, a professor of real estate at the Columbia Business School. “We’re missing an opportunity to help many more Americans.”

Refinancing is only for loans owned or backed by Fannie Mae and Freddie Mac, or roughly half of all homes. Homeowners can tell whether the agencies back their loan by calling their mortgage companies.

For other borrowers, the government plan subsidizes lenders who modify loan payments, but only on loans below $729,750.

Mr. Moussa missed out on both counts.

The Treasury Department estimates that 2 percent of mortgages exceed these limits; the figure approaches 6 percent in California.

“The program made choices,” said Bill Apgar, a senior adviser at the Department of Housing and Urban Development. “In order to have the resources available to help the most people, it was decided to put limits on the help to the folks who have better than average capacity to adjust.” The planners expect 20 percent to 30 percent of people who receive modifications to default again, which is about half the rate for previous loan modifications.

Homeowners with more modest mortgages may also fall through the cracks. Tracy Frazier, 33, has a first mortgage of $325,000 on his house in Phoenix. But the county recorder valued it at $177,000, making him ineligible for refinancing and unlikely to get a loan modification because he is a poor risk.

“The situation we’re in, it stinks,” said Mr. Frazier, whose income has fallen to $42,000 from $80,000. “But I want to keep this home. Why get us out of it? If it goes to auction, you’ll get half the value.”

J.P. Morgan estimates that the loan modification plan will prevent 600,000 to 2.6 million foreclosures, depending on how liberally banks modify mortgages and how many borrowers default again.

Paul Willen, a senior economic adviser at the Federal Reserve Bank of Boston, cited another group not helped by the plan: the newly unemployed.

“Cutting my payment by 20 percent isn’t going to help me if I have no income,” Mr. Willen said. “And often these people have gotten a new job offer but they can’t move because their house is under water.”

Because house prices often stay low even after the economy recovers, he said, high foreclosure rates are likely to continue after the banks and employment stabilize.

Even with refinancing and loan modifications, many borrowers will still end up in foreclosure, said Christopher A. Viale, president of the Cambridge Credit Counseling Corporation, a nonprofit agency in Agawam, Mass.

“There’s 10 million households that aren’t being talked about, and they aren’t going to be helped at all,” Mr. Viale said. “They aren’t behind on their mortgages, but they’re putting everything on their credit cards, they’re making minimum payments and paying penalty rates, and there’s no way they can pay off the interest.”

In the past, these homeowners might have refinanced their homes to pay down this debt, but that is no longer an option. “They need reductions of 30 or 40 percent” on their mortgage payments, Mr. Viale said.

For Mr. Moussa, the road toward foreclosure has been precipitous. He bought his home in 2005 for $2.24 million, with a down payment of more than $500,000, and monthly payments of $4,000 for the first year. But as California real estate prices plummeted, his house’s value fell to about $1.1 million, he said. Then his income dropped by half.

After he defaulted on his mortgage five months ago, Mr. Moussa said he asked his lender, Countrywide Financial, to change the term of his loan to 40 years and to lower the interest to 4 percent until the car business revived.

“Two days ago I got the answer that at this point they can’t do anything,” he said.

Mr. Moussa now has monthly mortgage payments of $8,700 and a home that may never recover its equity. The stress has eroded his marriage, and his wife and daughter are now with her family in Beirut.

His frustration was evident in his voice. “I can make $5,000 payments per month. Why not do that for me for a couple years? Why take it away, sell it” for a huge loss, he asked. “In my area, half the houses are in foreclosure or short sales. And some of them have been stripped down, everything torn out.”

The president has called for legislation empowering bankruptcy court judges to lower the principal on mortgages to reflect fallen home values. This legislation has met strong resistance from the lending industry and many lawmakers.

For Mark Klepper, 50, who lives in Miami, buying a big house was a way to establish credit to start a business. In 2004 he bought a home for $585,000, and watched its value rise to $1.4 million. After refinancing twice, he owes $1,064,000. But the home is now worth a little more than he paid for it, and his income has fallen by 40 percent. He stopped paying his mortgage in January. If he were to continue paying, he said, the drain would crush his business. The government’s plan does not help him.

