Anglonautes > History > USA > 2009

History > 2009 > USA > Economy (VII)

Job Losses,

Early Retirements

Hurt Social Security

September 28, 2009
Filed at 2:32 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Big job losses and a spike in early retirement claims from laid-off seniors will force Social Security to pay out more in benefits than it collects in taxes the next two years, the first time that's happened since the 1980s.

The deficits -- $10 billion in 2010 and $9 billion in 2011 -- won't affect payments to retirees because Social Security has accumulated surpluses from previous years totaling $2.5 trillion. But they will add to the overall federal deficit.

Applications for retirement benefits are 23 percent higher than last year, while disability claims have risen by about 20 percent. Social Security officials had expected applications to increase from the growing number of baby boomers reaching retirement, but they didn't expect the increase to be so large.

What happened? The recession hit and many older workers suddenly found themselves laid off with no place to turn but Social Security.

''A lot of people who in better times would have continued working are opting to retire,'' said Alan J. Auerbach, an economics and law professor at the University of California, Berkeley. ''If they were younger, we would call them unemployed.''

Job losses are forcing more retirements even though an increasing number of older people want to keep working. Many can't afford to retire, especially after the financial collapse demolished their nest eggs.

Some have no choice.

Marylyn Kish turns 62 in December, making her eligible for early benefits. She wants to put off applying for Social Security until she is at least 67 because the longer you wait, the larger your monthly check.

But she first needs to find a job.

Kish lives in tiny Concord Township in Lake County, Ohio, northeast of Cleveland. The region, like many others, has been hit hard by the recession.

She was laid off about a year ago from her job as an office manager at an employment agency and now spends hours each morning scouring job sites on the Internet. Neither she nor her husband, Raymond, has health insurance.

''I want to work,'' she said. ''I have a brain and I want to use it.''

Kish is far from alone. The share of U.S. residents in their 60s either working or looking for work has climbed steadily since the mid-1990s, according to data from the Bureau of Labor Statistics. This year, more than 55 percent of people age 60 to 64 are still in the labor force, compared with about 46 percent a decade ago.

Kish said her husband already gets early benefits. She will have to apply, too, if she doesn't soon find a job.

''We won't starve,'' she said. ''But I want more than that. I want to be able to do more than just pay my bills.''

Nearly 2.2 million people applied for Social Security retirement benefits from start of the budget year in October through July, compared with just under 1.8 million in the same period last year.

The increase in early retirements is hurting Social Security's short-term finances, already strained from the loss of 6.9 million U.S. jobs. Social Security is funded through payroll taxes, which are down because of so many lost jobs.

The Congressional Budget Office is projecting that Social Security will pay out more in benefits than it collects in taxes next year and in 2011, a first since the early 1980s, when Congress last overhauled Social Security.

Social Security is projected to start generating surpluses again in 2012 before permanently returning to deficits in 2016 unless Congress acts again to shore up the program. Without a new fix, the $2.5 trillion in Social Security's trust funds will be exhausted in 2037. Those funds have actually been spent over the years on other government programs. They are now represented by government bonds, or IOUs, that will have to be repaid as Social Security draws down its trust fund.

President Barack Obama has said he would like to tackle Social Security next year.

''The thing to keep in mind is that it's unlikely we are going to pull out (of the recession) with a strong recovery,'' said Kent Smetters, an associate professor at the University of Pennsylvania's Wharton School. ''These deficits may last longer than a year or two.''

About 43 million retirees and their dependents receive Social Security benefits. An additional 9.5 million receive disability benefits. The average monthly benefit for retirees is $1,100 while the average disability benefit is about $920.

The recession is also fueling applications for disability benefits, said Stephen C. Goss, the Social Security Administration's chief actuary. In a typical year, about 2.5 million people apply for disability benefits, including Supplemental Security Income. Applications are on pace to reach 3 million in the budget year that ends this month and even more are expected next year, Goss said.

A lot of people who had been working despite their disabilities are applying for benefits after losing their jobs. ''When there's a bad recession and we lose 6 million jobs, people of all types are going to be part of that,'' Goss said.

Nancy Rhoades said she dreads applying for disability benefits because of her multiple sclerosis. Rhoades, who lives in Orange, Va., about 75 miles northwest of Richmond, said her illness is physically draining, but she takes pride in working and caring for herself.

In June, however, her hours were cut in half -- to just 10 a week -- at a community services organization. She lost her health benefits, though she is able to buy insurance through work, for about $530 a month.

''I've had to go into my retirement annuity for medical costs,'' she said.

Her husband, Wayne, turned 62 on Sunday, and has applied for early Social Security benefits. He still works part time.

Nancy Rhoades is just 56, so she won't be eligible for retirement benefits for six more years. She's pretty confident she would qualify for disability benefits, but would rather work.

''You don't think of things like this happening to you,'' she said. ''You want to be in a position to work until retirement, and even after retirement.''

------

On the Net:

Social Security retirement planner: http://www.ssa.gov/retire2/retirechart.htm

Congressional Budget Office: http://tinyurl.com/ydgrl5d

Job Losses, Early Retirements Hurt Social Security, NYT, 28.9.2009, http://www.nytimes.com/aponline/2009/09/28/us/politics/AP-US-Social-Security-Early-Retirements.html

U.S. Job Seekers

Exceed Openings by Record Ratio

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

Despite signs that the economy has resumed growing, unemployed Americans now confront a job market that is bleaker than ever in the current recession, and employment prospects are still getting worse.

Job seekers now outnumber openings six to one, the worst ratio since the government began tracking open positions in 2000. According to the Labor Department’s latest numbers, from July, only 2.4 million full-time permanent jobs were open, with 14.5 million people officially unemployed.

And even though the pace of layoffs is slowing, many companies remain anxious about growth prospects in the months ahead, making them reluctant to add to their payrolls.

“There’s too much uncertainty out there,” said Thomas A. Kochan, a labor economist at M.I.T.’s Sloan School of Management. “There’s not going to be an upsurge in job openings for quite a while, not until employers feel confident the economy is really growing.”

The dearth of jobs reflects the caution of many American businesses when no one knows what will emerge to propel the economy. With unemployment at 9.7 percent nationwide, the shortage of paychecks is both a cause and an effect of weak hiring.

In Milwaukee, Debbie Kransky has been without work since February, when she was laid off from a medical billing position — her second job loss in two years. She has exhausted her unemployment benefits, because her last job lasted for only a month.

Indeed, in a perverse quirk of the unemployment system, she would have qualified for continued benefits had she stayed jobless the whole two years, rather than taking a new position this year. But since her latest unemployment claim stemmed from a job that lasted mere weeks, she recently drew her final check of $340.

Ms. Kransky, 51, has run through her life savings of roughly $10,000. Her job search has garnered little besides anxiety.

“I’ve worked my entire life,” said Ms. Kransky, who lives alone in a one-bedroom apartment. “I’ve got October rent. After that, I don’t know. I’ve never lived month to month my entire life. I’m just so scared, I can’t even put it into words.”

Last week, Ms. Kransky was invited to an interview for a clerical job with a health insurance company. She drove her Jeep truck downtown and waited in the lobby of an office building for nearly an hour, but no one showed. Despondent, she drove home, down $10 in gasoline.

For years, the economy has been powered by consumers, who borrowed exuberantly against real estate and tapped burgeoning stock portfolios to spend in excess of their incomes. Those sources of easy money have mostly dried up. Consumption is now tempered by saving; optimism has been eclipsed by worry.

Meanwhile, some businesses are in a holding pattern as they await the financial consequences of the health care reforms being debated in Washington.

Even after companies regain an inclination to expand, they will probably not hire aggressively anytime soon. Experts say that so many businesses have pared back working hours for people on their payrolls, while eliminating temporary workers, that many can increase output simply by increasing the workload on existing employees.

“They have tons of room to increase work without hiring a single person,” said Heidi Shierholz, an economist at the Economic Policy Institute Economist. “For people who are out of work, we do not see signs of light at the end of the tunnel.”

Even typically hard-charging companies are showing caution.

During the technology bubble of the late 1990s and again this decade, Cisco Systems — which makes Internet equipment — expanded rapidly. As the sense takes hold that the recession has passed, Cisco is again envisioning double-digit rates of sales growth, with plans to move aggressively into new markets, like the business of operating large scale computer data servers.

Yet even as Cisco pursues such designs, the company’s chief executive, John T. Chambers, said in an interview Friday that he anticipated “slow hiring,” given concerns about the vigor of growth ahead. “We’ll be doing it selectively,” he said.

Two recent surveys of newspaper help-wanted advertisements and of employers’ inclinations to add workers were at their lowest levels on record, noted Andrew Tilton, a Goldman Sachs economist.

Job placement companies say their customers are not yet wiling to hire large numbers of temporary workers, usually a precursor to hiring full-timers.

“It’s going to take quite some time before we see robust job growth,” said Tig Gilliam, chief executive of Adecco North America, a major job placement and staffing company.

During the last recession, in 2001, the number of jobless people reached little more than double the number of full-time job openings, according to the Labor Department data. By the beginning of this year, job seekers outnumbered jobs four-to-one, with the ratio growing ever more lopsided in recent months.

Though layoffs have been both severe and prominent, the greatest source of distress is a predilection against hiring by many American businesses. From the beginning of the recession in December 2007 through July of this year, job openings declined 45 percent in the West and the South, 36 percent in the Midwest and 23 percent in the Northeast.

Shrinking job opportunities have assailed virtually every industry this year. Since the end of 2008, job openings have diminished 47 percent in manufacturing, 37 percent in construction and 22 percent in retail. Even in education and health services — faster-growing areas in which many unemployed people have trained for new careers — job openings have dropped 21 percent this year. Despite the passage of a stimulus spending package aimed at shoring up state and local coffers, government job openings have diminished 17 percent this year.

In the suburbs of Chicago, Vicki Redican, 52, has been unemployed for almost two years, since she lost her $75,000-a-year job as a sales and marketing manager at a plastics company. College-educated, Ms. Redican first sought another management job. More recently, she has tried and failed to land a cashier’s position at a local grocery store, and a barista slot at a Starbucks coffee shop.

Substitute teaching assignments once helped her pay the bills. “Now, there are so many people substitute teaching that I can no longer get assignments,” she said.

“I’ve learned that I can’t look to tomorrow,” she said. “Every day, I try to do the best I can. I say to myself, ‘I don’t control this process.’ That’s the only way you can look at it. Otherwise, you’d have to go up on the roof and crack your head open.”

U.S. Job Seekers Exceed Openings by Record Ratio, NYT, 27.8.2009, http://www.nytimes.com/2009/09/27/business/economy/27jobs.html

Group of 20

Agrees on Far-Reaching Economic Plan

September 26, 2009
The New York Times
By EDMUND L. ANDREWS

PITTSBURGH — One year after a financial crisis that began in the United States tipped the world into a severe recession, leaders from both rich countries and fast-growing powerhouses like China agreed on Friday to a far-reaching effort to revamp the economic system.

The agreements, if carried out by national governments, would lead to much tighter regulation over financial institutions, complex financial instruments and executive pay. They could also lead to big changes and more outside scrutiny over the economic strategies of individual countries, including the United States.

“We have achieved a level of tangible, global economic cooperation that we’ve never seen before,” President Obama said shortly after the summit meeting of 20 leading economies concluded here. “Our financial system will be far different and more secure than the one that failed so dramatically last year.”

The leaders pledged to rethink their economic policies in a coordinated effort to reduce the immense imbalances between export-dominated countries like China and Japan and debt-laden countries like the United States, which has long been the world’s most willing consumer.

The United States will be expected to increase its savings rate, reduce its trade deficit and address its huge budget deficit. Countries like China, Japan and Germany will be expected to reduce their dependence on exports by promoting more consumer spending and investment at home.

The ideas are not new, and there is no enforcement mechanism to penalize countries if they stick to their old habits. But for the first time ever, each country agreed to submit its policies to a “peer review” from the other governments as well as to monitoring by the International Monetary Fund.

That in itself would be a big change, given how prickly national leaders have often been toward outside criticism of their policies. American officials, who pushed for the plan during weeks of negotiations before the summit meeting, argued that governments were so shocked by the economic crisis that they were willing to rethink what was in their self-interest.

“I’m quite impressed,” said Eswar S. Prasad, an economist at Cornell University who had initially been skeptical about the proposed “framework” for stable growth. “A commitment by the U.S. to take the process seriously is a potential game-changer that would give the framework some credibility.”

The outcome was revealed the same day the leaders formally announced that discussions about global economic issues would shift permanently from the Group of 7 big industrial nations — the United States, Britain, France, Canada, Italy, Germany and Japan — to the Group of 20, which includes China, India, Brazil, South Korea and South Africa, reflecting the increased clout of fast-growing developing nations in the global economy.

The decision reflected both symbolic and practical needs. Poorer but fast-growing nations have long complained that their influence on global policy has lagged behind their economic role. As a practical matter, China and other developing countries played a central role in fighting the global downturn by undertaking aggressive stimulus programs in concert with the United States and Europe.

American officials had been negotiating with their foreign counterparts for months before the summit meeting, and the agreements endorsed on Friday were mostly pledges rather than binding commitments.

One of the most important elements of the agreement calls on the Group of 20 countries to require higher levels of capital at banks and other financial institutions. The goal is to reduce risk-taking by forcing institutions to keep bigger reserves as a buffer against unexpected losses or disruptions in credit markets.

The Group of 20 communiqué outlines a long set of principles for tougher rules, and governments pledged to develop “internationally agreed” regulations by the end of 2010.

But the communiqué includes no specific numbers on how high capital reserves should be, and there are big disagreements over that issue.

French and German banks generally have lower capital reserves than their American rivals, and European officials have complained that their banks could be at a disadvantage because they would have to set aside more money to meet new requirements. Japanese officials have warned that they need to pursue their own approach, contending that Japanese banks are inherently more conservative than American banks.

Similarly, American and French officials disagreed before the summit meeting on how to clamp down on executive pay. Officials on both sides agreed that executive bonuses contributed to the financial crisis by rewarding short-term performance without regard to longer-term risks. But French officials wanted to impose specific caps on bonuses, perhaps based on a percentage of a bank’s profits.

American and British officials thought specific caps were too rigid, and pushed for rules that would defer the payout of bonuses for several years and reduce the incentive for people to take short-term gambles. The American view prevailed, but that does not preclude governments from imposing tighter restrictions.

For all the unanswered questions, the final communiqué covered an extraordinary number of complex financial issues. The leaders agreed, for example, to devise policies by the end of 2010 for closing troubled financial institutions that were considered “too big to fail.” They also agreed on the need to regulate financial derivatives, endorsing the approach proposed by the Obama administration in its bill to overhaul the regulatory system.

They also renewed their vow to give China and other Asian nations a bigger share of the vote at the International Monetary Fund and the World Bank. Asian countries have long complained that their stakes no longer reflect their financial contributions.

In another nod to developing countries, the leaders agreed to revive talks to reach a new global trade agreement by the end of 2010 that would, among other things, reduce barriers to agricultural exports. The goal may be optimistic: the Obama administration has shown no enthusiasm for new trade deals, and many Democrats want to see more protections rather than fewer.

The big question is whether the Group of 20 will be more effective because it includes important new players like India and Brazil, or whether it will simply be more unwieldy.

American officials acknowledged that the economic crisis crystallized priorities of countries with normally conflicting agendas in ways that occur only rarely in normal times. But they said they were betting that individual governments would see their self-interest as more tied than before to the stability of the rest of the world.

“The announcement today is more than symbolic,” said Robert M. Kimmitt, who served as deputy Treasury secretary under President George W. Bush. “The fact that leaders are turning to the strategic challenge and doing it in a coordinated way at the level of the Group of 20 is significant.”

Group of 20 Agrees on Far-Reaching Economic Plan, NYT, 26.9.2009, http://www.nytimes.com/2009/09/26/world/26summit.html

New Signs

That Recovery May Com

in Dribs and Drabs

September 26, 2009
The New York Times
By JACK HEALY

New figures on home sales and manufacturing activity suggested on Friday that economic recovery was likely to occur in fits and starts because of high unemployment, a mercurial stock market and shaky consumer demand.

“It’s not going to be smooth,” said Bernard Baumohl, managing director of the Economic Outlook Group, who is expecting a strong rebound. “We will be moving three steps forward and one step back. But on the whole, I expect this recovery’s going to be moving upward.”

Reports on Friday showed that consumer sentiment rose this week to its highest levels since the start of 2008 and that new-home sales edged up for a fifth consecutive month, but other barometers of the economy revealed uncertainties.

Orders for goods like airplanes and machinery fell unexpectedly in August, the government reported on Friday, showing that the manufacturing sector was still fragile.

New orders for durable goods slid by a seasonally adjusted 2.4 percent from July, reflecting a 40 percent monthly decrease in orders of civilian aircraft. Orders for computers, electrical equipment and transportation equipment all fell, and shipments of all durable goods slipped 1.4 percent for the month.

Over all, orders for durable goods were down 25 percent from a year earlier. But excluding the transportation sector, durable goods orders were flat in August.

Still, the report was the second signal of economic weakness in two days, and fell short of economists’ forecasts for a gain of 0.4 percent. On Thursday, a real estate industry group reported that sales of previously owned homes — which dominate the housing market — fell in August after several months of gains. Although Friday’s report on new-home sales showed a gain, it was less than economists had expected.

“We expect a very sluggish recovery,” said Cliff Waldman, an economist at the Manufacturers Alliance/MAPI. “It’s more than just a downturn. You had a collapse in the housing market, and a near collapse in the financial system.”

Factories and industrial businesses have gradually been ramping up production and hiring part-time workers in some areas as they begin rebuilding their depleted inventories. Most economists say they believe the economy has now technically pulled out of recession, and are expecting businesses to expand in the second half of the year.

Still, that recovery is likely to be jagged, marked by high unemployment and questions about whether consumer or business spending will bounce back or remain subdued.

The Commerce Department reported on Friday that sales of new homes rose 0.7 percent in August, hitting their highest level in almost a year. Sales rose to a seasonally adjusted annual rate of 429,000, largely because home sales increased the West.

The median price of a new home fell to $195,200, from $215,600 a month earlier.

Meanwhile, a Reuters-University of Michigan survey showed that consumer sentiment rose in September as consumers said they were growing more optimistic about the economy’s progress and the employment picture heading forward. The index of sentiment rose to 73.5, from 65.7 in August.

New Signs That Recovery May Come in Dribs and Drabs, NYT, 26.9.2009, http://www.nytimes.com/2009/09/26/business/economy/26econ.html

Family-Run Amusement Parks

Surviving a Downturn

September 24, 2009
The New York Times
By ROBERT STRAUSS

WILDWOOD, N.J. — Given that consumers have been so reluctant to spend lately, the family-run amusement park would seem especially vulnerable.

But amusement park owners around the country say the weather, not the housing downturn or job losses, played a bigger role in their fortunes this past summer.

“We had a lousy, wet June and a couple of hurricane threats this summer, so that was bad,” said Jack Morey, who with his brother Will, owns and runs three amusement piers along the Wildwood boardwalk. “Then the weather got better in August, and suddenly everyone was there.”

If they have sunshine and moderate temperatures, Mr. Morey and his fellow owners around the country say, the slower economy seems to be favoring them.

Indeed, the fact that most of the independent parks are owned by families may insulate them a bit from the normal business cycles, said William Alexander, who teaches courses in family business at the Wharton School at the University of Pennsylvania. “In many cases, these are seasonal businesses,” Mr. Alexander said. “And in the summer, the whole family would participate. In difficult economic times, particularly, a family committed to a business will sacrifice in deferring compensation and bonuses.”

Mr. Alexander also noted that the family-run amusement parks were generally “not as involved as the large ones in the amusement arms race, where building the next big roller coaster is the goal.” As a result, he said, “Their capital cost structures are not as stretched.”

Six Flags, which runs the Great Adventure Parks, filed for Chapter 11 bankruptcy protection in June. New owners took over in 2005 after the company had increased its debt through expansion and spending on gigantic roller coasters. When it filed for bankruptcy, the current managers said that park attendance had held up over the last couple of years, but that revenue was not adequate to cover its debt.

Family-operated parks run the gamut from places like Storybook Land, an amusement park in Cardiff, N.J., about a dozen miles west of Atlantic City, that offers smaller rides aimed at younger children, to places like Morey’s Piers, which have roller coasters just short of the Six Flags-type screamers. Most have 20 to 50 rides or attractions, sometimes water parks, and often arcades or shows. They are day-trip places, with passes that stay firmly in the low- to mid-double-digit dollar range. A day pass for one of the Six Flags parks costs $45 to $55 a person, and parking is at least $15.

“We feel in competition with places like Six Flags,” said Dick Andrew, vice president of marketing at the Lagoon and Pioneer Village, a 49-ride park in Farmington, Utah, which opened in 1886, 10 years before Utah became a state. “Denver has a Six Flags and that is 600 miles away, and the large parks in California are more than 700 miles away. But people here in Utah think nothing of loading up the kids in the van and just driving. We always have to be aware that the customer isn’t just going to come here because we are down the road.”

Thus, the family amusement parks have to be both keepers of nostalgia and up-to-date. In Wildwood, the Moreys say they try to come up with at least one new ride or attraction a year, but still have the old bumper cars and carousel. At the Santa Cruz Beach Boardwalk in that central California seaside town, the Canfield family, which has owned the park for more than a century, decided not long ago to replace the Haunted Castle ride that had been showing wear after 30 years in operation.

“But we asked around and you know what we replaced it with? An updated Haunted Castle ride,” said Marq S. Lipton, the company’s vice president of marketing and sales. “It is an advantage to be working for a company that has been in business for more than 100 years. You have seen just about every type of economy. You can let the past help guide your future actions and plans.”

Even though the economy did not devastate the family parks, it did lead many of them to re-evaluate what the future might bring. At Wild West City, a 53-year-old park in northwestern New Jersey with an old-time Western village, some rides and a mock shootout and Western show on the Main Street every hour or so in the summer, there are often obstacles just to staying in business.

“Our cap-gun supplier went out of business two years ago,” said Wild West City’s manager, Mary Benson. “Who would figure that? So we had to find someone else, which was more expensive.” Licensing and insurance goes up every year, she said, and the minimum wage, which is what many young seasonal workers often get, jumped in New Jersey to $7.25 this year from $6.15 an hour in 2006. Corporate business — companies throwing picnics and the like — has declined but, she said, will hopefully come back when the economy improves.

“We’re managing, but we do it because we love it,” she said, noting that the owner, Mike Stabile, whose family bought the park in 1963, still gets out on the Main Street daily to do the lasso show.

There have been at least three closings of long-term amusement parks this year, according to Jim Futrell, the historian for the National Amusement Park Historical Association and the writer of four books on amusement parks. But all those, he said, had family-based disagreements, and were not related to the general economy. In the early part of the decade, though, he said, several seaside parks in places like Myrtle Beach and the Outer Banks and the New Jersey shore closed because the land along the ocean just became too valuable.

“The ironic thing, though, is that most all of that land lies vacant today,” he said. “It never did become condos or housing developments,” he said. In fact, in one place, Sea Isle City, N.J., the town leased back the land to an amusement operator this summer. John Fricano, owner of Storybook Land, which has been in his family for 54 years, said the family amusement park offered a form of stability to customers. “People know what we have to offer, and well, we have been lucky that they always come back,” he said. “There are always new kids and, for the most part, this business is about kids and their families. Now the original kids bring their kids.”

Family-Run Amusement Parks Surviving a Downturn, NYT, 24.9.2009, http://www.nytimes.com/2009/09/24/business/smallbusiness/24sbiz.html

With Low Prices,

Hyundai Builds Market Share

September 22, 2009
The New York Times
By NICK BUNKLEY

DETROIT — It was not exactly a planned strategy, but the recession, particularly in the United States, has been very good for Hyundai, the South Korean automaker.

After years of struggling to prove to consumers than it was more than a second-tier brand, Hyundai Motor America and its affiliate, Kia Motor America, accounted for 8 percent of the new-vehicle market in the United States in August, more than Chrysler’s 7.4 percent. The company sold more than 60,000 vehicles last month as buyers rushed to take advantage of the government’s cash-for-clunkers program before its end.

The carmaker’s sales topped August 2008 by 47 percent — total industry sales were up only 1 percent.

“They have a tremendous amount of momentum right now, and I don’t see that stopping,” said Erich Merkle, an analyst who founded the Web site Autoconomy.com in Grand Rapids, Mich. “Hyundai is a competitive threat not just to the Big Three but for the first time to the Japanese automakers as well.”

Globally, the Hyundai-Kia Automotive Group, which owns the Hyundai Motor Company and about 39 percent of Kia Motors, passed Honda last year and the Ford Motor Company this year. It became the fourth-largest automaker, behind Toyota, General Motors and Volkswagen (it is seventh in the United States). It was in 11th place worldwide less than a decade ago.

Hyundai and Kia both expect to sell more vehicles in the United States this year than they did in 2008, a claim that only one other automaker, Subaru, can make. Sales by all of Hyundai’s bigger competitors have fallen by more than 20 percent so far this year.

“There’s a great spot for a brand like ours, particularly in a recessionlike environment,” John Krafcik, the chief executive of Hyundai Motor America, said. “Consumers are beginning to question the value of a premium brand — is it worth an extra $5,000?”

Hyundai’s Exhibit A is the Genesis, a luxury sedan that was named North American car of the year at the Detroit auto show in January. Part of the appeal of the Genesis, in addition to a price tag that is thousands less than that of its chief rivals, may be that hardly anyone associates Hyundai with the word “luxury.”

Its lowest-priced model, the Accent, sells for just under $10,000 for the base package. The Genesis, its most expensive model, starts at $32,250 — by comparison, the Lexus ES 350 costs $34,470, and the Cadillac CTS costs $36,560.

Several dealers have said that they are selling the Genesis to business owners who, after laying off some employees, want to project an image that they, too, are cutting back.

“The current economic climate really places an emphasis on people spending their money wisely,” said George Glassman, a Hyundai and Kia dealer in suburban Detroit who sold Oldsmobiles until G.M. eliminated that brand in 2004.

“They’re appealing to people’s desires to spend reasonably and to get great value for your dollar,” Mr. Glassman said. “Twenty years ago, Hyundai was a reasonable alternative to purchasing a used car. Now they are attracting consumers from all ages and all walks of life.”

Mr. Glassman’s recent customers include Joe Randazzo, who had considered the Chevrolet Malibu sedan because his son works for G.M. Despite the family connection and his past preference for Cadillacs, Mr. Randazzo chose to buy a Hyundai Sonata.

“It’s a very good ride, and I really enjoy driving it,” said Mr. Randazzo, 79, who is retired from running a ceramic tile business. “I used to drive Cadillacs all the time. I don’t need to drive a heavy car like that anymore. No disrespect to G.M. or anybody, but my next car will be a Hyundai, too.”

Hyundai’s research indicates that 30 percent of consumers now consider the brand when shopping for a new vehicle, nearly triple the number who did about five years ago.

“They went from the perception of cheap to an excellent value,” said Mr. Merkle, the analyst. “I think that this will stick even after we come out of this environment, because people are becoming better acquainted with the product.”

Aggressive marketing is another reason Hyundai’s sales are surging. The automaker introduced a first-of-its-kind offer early this year that lets customers who find themselves without work return their car with no penalty for up to a year. It later expanded the offer to include up to three months of payment relief.

G.M. and Ford briefly offered similar programs after the Hyundai program helped increase sales.

Hyundai also jumped ahead of competitors this summer, by inviting customers to turn in old, inefficient vehicles under the cash-for-clunkers program three weeks before its official start.

“They’re really trying to use this recession as an opportunity to take market share, which they have,” Jessica Caldwell, director of industry analysis at Edmunds.com.

Hyundai and Kia are pushing for more. In November, Kia plans to open a new assembly plant in West Point, Ga., its first in the United States. (Hyundai has a plant in Alabama.)

Several new models are coming soon, including the compact Kia Forte this fall and revamped versions of the Hyundai Sonata and Tucson next year.

The company’s goal is to have the industry’s highest fuel economy by 2015; it is currently third, behind Toyota and Honda, even with no hybrid in its lineup.

“We may do that a couple of years earlier if you look at the trajectory we’re in,” said Mr. Krafcik.

With Low Prices, Hyundai Builds Market Share, NYT, 22.9.2009, http://www.nytimes.com/2009/09/22/business/global/22hyundai.html

Obama Lashes Out At Banks

Over Student Loans

September 21, 2009
Filed at 12:09 p.m. ET
The New York Times
By REUTERS

TROY, New York (Reuters) - President Barack Obama on Monday criticized the largest U.S. banks for their efforts to thwart legislation that would overhaul federal student loan programs.

Speaking at a community college in Troy, N.Y., he singled out in particular banks that have received bailout money from the federal government, saying they want to maintain the status quo on student loans because they get an "unwarranted subsidy" from it.

(Reporting by Caren Bohan and Patricia Zengerle, Editing by Sandra Maler)

Obama Lashes Out At Banks Over Student Loans, NYT, 21.9.2009, http://www.nytimes.com/reuters/2009/09/21/us/politics/politics-us-obama-studentloans.html

August Joblessness Hit 10%

in 14 States and D.C.

September 19, 2009
The New York Times
By CATHERINE RAMPELL

In 14 states and the District of Columbia at least a tenth of the work force was unemployed in August, according to a Bureau of Labor Statistics report released Friday.

Even as some economic indicators in housing and elsewhere showed signs of improvement, jobless rates declined in 16 states from July to August. In every other state the portion of workers who could not find jobs stagnated or, in most places, grew.

Compared with the same time last year, unemployment rates increased in every state and the District of Columbia, fueling expectations that the many government efforts to tame the recession will not prevent a jobless recovery.

“We’re not really seeing recovery anywhere yet, and it’ll still be awhile before we see much of a difference,” said Dean Baker, co-director of the Center for Economic and Policy Research.

The regions that have been hit hardest — primarily those with once-bustling construction and manufacturing industries — continue to suffer, Mr. Baker said. “The only positive news, probably going into next year, will be slower rates of decline, not job additions.”

Michigan continued to have the country’s highest jobless rate, at a seasonally adjusted 15.2 percent, compared with a national rate of 9.7 percent. In the Detroit metropolitan area, the rate reached 17.3 percent.

Nevada and Rhode Island followed Michigan, with unemployment rates of 13.2 percent and 12.8 percent, respectively. The rates in Nevada, Rhode Island and California — where unemployment reached 12.2 percent — were the highest on record for those states.

Generally, Western states had the weakest job markets, with Plains-state labor forces relatively more resilient. North Dakota, South Dakota and Nebraska all registered jobless rates of 5 percent or lower. Compared with places like California, unemployment has barely budged in these states over the last year.

Nonfarm payroll jobs — calculated from a different government survey — declined in 42 states and the District of Columbia. Texas lost the most jobs from July to August of this year, with a net loss of 62,200 positions. It was followed by Michigan and Georgia.

North Carolina, Montana and West Virginia registered the biggest month-over-month increases in nonfarm payrolls. Economists caution that because such monthly state payroll measures can be volatile, these increases may not indicate a turnaround.

New York did not have a statistically significant change in payroll employment from July to August, but over the last year the state had lost 188,400 jobs.

The state’s unemployment rate was 9 percent in August, up from 8.6 percent in July, and unemployment in New York City alone reached 10.3 percent in August, from 9.5 percent in July.

August Joblessness Hit 10% in 14 States and D.C., NYT, 19.9.2009, http://www.nytimes.com/2009/09/19/business/economy/19jobless.html

California Joblessness

Reaches 70-Year High

September 19, 2009
The New York Times
By JENNIFER STEINHAUER

LOS ANGELES — California’s unemployment rate in August hit its highest point in nearly 70 years, starkly underscoring how the nation’s incipient economic recovery continues to elude millions of Americans looking for work.

While job losses continue to fall, the state’s new unemployment rate — 12.2 percent, according to the Bureau of Labor Statistics — is far above the national average of 9.7 percent and places California, the nation’s most-populous state, fourth behind Michigan, Nevada and Rhode Island. Statistics kept by the state show California’s unemployment rate was 14.7 percent in 1940, said Kevin Callori, a spokesman for the California Employment Development Department.While California has convulsed under the same blows as the rest of the country over the last two years, its exposure to both the foreclosure crisis and the slowdown in construction — an industry that has fueled growth in much of the state over the last decade — has been outsized.

Total building levels in California have fallen to $23 billion this year from $63 billion in 2005; home building this year is less than a quarter of what it was in 2005, according to the Center for Continuing Study of the California Economy. Roughly 500,000 of the state’s job losses have been in construction, finance, real estate and industries related to construction.

“We were at the epicenter of the housing bubble, and we are at the epicenter of the fallout,” said Stephen Levy, senior economist and director of the center. “The reason we are doing worse in California than other states is construction.”

While California has enjoyed some signs of a comeback in recent months, unemployment, which is often the last economic indicator to turn around in a protracted recession, is expected to remain high for the near future. For example, a recent study by the University of California, Los Angeles, predicted that while the state would enjoy 2 percent quarterly growth in 2010, the unemployment rate would remain above 10 percent.

Such numbers have caused deep pain to a state overly reliant on personal income taxes to balance its budget. The near collapse of the stock market, which greatly reduced personal wealth in the state, and job losses related to the housing bust combined to sharply reduce that source of revenue.

In July, Gov. Arnold Schwarzenegger signed a budget that closed a roughly $24 billion two-year gap with extensive cuts to social services, parks and education. This has left the state with large numbers of people without jobs seeking government services, which further strained its resources and hindered potential consumer spending among laid off and furloughed government workers.

The governor seized on California’s grim unemployment milestone Friday to make a case for his current pet projects: revising the state’s tax system, fixing its broken water system, which has contributed to unemployment in the state’s farm regions, and tapping the federal government for all he can get.

“The latest unemployment numbers reinforce the importance of combining federal, state and local efforts to put Californians back to work and to help all those struggling in this difficult economy,” Mr. Schwarzenegger said. “Immediately addressing our challenges, which include reforming the state’s antiquated tax structure and updating our water delivery system will move the state forward and build a stronger, more diverse economy. While I am pleased to see fewer jobs lost, my administration will not rest until job growth resumes and employment returns to normal.”

Earlier this week, Ben S. Bernanke, the Federal Reserve chairman, proclaimed that the country was emerging from its protracted recession, and doubtlessly, California is showing its own signs of recovery. In Southern California, the center of the housing bust, home sales rose 11 percent in August from a year earlier, and prices have begun to tick up as well. In addition, the state’s exports are once again growing as international economics, particularly in Asia, have begun to recover and create demand for goods, and layoffs have slowed statewide.

“Any economist would tell you we’re in a recovery,” Mr. Levy said. “Job losses are lessening, the G.D.P. is rising, the housing market is stabilizing, and have you looked at the stock market lately? But the unemployment rate is the thing families care about. They don’t care about G.D.P. or China coming back; they care about jobs.”

California Joblessness Reaches 70-Year High, NYT, 19.9.2009, http://www.nytimes.com/2009/09/19/us/19calif.html

California Joblessness

Reaches 70-Year High

September 19, 2009
The New York Times
By JENNIFER STEINHAUER

California Joblessness Reaches 70-Year High, NYT, 19.9.2009, http://www.nytimes.com/2009/09/19/us/19calif.html

Recovery Picks Up in China

as U.S. Economy Still Ails

September 18, 2009
The New York Times
By KEITH BRADSHER

WUXI, China — Just eight months ago, thousands of Chinese workers rioted outside factories closed by the global downturn.

Now many of those plants have reopened and are hiring again. Some executives are even struggling to find enough temporary staff to fill Christmas orders.

The image of laid-off workers here returning to jobs stands in sharp contrast to the United States, where even as the economy shows signs of improvement, the unemployment rate continues to march toward double digits.

In China, even the hardest-hit factories — those depending on exports to the United States and Europe — are starting to rehire workers. No one here is talking about a jobless recovery.

Even the real estate market is picking up. In this industrial town 90 miles northwest of Shanghai, prospective investors lined up one recent Saturday to buy apartments in the still-unfinished Rose Avenue complex. Many of them slept outside the sales office all night.

“The whole country’s economy is back on track,” said Shi Yingyi, a 34-year-old housewife who joined the throng. “I feel more confident now.”

The confidence stems from China’s three-pronged effort — a combination of stimulus, liberal bank lending and broad government support for exports.

The Chinese central bank said the country’s economy surged at an annualized rate of 14.9 percent in the second quarter. The United States economy shrank at an annual rate of 1 percent in that period.

“So often China and the U.S. are mixed together as being in the same situation, and that is totally wrong,” said Xu Xiaonian, an economist in Beijing with the China Europe International Business School.

That does not mean the two nations are not connected, of course. China’s rebound in growth may slow if the American economy does not pick up. China needs the United States to buy its goods, and the United States needs China to continue to buy its debt.

This mutual dependence makes it harder for either country to let the current dispute over Chinese tires and American chicken and auto parts to grow into a trade war.

But with more economic planning than the United States, China has been able to disburse its stimulus much faster, turning it into new rail lines and highways.

China’s finance ministry announced in late June that half the $173 billion in central government spending had already been allocated to specific projects. The White House said in early July that a quarter of the spending authority and tax cuts in the $789 billion American stimulus had been allocated or used.

But even more key to China’s recovery, economists say, are two other government efforts that are paying big dividends: looser lending and export supports.

The state-controlled banking system here — which breezed through the global financial crisis with minimal losses as American financial institutions reeled — unleashed $1.2 trillion in extra lending to Chinese consumers and businesses in the first seven months of this year. That money is financing everything from a boom in car sales, up 82 percent in August from a year earlier, to frenzied factory construction.

Beijing also has given huge tax breaks and other assistance to exporters. They include placing broad restrictions on imports and intervening heavily in currency markets to hold down the value of the renminbi, to keep Chinese exports competitive even in a weakened global economy.