“I feel if there’s a plan out there, there shouldn’t be a limit,” Mr. Klepper said. “If the government is helping these lenders, they need to take some principal write-downs.”

He asked his lender to reduce his balance to $600,000 and his rate to 4 percent, but so far has made no headway.

“I’m saying I can afford to pay, just not what I did in the past,” he said. “I wouldn’t be asking for it if everything was fine, but it’s not.”

    Unlucky or Unwise, Some Borrowers Are Left Out, 5.3.2009, http://www.nytimes.com/2009/03/05/us/05mortgage.html?hp

Brown Speaks to Congress on Economy

March 5, 2009
The New York Times
By BRIAN KNOWLTON

WASHINGTON — Prime Minister Gordon Brown urged American leaders on Wednesday to “seize the moment,” in tandem with their European allies, to work through the global economic crisis and prepare for a future that brings “the biggest expansion of middle-class incomes and jobs the world has ever seen.”

Speaking from one of the most prominent stages accorded any visiting foreign dignitary — a joint meeting of Congress — Mr. Brown called for a clear rejection of protectionist tendencies as the world struggles toward recovery.

The address came a day after President Obama assured Mr. Brown that the “special relationship” between the two countries was as strong as ever — despite what some observers have described as coolness in the handling of the prime minister’s visit. The White House spokesman, Robert Gibbs, said again Wednesday that “the relationship remains strong and special.”

In any case, the senators and congressmen, joined by American military leaders and other dignitaries, gave the prime minister a warm welcome, interrupting his 45-minute speech at least a dozen times with standing ovations. One of those came after he announced that Senator Edward M. Kennedy of Massachusetts, who is suffering from brain cancer, had been granted an honorary knighthood.

The chamber was nearly full as Mr. Brown spoke; the Capitol interns who are sometimes summoned to fill empty seats on such occasions were relatively few in number.

Mr. Brown praised his host country as one of remarkable strength, optimism and resilience. “America is not just the indispensable nation,” he said, “you are the irrepressible nation.”

Those strengths, he added, needed to be marshaled fully now in what Mr. Brown said would have to be concerted world action to stimulate national economies, bolster banks and improve their oversight, and help developing countries survive the downturn.

Echoing a point that Mr. Obama has begun to make, Mr. Brown argued that a big part of the solution to the crisis lay in having confidence that it can be solved.

“While today people are anxious and feel insecure, over the next two decades our world economy will double in size,” Mr. Brown said. “Twice as many opportunities for business, twice as much prosperity, and the biggest expansion of middle class incomes and jobs the world has ever seen.”

He argued that the United States, under a president who enjoys great popularity at home and sometimes even greater popularity abroad, would find a rare receptiveness to its efforts to move forward.

“Let me say that you now have the most pro-American European leadership in living memory,” Mr. Brown said.

“There is no old Europe, no new Europe, there is only your friend Europe. So once again I say we should seize the moment — because never before have I seen a world so willing to come together. Never before has that been more needed. And never before have the benefits of cooperation been so far-reaching.”

He also vowed to continue close cooperation in the fight against terrorism, in efforts to induce Iran to suspend its nuclear program, and in moves to curtail global warming. And he paid tribute to the soldiers of both countries who had fought in Iraq and Afghanistan.

Mr. Brown, who was chancellor of the Exchequer, or finance minister, in the Labour Party government of Tony Blair, has been calling for a “global new deal” with every country working to end the downturn.

The prime minister has been laying the groundwork for a meeting on April 2 in London of the leaders of the Group of 20 major economies. He has been calling for greater accountability and transparency, and stricter oversight, for banking and financial institutions around the world.

Mr. Obama has supported many of the same goals, at least in principle.

But Julianne Smith, director of the Europe program at the Center for Strategic and International Studies in Washington, said that Mr. Brown might not get all he wanted.