Indeed, subsidies abound at all levels of government: the Wuxi municipal government just offered up to $146,000 to each local business that increases exports in the last three months of this year.

To be sure, not all the laid off workers throughout China have been hired back.

“Some plants reduced worker numbers by 20 to 30 percent, now they hire back 10 percent,” said Stanley Lau, deputy chairman of the Federation of Hong Kong Industries, which represents export-oriented factories employing 10 million Chinese workers.

Even so, American trade data shows that imports from China only eroded 14.2 percent in the first seven months of this year while imports from the rest of the world plunged 32.6 percent. China’s trade surplus, already the world’s largest, was $108 billion for the seven-month period.

“We definitely see an upswing in sales orders in the second half of this year when compared to the first half,” said Gu Fung, the sales manager at the Wuxi Baolai Batteries Company.

China’s well-capitalized banking system allowed for rapid investment.

Chinese banks came into the crisis with enormous excess reserves, the result of three years of tight regulatory limits on lending to prevent the economy from overheating. When those limits were removed, and authorities urged bank executives to lend, the total value of loans outstanding shot up more in the first seven months of this year than in the previous 24 months.

By contrast, total loans and leases outstanding at financial institutions insured by the Federal Deposit Insurance Corporation actually fell $249 billion, or 3.2 percent, in the first half of this year.

Though Washington has used taxpayer money to bail out American banks, it does not have Beijing’s power to force banks to lend that money to businesses and consumers.

As much as a third of the extra bank lending in China appears to have gone into real estate and stock market speculation. But the bulk has gone into investments by companies and local governments, with tangible results.

China’s currency and trade policies, though highly effective, would be hard for the United States to emulate.

For instance, government intervention in currency markets has prevented the renminbi from moving appreciably against the dollar in more than 14 months, and has pushed the renminbi down by 18 percent against the euro since March.

Government agencies have been told not to buy imported goods with money from economic stimulus programs unless no domestic alternative is available. Washington has imposed a less restrictive rule, misleadingly known as “Buy American,” requiring that construction materials for the stimulus program be bought from any of the 39 countries that have agreed to free trade in government procurement — which China has not.

Still, China’s stimulus efforts could be sowing the seeds of future distress. With so much money washing into the system so fast, regulators have voiced concerns about corruption in government investment projects.

Cheap cash has a way of inflating bubbles — just ask Wall Street — that could damage China’s economy and its banks when they pop.

“You have to imagine the rigor and due diligence” that mainland banks have been showing in rushing out so many loans, said Benjamin Hung, the chief executive of the Hong Kong unit of Standard Chartered Bank.

But such concerns are so 2008.

Hilda Wang contributed reporting to this article.

Recovery Picks Up in China as U.S. Economy Still Ails, NYT, 18.9.2009, http://www.nytimes.com/2009/09/18/business/global/18yuan.html

Unemployment Hits 10.3%

in New York City

September 18, 2009
The New York Times
By PATRICK McGEEHAN

Continuing layoffs on Wall Street drove New York City’s unemployment rate to 10.3 percent in August, a 16-year high that underscores the need to retrain former financial services workers for other jobs, state officials said Thursday.

In the year since the Lehman Brothers investment bank collapsed and others had to be rescued from failing, the number of unemployed city residents has risen to more than 415,000, the highest total on record. The still-shrinking financial sector, which had been the main engine of employment growth in the city before the downturn, has essentially been declared to be in a state of emergency.

The State Department of Labor has begun using a “national emergency grant” of $11 million in federal funds to help those laid off on Wall Street shift into other fields, like health care and education. Emphasizing the need for such a shift, M. Patricia Smith, the state labor commissioner, said, “Our economists don’t see the financial-services sector ever coming back as strong as it was.”

Ms. Smith joined Gov. David A. Paterson and Assembly Speaker Sheldon Silver at a news conference in Lower Manhattan to discuss the latest jobs data and promote the retraining program. Mr. Paterson said the latest increases in the state and city unemployment rates showed that the recession was continuing in New York.

Referring to the recent pronouncement from Ben S. Bernanke, the chairman of the Federal Reserve, that the national recession is probably over, Mr. Paterson said, “What he’s saying about the national recession doesn’t apply to us.” He said New York faced at least another year of “tough sledding.”

The city’s unemployment rate, which rose from 9.5 percent in July, is now well above the national rate of 9.7 percent. Until July, unemployment had been the same or lower in the city than it was in the country for more than 18 months. Last month, the state’s unemployment rate rose to 9 percent, from 8.6 percent in July. Excluding the city, unemployment in New York State was 8 percent.

Still, Mayor Michael R. Bloomberg found a bright spot in the report. “While the job market is tight,” he said, “the city is losing jobs at less than half the rate of the rest of the country. This is an important sign that despite the challenges, people continue to be optimistic about the city’s future.”

Ms. Smith said the divergence between the city and the rest of the state was largely attributable to continued cutbacks on Wall Street and the ripple effect of the loss of those high-paying jobs. She emphasized that most of the Wall Street layoffs have involved mid- and lower-level workers who did not earn millions of dollars a year.

Under the retraining program that began in July, more than 450 people have begun classes to prepare for a career shift, and state officials say they have enough money to help at least 1,000 more.

One person in the program, Marisha Clinton, 39, of Prospect Heights, Brooklyn, said she lost her job analyzing technology stocks for Bear Stearns after it collapsed early last year. A year later, she was laid off by another securities firm.

Now, Ms. Clinton is using the $12,500 subsidy offered by the Labor Department to take courses at the New York Institute of Finance that might help her find other work.

“I’m keeping my options open,” Ms. Clinton said. “I’ve been working since I was 14 years old. I’d rather be working than not.”

The emergency federal grant went to New York. New Jersey and Connecticut, which received a combined $22 million to retrain people who have lost jobs since June 2008 at any of 31 companies — mostly large financial firms like Citigroup and Lehman Brothers.

Lana Umali, who worked for JPMorgan Chase for 20 years before losing her job in Manhattan last year, has already put Wall Street behind her. Ms. Umali, who lives in Middletown, N.J., used the state subsidy to help pay for courses to prepare her to work with elderly people. She is hoping to find work at a company that operates assisted-living facilities.

Immediately after she was laid off in June 2008, she said, “I was determined to go back into financial services. I never really thought about anything else.” But after a fruitless search, Ms. Umali said, “I got in touch with a whole other side of me.”

Unemployment Hits 10.3% in New York City, NYT, 18.9.2009, http://www.nytimes.com/2009/09/18/nyregion/18unemploy.html

U.S. Proposes Ban

on ‘Flash’ Trading on Wall Street

September 18, 2009
The New York Times
By JENNY ANDERSON

It is an obscure art of Wall Street, a technique that gives a scattering of traders an edge over everyone else — and the Securities and Exchange Commission wants to stamp it out.

The S.E.C. on Thursday proposed banning what are known as flash orders, which use powerful computers to glimpse at investors’ orders. The practice is often associated with a controversial corner of finance called high-frequency trading, which has grown, largely hidden from view, into a potent force in the markets.

The proposed ban was announced on the same day that the S.E.C. put forward new rules for credit ratings agencies, which were widely criticized for their role in the financial crisis. Together, the moves telegraphed a tougher line from the commission after a series of prominent missteps, including its failure to spot the Ponzi scheme orchestrated by Bernard L. Madoff.

Critics say flash orders favor sophisticated, fast-moving traders at the expense of slower market participants. Using lightning-quick computers, high-frequency traders often issue and then cancel orders almost simultaneously and get an early peek at how others are trading.

Mary L. Schapiro, the chairwoman of the S.E.C., said on Thursday that in proposing the ban, the commission was trying to balance the often competing interests of long-term investors and short-term traders. The proposal requires a second vote by the commission to become binding.

“Flash orders may create a two-tiered market by allowing only selected participants to access information about the best available prices for listed securities,” she said during a meeting in Washington. Other modern market practices, she said, are similarly opaque.

Fast-moving electronic exchanges have upended old-fashioned stock trading. Buyers and sellers no longer must interact on exchange floors and haggle over prices. Today, traders employ powerful computer programs to execute millions of orders a second and scan dozens of marketplaces simultaneously.

While anyone can gain access to flash orders for a fee, only very powerful computers can process and act on the information. In July, flash orders represented 2.8 percent of the roughly 9 billion shares of stocks traded in the United States.

According to Richard H. Repetto, an analyst at Sandler O’Neill who studies stock exchanges, the average trade is executed, or completed, in less than 10 milliseconds and often as fast as 5 milliseconds.

The proliferation of high-frequency trading has pushed up average daily volume on the nation’s stock exchanges by 164 percent since 2005. Proponents of the practice argue such trading enhances the liquidity and greases the wheels of the markets.

“High frequency trading has made the markets more efficient, and generally speaking, markets that are more efficient are better for all participants,” said Justin Schack, a vice president at Rosenblatt Securities.

Even so, Mr. Schack said he was pleased the S.E.C. was moving to ban flash orders, which he said tended to “benefit everyone except for the customer.”

Direct Edge, an electronic exchange, has benefited the most from the use of flash orders, analysts said. But other electronic exchanges, including Nasdaq and BATS also jumped into the market, prodded by competitive pressures.

Getting flashed an order offers traders a distinctive edge. When buy and sell orders come into an exchange, they are first flashed to those paying to see them for 30 milliseconds — 0.03 seconds — before they are available to everyone else. In the blink of an eye, the systems can detect patterns and get a jump on other investors. Before others even sees the order, high-frequency traders swoop in and then out.

The move to ban flash orders drew praise from some on Capitol Hill.

“This ban, as proposed, is pretty much water-tight and should not be weakened by the commission as the rule-making process goes forward,” said Senator Charles E. Schumer, Democrat of New York. “This proposal will once and for all get rid of flash trading.”

The parent of the New York Stock Exchange, NYSE Euronext, which never adopted flash trades, trumpeted the proposal. “I think this was a practice that gave unfair access to information flow to a select group of brokers, disadvantaged customer orders and led to a two-tier market system,” said Larry Leibowitz, head of United States markets and global technology at NYSE Euronext.

The S.E.C. on Thursday also passed rules aimed at improving transparency at credit rating agencies and reducing conflicts of interest at the companies.

One rule will force certain investors to rely less on credit ratings and more on their own research. Another requires the agencies to disclose rating histories and requires them to share information about securities they have rated with competitors so they too can rate the securities.

“These are baby steps, clearly,” said Jerome S. Fons, an independent consultant and former managing director at Moody’s, one of the major ratings agencies. He said even greater public disclosure was needed from the agencies.

U.S. Proposes Ban on ‘Flash’ Trading on Wall Street, NYT, 18.9.2009, http://www.nytimes.com/2009/09/18/business/18regulate.html

Economic Scene

Wages Grow for Those With Jobs,

New Figures Show

September 16, 2009
The New York Times
By DAVID LEONHARDT

Last winter, stories of companies cutting their workers’ pay were everywhere. FedEx said in December that it would reduce the pay of salaried workers by 5 percent. Caterpillar announced it would cut pay by up to 15 percent. The employees of a General Motors dealership near Philadelphia agreed to work one week for minimum wage.

For the first time since perhaps the Great Depression, it seemed possible that average hourly pay would actually begin falling, even before inflation was taken into account.

But that’s not what has happened.

Wage growth has picked up in the last several months, according to two different government surveys. You don’t hear or read nearly as many stories about pay cuts these days. Even though unemployment has reached its highest level in 26 years, most workers have received a raise over the last year.

That contrast highlights what I think is one of the more overlooked features of the Great Recession. In the job market, at least, the recession’s pain has been unusually concentrated.

And it hasn’t been concentrated in the typical way. Nearly every region and every demographic group has indeed been affected. But the pain has been concentrated within groups.

People who have lost their jobs are struggling terribly to find new ones. Since the downturn began in 2007, companies have been extremely reluctant to hire new workers, and few new companies have started. The economy and the job market are churning very slowly.

“There are thousands of people applying for every job I’m looking at,” Rick Alexander, an unemployed master carpenter in Florida, told my colleague Michael Luo. “And potential employers won’t even give me the courtesy of acknowledging I applied.” Almost five million of the officially unemployed — those still looking for work — have now been out of work for 27 weeks or longer. In the six decades that the Labor Department has been keeping records, that group has never been a larger share of the work force than it is today.

Yet there is a flip side to the lack of churn. Instead of doing lots of firing and some hiring, many companies have done only some firing and virtually no hiring, the statistics show. And that isn’t all bad.

Try thinking of it this way: All of the unemployed people in the country are gathered in a huge gymnasium that’s been turned into a job search center. The fact that this recession is the worst in a generation means that there are many, many people in the gym. The fact that the economy is churning so slowly means that there is not much traffic into and out of the gym.

If you’re inside, you will have a hard time getting out. Yet if you’re lucky enough to be outside the gym, you will probably be able to stay there. The consequences of a job loss are terribly high, but — given that the unemployment rate is almost 10 percent — the odds of job loss are surprisingly low.

The reasons for the slow churn are obviously complex. The baby boomers are moving out of the ages at which people typically start businesses. The economy has shifted away from sectors, like manufacturing, in which temporary layoffs are common. Educational gains have slowed, which affects innovation. And the federal government was not willing, at least until recently, to make the kind of investments that spurred entrepreneurship in the past — building the highway system, supporting scientific research, creating the Pentagon computer network that turned into the Internet.

But whatever the causes, the effects of the slow churn are clear: the pain of this recession has been concentrated. That’s all the more true now that wages may be rising again.

•

The story about falling wages was — and remains — a reasonable one.

“There’s been a huge shift in power in recent years from labor to capital,” as the astute financial blogger Felix Salmon has written. Labor unions have shrunk, and companies can move operations to lower-wage countries. “Now that workers have lost their negotiating leverage,” Mr. Salmon wrote after FedEx made its announcement, “we might start seeing more across-the-board pay cuts.” If the economy were to weaken again, we still might.

So far, though, we haven’t. Between the collapse of Lehman Brothers last September and this June, the average weekly pay of rank-and-file workers (who make up 80 percent of the work force) remained stuck at about $612. Hourly pay rose a bit, but the increase was canceled out by a shrinking workweek. Since June — with the economy apparently starting to grow again, as Ben Bernanke noted on Tuesday — the workweek has grown and hourly pay growth has accelerated. Last month, average weekly pay rose to $618.

Most companies have evidently decided that pay cuts aren’t worth the downside. Economists refer to this phenomenon as the sticky-wage theory, and it seems to have survived the Great Recession.

The theory holds that executives of companies don’t cut pay, even when demand for labor has fallen. They worry that employees will become less motivated or start looking for another job, says Laury Sejen, who oversees the compensation consultants at Watson Wyatt. So companies instead lay off workers or stop hiring. They concentrate the pain.

The added wrinkle in this recession is that inflation has dropped below zero, thanks largely to a sharp fall in energy prices. In most recessions, inflation remains positive — indeed, higher than wage growth, which means that inflation-adjusted pay declines. In this recession, average prices have fallen 2 percent over the past year, while weekly pay has either been flat or risen 1 percent, depending on which data you believe.

So inflation-adjusted pay is up 2 to 3 percent. Amazingly enough, that’s almost as big as the peak increases during the late 1990s boom.

I realize how strange this sounds. (I work at one of the companies that did cut pay.) House values have sunk, and 401(k) accounts remain battered. In the years leading up to the recession, pay increases for most families were meager. The Census Bureau reported last week that median real household income — which, of course, includes households that have suffered a job loss — was lower last year than a full decade earlier.

But we’re still in unusual territory. The economy is just emerging from a severe recession, yet the pay of most workers has been rising. That wasn’t the case at the end of any other recent recession.

I hope you can keep this in mind if you’re one of those fortunate enough to be outside the metaphorical gymnasium and still working. The economy surely doesn’t feel healthy right now. But just imagine how it feels to everybody who has borne the brunt of the recession.

Wages Grow for Those With Jobs, New Figures Show, NYT, 16.9.2009, http://www.nytimes.com/2009/09/16/business/economy/16leonhardt.html

Editorial

A Long Way Down

September 16, 2009
The New York Times

It is sadly predictable that in a recession, the poor get poorer and the middle class loses ground. But even a downturn as deep and prolonged as this one cannot fully account for the desperate straits of so many Americans.

The Census Bureau reported last week that the nation’s poverty rate rose to 13.2 percent in 2008, the highest level since 1997 and a significant increase from 12.5 percent in 2007. That means that some 40 million people in this country are living below the poverty line, defined as an income of $22,205 for a family of four.

The middle class also took a major hit. Median household income fell in 2008 to $50,300 from $52,200 in 2007. That is the steepest year-to-year drop since the government began keeping track four decades ago; adjusted for inflation, median income was lower in 2008 than in 1998 and every year since then.

Clearly, the recession has been brutal. But even before the recession, far too many Americans were already living far too close to the edge.

As is now painfully evident, the economic growth of the Bush era was largely an illusion. Poverty worsened during most of the boom years and middle-class pay stagnated, as most gains flowed to the top. In a recent update of their groundbreaking series on income trends, the economists Thomas Piketty and Emmanuel Saez found that from 2002 to 2007, the top 1 percent of households — those making more than $400,000 a year — received two-thirds of the nation’s total income gains, their largest share of the spoils since the 1920s.

Because many if not most Americans gained little to nothing from the Bush “growth” years, they have found themselves especially vulnerable to the recession.

Federal stimulus spending has helped cushion the blow. The question going forward is whether an economic recovery, when it comes, will help the poor and middle class or whether the top-heavy favoritism of the previous expansion will reassert itself.

The answer depends on how policy makers foster and manage a recovery. Economic growth alone does not guarantee job growth. Congress and the Obama administration must extend certain components of the stimulus package until employment does revive, including unemployment benefits, food stamps, tax breaks for working families with children and fiscal aid to states.

Policy makers must also resist the reassuring but false notion that renewed economic growth can, by itself, raise living standards broadly. Government policies are needed to ensure that growth is shared. Reforming health care so that illness is not bankrupting — for families or for the federal budget — would be a major step in the right direction.

The administration has also said that it would let the Bush-era tax cuts for the rich expire as scheduled at the end of 2010. More progressive taxation needs to be accompanied by more progressive spending, on public education and on job training and job creation. Support for unions and enforcement of labor standards would also help to ensure that in the next economic expansion, a fair share of profits would find its way into wages.

As the Bush era showed, the economy can grow without any of that happening. But it also showed that such growth is neither defensible nor sustainable. With half the population falling behind or struggling to keep up, the economy cannot generate secure and adequate spending, investing or upward mobility for the country to truly prosper.

A Long Way Down, NYT, 16.9.2009, http://www.nytimes.com/2009/09/16/opinion/16wed1.html

On Wall Street,

Obama Pushes Stricter Finance Rules

September 15, 2009
The New York Times
By JEFF ZELENY

President Obama came to Wall Street on Monday to tout how the nation’s economic outlook has improved from a year ago, but he called on Congress to pass stronger financial regulations this year, as he offered a sharp admonition that “there are some in the financial industry who are misreading this moment.”

“Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them,” Mr. Obama said in a speech at Federal Hall in Lower Manhattan. “They do so not just at their own peril, but at our nation’s.”

The president offered no new policy proposals during a lunchtime speech but sought to use the one-year anniversary of the fall of Lehman Brothers as a moment to mark how the country’s financial system has moved beyond the brink of collapse. As he urged lawmakers to adopt new regulations for Wall Street, he asked executives to accept tougher oversight.

“I want everybody here to hear my words,” Mr. Obama said. “We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses. Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.”

Mr. Obama touted the administration’s plans to increase capital cushions at big banks, give the Federal Reserve new powers to oversee system-wide risks to the financial system and establish a new consumer-protection agency, which would have broad powers over home mortgages and other consumer loans.

Mr. Obama also urged banks to adopt changes before Congress acts by simplifying the language they use with consumers, overhauling their pay structures or allowing shareholders vote on 2009 bonuses.

Michael Steele, the chairman of the Republican National Committee, said in a statement that the policies of the Obama administration have not improved the economic lot for many Americans.

“For more than 3 million Americans who have lost their jobs this year, the president’s policies have been a failure,” Mr. Steele said in a statement released after the speech. “His $787 billion stimulus bill has led to wasteful spending but hasn’t created the jobs he promised.”

Mr. Obama’s appearance on Wall Street comes a year after the collapse of Lehman Brothers touched off a series of extraordinary government interventions in the nation’s business sector. The anniversary also marks the moment that Mr. Obama became steeped in the financial crisis, which dominated the closing chapter of his campaign with Senator John McCain of Arizona.

It was one year ago that Mr. McCain declared “the fundamentals of our economy are strong,” a remark Mr. Obama instantly seized upon to portray his Republican rival as out of touch with hardships facing Americans. The argument helped Mr. Obama win the White House, where he inherited an economic crisis. Now, he fully owns it.

“Full recovery of the financial system will take a great deal more time and work, the growing stability resulting from these interventions means we are beginning to return to normalcy,” Mr. Obama said, speaking to an audience of a few hundred people in Federal Hall. “But what I want to emphasize is this: normalcy cannot lead to complacency.”

The president spoke beneath the dome of the building where the nation’s founding fathers once argued sharply over the role that government should play in the country’s economy. Mr. Obama noted the historic setting, saying: “Two centuries later, we still grapple with these questions — questions made more acute in moments of crisis.”

To an audience of a few hundred Wall Street executives, lawmakers and Mayor Michael Bloomberg of New York, Mr. Obama said he would push Congress to pass legislation to “guard against the kind of systemic risks we have seen.” The president was welcomed warmly, but the speech was interrupted only once by applause.

“The fact is, many of the firms that are now returning to prosperity owe a debt to the American people,” Mr. Obama said. “Though they were not the cause of the crisis, American taxpayers through their government took extraordinary action to stabilize the financial industry. They shouldered the burden of the bailout and they are still bearing the burden of the fallout.”

While some Democrats say the health care debate in Washington makes it unlikely that financial reform can be undertaken, Representative Barney Frank of Massachusetts, chairman of the Financial Services Committee, said he was committed to pursuing the measure this year. The president acknowledged Mr. Frank, who was sitting near the stage, and said the administration wanted to work with the financial industry in crafting the legislation.

“We have a responsibility to write and enforce these rules to protect consumers of financial products, taxpayers, and our economy as a whole,” Mr. Obama said. “Yes, they must be developed in a way that does not stifle innovation and enterprise.”

He added, “The old ways that led to this crisis cannot stand.”

In response to the financial crisis, the Obama administration proposed a series of new financial regulation, included oversight of the risk that large financial institutions pose to the economy, new ways for the government to dismantle fallen companies and a new regulator to oversee financial products for consumers.

“At the same time, what we must do now goes beyond just these reforms,” Mr. Obama said. “For what took place one year ago was not merely a failure of regulation or legislation; it was not merely a failure of oversight or foresight. It was a failure of responsibility that allowed Washington to become a place where problems — including structural problems in our financial system — were ignored rather than solved.”

Following the speech, the president was heading off to have lunch with former President Bill Clinton before returning to Washington later Monday afternoon.

Jack Healy contributed reporting.

On Wall Street, Obama Pushes Stricter Finance Rules, NYT, 15.9.2009, http://www.nytimes.com/2009/09/15/business/15obama.html

Text of Obama’s

Speech on Financial Reform

September 15, 2009
The New York Times

Following is the text of President Obama’s address on financial reform, as prepared for delivery on Monday at Federal Hall in New York and released by the White House:

Thank you all for being here and for your warm welcome. It’s a privilege to be in historic Federal Hall. It was here more than two centuries ago that our first Congress served and our first President was inaugurated. It was here, in the early days of our Republic, that Hamilton and Jefferson debated how best to administer a young economy and to ensure that our nation rewarded the talents and drive of its people. Two centuries later, we still grapple with these questions — questions made more acute in moments of crisis.

It was one year ago that we experienced just such a crisis. As investors and pension-holders watched with dread and dismay, and after a series of emergency meetings often conducted in the dead of the night, several of the world’s largest and oldest financial institutions had fallen, either bankrupt, bought, or bailed out: Lehman Brothers, Merrill Lynch, AIG, Washington Mutual, Wachovia. A week before this began, Fannie Mae and Freddie Mac had been taken over by the government. Other large firms teetered on the brink of insolvency. Credit markets froze as banks refused to lend not only to families and businesses but to one another. Five trillion dollars of Americans’ household wealth evaporated in the span of just three months.

Congress and the previous administration took difficult but necessary action in the days and months that followed. Nevertheless, when this administration walked through the door in January, the situation remained urgent. The markets had fallen sharply; credit was not flowing. It was feared that the largest banks — those that remained standing — had too little capital and far too much exposure to risky loans. And the consequences had spread far beyond the streets of lower Manhattan. This was no longer just a financial crisis; it had become a full-blown economic crisis, with home prices sinking, businesses struggling to access affordable credit, and the economy shedding an average of 700,000 jobs each month.

We could not separate what was happening in the corridors of our financial institutions from what was happening on factory floors and around kitchen tables. Home foreclosures linked those who took out home loans and those who repackaged those loans as securities. A lack of access to affordable credit threatened the health of large firms and small businesses, as well as all those whose jobs depended on them. And a weakened financial system weakened the broader economy, which in turn further weakened the financial system.

The only way to address successfully any of these challenges was to address them together, and so this administration — with terrific leadership by my Treasury Secretary, Tim Geithner, as well the Chair of my Council of Economic Advisers, Christy Romer, and the Chair of the National Economic Council, Larry Summers — moved quickly on all fronts, initializing a financial stability plan to rescue the system from the crisis and restart lending for all those affected by the crisis. By opening and examining the books of large financial firms, we helped restore the availability of two things that had been in short supply: capital and confidence. By taking aggressive and innovative steps in credit markets, we spurred lending not just to banks, but to folks looking to buy homes or cars, take out student loans, or finance small businesses. Our home ownership plan has helped responsible homeowners refinance to stem the tide of lost homes and lost home values.

And the recovery plan is providing help to the unemployed and tax relief for working families, all while spurring consumer spending. It’s prevented layoffs of tens of thousands of teachers, police officers, and other essential public servants. And thousands of recovery projects are underway all across America, putting people to work building wind turbines and solar panels, renovating schools and hospitals, and repairing our nation’s roads and bridges.

Eight months later, the work of recovery continues. And although I will never be satisfied while people are out of work and our financial system is weakened, we can be confident that the storms of the past two years are beginning to break.

In fact, while there continues to be a need for government involvement to stabilize the financial system, that necessity is waning. After months in which public dollars were flowing into our financial system, we are finally beginning to see money flowing back to the taxpayers. This doesn’t mean taxpayers will escape the worst financial crisis in decades unscathed. But banks have repaid more than $70 billion, and in those cases where the government’s stake has been sold completely, taxpayers have actually earned a 17-percent return on their investment. Just a few months ago, many experts from across the ideological spectrum feared that ensuring financial stability would require even more tax dollars. Instead, we’ve been able to eliminate a $250 billion reserve included in our budget because that fear has not been realized.

While full recovery of the financial system will take a great deal more time and work, the growing stability resulting from these interventions means we are beginning to return to normalcy. But what I want to emphasize is this: normalcy cannot lead to complacency.

Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them. They do so not just at their own peril, but at our nation’s. So I want them to hear my words: We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses. Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.

That’s why we need strong rules of the road to guard against the kind of systemic risks we have seen. And we have a responsibility to write and enforce these rules to protect consumers of financial products, taxpayers, and our economy as a whole. Yes, they must be developed in a way that does not stifle innovation and enterprise. And we want to work with the financial industry to achieve that end. But the old ways that led to this crisis cannot stand. And to the extent that some have so readily returned to them underscores the need for change and change now. History cannot be allowed to repeat itself.

Instead, we are calling on the financial industry to join us in a constructive effort to update the rules and regulatory structure to meet the challenges of this new century. That is what my administration seeks to do. We have sought ideas and input from industry leaders, policy experts, academics, consumer advocates, and the broader public. And we’ve worked closely with leaders in the Senate and House, including Senators Chris Dodd and Richard Shelby, and Congressman Barney Frank, who are now working to pass regulatory reform through Congress.

Taken together, we are proposing the most ambitious overhaul of the financial system since the Great Depression. But I want to emphasize that these reforms are rooted in a simple principle: we ought to set clear rules of the road that promote transparency and accountability. That’s how we’ll make certain that markets foster responsibility, not recklessness, and reward those who compete honestly and vigorously within the system, instead of those who try to game the system.

First, we’re proposing new rules to protect consumers and a new Consumer Financial Protection Agency to enforce those rules. This crisis was not just the result of decisions made by the mightiest of financial firms. It was also the result of decisions made by ordinary Americans to open credit cards and take on mortgages. And while there were many who took out loans they knew they couldn’t afford, there were also millions of Americans who signed contracts they didn’t fully understand offered by lenders who didn’t always tell the truth.

This is in part because there is no single agency charged with making sure it doesn’t happen. That is what we’ll change. The Consumer Financial Protection Agency will have the power to ensure that consumers get information that is clear and concise, and to prevent the worst kinds of abuses. Consumers shouldn’t have to worry about loan contracts designed to be unintelligible, hidden fees attached to their mortgages, and financial penalties — whether through a credit card or debit card — that appear without warning on their statements. And responsible lenders, including community banks, doing the right thing shouldn’t have to worry about ruinous competition from unregulated competitors.

Now there are those who are suggesting that somehow this will restrict the choices available to consumers. Nothing could be further from the truth. The lack of clear rules in the past meant we had innovation of the wrong kind: the firm that could make its products look best by doing the best job of hiding the real costs won. For example, we had “teaser” rates on credit cards and mortgages that lured people in and then surprised them with big rate increases. By setting ground rules, we’ll increase the kind of competition that actually provides people better and greater choices, as companies compete to offer the best product, not the one that’s most complex or confusing.

Second, we’ve got to close the loopholes that were at the heart of the crisis. Where there were gaps in the rules, regulators lacked the authority to take action. Where there were overlaps, regulators often lacked accountability for inaction. These weaknesses in oversight engendered systematic, and systemic, abuse.

Under existing rules, some companies can actually shop for the regulator of their choice — and others, like hedge funds, can operate outside of the regulatory system altogether. We’ve seen the development of financial instruments, like derivatives and credit default swaps, without anyone examining the risks or regulating all of the players. And we’ve seen lenders profit by providing loans to borrowers who they knew would never repay, because the lender offloaded the loan and the consequences to someone else. Those who refuse to game the system are at a disadvantage.

Now, one of the main reasons this crisis could take place is that many agencies and regulators were responsible for oversight of individual financial firms and their subsidiaries, but no one was responsible for protecting the whole system. In other words, regulators were charged with seeing the trees, but not the forest. And even then, some firms that posed a “systemic risk” were not regulated as strongly as others, exploiting loopholes in the system to take on greater risk with less scrutiny. As a result, the failure of one firm threatened the viability of many others. We were facing one of the largest financial crises in history and those responsible for oversight were caught off guard and without the authority to act.

That’s why we’ll create clear accountability and responsibility for regulating large financial firms that pose a systemic risk. While holding the Federal Reserve fully accountable for regulation of the largest, most interconnected firms, we’ll create an oversight council to bring together regulators from across markets to share information, to identify gaps in regulation, and to tackle issues that don’t fit neatly into an organizational chart. We’ll also require these financial firms to meet stronger capital and liquidity requirements and observe greater constraints on their risky behavior. That’s one of the lessons of the past year. The only way to avoid a crisis of this magnitude is to ensure that large firms can’t take risks that threaten our entire financial system, and to make sure they have the resources to weather even the worst of economic storms.

Even as we’ve proposed safeguards to make the failure of large and interconnected firms less likely, we’ve also proposed creating what’s called “resolution authority” in the event that such a failure happens and poses a threat to the stability of the financial system. This is intended to put an end to the idea that some firms are “too big to fail.” For a market to function, those who invest and lend in that market must believe that their money is actually at risk. And the system as a whole isn’t safe until it is safe from the failure of any individual institution.

If a bank approaches insolvency, we have a process through the FDIC that protects depositors and maintains confidence in the banking system. This process was created during the Great Depression when the failure of one bank led to runs on other banks, which in turn threatened the banking system. And it works. Yet we don’t have any kind of process in place to contain the failure of a Lehman Brothers or AIG or any of the largest and most interconnected financial firms in our country.

That’s why, when this crisis began, crucial decisions about what would happen to some of the world’s biggest companies — companies employing tens of thousands of people and holding trillions of dollars in assets — took place in hurried discussions in the middle of the night. And that’s why we’ve had to rely on taxpayer dollars. The only resolution authority we currently have that would prevent a financial meltdown involved tapping the Federal Reserve or the federal treasury. With so much at stake, we should not be forced to choose between allowing a company to fall into a rapid and chaotic dissolution that threatens the economy and innocent people, or forcing taxpayers to foot the bill. Our plan would put the cost of a firm’s failure on those who own its stock and loaned it money. And if taxpayers ever have to step in again to prevent a second Great Depression, the financial industry will have to pay the taxpayer back — every cent.

Finally, we need to close the gaps that exist not just within this country but among countries. The United States is leading a coordinated response to promote recovery and to restore prosperity among both the world’s largest economies and the world’s fastest growing economies. At a summit in London in April, leaders agreed to work together in an unprecedented way to spur global demand but also to address the underlying problems that caused such a deep and lasting global recession. This work will continue next week in Pittsburgh when I convene the G20, which has proven to be an effective forum for coordinating policies among key developed and emerging economies and one that I see taking on an important role in the future.

Essential to this effort is reforming what’s broken in the global financial system — a system that links economies and spreads both rewards and risks. For we know that abuses in financial markets anywhere can have an impact everywhere; and just as gaps in domestic regulation lead to a race to the bottom, so too do gaps in regulation around the world. Instead, we need a global race to the top, including stronger capital standards, as I’ve called for today. As the United States is aggressively reforming our regulatory system, we will be working to ensure that the rest of the world does the same.

A healthy economy in the 21st Century also depends upon our ability to buy and sell goods in markets across the globe. And make no mistake, this administration is committed to pursuing expanded trade and new trade agreements. It is absolutely essential to our economic future. But no trading system will work if we fail to enforce our trade agreements. So when, as happened this weekend, we invoke provisions of existing agreements, we do so not to be provocative or to promote self-defeating protectionism. We do so because enforcing trade agreements is part and parcel of maintaining an open and free trading system.

And just as we have to live up to our responsibilities on trade, we have to live up to our responsibilities on financial reform as well. I have urged leaders in Congress to pass regulatory reform this year and both Congressman Frank and Senator Dodd, who are leading this effort, have made it clear that that’s what they intend to do. Now there will be those who defend the status quo. There will be those who argue we should do less or nothing at all. But to them I’d say only this: do you believe that the absence of sound regulation one year ago was good for the financial system? Do you believe the resulting decline in markets and wealth and employment was good for the economy? Or the American people?

I’ve always been a strong believer in the power of the free market. I believe that jobs are best created not by government, but by businesses and entrepreneurs willing to take a risk on a good idea. I believe that the role of government is not to disparage wealth, but to expand its reach; not to stifle markets, but to provide the ground rules and level playing field that helps to make them more vibrant — and that will allow us to better tap the creative and innovative potential of our people. For we know that it is the dynamism of our people that has been the source of America’s progress and prosperity.

So I certainly did not run for President to bail out banks or intervene in the capital markets. But it is important to note that the very absence of common-sense regulations able to keep up with a fast-paced financial sector is what created the need for that extraordinary intervention. The lack of sensible rules of the road, so often opposed by those who claim to speak for the free market, led to a rescue far more intrusive than anything any of us, Democrat or Republican, progressive or conservative, would have proposed or predicted.

At the same time, what we must do now goes beyond just these reforms. For what took place one year ago was not merely a failure of regulation or legislation; it was not merely a failure of oversight or foresight. It was a failure of responsibility that allowed Washington to become a place where problems — including structural problems in our financial system — were ignored rather than solved. It was a failure of responsibility that led homebuyers and derivative traders alike to take reckless risks they couldn’t afford. It was a collective failure of responsibility in Washington, on Wall Street, and across America that led to the near-collapse of our financial system one year ago.

Restoring a willingness to take responsibility — even when it is hard — is at the heart of what we must do. Here on Wall Street, you have a responsibility. The reforms I’ve laid out will pass and these changes will become law. But one of the most important ways to rebuild the system stronger than before is to rebuild trust stronger than before — and you do not have to wait for a new law to do that. You don’t have to wait to use plain language in your dealings with consumers. You don’t have to wait to put the 2009 bonuses of your senior executives up for a shareholder vote. You don’t have to wait for a law to overhaul your pay system so that folks are rewarded for long-term performance instead of short-term gains.

The fact is, many of the firms that are now returning to prosperity owe a debt to the American people. Though they were not the cause of the crisis, American taxpayers through their government took extraordinary action to stabilize the financial industry. They shouldered the burden of the bailout and they are still bearing the burden of the fallout — in lost jobs, lost homes and lost opportunities. It is neither right nor responsible after you’ve recovered with the help of your government to shirk your obligation to the goal of wider recovery, a more stable system, and a more broadly shared prosperity.

So I want to urge you to demonstrate that you take this obligation to heart. To put greater effort into helping families who need their mortgages modified under my administration’s homeownership plan. To help small business owners who desperately need loans and who are bearing the brunt of the decline in available credit. To help communities that would benefit from the financing you could provide, or the community development institutions you could support. To come up with creative approaches to improve financial education and to bring banking to those who live and work entirely outside the banking system. And, of course, to embrace serious financial reform, not fight it.