“I don’t think he’s going to be able to go back home and say ‘Obama and I see completely eye-to-eye on some big global regulation scheme,’ ” she said.

Part of that is a general American skepticism toward such internationalist approaches, Ms. Smith said. “Europeans, even the Brits, have a higher level of comfort with global machinery and bureaucratic machinery than Americans do,” she said.

Commentators on both sides of the ocean have catalogued a number of signs that the reception accorded to Mr. Brown in Washington was not quite as warm as the ones British prime ministers enjoyed during the Bush years: No invitation to Camp David, no full-scale news conference, no state dinner — and while there was a meeting between the men’s wives, none was held between the two couples. Mr. Brown, whose own approval ratings in Britain are suffering, had hoped to profit from his visit to the popular American president.

Mr. Obama brushed such concerns aside on Tuesday, saying that the two countries were united by a bond “that will not break.”

And Mr. Brown said the same on Wednesday: “Partnerships of purpose are indestructible,” he said. “There is no power on Earth that can drive us apart.”

    Brown Speaks to Congress on Economy, NYT, 5.3.2009, http://www.nytimes.com/2009/03/05/world/europe/05brown.html

Economic Scene

Job Losses Show Breadth of Recession

March 4, 2009
The New York Times
By DAVID LEONHARDT
 

What does the worst recession in a generation look like?

It is both deep and broad. Every state in the country, with the exception of a band stretching from the Dakotas down to Texas, is now shedding jobs at a rapid pace. And even that band has recently begun to suffer, because of the sharp fall in both oil and crop prices.

Unlike the last two recessions — earlier this decade and in the early 1990s — this one is causing much more job loss among the less educated than among college graduates. Those earlier recessions introduced the country to the concept of mass white-collar layoffs. The brunt of the layoffs in this recession is falling on construction workers, hotel workers, retail workers and others without a four-year degree.

The Great Recession of 2008 (and beyond) is hurting men more than women. It is hurting homeowners and investors more than renters or retirees who rely on Social Security checks. It is hurting Latinos more than any other ethnic group. A year ago, a greater share of Latinos held jobs than whites. Today, the two have switched places.

If the Great Recession, as some have called it, has a capital city, it is El Centro, Calif., due east of San Diego, in the desert of California’s Inland Valley. El Centro has the highest unemployment rate in the nation, a depressionlike 22.6 percent.

It’s an agricultural area — because of water pumped in from the Colorado River, which allows lettuce, broccoli and the like to grow — and unemployment is in double digits even in good times. But El Centro has lately been hit by the brutal combination of a drought, a housing bust and a falling peso, which cuts into the buying power of Mexicans who cross the border to shop.

Until recently, El Centro was one of those relatively cheap inland California areas where construction and home sales were booming. Today, it is pockmarked with “bank-owned” for sale signs. A wallboard factory in nearby Plaster City — its actual name — has laid off workers once kept busy by the housing boom. Even Wal-Mart has cut jobs, Sam Couchman, who runs the county’s work force development office, told me.

You often hear that recessions exact the biggest price on the most vulnerable workers. And that’s true about this recession, at least for the moment. But it isn’t the whole story. Just look at Wall Street, where a generation-long bubble seems to lose a bit more air every day.

In the long run, this Great Recession may end up afflicting the comfortable more than the afflicted.

•

The main reason that recessions tend to increase inequality is that lower-income workers are concentrated in boom-and-bust industries. Agriculture is the classic example. In recent years, construction has become the most important one.

By the start of this decade, the construction sector employed more men without a college education than the manufacturing sector did, Lawrence Katz, the Harvard labor economist, points out. (As recently as 1980, three times as many such men worked in manufacturing as construction.) The housing boom was like a giant jobs program for many workers who otherwise would have struggled to find decent paying work.

The housing bust has forced many of them into precisely that struggle and helps explain the recession’s outsize toll on Latinos and men. In the summer of 2005, just as the real estate market was peaking, I spent a day visiting home construction sites in Frederick, Md., something of a Washington exurb, interviewing the workers. They were almost exclusively Latino.