Just as we are asking the private sector to think about the long term, Washington must as well. When my administration came through the door, we not only faced a financial crisis and costly recession, we also found waiting a trillion-dollar deficit. Yes, we have had to take extraordinary action in the wake of an extraordinary economic crisis. But I am committed to putting this nation on a sound and secure fiscal footing. That’s why we’re pushing to restore pay-as-you-go rules, because I will not go along with the old Washington ways which said it was OK to pass spending bills and tax cuts without a plan to pay for it. That’s why we’re cutting programs that don’t work or are out of date. And that’s why I’ve insisted that health insurance reform not add a dime to the deficit, now or in the future.

There are those who would suggest that we must choose between markets unfettered by even the most modest of regulations — and markets weighed down by onerous regulations that suppress the spirit of enterprise and innovation. But if there is one lesson we can learn from the last year, it is that this is a false choice. Common-sense rules of the road do not hinder the markets but make them stronger. Indeed, they are essential to ensuring that our markets function, and function fairly and freely.

One year ago, we saw in stark relief how markets can err; how a lack of common-sense rules can lead to excess and abuse; how close we can come to the brink. One year later, it is incumbent on us to put in place those reforms that will prevent this kind of crisis from ever happening again; that reflect the painful but important lessons we’ve learned; and that will help us move from a period of recklessness and crisis to one of responsibility and prosperity. That is what we must do. And I’m confident that is what we will do.

Thank you.

Text of Obama’s Speech on Financial Reform, NYT, 15.9.2009, http://www.nytimes.com/2009/09/15/business/15obamatext.html

Editorial

Reforming the Financial System

September 14, 2009
The New York Times

On Monday, the one-year anniversary of the collapse of Lehman Brothers, President Obama is scheduled to deliver a major speech on the financial crisis. He should take justifiable pride in some of the aggressive steps his administration has taken to rescue the financial system and the broader economy.

Yet, the important work of regulatory reform remains undone. The administration has proposed legislation that would bring most of the financial system under a regulatory umbrella, and impose higher capital requirements to cushion against losses. But in specific areas, like consumer protection, Obama officials will have to fight to ensure that lawmakers do not water down the administration’s intent. In another area — the regulation of derivatives — Congress must improve the administration’s proposal. As Congress considers the legislation this fall, here are some key issues:

CONSUMER PROTECTION The financial crisis would have been less severe — or largely avoided — if regulators had curbed abusive and unsound lending back when bad mortgage loans first began to proliferate. But all too predictably, they failed to act.

Prominent overseers like the Federal Reserve and the Office of the Comptroller of the Currency had long viewed consumer protection as a regulatory backwater. In keeping with the prevailing antiregulatory ethos, they also tended to equate bank profitability with bank safety and soundness. That led them to view products and practices that boosted bank profits as “good”— even as tricky loans and lax lending standards set the stage for mass defaults, and systemwide collapse.

The strongest of the administration’s proposed reforms — a Consumer Financial Protection Agency — seeks to rectify that regulatory failure. The new agency would take on the consumer protection responsibilities that are currently dispersed among numerous regulators and police the financial system with a sole focus on the best interest of the consumer. It could ensure, for example, that lenders — whether banks or nonbanks — provide simpler alternatives to complex mortgages and could impose restrictions on other forms of credit, like stealth overdraft fees.

Unfortunately, Congress is already being pressured by the financial industry to weaken the proposal. It is imperative that the final legislation explicitly prohibit the new agency from pre-empting stronger state consumer-protection laws. Pre-emption— favored by banks, financial firms and regulators who are cozy with them — has long been used to reduce consumer protection and regulatory oversight. The final legislation must also retain the new agency’s power to examine banks’ books and enforce rules. An agency without full ongoing regulatory authority would be set up for failure.

DERIVATIVES The multitrillion-dollar market in derivatives was a major catalyst of the financial crisis. Derivatives are supposed to help investors and businesses manage risk, but after a 2000 law largely deregulated them, they also became tools for vast speculation, creating and amplifying risk instead of reducing it.

In general, the administration’s plan to regulate derivatives is serious and far-reaching. But, unfortunately, it is marred by loopholes that would protect banks’ lush profits in derivatives while leaving the system and taxpayers vulnerable to renewed instability.

The basic flaw in the plan is that it splits the derivatives market in two. Standardized derivative contracts would be traded on regulated exchanges. Customized contracts would continue to be privately traded — which could open the door to some of the same below-the-radar transactions that have already proved so disastrous. Beyond an odd contract here or there, derivatives should be standardized and exchange traded, period.

The administration’s proposed legislation also would exempt some derivative investors, like many hedge funds, from the requirement to trade standardized contracts on an exchange. This major exception could undermine the entire objective of lowering risk, increasing transparency and fostering efficiency.

That point was made in a recent letter to lawmakers from Gary Gensler, the chairman of the Commodity Futures Trading Commission, who would have significant responsibility for derivatives under a reformed system. Mr. Gensler has also pointed out that the proposed legislation would exempt certain derivatives called foreign exchange swaps from regulation. That broad exclusion could allow other derivatives transactions to be structured in a way that would avoid regulation.

A light touch on derivatives, when a firm hand is needed, only reinforces the notion that the banks are ultimately in charge. To restore confidence both in markets and in the government, Obama officials and lawmakers must tighten the derivatives reform proposal.

SYSTEMIC RISK REGULATION The administration proposes empowering the Federal Reserve to supervise and regulate firms whose failure could damage the system as a whole and to seize such firms if failure is imminent.

The proposal is clearly problematic. For one thing, the Fed, in its conduct of monetary policy, can itself be a source of systemic risk. It is widely believed that the Fed’s interest-rate decisions in this decade helped to inflate the housing bubble. In addition, the Fed, as currently configured, may not be sufficiently distanced from the banks to oversee the system objectively.

Unless the administration and the Fed propose policies and procedures to eliminate such conflicts, they are insurmountable. In that case, systemic risk regulation would best be left to a small group of bank regulators working to identify and resolve emerging risks.

Lost in this debate over the Fed’s role is the fact that systemic risk would best be controlled by restoring rules ignored in the deregulatory fervor of the past decade, developing new rules as needed and enforcing them day to day. Also missing from the debate — and the proposed legislation — is a roadmap for restructuring and downsizing too-big-to-fail institutions over time so that they are no longer a threat.

These changes will take time. For now, what is most important is that the broader reform effort get off the ground. Mr. Obama’s speech is the opportunity to relaunch the effort; the hard work still lies ahead.

Reforming the Financial System, NYT, 14.6.2009, http://www.nytimes.com/2009/09/14/opinion/14mon1.html

In Wisconsin,

Hopeful Signs for Factories

September 13, 2009
The New York Times
By PETER S. GOODMAN

MEQUON, Wis. — At the Rockwell Automation factory here, something encouraging happened recently that might be a portent of national economic recovery: managers reinstated a shift, hiring a dozen workers.

After months of layoffs, diminished production and anxiety about the depths of the Great Recession, the company — a bellwether because most of its customers are manufacturers themselves — saw enough new orders to justify adding people.

Given the panicked retreat that has characterized life on the American factory floor for many months, any expansion registers as a hopeful sign for the economy. Last week, the Federal Reserve found signs of “modest improvement” in manufacturing. That reinforced the direction of a widely watched manufacturing index tracked by the Institute for Supply Management, which surged into positive territory last month for the first time in a year and a half.

Yet these indications, while welcome, promise no vigorous expansion: For now, factory overseers remain uncertain that a lasting resurgence is at hand, making them reluctant to hire workers aggressively and invest in new equipment.

“We’re starting to see stabilization,” said Keith D. Nosbusch, chairman and chief executive of Rockwell, which makes machinery used in manufacturing. “The deceleration is slowing, but we haven’t seen the bottom yet. We have yet to see a turnaround.”

The tentative signs of factory improvement largely reflect a replenishing of inventories after months of weak sales, rather than an increase in demand for goods. For manufacturing to return to strength and help power a broader economic recovery, consumers would have to start buying more products, experts say.

Still, the mere process of expanding inventories could be enough to sustain several months of increased production, say economists. That could eventually generate more factory jobs, giving workers money to spend at other businesses. And that might instill enough momentum for a broader economic expansion.

“After one of the most incredible cutbacks and slicing away ever, just replenishing inventories is sufficient to maintain increased output,” said Allen Sinai, chief global economist at Decision Economics. “It’s part of the process of recovery in the United States, which is imminent.”

On Wall Street and in academic circles, where economists pick through often contradictory indicators for evidence of revival, the situation inside American factories is of crucial interest. Though manufacturing has diminished as a share of the economy, it still employs 11.7 million people, and it tends to trace the ups and downs of broader business prospects, making it a useful indicator of overall economic vigor.

The recent manufacturing data has been seized on by many economists as a signal that the recession is, technically speaking, already over or nearing an end.

“Those are genuine signs that this economy has turned the corner and begun to recover,” said Bernard Baumohl, chief global economist at the Economic Outlook Group.

However, for now, growth in manufacturing jobs is mostly just a hope. Though improved business prospects appear to have tempered layoffs, manufacturing lost 65,000 net jobs in August, according to the Labor Department, adding to more than 2 million jobs in the sector that have disappeared since the recession began.

“None of these factories are yet convinced that this is a sustainable recovery, so they’re very cautious about hiring,” said Mr. Baumohl.

Wisconsin is an ideal laboratory in which to assess manufacturing. No other state has a larger share of its jobs in manufacturing — more than 17 percent, according to the Labor Department. Today, that translates into a palpable lack of security.

At the original Miller brewery in downtown Milwaukee — now a tiny piece of a mammoth operation that produces more than 100 million cases of beer annually — roughly 25 of the 550 workers who labor for hourly wages typically leave the company in the course of a year. This year, the number is zero.

“It used to be you might leave here and go over there for a higher-paying job,” said Andrew K. Moschea, a brewing vice president for Miller Coors. “ ‘Over there’ isn’t there anymore, or it’s laying off.”

The Miller plant is a bright spot in the local economy. Though production of kegs of beer is down a little, reflecting business at restaurants and bars, lower-priced cans are up, making for expanded volume.

When Miller recently hired 30 part-time workers to round out its weekend shifts, paying more than $20 an hour, thousands applied, many from skilled trades that once paid twice as much.

Rockwell Automation’s machinery, computer software and know-how form the guts of assembly lines in a wide array of industries.

“The products they produce through the whole range are critical for doing manufacturing,” said John S. Heywood, an economist at the University of Wisconsin, Milwaukee.

In recent months, Rockwell has suffered along with much of American industry. As car sales plummeted, automakers canceled new orders for Rockwell’s machinery. As the price of oil plunged this year, energy companies scrapped expansion plans, eliminating demand for Rockwell’s machinery.

In recent years, Rockwell has established a presence in more than 80 countries, deriving roughly half its revenue overseas. But as the slowdown spread to Asia, Europe and Latin America, the comforts of being global evaporated.

As Rockwell’s customers grew fearful of losing access to credit, they eliminated plans for new factories, idled existing plants and put off replacing and servicing older gear. “It came quick,” Mr. Nosbusch said. “It was steep.”

Rockwell began large-scale layoffs in October 2008 — three percent of its 20,000-plus workers worldwide, including 300 in the United States. Scattered layoffs continued in the months after. The company also cut working hours, trimmed wages and eliminated its own contributions to employee retirement accounts.

Here in Mequon, about 20 miles north of Milwaukee, management trimmed its production work force from about 240 to 220. It scrapped a shift in its board shop, where workers in lab coats use sophisticated machinery to attach capacitors, transistors and other electronics to custom-sized circuit boards.

The circuit boards are the brains of Rockwell’s power-regulating machines. Production declined by one-fifth this year. But in recent weeks, as Rockwell has rebuilt its inventory, production has nudged up 5 percent, prompting the resurrection of the third shift.

Still, worry remains, making future hiring unlikely. Rockwell’s customers have resumed replacing older gear, but have not begun full-scale expansions, which would generate much more business.

Factory managers doubt whether American consumers — still reeling from lost jobs and savings — can snap back vigorously enough to restore manufacturing.

“I’ve got 22 years of experience and I’ve never seen anything like this,” said Mike Laszkiewicz, 48, vice president and general manager of Rockwell’s power control business. “This is a tough one. I’m a little uncertain which way this is going to go.”

In Wisconsin, Hopeful Signs for Factories, NYT, 13.9.2009, http://www.nytimes.com/2009/09/13/business/economy/13manufacture.html

A Year After a Cataclysm,

Little Change on Wall St.

September 12, 2009
The New York Times
By ALEX BERENSON

Wall Street lives on.

One year after the collapse of Lehman Brothers, the surprise is not how much has changed in the financial industry, but how little.

Backstopped by huge federal guarantees, the biggest banks have restructured only around the edges. Employment in the industry has fallen just 8 percent since last September. Only a handful of big hedge funds have closed. Pay is already returning to precrash levels, topped by the 30,000 employees of Goldman Sachs, who are on track to earn an average of $700,000 this year. Nor are major pay cuts likely, according to a report last week from J.P. Morgan Securities. Executives at most big banks have kept their jobs. Financial stocks have soared since their winter lows.

The Obama administration has proposed regulatory changes, but even their backers say they face a difficult road in Congress. For now, banks still sell and trade unregulated derivatives, despite their role in last fall’s chaos. Radical changes like pay caps or restrictions on bank size face overwhelming resistance. Even minor changes, like requiring banks to disclose more about the derivatives they own, are far from certain.

Coming on the same weekend as the 11th-hour bailout of the giant insurer American International Group, and the sale of Merrill Lynch, Lehman’s failure was the climax of a cataclysmic weekend in the financial industry. In the days that followed, nearly everyone seemed to agree that Wall Street was due for fundamental change. Its “heads I win, tails I’m bailed out” model could not continue. Its eight-figure paydays would end.

In fact, though, regulators and lawmakers have spent most of the last year trying to save the financial industry, rather than transform it. In the short run, their efforts have succeeded. Citigroup and other wounded banks have avoided bankruptcy, and the economy has sidestepped a depression. But the same investors and economists who predicted, and in some cases profited from, the collapse last fall say the rescue has come at an extraordinary cost. They warn that if the industry’s systemic risks are not addressed, they could cause an even bigger crisis — in years, not decades. Next time, they say, the credit of the United States government may be at risk.

Simon Johnson, a professor at the Sloan School of Management at the Massachusetts Institute of Technology and former chief economist of the International Monetary Fund, said that the seeds of another collapse had already sprouted. If major banks are allowed to keep making bets that are ultimately backed by taxpayer guarantees, they will return to the practices that led them to underwrite trillions of dollars in bad loans, Professor Johnson said.

“They will run up big risks, they will fail again, they will hit us for a big check,” he predicted.

The doomsday view is far from universal.

Wall Street executives say the Lehman bankruptcy opened their eyes to the fragility of their institutions. They note that they have pulled back on risk and reduced leverage, creating a bigger cushion against losses. And they say that regulators were right to support the financial industry over the last year, rather than imposing new rules or allowing weak banks to collapse.

“There is less leverage in the entire financial system,” said David A. Viniar, Goldman’s chief financial officer. At Goldman, $1 in capital now supports about $14 in loans and investments, compared with $24 a year ago.

But even some senior Wall Street executives acknowledge the lack of change surprises them, given how poorly the industry performed last fall and the degree of government support necessary to keep it from collapsing.

“There was a general feeling that an enormous amount of additional regulation should be put in place to prevent what happened that weekend from happening again,” said Byron Wien, vice chairman of Blackstone Advisory Services and the former chief investment strategist for Morgan Stanley and Pequot Capital. “So far, we haven’t seen a lot of action.”

Robert J. Shiller, the Yale University economics professor who predicted the dot-com crash and the housing bust, said the window for change may be closing. “People will accept change at a time of crisis, but we haven’t managed to do much, and maybe complacency is coming back,” Professor Shiller said. “We seem to be losing momentum.”

Kenneth C. Griffin, founder and chief executive of the Citadel Investment Group, a Chicago-based hedge fund that manages $13 billion, said that regulators and lawmakers needed to impose rules so failing banks could be shut, rather than allowed to operate indefinitely with taxpayer support.

“We’ve taken a lot of steps for the worse, and not for the better, in terms of the structural underpinnings of our capital markets,” Mr. Griffin said. “We have to change the rules and correct the fundamental flaws in the financial system.”

To be sure, Wall Street is not exactly as it was before the cataclysm of last year.

Then, a dozen or so big banks formed the top tier. Now Goldman Sachs and JPMorgan Chase are clearly the strongest, with Morgan Stanley struggling to compete. Bank of America and Citigroup are the weakest big banks, heavily reliant on government guarantees to survive.

“We have more separation between the healthiest and the least healthy of the big banks,” said Darrell Duffie, a finance professor at Stanford University.

Banks have collectively raised hundreds of billions in new capital to help cushion losses on bad loans and are taking a more prudent approach to lending and underwriting. The worst excesses of 2006 and 2007, when banks lent hundreds of billions of dollars against all kinds of real estate at terms that even at the time seemed absurd, have ended.

But those changes are not unexpected. Banks typically raise lending standards during recessions. And even if they wanted to keep up underwriting, they would not find much of a market. Many pension and hedge funds have suffered huge losses on mortgage-backed bonds and are hardly rushing to buy more.

Critics of the industry argue that the pullback in risk will be only temporary without deep regulatory changes. Nassim Nicholas Taleb, a statistician, trader, and author, has argued for years that financial firms chronically underestimate their risks and must be managed much more cautiously. Universa Investments, a $5 billion fund in which he is a principal, made more than 100 percent profit last year betting on the possibility of a collapse.

Mr. Taleb warns that the system has grown riskier since last fall. The extensive government support that began after Lehman collapsed will lead investors to assume that governments will always prevent major banks from collapsing, he said.

So investors will lend money to the financial industry on easy terms. In turn, financial institutions will use that cheap money to make risky loans and trades. The banks will keep the profits when their bets pay off, while taxpayers will swallow the losses when the bets go bad and threaten the system.

Economists call the phenomenon moral hazard. Bankers have a different term: I.B.G. The phrase implies that by the time a deal goes sour, “I’ll be gone,” after having received a sizable bonus.

Despite the predictions last year about pay cuts, those bonuses appear secure. Kian Abouhossein, an analyst at J.P. Morgan in London, predicted this week that eight major American and European banks would pay the 141,000 employees in their investment banking units $77 billion in 2011 — about $543,000 per worker, not far from the 2007 peak — even after minor regulatory changes are adopted.

Because the rewards are so rich, the banks will not change unless regulators and lawmakers force them, Mr. Taleb said.

“I don’t know anyone on Wall Street who goes to work every day thinking of anything but how to increase their bonus,” he said.

To prevent a replay of last year’s crisis, investors in financial institutions, especially bondholders, must believe that they will lose money if banks fail, said Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation. “You need to send that very strong, clear signal to restore market discipline,” Ms. Bair said.

But legislation that would allow regulators to close giant institutions in an orderly fashion has been stalled for months. So too have efforts to create a systemic regulator that would focus on the broader risk that might occur from the ripple effects caused by the failure of one major bank.