At the time, the national unemployment rate for Latino men was 3.6 percent. Today, when there aren’t many homes being built in Frederick or anywhere else, that unemployment rate is 11 percent. And this number understates the damage, since it excludes a considerable number of immigrants who have returned home.

Frederick was typical of the boom in another way, too. It wasn’t nearly as affluent as some closer suburbs. Now the bust is widening that gap.

If you look at the interactive map with this column, you will see the places that already had high unemployment before the recession have also had some of the largest increases. Some are victims of the housing bust, like inland California. Others are manufacturing centers, as in Michigan and North Carolina, whose long-term decline is accelerating. Rhode Island, home to both factories and Boston exurbs, has one of the highest jobless rates in the nation.

All of these trends will serve to increase inequality. Yet I still think the Great Recession will eventually end up compressing the rungs on the nation’s economic ladder. Why? For the same three fundamental reasons that the Great Depression did.

The first is the stock market crash. Clearly, it has hurt wealthy and upper middle-class families, who own the bulk of stock, more than others. In addition, thousands of high-paying Wall Street jobs — jobs that have helped the share of income flowing to the top 1 percent of earners soar in recent decades — will disappear.

Hard as it may be to believe, the crash will also help a lot of young families. The stocks that they buy in coming years are likely to appreciate far more than they would have if the Dow were still above 14,000. The same is true of future house purchases for the one in three families still renting a home.

The second reason is government policy. The Obama administration plans to raise taxes on the affluent, cut them for everyone else (so long as the government can afford it, that is) and take other steps to reduce inequality. Franklin D. Roosevelt did something similar and it had a huge effect.

Of course, these two factors both boil down to redistribution. One group is benefiting at the expense of another. Yes, many of the people on the losing end of that shift have done quite well in recent years, far better than most Americans. Still, the shift isn’t making the economic pie any bigger. It is simply being divided differently.

Which is why the third factor — education — is the most important of all. It can make the pie larger and divide it more evenly.

That was the legacy of the great surge in school enrollment during the Great Depression. Teenagers who once would have dropped out to do factory work instead stayed in high school, notes Claudia Goldin, an economist who recently wrote a history of education with Mr. Katz.

In the manufacturing-heavy mid-Atlantic states, the high school graduation rate was just above 20 percent in the late 1920s. By 1940, it was almost 60 percent. These graduates then became the skilled workers and teachers who helped build the great post-World War II American economy.

Nothing would benefit tomorrow’s economy more than a similar surge. And there is some evidence that it’s starting to happen. In El Centro, enrollment at Imperial Valley Community College jumped 11 percent this semester. Ed Gould, the college president, said he expected applications to keep rising next year.

Unfortunately, California — one of the states hit hardest by the Great Recession — is in the midst of a fiscal crisis. So Imperial Valley’s budget is being capped. Next year, Mr. Gould expects he will have to tell some students that they can’t take a full load of classes, just when they most need help.

    Job Losses Show Breadth of Recession, NYT, 4.3.3009, http://www.nytimes.com/2009/03/04/business/04leonhardt.html

Steep Market

Drops Highlight Despair

Over Rescue Efforts

March 3, 2009
The New York Times
By FLOYD NORRIS

Fears that the world’s economies are even weaker than had been thought ricocheted around the globe on Monday as investors from Hong Kong to London to New York bailed out of stocks.

Losses cascaded from one market to the next as concern spread that government efforts had not been enough to stabilize troubled financial institutions or broader economies.

The losses were bad everywhere but especially severe in Europe, where an emergency meeting over the weekend ended in bickering and the rejection of a bailout plea from Hungary.

In the United States, the Dow Jones industrial average fell below 7,000 for the first time since 1997 as investors reacted to reports that construction and industrial activity had continued to decline and to a $61.7 billion loss posted by the insurance giant, the American International Group. It was the largest quarterly loss ever for a company.