Another proposed change would require banks to list and trade derivatives through a central clearinghouse, just as stocks and options are traded through exchanges, but it has yet to go anywhere.

The term derivatives encompasses a variety of financial products, including contracts whose value changes as interest rates move and insurance that pays off if a bond defaults. Derivatives drove the boom before 2008 by encouraging banks to make loans without adequate reserves. They also worsened the panic last fall because they inherently tie institutions together. Investors worried that the collapse of one bank would lead to big losses at others.

Requiring that derivatives be traded openly sounds like a relatively small change, but it could have important effects.

Exchange trading would open pricing for derivatives, so banks could not hide money-losing positions. Banks would have to put up money as positions moved against them, since the exchanges would seize and sell derivatives that were not backed by adequate margin. That move would help avoid the situation A.I.G. faced last year, after it wrote hundreds of billions of dollars of credit insurance and had no money to make good on its promises when the bonds defaulted. But critics say that even the proposed changes would not go far enough, because they would exempt some complex derivatives from exchange trading or clearing. Moreover, some banks oppose opening derivatives trading, because it would cut their profits by making pricing more visible and as a consequence competitive. For now, legislation to force derivatives trading onto exchanges has stalled, and banks are still writing contracts with limited regulatory oversight.

“The off-exchange derivatives market is still the Wild West,” Ms. Bair said.

A Year After a Cataclysm, Little Change on Wall St., NYT, 12.9.2009, http://www.nytimes.com/2009/09/12/business/12change.html

States Face Drop

in Casino and Lottery Revenues

for First Time

September 10, 2009
The New York Times
By IAN URBINA

CINCINNATI — Casinos and lotteries in most states are reporting a downturn in revenue for the first time, resulting in a drop in the money collected by state and local governments, according to new state data.

The decline comes as states are rapidly expanding gambling in hopes of stemming severe budget shortfalls, and it indicates that gambling is not insulated from broader economic forces like recessions, as has been argued in the past.

The drop has led some gambling experts to wonder whether the industry is reaching market saturation, whereby a limited number of gamblers with a fixed amount of money to bet is being split across a growing number of gambling options.

States that have been invested in gambling the longest have been hit hardest. Illinois reported a $166 million drop in tax revenue in fiscal year 2009, from 2008; Nevada had a $122 million drop, and New Jersey $62 million.

In hopes of enticing more gamblers, New Jersey lawmakers have repealed a smoking ban, and in Illinois they are considering allowing free drinks on riverboat casinos.

“The data shows that states take a real chance in depending on gambling because this revenue is not likely to keep pace with growing budgetary needs,” said Lucy Dadayan, a senior analyst at the Nelson A. Rockefeller Institute of Government at the State University at Albany, which will release a report on the subject next week.

“In the absence of new types of gambling, it can become a zero-sum game as states compete for the same pot.”

Others, however, argue that the current decline is temporary, and that the industry has plenty of room to expand. Some experts expect revenues to bounce back, but doubt they will be as robust as they were before the recession.

The 12 states that have casinos made $4.5 billion in fiscal year 2009, which ended June 30, a 7.4 percent drop from last year, according to the state data. Among the 42 states with lotteries, 38 reported data indicating that they made $14.5 billion this year, a 2.6 percent drop compared with the earnings from the same states last year.

Gambling critics have long maintained that it provides short-term revenue at the expense of long-term social costs, like increased crime and addiction. But the new data also shows that the revenue collected by states and local governments is decreasing while competition for it is on the rise. Still, state leaders are looking for ways to get a piece of the earnings.

Here in Ohio, Gov. Ted Strickland, a Democrat and former Methodist minister, reversed his opposition to gambling and, in conjunction with the legislature, issued a directive allowing video slots at the state’s seven racetracks.

In Colorado, voters last year backed an increase in betting limits at casinos, and Missouri voters approved the end of limits on how much a gambler can lose. “We need those slots like nobody’s business,” said Mildred Cox, 77, who for 28 years has run the concession stand at River Downs here, one of the seven horse racing tracks slated to receive some of the state’s 17,500 proposed new slot machines. “Look at this place, it’s desolate.”

Across from her, a crowd of older men, betting tickets in hand, stood staring at several televisions mounted on the wall showing races in other states and Canada.

As a bell rang, the horses sprinted by, competing for a winning prize of $4,600. But the men barely broke their concentration from the televisions.

“You can’t attract the best horses and the biggest bettors with purses like that,” said Ms. Cox, pointing outside at a largely empty grandstand.

Thirty years ago, gamblers had to go to Las Vegas or Atlantic City to bet legally. Now, a dozen states have commercial casinos, 12 have “racinos,” or slot machines and other games that are installed at racetracks, 29 states have Indian casinos, and 42 states and the District of Columbia, have lotteries.

“When budgets get tight, expanding gambling always looks to lawmakers like the perfect quick-fix solution,” said John Kindt, a professor of business and legal policy at the University of Illinois who studies the impact of state-sponsored gambling. “But in the end, it so often proves to be neither quick nor a fix.”

Crime jumps 10 percent in areas with casinos, personal bankruptcies soar 18 percent to 42 percent and the number of new gambling addicts doubles, Mr. Kindt said. Predicted state revenue often falls short and plans frequently get tripped up by legal fights or popular opposition, he said.

In Delaware, for example, Gov. Jack Markell said in March that he wanted to legalize sports betting in casinos, which he said would bring in $53 million in the first year to help plug an $800 million budget shortfall. But the plan was blocked by a federal court in Philadelphia on Aug. 24 on the grounds that it would undermine confidence in professional sports.

In Ohio, Governor Strickland reversed his stance on video slots at racetracks based on a “conservative” estimate that the new machines would net more than $760 million to the state.

But the slots are not likely to arrive here any time soon because a lawsuit is pending before the Ohio Supreme Court that argues that the plan should be placed before the voters. The slots may also get overtaken by a proposed constitutional amendment that will be on the November ballot and would allow four full-fledged casinos, one each in Cincinnati, Cleveland, Columbus and Toledo.

Still, Frank J. Fahrenkopf Jr., president of the American Gaming Association, said states had plenty of reasons to want to expand gambling.

“Even though our revenues are down during the recession, bringing a casino into a community will still provide new jobs, new tax revenues, new opportunities for local vendors and other benefits that didn’t exist before,” Mr. Fahrenkopf said. “It isn’t surprising that as consumers are tightening their wallets, and with less discretionary spending for entertainment, they are spending less when they visit casinos, too.”

About 60 percent of people who participate in casino gambling have cut back on spending on the activity, according to a 2008 national survey conducted by the association.

Despite the downturn, revenue from racinos grew this fiscal year, producing $2.9 billion in taxes and fees in 12 states compared with $2.7 billion the year before, a 6.7 percent increase.

But Ms. Dadayan of the Rockefeller Institute said the racino windfalls might be short-lived because slot profits usually soften with time as their novelty wears off and more states add machines.

If Pennsylvania and Indiana, where slots are new, are excluded, the total slot revenue from the other 10 states with racinos actually fell by $76 million in fiscal year 2009, a 4 percent decline.

States Face Drop in Casino and Lottery Revenues for First Time, NYT, 10.9.2009, http://www.nytimes.com/2009/09/10/us/10gambling.html

The House Trap

September 9, 2009
The New York Times
By DAVID STREITFELD

Edward and Maria Moller are worried about losing their house — not now, but in 2013.

That is when the suburban San Diego schoolteachers will see their mortgage payments jump, most likely beyond their ability to pay.

Like millions of buyers during the boom, the Mollers leveraged their way into a house they could not otherwise afford by taking out a loan that required them to make only interest payments at first, putting off payments on the principal for several years.

It was a “buy now, pay later” strategy on a grand scale, meant for a market where home prices went only up, and now the bill is starting to come due.

With many of these homes under water — worth less than the loans against them — many interest-only mortgages will soon become unaffordable, as the homeowners have to actually start paying principal. Monthly payments can jump by as much as 75 percent.

The Mollers owe so much more than their house is worth, and have so few options, that they are already anticipating doom.

“I’m praying for another boom,” said Mr. Moller, 34. “Otherwise, we’ll have to walk.”

Keith Gumbinger, an analyst with HSH Associates, said: “This is going to be the source of tomorrow’s troubles. The borrowers might have thought these were safe loans, but it turns out they bet the house.”

After three brutal years, evidence is growing that the housing market has turned a corner. Sales in July were the highest in a year, and August gives signs of having been even better. In nearly all major cities, home prices are now rising.

Celebration, however, might be premature. The plight of the Mollers and many others in a similar position is likely to weigh on any possible recovery for years to come.

Experts predict a steady drumbeat of defaults over much of the next decade as these interest-only loans mature. Auctioned off at low prices, those foreclosed houses could help brake any revival in home prices.

Interest-only loans are not the only type of exotic mortgage hanging over the housing market. Another big problem is homeowners with “pay option” loans; in many of these loans, principal balances are actually increasing over time.

Still, interest-only loans represent an especially large problem. An analysis for The New York Times by the real estate information company First American CoreLogic shows there are 2.8 million active interest-only home loans worth a combined total of $908 billion.

The interest-only periods, which put off the principal payments for five, seven or 10 years, are now beginning to expire. In the next 12 months, $71 billion of interest-only loans will reset. The year after, another $100 billion will reset. After mid-2011, another $400 billion will reset.

John Karevoll, a longtime senior analyst for MDA DataQuick, sees the plight of interest-only owners this way: “You’re heading straight for a big wall and you can’t put the brakes on.”

The greater the length of the interest-only period, the more years the owners have to hope for a recovery, government help, or a miracle. But a long interest-only period works against them, too. A loan that is interest-only for its first 10 years means the entire house has to be paid off in the next 20 rather than the more typical 30 years.

One possible solution: start paying extra each month now to pay down the principal before the loans reset. But many homeowners took out the maximum they qualified for, and don’t have the means to pay more, or at least not enough to make a sizeable dent in the principal.

A decade ago, interest-only loans were rare. But as the boom heated up and desperate buyers sought any leverage they could, these loans became ubiquitous. They were especially popular in Florida, Nevada and above all California. In 2004, nearly half of all buyers in the state got one.

The Mollers bought in 2005, paying $460,000 for their three-bedroom, thousand-square-foot house. A quick refinance a few months later supplied cash to pay debts. Now the house is worth perhaps $310,000. After their interest-only period is up, they expect their monthly payments to increase 20 percent if not more.

“Everyone out here always preached to me, ‘Buy real estate. It’s the best investment you’ll ever have,’ ” said Mr. Moller, who grew up in Iowa. “Then all this stuff started crumbling and I was like, ‘You’re kidding me.’ ”

While default may be a long way off, the prospect is already dampening the couple’s spending habits. They are postponing the new windows the house needs. They recently bought a 2005 Nissan Murano instead of a new car, and they have put off buying a flat-screen TV.

Mark Goldman, a San Diego mortgage broker, said many interest-only buyers thought they would be in control when the loans reset. “They expected to move or refinance,” he said. “But you can’t do either when you’re under water.”

Among the people Mr. Goldman put into interest-only loans was himself. He refinanced five years ago to shrink his payments so he and his wife, Julie, could put their two sons through college. When the interest-only period expired a few months ago, their payments went up by 40 percent.

The Goldmans have been in their house for 20 years, which means they still have some equity. Still, they are unhappy to find themselves in “a world different than we planned for,” said Mr. Goldman, a lecturer in real estate finance at San Diego State. “If you purchased your home with an interest-only loan between 2003 and 2006, you’re cooked.”

The federal government, through the finance company Fannie Mae, increased the scope of a program this summer that might help some interest-only borrowers by letting them refinance. But it will not help many in coastal California. Only loans owned by Fannie Mae are eligible, and during the boom Fannie had a limit of $417,000 — not enough to buy a home at the peak in a middle-class community.

Dean Janis, a Southern California lawyer who bought a $950,000 home in 2004, will see his interest-only loan reset in December. He calculates that will send his payments up a minimum of 27 percent, to $3,726. A rise in rates could eventually push it as high as $6,700.

“I understand I took a risk,” Mr. Janis said. “But I did not anticipate that the real estate market would go down 30 percent.” He talked with Wells Fargo about his options, and the lender said he had none.

Homeowners with interest-only loans have a much greater likelihood of default, the First American CoreLogic figures indicate. Nationally about 18 percent of prime interest-only loans are at least 60 days delinquent. In California, the level is even higher: 21 percent, a rate exceeded only in the other bubble states of Florida and Nevada.

“The bailout is not trickling through to help many of us who have worked hard, under very difficult circumstances, to keep paying our bills,” Mr. Janis said. “I am stuck with nowhere to go — absent trashing my credit and defaulting.”

The House Trap, NYT, 9.9.2009, http://www.nytimes.com/2009/09/09/business/09loans.html

The Card Game

Overspending on Debit Cards

Is a Boon for Banks

September 9, 2009
The New York Times
By RON LIEBER
and ANDREW MARTIN

When Peter Means returned to graduate school after a career as a civil servant, he turned to a debit card to help him spend his money more carefully.

So he was stunned when his bank charged him seven $34 fees to cover seven purchases when there was not enough cash in his account, notifying him only afterward. He paid $4.14 for a coffee at Starbucks — and a $34 fee. He got the $6.50 student discount at the movie theater — but no discount on the $34 fee. He paid $6.76 at Lowe’s for screws — and yet another $34 fee. All told, he owed $238 in extra charges for just a day’s worth of activity.

Mr. Means, who is 59 and lives in Colorado, figured employees at his bank, Wells Fargo, would show some mercy since each purchase was less than $12. In addition, a deposit from a few days earlier would have covered everything had it not taken days to clear. But they would not budge.

Banks and credit unions have long pitched debit cards as a convenient and prudent way to buy. But a growing number are now allowing consumers to exceed their balances — for a price.

Banks market it as overdraft protection, and the fees it generates have become an important source of income for the banking industry at a time of big losses in other operations. This year alone, banks are expected to bring in $27 billion by covering overdrafts on checking accounts, typically on debit card purchases or checks that exceed a customer’s balance.

In fact, banks now make more covering overdrafts than they do on penalty fees from credit cards.

But because consumers use debit cards far more often than credit cards, a cascade of fees can be set off quickly, often for people who are least able to afford it. Some banks further increase their revenue by manipulating the order of a customer’s transactions in a way that causes more of them to incur overdraft fees.

“Banks will let you overspend on your debit card in a way that is much, much more expensive than almost any credit card,” said Eric Halperin, director of the Washington office of the Center for Responsible Lending.

Debit has essentially changed into a stealth form of credit, according to critics like him, and three quarters of the nation’s largest banks, except for a few like Citigroup and INGDirect, automatically cover debit and A.T.M. overdrafts.

Although regulators have warned of abuses since at least 2001, they have done little to curb the explosive growth of overdraft fees. But as a consumer outcry grows, the practice is under attack, and regulators plan to introduce new protections before year’s end. The proposals do not seek to ban overdraft fees altogether. Rather, regulators and lawmakers say they hope to curb abuses and make the fees more fair.

The Federal Reserve is considering requiring banks to get permission from consumers before enrolling them in overdraft programs, so that consumers like Mr. Means are not caught unaware at the cash register.

Representative Carolyn Maloney, Democrat of New York, would go even further by requiring warnings when a debit card purchase will overdraw an account and by barring banks from running the most expensive purchases through accounts first.

The proposals carry considerable momentum given the popularity of credit card legislation signed into law in May. They also have a certain inevitable logic, since the credit card legislation requires a similar “opt in” decision from consumers who want to spend more than their credit limits and pay the corresponding over-the-limit fees. Overdrafts are simply the reverse, where the limit is zero, and the bank charges a fee for going under it.

But with so much at stake, the banking industry is intent on holding its ground.

Bankers say they are merely charging a fee for a convenience that protects consumers from embarrassment, like having a debit card rejected on a dinner date. Ultimately, they add, consumers have responsibility for their own finances.

“Everyone should know how much they have in their account and manage their funds well to avoid those fees,” said Scott Talbott, chief lobbyist at the Financial Services Roundtable, an advocacy group for large financial institutions.

Some experts warn that a sharp reduction in overdraft fees could put weakened financial institutions out of business.

Michael Moebs, an economist who advises banks and credit unions, said Ms. Maloney’s legislation would effectively kill overdraft services, causing an estimated 1,000 banks and 2,000 credit unions to fold within two years. That is because 45 percent of the nation’s banks and credit unions collect more from overdraft services than they make in profits, he said.

“Will they be able to replace it with another fee?” Mr. Moebs said. “Not immediately and not soon enough.”

They will certainly try. For instance, some banks have said they might slap a monthly fee of between $10 to $20 on every free checking account. At the moment, people who pay overdraft fees help subsidize the free accounts of those who do not.

Banks may also have to answer a question that many consumers ask and that Ms. Maloney has raised in her proposal: Why can’t banks simply alert a consumer at the cash register if they are about to spend more than they have in their account, and allow them to say right then and there whether they want to pay a fee to continue?

The banking industry says that simply is not possible without new equipment and software, costs that would be borne by consumers.

“If you think about when you swipe your card at, let’s say, Starbucks or at the Safeway or the Giant, there is no real sort of interaction there,” said Mr. Talbott. “It’s just approved or disapproved. So how logically would that work? Would a screen come up? Would someone at the bank call the checkout clerk and say, ‘That customer is overdrawn?’ Logistically that would be very difficult to implement.”

No one could have imagined this controversy decades ago, when the A.T.M. card was born. Back then, it was simple: when money ran out, the card was usually rejected by the banks.

But then A.T.M. cards started acquiring Visa or MasterCard logos, allowing users to “debit” their bank accounts for purchases. A thorny issue soon sprang up. What if there wasn’t enough money in a cardholder’s account to cover a purchase?

For years, banks had covered good customers who bounced occasional checks, and for a while they did so with debit cards, too. William H. Strunk, a banking consultant, devised a program in 1994 that would let banks and credit unions provide overdraft coverage for every customer — and charge consumers for each transgression.

“You are doing them a favor here,” said Mr. Strunk, adding that overdraft services saved consumers from paying merchant fees on bounced checks.

Some institutions do not see it that way, and either do not offer overdraft services or allow their clients to decline the service. “We’ve never subscribed to the notion that individuals who overdraw or attempt to should be allowed to do so without the opportunity to opt in,” said Gary J. Perez, the president and chief executive of the University of Southern California Credit Union.

A Source of Easy Money

But many of the nation’s banks have found that overdraft fees are easy money. According to a 2008 F.D.I.C. study, 41 percent of United States banks have automated overdraft programs; among large banks, the figure was 77 percent. Banks now cover two overdrafts for every one they reject.

In all, $27 billion in fee income flows from covering overdrafts from debit card purchases, A.T.M. transactions, checks and automatic payments for bills like utilities; an additional $11.5 billion arrives from bounced checks and other instances in which banks refuse to pay overdrafts, Mr. Moebs said.

By contrast, penalty fees from credit cards will add up to about $20.5 billion this year, according to R. K. Hammer, a consultant to the credit card industry. For instance, customers incur penalties for paying their bills late or by spending beyond the credit limit the bank has set for them. Banks also make billions in interest from credit cards.