In Britain, the major stock market index lost 5.3 percent, and the performance of the major Italian index was worse, declining 6 percent. With the dollar also gaining, the losses were even greater for international investors in those markets.

In the United States, the Dow fell 299.64 points, or 4.24 percent, to 6,763.29, while the Standard & Poor’s 500-stock index fell 34.27 points, or 4.66 percent, to 700.82. The Nasdaq composite ended 54.99 points, or 3.99 percent, lower, at 1,322.85.

Crude oil settled at $40.15 a barrel, down $4.61.

“It’s pretty despondent everywhere,” said Dwyfor Evans, a strategist at State Street Global Markets in Hong Kong. “O.K., there are signs that some of the leading indicators have stabilized to some extent, but it’s at a very, very low level, and we’re not seeing corporate investment picking up, or consumers starting to spend again — in other words, the traditional mechanisms by which economies come out of a recession are absent at this time.”

Hopes that the American economy, which led the world into recession, might lead it back out this year have been fading.

Last weekend, Warren E. Buffett, the chairman of Berkshire Hathaway, wrote in his company’s annual report that “the economy will be in shambles, throughout 2009, and, for that matter, probably well beyond.”

As if to emphasize the problems, the Institute for Supply Management reported that companies in Britain, France, Germany, Italy, and the United States said business was getting much worse, especially in terms of jobs.

Paul Dales, an economist with Capital Economics, pointed to the survey in forecasting that the February employment report will show a decline of 785,000 jobs when it is released on Friday. If so, it would be the largest one-month decline in employment in nearly 60 years.

Last week, the United States revised its estimate of fourth quarter gross domestic product to show a decline at an annual rate of 6.2 percent, the worst in more than a quarter century. On Monday in reporting that construction activity fell sharply in January, the government also revised the December figure lower.

“That change could move the fourth quarter figure down to a 7 percent decline,” said Robert Barbera, the chief economist of ITG, a research firm.

Despite the American problems, the dollar has been gaining, particularly against European currencies. The euro slipped to under $1.26, nearing a two-year low and down from a high of almost $1.60 last spring. There was a renewed flight to safety, with the 10-year Treasury bond yield falling to under 3 percent.

The continued plunge of the stock markets has stunned investors and governments. Over the six months that ended last week, the S.& P. 500 lost 43 percent of its value. There were similar declines during the Great Depression, but since then, the worst six-month performance before the current plunge was a 32 percent fall in 1974 when the world was also in recession.

While there has been speculation about international cooperation to deal with the growing financial and economic crisis, the European Union summit this weekend provided an indication that few countries were willing to risk their own taxpayers’ money to help others.

“The E.U. again has proven it is unable to manage a coordinated response to the crisis,” Commerzbank analysts wrote in a note Monday. “The problems arising in Eastern Europe will put further pressure on the euro.”

While all countries are suffering, the United States and some Western European countries still have access to loans, which has enabled them to mount large stimulus plans and bear the costs of bailing out banks.

But in some other areas, notably Eastern Europe, the value of the local currencies has plunged as economic activity has weakened. That is a perilous path in countries where the government and many homeowners took out loans in foreign currencies, seeking lower interest rates, and now find themselves owing far more than they borrowed.

Reflecting that fact, over the same six months that the American stock market fell 43 percent, most European and Asian markets did even worse when measured in dollars. The Hungarian market, for example, was off 67 percent, while the German exchange fell 48 percent.

Investors have greeted the stimulus spending plans with some hesitation in part because of signs that the financial system continues to weaken.

“We can unleash as many trillions of dollars in stimulus as we wish, but if we don’t fix the banking system, we still have a patient in cardiac arrest,” the chief strategist at Charles Schwab, Liz Ann Sonders, said.

In addition to the loss at A.I.G., HSBC, the London-based international bank, said it would close its American consumer finance business, which it took on when it acquired Household Finance in 2003, in one of the decade’s worst acquisitions. HSBC said it would raise $17 billion in new capital from shareholders. Its shares fell 19 percent, to its lowest level in a decade.