Most of the overdraft fees are drawn from a small pool of consumers. Ninety-three percent of all overdraft charges come from 14 percent of bank customers who exceeded their balances five times or more in a year, the F.D.I.C. found in its survey. Recurrent overdrafts are also more common among lower-income consumers, the study said.

Advocacy groups say banks are making a fortune because consumers are unaware of the exorbitant costs of overdraft services. And banks, they argue, have an incentive to keep it that way.

That is what Mr. Means found when he approached his Wells Fargo branch in Fort Collins, Colo., to redress the $238 in fees he was billed. An employee explained that her ability to waive fees had been revoked by the bank because she had refunded fees for too many customers, Mr. Means said she told him.

Rory Foster, a former branch manager in Illinois, said that Wells Fargo based its compensation for managers in part on overall branch profitability. Fee income, including that from overdrafts, is part of the calculation.

A spokeswoman for Wells Fargo, Richele J. Messick, said the bank did not tie branch manager pay directly to fee collection.

‘I Can’t Afford That’

Yet fees, and how they are generated, remain a mystery to many consumers. Because regulators do not treat overdraft charges as loans, banks do not have to disclose their annualized cost to consumers.

And often, the price is enormous. According to the F.D.I.C. study, a $27 overdraft fee that a customer repays in two weeks on a $20 debit purchase would incur an annual percentage rate of 3,520 percent. By contrast, penalty interest rates on credit cards generally run about 30 percent.

“People would be shocked at how brutally high those fees are relative to the costs of a credit card,” said Edmund Mierzwinski, the consumer program director for the United States Public Interest Research Group.

Ruth Holton-Hodson discovered that the hard way. She keeps close tabs on the welfare of her brother, who lives in a halfway house in Maryland and uses what little he has in his account at Bank of America to pay rent and buy an occasional pack of cigarettes or a sandwich.

When the brother, who has a mental illness that she says requires her to assist with his finances, started falling behind on rent, Ms. Holton-Hodson found he had racked up more than $300 in debit card overdraft fees in three months, including a $35 one for exceeding his balance by 79 cents.

Ms. Holton-Hodson said she spent two years asking bank employees if her brother could get a card that would not allow him to spend more than he had. Though Bank of America does not typically allow customers to opt out of overdraft protection, it finally granted an exemption.

“I’ve been angered and outraged for many years,” she said. “When there is no money in his account, he shouldn’t be able to pay.”

Anne Pace, a spokeswoman for Bank of America, said the case was “complicated issue without any simple solutions,” but declined to elaborate, citing privacy concerns. She added the bank allowed customers to opt out of overdraft services on a “case-by-case basis.”

And when a consumer does overdraw an account, banks have found a way to multiply the fees they collect by rearranging the sequence of transactions, critics say.

Ralph Tornes, who lives in Florida, is pursuing a lawsuit against Bank of America for charging him nearly $500 in overdraft fees in 2008 after it rearranged his purchases from largest to smallest. In May 2008, for instance, Mr. Tornes had $195 in his account when he made two debit purchases for $8 and $13; the bank also processed a bill payment of $256.

He claims that Bank of America took his purchases out of chronological order and ran the biggest one through first. So instead of paying $35 for one overdraft fee, he was stuck with three, for a total of $105.

Mr. Talbott, of the Financial Services Roundtable, said some banks reordered purchases based on surveys showing that consumers want their most vital bills, like rent and car payments, which tend to be for larger amounts, paid before items like a $3 coffee.

Consumers who have been slapped with large fees as a result of this practice have a different perspective. “There is no reason they should get the little guy because he’s only got a few bucks in his account,” said Ryan Pena, 24, a recent college graduate who has filed suit against Wachovia, now part of Wells Fargo, for what he says are abusive practices, including reordering his purchases. “I can’t afford that.”

Officials at Bank of America and Wachovia declined to talk about specific complaints, but echoed Mr. Talbott’s remarks on processing payments.

The Debate in Washington

These lawsuits open a window onto the questions that government officials and banks are now trying to answer. Do consumers actually want overdraft service? Can they use it responsibly? If so, what is the best way to deliver it?

Federal regulators have acknowledged problems with overdraft fees since at least 2001 but have done little aside from improving disclosure and issue voluntary guidelines they hoped the industry would follow. That year, Daniel P. Stipano, deputy chief counsel for the Office of the Comptroller of the Currency, wrote that a company that markets overdraft programs to banks showed a “complete lack of consumer safeguards.”

In 2005, after intense industry pressure, the Federal Reserve ruled that overdraft charges should not be covered by the Truth in Lending Act. That meant bankers did not have to seek consumers’ permission to sign them up, nor did they have to disclose the equivalent interest rate for the fees.

That same year, the Federal Reserve said that some banks had “adopted marketing practices that appear to encourage consumers to overdraw their accounts.” It issued a list of “best practices” that asked banks to more clearly disclose overdraft fees, let customers opt out of overdraft programs and provide an alert when a purchase occurs that would put the account below zero. But critics said the recommendations had no teeth.

“No regulator has made any of their bank examiners adhere to best practices,” said Mr. Halperin, of the Center for Responsible Lending. “The result is over that time period consumers have paid probably upwards of $80 billion in overdraft fees while the Federal Reserve considers and considers and considers whether or not they are going to do anything.”

Officials at the Federal Reserve dispute that they have not taken sufficient action on overdraft fees, noting that they imposed tougher disclosure requirements in 2004 and are now considering additional regulations to address abusive practices. They will disclose their intent before the end of the year.

What no one disputes is that the stakes in the coming battle on overdraft fees are enormous. Ms. Maloney said she did not push her overdraft legislation this spring because the uproar from the banking industry could have jeopardized the credit card bill.

“It was very important to provide more tools to consumers to better manage their credit cards,” she said. “And now I think they deserve the same treatment with debit cards.”

Overspending on Debit Cards Is a Boon for Banks, NYT, 9.9.2009, http://www.nytimes.com/2009/09/09/your-money/credit-and-debit-cards/09debit.html

Obama Says

US Still Faces

Complex Economic Crisis

September 7, 2009
Filed at 12:21 p.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- President Barack Obama said Monday the country still faces a ''vast and complex'' economic crisis and is pledging to work with business and labor to make things better.

In a Labor Day statement the White House released as he headed for a union picnic in Ohio, Obama voiced confidence that ''working Americans will help our nation emerge from this crisis.''

He also paid tribute in the holiday proclamation to the contributions that working people have made over the course of history, saying they have ''carried us through times of challenge and uncertainty.''

Obama chose a Labor Day union picnic in Cincinnati as the backdrop to announce his selection of Ron Bloom as senior counselor for manufacturing policy. Bloom planned to travel there with the president for an afternoon announcement at the AFL-CIO event.

Bloom was senior adviser to Treasury Secretary Timothy Geithner as part of the auto industry task force since February. Bloom, a Harvard Business School graduate, previously advised the United Steelworkers union and worked as an investment banker.

Bloom will work with the National Economic Council to lead policy development and planning for Obama's work to revitalize U.S. manufacturing, the White House said.

Obama's speech to union members was the first of at least three speeches this week.

Earlier Monday, Labor Secretary Hilda Solis, who will join Obama at the Ohio labor event, said Monday she sees ''stabilization occurring'' in the job market, saying some sectors have shown improvement.

But in an interview on NBC's ''Today'' show, Solis also said, ''It's certainly not somewhere where we need it to be right now.'' She said the administration is deploying ''everything in our toolbox'' to try to steady shaky labor markets, adding that job-training efforts will be stepped up this fall.

''I would first of all say that we understand that ... this number (9.7 jobless rate) is very unacceptable,'' Solis said. ''What I would like to say this Labor Day is, 'Don't be discouraged. Come visit our offices, get to know our staff, figure out if you need to plan out a new job, a new career, get into a new education program.' ''

Obama's remarks were expected to touch on health care in advance of a Wednesday evening address to Congress on his proposed overhaul. On Tuesday, Obama will speak to American children as they begin the school year.

The AFL-CIO Labor Day picnic normally draws up to 20,000 people, union spokesman Eddie Vale said. AFL-CIO president John Sweeney and secretary-treasurer Richard Trumka were expected to welcome Obama to the gathering.

-----

On the Net:

AFL-CIO: http://www.aflcio.org/

Obama Says US Still Faces Complex Economic Crisis, NYT, 7.9.2009, http://www.nytimes.com/aponline/2009/09/07/us/politics/AP-US-Obama-Labor-Day.html

Out of Work,

and Too Down to Search On

September 7, 2009
The New York Times
By MICHAEL LUO

They were left out of the latest unemployment rate, as they are every month: millions of hidden casualties of the Great Recession who are not counted in the rate because they have stopped looking for work.

But that does not mean these discouraged Americans do not want to be employed. As interviews with several of them demonstrate, many desperately long for a job, but their inability to find one has made them perhaps the ultimate embodiment of pessimism as this recession wears on.

Some have halted their job searches out of sheer frustration. Others have decided it makes more sense to become stay-at-home fathers or mothers, or to go back to school, until the job market improves. Still others have chosen to retire for now and have begun collecting Social Security or disability benefits, for which claims have surged.

Rick Alexander, a master carpenter in Florida who has given up searching after months of effort, said the disappointment eventually became unbearable.

“When you were in high school and kept asking the head cheerleader out for a date and she kept saying no, at some point you stopped asking her,” he said. “It becomes a ‘why bother?’ scenario.”

The official jobless rate, which garners the bulk of attention from politicians and the public, was reported on Friday to have risen to 9.7 percent in August. But to be included in that measure, which is calculated by the Bureau of Labor Statistics from a monthly nationwide survey, a worker must have actively looked for a job at some point in the preceding four weeks.

For an increasing number of people in this country who would prefer to be working, that is not the case.

It is difficult to assign an exact figure, because of limitations in the data collected by the bureau, but various measures that capture discouragement have swelled in this recession.

In the most direct measure of job market hopelessness, the bureau has a narrow definition of a group it classifies as “discouraged workers.” These are people who have looked for work at some point in the past year but have not looked in the last four weeks because they believe that no jobs are available or that they would not qualify, among other reasons. In August, there were roughly 758,000 discouraged workers nationally, compared with 349,000 in November 2007, the month before the recession officially began.

The bureau also has a broader category of jobless it calls “marginally attached to the labor force,” which includes discouraged workers as well as those who have stopped looking because of other reasons, like school, family responsibilities or health issues. But economists agree that many of these workers probably would have found a way to work in a good economy.

There were roughly 2.3 million people in this group in August, up from 1.4 million in November 2007. If the unemployment rate were expanded to include all marginally attached workers, it would have been 11 percent in August.

But even this figure is probably an undercount of the extent of the jobless problem in this country. There are about 1.4 million more people who are not in the labor force than when the recession began. Some of these are retirees, stay-at-home parents, people on disability and students. But it is also rather likely that many of these people have given up looking for work at least partly because of economic reasons as well.

Here are four people’s stories:

Rick Alexander: A Builder by Trade, With Too Much Time

In the worst case, Rick Alexander figured, he could scrounge up a job at Home Depot.

He was a master carpenter, after all. He had skills. He had run his own successful home-restoration business for 28 years.

In early 2008, however, he moved to Florida to take care of his ailing parents, leaving his business in Connecticut to his daughter.

After helping his parents into an assisted-living facility, he began applying for jobs. He devoted eight hours a day to the task, sometimes sending out three or four applications a day.

“It was a full-time job,” he said.

At first, he focused on jobs in construction, applying to be a site supervisor. He looked for anything within an hour’s commute of where he was living in Jensen Beach.

But the real estate industry had fallen off precipitously, bringing building to a near standstill. Mr. Alexander, 58, began branching out to suppliers, applying at lumberyards and other wholesalers. Eventually, he expanded his search to Home Depot, Lowe’s and mom-and-pop hardware stores. Finally, he began applying for “everything under the sun,” even the overnight shift at convenience stores.

By that summer, he had still received no callbacks for interviews. He went back to Connecticut for several weeks to do a renovation for an old client to earn some cash. When he returned to Florida in August 2008, he tried to start his own business, selling advertising on video displays mounted in coffee shops and other places.

He networked furiously with local businesses, but by then the economy had nose-dived. Mr. Alexander said he grossed a total of $150. He sank into a funk and stopped looking.

“There are thousands of people applying for every job I’m looking at, and potential employers won’t even give me the courtesy of acknowledging I applied,” he said. “The entirety of that causes me not to bother. It’s a waste of my time and theirs.”

He has applied to just two jobs this year, both several months ago. The unemployment rate in his area, Martin County, now exceeds 11 percent. After prodding from his companion, Dona Olinger, he went down to Home Depot a little over a month ago to re-activate his application there.

His savings are gone. He lives with Ms. Olinger, who makes $10 an hour as a volunteer coordinator at a food pantry, Harvest Food and Outreach Center, where they also get groceries every week. It is her salary that pays their rent.

Mr. Alexander’s parents have since moved out of the assisted-living facility and back into their home, so he tends to them most days. He reads Robert Ludlum novels. He sleeps. To fill his time, he is looking into volunteer work. The other day, he cut the grass on his small lawn using just a pair of clippers.

Ray Rucker: Feeling Counted Out With Years Still Left

Ray Rucker came home from a job interview several months ago, sat down in his living room with his suit still on and wept.

The meeting with the interviewer had lasted 10 minutes. The man did not even open a folder in front of him to study Mr. Rucker’s résumé. It was just “jibber jabber,” Mr. Rucker said later.

Mr. Rucker, who lives in Overland Park, Kan., had little doubt about what had happened. He is 62 years old and, as he puts it, “I look 62.”

He lost his job as a facilities manager for Starbucks in Kansas City and Wichita, Kan., last November, when the company closed hundreds of stores across the country. He had done similar work for years for other national restaurant chains and retail outlets.

He landed his first interview within a month, with a retail chain. He was invited back to talk to the vice president of operations and to the director of operations. He was also invited to meet with the company’s chief executive.

But as Mr. Rucker was finishing with the director of operations, she asked him straight out whether he was retiring soon. Shocked, Mr. Rucker answered, truthfully, that he planned to work at least 10 more years.

The meeting with the chief executive never came. Mr. Rucker said he thinks his interviewer simply did not believe he planned to continue working.

A month ago, he found a job posting that seemed tailored for him, a facilities manager for a national restaurant chain. He sent in his résumé and three days later got called for an interview. The company official said he was in a hurry to fill the position. But Mr. Rucker soon learned that this one, too, had slipped from his grasp.

“That’s the one when I kind of threw in the towel,” he said.

Mr. Rucker said he was done looking. His wife, who works at a small nonprofit organization, protested, saying there was more he could do to look.

“You don’t know what I’m going through,” Mr. Rucker said he told her.

“You send out so much, and you don’t get responses,” he said. “Then when you get called in, you’re treated like you’re too old. Why am I doing this?”

So he made an appointment with the local Social Security office to begin claiming benefits. He might try to get some kind of hourly job to help make ends meet. He has mapped out some home renovation projects he wants to do.

The Social Security checks will not equal even a third of what he used to make. But he is now preparing for semiretirement.

Jenny Salinas: From a Nonstop Career to a Focus on the Home

Jenny Salinas never envisioned being a stay-at-home mother, taking care of the children and keeping house. She was the one with the high-powered career, the six-figure salary, always jetting off to Russia or China.

She put her 5-year-old daughter, Mia, in day care when she was three months old. Mia got so used to her mother going away she would simply say, “Mommy’s on a trip,” and blow her kisses when she left.

But after searching unsuccessfully since January for a job, Mrs. Salinas, 37, said her priorities had shifted. She is now content to stay home and focus on her family. She and her husband are even talking about having more children.

“It’s just amazing how it changes your perspective on what’s important,” she said.

Mrs. Salinas had been a manager of corporate marketing and media relations at an oil and gas company in Houston, where she lives. She was so focused on her career, she said, that she never noticed her daughter had a lazy eye. Mrs. Salinas’s mother mentioned something to her, but only after Mrs. Salinas was laid off did she realize that her daughter needed to see an ophthalmologist.

“That’s how much I was on my BlackBerry,” Mrs. Salinas said.

Mrs. Salinas was initially confident that she would land somewhere quickly. She seemed to be doing well, too, scoring interview after interview for senior-level corporate marketing positions. But each of those prospects dried up, usually because of a hiring freeze or some other obstacle.

So, for the last two months, she has not looked at all. Partly, she has been busy, selling their old house, moving into a new one they are renting at half the monthly expense, seeing her daughter off to kindergarten.

She is helped by the fact that her husband, a vice president at an advertising agency, still has his job. After the couple realized that her job search might take time, they decided to cut back on their spending.

She has in mind a specific set of companies, but they are all still not hiring. Unwilling to settle for just any job, she said, she would rather bide her time.

But the process of searching for work and coming up empty has also left her feeling spent.

“I was just discouraged, fed up and angry, feeling like my career had betrayed me,” she said.

Her daughter used to be in day care or preschool from 7 a.m. to 6 p.m., but Mrs. Salinas began dropping her off later and picking her up earlier. Some days, they skip day care completely and while away the day together.

Tatjana Jovanovic-Grove: Moving From Serbia, Scraping By Online

Tatjana Jovanovic-Grove now occupies her days with arts and crafts projects. She makes a little money selling them online — $10 here, $50 there — but mostly it beats the sense of futility that used to envelop her each day during her quest to find a job.

“I stopped looking because that feeling of being rejected again and again is hard,” she said. “It’s just like somebody punching you in the face.”

Ms. Jovanovic-Grove, 41, has struggled to find work since she immigrated in late 2005 to the United States from her native Serbia, where she was a biology researcher at a prestigious research institute in Belgrade.

She had married an American, Doug Grove, 42, a Wal-Mart mechanic she met over the Internet. The couple initially lived in Glendale, Ariz., with their three children from previous marriages, but they moved to Winston-Salem, N.C., in late 2007.

They were attracted by the weather and the low crime rate. They also thought Ms. Jovanovic-Grove, who earned a master’s degree in Serbia in environmental protection and zoology, would have an easier time finding a job in an area rich with universities.

“I was really thinking I would have no problem,” she said.

The need for her to find work became more urgent after the couple took on thousands of dollars in additional debt after they turned their Arizona home over to a bank in lieu of a foreclosure settlement. They had been unable to sell it amid the state’s collapsing real estate market.

But aside from a few temporary jobs, Ms. Jovanovic-Grove has come up empty on everything from research assistant positions to retail jobs. Meanwhile, her husband’s hours at Wal-Mart, where he is paid a little more than $14 an hour, have been cut back.

In May, she stopped looking completely, concluding that the job market was saturated. Winston-Salem’s unemployment rate exceeded 10 percent.

“You figure out it’s just like when you toss a piece of meat at a pack of hungry cats,” she said. “I just gave up because I could not compete.”

Instead, she has turned to making wood handicrafts and selling them on Etsy.com, an online marketplace. The small payments she gets often mean she earns less than fifty cents an hour for her effort. But she reasoned it is better than wasting gas driving around applying for jobs she believes she cannot get.