The A.I.G. loss far exceeded the previous quarterly record deficit of $44.9 billion, set by Time Warner in 2002 when it wrote down the value of AOL.

Another factor depressing investors is the dividend cuts that many companies have been forced to make. On Monday, the large regional bank PNC Financial Services Group cut its dividend 85 percent and the International Paper Company cut its by 90 percent. Last week, General Electric cut its dividend 68 percent, and JPMorgan Chase reduced its dividend 87 percent.

The surveys of businesses, which ask whether various aspects of business are getting better or worse, showed figures in the low-to-mid 30s in all countries, driven down by sharply lower employment expectations. On those surveys, a figure of 50 indicates that business is neither getting better nor worse, and figures below 40 show a sharp rate of decline.

That very plunge could augur well in the not-too-distant future, since it appears that production in many areas is running below sales as companies seek to cut costs.

“The intensity of inventory reduction is stunning,” said Tobias Levkovich, a Citigroup strategist, in a note to clients. “The depressed level of production relative to final sales argues that there is real potential for production levels to lift” in the second half of the year, he said, leading to surprisingly good profits.

For now, at least, few investors expect any such good news. The S.&. P 500 fell 18.6 percent in the first two months of 2009, even before Monday’s fall. That was its worst start, exceeding the 18.2 percent fall recorded in the first two months of 1933, another year when a new president took office during an economic and financial crisis. In 1933, the stock market soon turned, and nearly doubled over 12 months.

The S.& P. 500 has now fallen below, and the Dow is close to, the levels that prevailed on Dec. 5, 1996, when Alan Greenspan, then the chairman of the Federal Reserve, inquired in a speech, “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

It was a question that has been answered over the last 17 months. During that period, the Dow has fallen 52.3 percent, a larger percentage decline than in any bear market since the Great Depression, but nowhere near the 89 percent collapse that took less than three years to complete after the 1929 high.

Bettina Wassener and Judy Dempsey contributed reporting.

    Steep Market Drops Highlight Despair Over Rescue Efforts, NYT, 3.3.2009, http://www.nytimes.com/2009/03/03/business/worldbusiness/03markets.html

A.I.G. Reports $61.7 Billion Loss

as U.S. Gives More Aid

March 3, 2009
The New York Times
By ANDREW ROSS SORKIN and MARY WILLIAMS WALSH

The federal government agreed Monday morning to provide an additional $30 billion in taxpayer money to the American International Group and loosen the terms of its huge loan to the insurer, even as the insurance giant reported a$61.7 billion loss, the biggest quarterly loss in history.

The loss of $22.95 a share compared with a fourth-quarter loss in the period a year ago of $5.3 billion or $2.08 a share.The intervention would be the fourth time that the United States has had to step in to help A.I.G., the giant insurer, avert bankruptcy. The government already owns nearly 80 percent of the insurer’s holding company as a result of the earlier interventions, which included a $60 billion loan, a $40 billion purchase of preferred shares and $50 billion to soak up the company’s toxic assets.

Federal officials, who worked feverishly over the weekend to complete the restructuring, said they thought they had no choice but to prop up A.I.G., because its business and trading activities are so intricately woven through the world’s banking system.

But the deal also presents more financial risks to taxpayers at a time when the public and Congress have been sharply questioning the wisdom of risking federal money to bail out private enterprises.

The government’s commitment to A.I.G. far eclipses its rescue of other financial companies, including Citigroup, which has received $50 billion in rescue financing, and Bank of America, with $45 billion.

Credit rating agencies like Moody’s, Fitch Ratings and Standard & Poor’s had been preparing to sharply downgrade A.I.G.’s credit ratings on Monday because of the record quarterly loss. That would have forced A.I.G. to default on its debt, threatening to set off shock waves throughout the financial system as banks holding A.I.G. derivatives contracts would probably demand cash collateral and other payments from A.I.G. during a time when it has little to spare.

The major credit-rating agencies were briefed on the pending deal between A.I.G. and the government, the people involved in the talks said, and they have committed not to downgrade the company’s debt as a result.

Under the deal, the government will commit $30 billion in cash to A.I.G. from the Troubled Asset Relief Program, should the company need it, the Treasury Department said in a statement. A.I.G. is not expected to draw down the money immediately, and but the government’s commitment was enough to satisfy the rating agencies.

To further ease A.I.G.’s debt burden, instead of paying back $38 billion in cash with interest that it has used from a federal credit line, government will convert that into equity in two of the insurer’s subsidiaries in Asia — American International Assurance and the American Life Insurance Company.

Both units are performing well. This would give the government direct ownership in those subsidiaries and provide saleable assets to American taxpayers even if the A.I.G. holding company were to default on its loans.

The government stake in American International Assurance is likely to be controversial. The unit had been put up for sale recently, without success. That suggests that the government is giving A.I.G. better terms than private investors were willing to give, exposing the government to further accusations that it is providing a handout to A.I.G.

Also as part of the deal, the government would agree to lower the interest rate on all remaining A.I.G. debt to match the London Interbank Offered Rate, or Libor. That would replace the previous rate, which was three percentage points higher than Libor. That move would save A.I.G. $1 billion in interest payments.

A.I.G.’s loss would be the largest ever by any company in a single quarter. Still, of the $61.7 billion loss being reported, only about $2 billion is a cash loss. The rest is the result of noncash items like write-downs on the value of the company’s assets.

The new cash commitment reached on Sunday represented the fourth time since September that the federal government has taken steps to keep A.I.G. from collapsing. The previous rescues were intended to stabilize A.I.G. and buy it time to restructure. But the rescues were insufficient, in part because A.I.G. has either invested in or insured so many assets that keep losing value as the economy sours.

In September, the Federal Reserve lent A.I.G. $85 billion when the company suddenly found itself unable to meet a round of cash calls. To secure the emergency loan, A.I.G. issued the Fed warrants for slightly less than 80 percent of the company’s shares.

Officials said at the time that they thought the loan would provide A.I.G. all the cash it could possibly need. The government brought in a seasoned insurance executive, Edward M. Liddy, to sell off some of A.I.G.’s operating units to raise money, since the rescue loan had to be paid back within two years. Mr. Liddy drew up a plan, saying he expected a smaller, well-capitalized version of A.I.G. to remain after the restructuring.

But in just weeks it became clear that A.I.G.’s problems were so grave the $85 billion would not be enough. It was using up that money alarmingly fast, thus burdening itself with higher than expected debt-servicing costs, because it had to pay the Fed a higher rate of interest on the part of the loan that it drew down.

In October, the government cut A.I.G. some slack by creating a new $38 billion facility to shore up its securities lending business, and gave the company access to a new commercial paper program, which had a much lower interest rate than the rescue loan.

But that was not enough either. In mid-November, the government restructured its loans to A.I.G., raising its total commitment to $150 billion. The new arrangement reduced the rescue loan to $60 billion and stretched out its term to five years instead of two.

At the same time, it injected $40 billion into A.I.G. in exchange for preferred shares. And it created two special-purpose entities to take the most toxic assets then plaguing A.I.G. out of play.

Those arrangements kept the government’s stake in A.I.G. at just below 80 percent. The government has not wanted to go above 80 percent, because it would then have to consolidate all of A.I.G.’s assets and liabilities into its own finances, putting taxpayers on the hook for the claims of roughly 76 million insurance policyholders around the world.

While November’s restructuring did buy A.I.G. more time, it was not able to sell the operating units that Mr. Liddy put up for sale — or, when assets were sold, the prices were shockingly low.

A.I.G. Reports $61.7 Billion Loss as U.S. Gives More Aid,
NYT, 3.3.2009,
http://www.nytimes.com/2009/03/03/business/03aig.html