Out of Work, and Too Down to Search On, NYT, 7.9.2009, http://www.nytimes.com/2009/09/07/us/07worker.html

Editorial

Big Tobacco Strikes Back

September 7, 2009
The New York Times

It didn’t take long for tobacco companies to try to evade tough new restrictions on their ability to market to young people. Less than three months after a landmark federal law granted the Food and Drug Administration power to regulate tobacco products, several of the industry’s biggest companies filed suit in tobacco-friendly Kentucky. They contend that the law’s marketing provisions infringe their commercial free-speech rights.

For the sake of the public’s health, we hope this suit is the last gasp of an industry that has a long, sorry history of pretending to market only to adults while surreptitiously targeting young people.

The industry is not trying to upend the entire law or the government’s right to regulate cigarette contents. Rather, it seeks to block restrictions that would greatly limit how and where it can advertise.

The law, for example, bans the use of color or graphic images in advertisements placed in magazines that reach a significant number of people under the age of 18 even though the primary audience might be adults. Ads in those magazines would have to consist of black text on a white background. The lawsuit contends that People magazine, Sports Illustrated and ESPN the Magazine, all read predominantly by adults, would be limited to black-and-white tobacco ads.

Under another provision, cigarette packages would have to carry much larger warnings than the current labels and would have to use color graphics to depict the health consequences of smoking.

The law also prohibits advertising that products carry a lower risk than traditional cigarettes without F.D.A. approval, a provision aimed at ensuring that such claims are scientifically valid not only for individual smokers but also for the population as a whole, including nonsmokers who might be enticed to smoke if they thought a cigarette was low-risk.

The industry contends that these and other restrictions limit its ability to convey “truthful information” about a lawful product to adult consumers, not just to young people. Antismoking advocates retort that the companies can convey their information in black and white without using colorful images that have a strong emotional resonance with young people.

To uphold the law, the courts would have to decide that all of these provisions are “narrowly tailored” to the goal of reducing youth smoking, one of the tests of constitutionality. In 2001 the Supreme Court overturned rules in Massachusetts prohibiting outdoor advertising of tobacco products within 1,000 feet of schools and playgrounds because, while aimed at protecting children, the restrictions interfered unduly with messages aimed at adults.

The new law revises provisions on outdoor advertising to meet the objections raised in that case. They would not prohibit ads in retail store windows near schools and playgrounds, for example, so that adult passers-by would know tobacco products were on sale inside.

And just in case more changes are thought necessary, the law instructs the F.D.A. to modify its rules before issuing them to comply with the Massachusetts decision and other governing First Amendment cases.

On public health grounds, the tobacco industry does not deserve much latitude to promote its deadly products with colorful images, as opposed to black-and-white text. In a 2006 opinion based on company documents, Federal District Judge Gladys Kessler found that tobacco companies had marketed to young people “while consistently, publicly, and falsely, denying they do so.”

Now, the courts must decide how much this rogue industry may be restrained. The health of millions of impressionable young people rides on the outcome.

Big Tobacco Strikes Back, NYT, 7.9.2009, http://www.nytimes.com/2009/09/07/opinion/07mon1.html

Teenage Jobless Rate

Reaches Record High

September 5, 2009
The New York Times
By CATHERINE RAMPELL

Pity the unemployed, but pity especially the young and unemployed.

This August, the teenage unemployment rate — that is, the percentage of teenagers who wanted a job who could not find one — was 25.5 percent, its highest level since the government began keeping track of such statistics in 1948. Likewise, the percentage of teenagers over all who were working was at its lowest level in recorded history.

“There are an amazing number of kids out there looking for work,” said Andrew M. Sum, an economics professor at Northeastern University. “And given that unemployment is a lagging indicator, and young people’s unemployment even lags behind the rest of unemployment, we’re going to see a lot of kids of out work for a long, long, long, long time.”

Recessions disproportionately hurt America’s youngest and most inexperienced workers, who are often the first to be laid off and the last to be rehired. Jobs for youth also never recovered after the last recession, in 2001.

But this August found more than a quarter of the teenagers in the job market unable to find work, an unemployment rate nearly three times that of the nonteenage population (9 percent), and nearly four times that of workers over 55 (6.8 percent, also a record high for that age group). An estimated 1.64 million people ages 16-19 were unemployed.

Many companies that rely on seasonal business, like leisure and hospitality, held the line and hired fewer workers this summer — a particular problem for teenagers.

In Miami, 18-year-old Rony Bonilla spent past summers busing tables at restaurants and working at the Miami Seaquarium. He said he set out to find another job this summer, but dozens of businesses, like Walgreens, Kmart and Chuck-E-Cheese, turned him down. Mr. Bonilla said he and many of his friends were unable to find any job offers beyond commission-only employment scams.

“I’m looking for anything to pay the bills,” he said. "You name it, I applied. And I never even heard from them.”

Expecting record unemployment among youth, Congress set aside $1.2 billion in February’s stimulus bill for youth jobs and training. As with everything stimulus-related, supporters, like Jonathan Larsen of the National Youth Employment Coalition, say the money has tempered a bad situation, although the overall numbers are dismal.

Economists say there are multiple explanations for why young workers have suffered so much in this downturn, but they mostly boil down to being at the bottom of the totem pole.

Recent college graduates, unable to find higher-paying jobs, are working at places like Starbucks and Gap, taking jobs once held by their younger peers. Half of college graduates under age 25 are in jobs that do not require college degrees, the highest portion in at least 18 years, Mr. Sum said.

Likewise, the reluctance or inability of older workers to retire has led to less attrition and fewer opportunities for workers to move up a rung and make room for new workers at the bottom of the corporate ladder.

Increases in the minimum wage may have made employers reluctant to hire teenagers, said Marvin H. Kosters, a resident scholar emeritus at the American Enterprise Institute.

High teenage jobless rates may also be distorted by other factors. The ability of more young people to rely on family may allow them to be pickier about jobs and therefore to stay out of work longer than they did in previous recessions, said Dean Baker, co-director of the Center for Economic and Policy Research.

Additionally, with more students applying to college, the remaining pool of job applicants may be less desirable to employers.

“Maybe the most employable kids pull out of the labor force, making the numbers for what percent of kids are looking for jobs appear even worse,” said Harry J. Holzer, an economist at Georgetown University and the Urban Institute.

The decision of more young people to attend college, which could help them increase their earning potential later in life, may be one silver lining of the recession, economists say. Similarly, back when graduating from high school was a rarer achievement, the Great Depression pushed potential dropouts to stay in high school because work was so hard to come by.

But there is a bit of a catch-22: Many college students need to work to pay for college. Half of traditional-age college students work 20 hours a week, Lawrence F. Katz, an economics professor at Harvard, said.

“In today’s labor market, the big margin comes from going on to college, not just graduating high school,” he said. “Unlike the decision to finish high school, that’s not something you can do free of tuition.”

Jack Healy contributed reporting.

Teenage Jobless Rate Reaches Record High, NYT, 5.9.2009, http://www.nytimes.com/2009/09/05/business/economy/05teen.html

Unemployment Hits 9.7%,

but Job Loss Slows in August

September 5, 2009
The New York Times
By JACK HEALY

Employers eliminated 216,000 jobs in August even as the larger American economy showed signs of turning around, suggesting that while the pace of job losses continues to slow, workers will still be among the last to benefit from a recovery.

The unemployment rate, calculated in a separate survey, resumed its climb last month after a dip in July, rising to 9.7 percent from 9.4 percent, the Labor Department reported on Friday in its monthly snapshot of the job market.

As factories slowly begin to ramp up production and businesses start to restock their shelves, economists anticipate that losses will dwindle and that employers could begin creating jobs by late this year or early 2010. But most forecasters — and White House officials — still expect the unemployment rate to reach 10 percent or higher.

“The job market is in for a slog,” said Mark Zandi, chief economist at Moody’s Economy.com. “It’s going to be slow, incremental improvement, and it’s the reason why the broader recovery’s going to be very fragile.”

Signs of weakness filled the report. Overtime hours were unchanged from a month earlier, and the length of the workweek was flat. Temporary employment services, among the first to hire after a recession, cut 6,500 jobs. And the rate of manufacturing job losses increased from a month earlier.

Still, Obama administration officials greeted the lower number of job losses as more evidence that the $787 billion stimulus was making a mark on the economy.

“The overall message in these numbers is that we’re headed in the right direction but we’re far from out of the woods,” said Jared Bernstein, an economic adviser to Vice President Joseph R. Biden Jr. “There are simply too many Americans seeking work, and that means too many families struggling with a job market that remains well behind the curve.”

Economists had foreseen 230,000 job losses for the month, and expected the unemployment rate to hit 9.5 percent. The government also revised monthly job losses for July higher, saying the economy had shed 276,000 jobs compared with the 247,000 that had originally been reported. The June number was revised to 463,000 job losses from 443,000.

Over all, the figures evinced a dreary — but not desperate — landscape.

Average hourly earnings rose by 6 cents in August, to a seasonally adjusted $18.65 an hour, and average weekly earnings edged up to $617.32 from $615.33 in July. And the median time workers are unemployed fell slightly, to 15.4 weeks.

Economists said the slower pace of job losses provided another sign that the recession was losing steam. The nation’s economic output is expected to rebound over the rest of the year after four quarters of contraction, and the housing market is gradually getting back onto its feet.

But economists say employers must create 300,000 to 400,000 jobs a month to bring unemployment rates back to pre-recession levels — a difficult hurdle after such a prolonged downturn.

“High unemployment rates are going to be with us for quite a while,” Michael Feroli, an economist at JPMorgan Chase, said. “It’s going to be a long, long time before we see 6 percent or 7 percent unemployment.”

Months — or years — of a lackluster job market could further strain the finances of the country’s approximately 15 million unemployed, constraining their spending and putting them at greater risk of home foreclosure or default on credit cards or auto loans.

Some 128,000 manufacturing and construction jobs evaporated in August, and businesses ranging from financial companies to retailers to restaurants appeared poised to continue cutting positions through the end of the year, economists said.

And some 20 months into the recession, people like Ginny Hoover of Williamsburg, Va., are beginning to use up their unemployment benefits, their extended benefits and even their emergency payments from the government.

Ms. Hoover, 49, said she had been unable to find any work beyond the offer of a commission-only job selling life insurance door to door since she lost her job at a pharmaceutical company in November 2007, a month before the recession began. To get by, she maxed out her credit cards, borrowed money from friends and broke her apartment lease and moved into a free rental unit owned by her boyfriend.

“It’s hard for me to believe that it’s been almost two years,” said Ms. Hoover, who is now pursuing certification as a legal assistant. “I thought maybe a month or two and I’d have another job. I never would have guessed that it would be as brutal as it was out there.”

But the loss of 216,000 jobs in August, while grim by normal standards, underscored how far the economy had come from its worst days, when an average of 691,000 jobs were lost each month in the first quarter. Economists credited the stimulus plan and other rescue efforts by the Treasury Department and the Federal Reserve with stabilizing the economy and slowing job losses.

“They ended the credit crisis,” Robert Barbera, chief economist at ITG, said. “Banks are functioning. You’re got some pop from the clunker program. They get high marks in those areas. It’s a real tough labor market, one of the toughest in the postwar period, but it simply looks better than it did six months ago.”

But struggling workers like Donna Angelillo, 49, of Del Ray Beach, Fla., say they have not seen any signs of improvement. Ms. Angelillo lost her job as a property manager in May and burned through her savings in two months. Her $1,000 monthly unemployment check does not even cover her $1,030 monthly rent, and Ms. Angelillo said her late bills were reaching a critical stage.

“‘I don’t have September rent, but right now I’m more concerned about the electricity,” she said. “Either today or tomorrow, they’re going to shut it off. I’m getting desperate.”

Unemployment Hits 9.7%, but Job Loss Slows in August, NYT, 5.9.2009, http://www.nytimes.com/2009/09/05/business/economy/05jobs.html

Editorial

Once and Future Taxes

September 4, 2009
The New York Times

So far, the Obama administration’s plan for dealing with the budget deficit — an estimated $9 trillion over a decade — is to not dig the hole any deeper. That’s an important first step. President Obama deserves credit for proposing ways to pay for his two big initiatives to date: health care reform and energy legislation. Reducing the growth in health care costs, in particular, is vital to curbing future deficits.

As for the hundreds of billions of dollars in economic stimulus, their impact on long-term deficits is marginal because the spending is temporary. More important, deficit spending is warranted in a recession because it eases the downturn and in so doing, averts even worse damage to the economy and the budget.

But, sooner than he may prefer, Mr. Obama will have to face up to what he has so far avoided: the need to raise taxes broadly to rein in deficits.

The deficits are not of his making. Some two-thirds of the $9 trillion shortfall resulted from policies that predate his administration; most of the rest is the cost of policies that both parties consider necessary, like continued relief from the alternative minimum tax.

But when he inherited the burden of the budget mess, Mr. Obama also inherited the responsibility to clean it up. Neither economic growth nor spending cuts will be enough to fix the projected shortfalls. Nor is there enough to be gained by confining tax increases only to families making more than $250,000 a year, a campaign promise that Mr. Obama still says he will keep.

Assuming the economy has begun to recover by 2010, next year would be the natural time to start raising taxes. That’s because the Bush-era tax cuts are set to expire at the end of 2010. If Congress does nothing, taxes will revert to higher levels for everyone; if it extends all of the cuts, taxes will stay low for everyone; if it extends some and lets others expire, taxes will stay low for some taxpayers and go up for others.

Since 2010 is also a Congressional election year, lawmakers will be reluctant to raise taxes at all, and certainly not without considerable support from the White House, which is already worried about the 2010 elections.

Under these political pressures, Congress might be tempted to extend all of the Bush cuts at least through 2011 — and that would be a dangerous move because time is not necessarily on Mr. Obama’s side.

No one is angling to raise taxes during the recession, but the longer it takes to show real progress on deficit reduction, the greater the possibility that the nation’s creditors will demand higher interest rates on loans to the Treasury. That would worsen the deficit by raising the nation’s borrowing costs. And with the recovery of both the financial system and the housing market dependent on low interest rates, an unanticipated or uncontrolled rate increase would be a crisis in its own right.

The question then is not whether taxes must go up, but when, how and how much. The White House budget director, Peter Orszag, has said the administration is working to bring the deficit down in the 2011 budget, due early next year. But when asked recently by The Wall Street Journal for details, including the possibility of higher taxes on families making less than $250,000, Mr. Orszag said that the administration was not yet giving any specifics on the next budget.

In the meantime, the tax code remains inadequate to the task of raising sufficient revenue — and high-income taxpayers are about to benefit once again. Next year, a misguided law enacted in 2006 will take effect, giving high-income taxpayers the chance to shelter much of their money from future tax increases.

The law will let high-income taxpayers transfer traditional individual retirement accounts into so-called Roth I.R.A.’s. Unlike regular I.R.A.’s., no tax is due when money is withdrawn from a Roth. That often makes Roths a better deal, especially if you believe that tax rates will be higher in the years to come — and they are bound to be higher. Taxpayers who switch to Roths will have to pay tax upfront on the amounts they transfer, so the government will get a jolt of revenue. But later, the transfers will be a money loser for the government as high-income Americans and their heirs make tax-free withdrawals that would have been taxable at tomorrow’s higher rates.

The Obama administration may not want to talk about the need for broad tax increases while other issues dominate the agenda. But if the administration and Congress do not act rationally and in a timely way, they risk being forced to act by circumstances beyond their control. In that event, the economic harm to Americans would be far greater than simply acknowledging the obvious and acting accordingly.

Once and Future Taxes, NYT, 4.9.2009, http://www.nytimes.com/2009/09/04/opinion/04fri1.html

Editorial

New Rules for Private Equity

August 31, 2009
The New York Times

When a bank fails, the preferred course of action by the Federal Deposit Insurance Corporation is to sell it, quickly, to a healthy bank. That protects the insurance fund and, by extension, taxpayers, because a sale is considerably less costly than liquidation. But with several hundred banks poised for failure in the months to come, there may not be enough ready buyers to clear out the anticipated inventory.

This is the crunch moment for which private equity firms have been waiting. The firms have long styled themselves as saviors, able and willing to spend billions of dollars to buy failed banks. The problem is, they are not banks and their partners don’t act or think like traditional bankers; they have thin track records running banks, and they do not want to be regulated as banks.

They are private firms, whose partners and investors have thrived on high-flying and highly leveraged deal-making. Many have amassed great wealth, but too often, they have reaped big gains while saddling their acquisitions with debilitating debt. Normally, private equity firms would not be anyone’s first choice to run a bank. But they have a lot of money and the government is going to have a lot of banks to sell.

Last week, the F.D.I.C. ably navigated that problem with new rules that seek to safeguard the insurance fund — and taxpayers — while inviting in fresh capital. Under the rules, private-equity-run banks would be required to maintain substantially larger capital cushions than traditional banks, and would be barred from selling an acquired bank for three years. That helps to compensate for private equity’s scant banking track record and to ensure that buying a bank is not just another get-rich-quick proposition. The rules bar the acquired bank from lending to companies affiliated with the new owner.

The F.D.I.C. also wisely encouraged private equity firms to pair with traditional bank buyers, by agreeing to exempt them from the higher capital standards if they work in partnership with a bank.

The F.D.I.C. could have gone further. It dropped a proposed rule that private equity firms serve as a so-called “source of strength” for the acquired bank, which would have required the firm to put up more money in the event of an emergency. But given the other safeguards, dropping that particular proposal was within the realm of reasonable negotiating. The F.D.I.C. has also said that it will review the rules in six months.

Private equity firms should view the requirements as an opportunity to show that they can be responsible bankers. If they don’t bid for failed banks because the rules don’t suit them, the F.D.I.C. must not take that as a sign to loosen the rules further. Rather, it would signal that private equity firms are indeed unsuited for banking — a business that has a public purpose and regulatory obligations, along with the potential for profits.

New Rules for Private Equity, NYT, 31.8.2009, http://www.nytimes.com/2009/08/31/opinion/31mon1.html

A ‘Little Judge’

Who Rejects Foreclosures,

Brooklyn Style

August 31, 2009
The New York Times
By MICHAEL POWELL

The judge waves you into his chambers in the State Supreme Court building in Brooklyn, past the caveat taped to his wall — “Be sure brain in gear before engaging mouth” — and into his inner office, where foreclosure motions are piled high enough to form a minor Alpine chain.

Every week, the nation’s mightiest banks come to his court seeking to take the homes of New Yorkers who cannot pay their mortgages. And nearly as often, the judge says, they file foreclosure papers speckled with errors.

He plucks out one motion and leafs through: a Deutsche Bank representative signed an affidavit claiming to be the vice president of two different banks. His office was in Kansas City, Mo., but the signature was notarized in Texas. And the bank did not even own the mortgage when it began to foreclose on the homeowner.

The judge’s lips pucker as if he had inhaled a pickle; he rejected this one.

“I’m a little guy in Brooklyn who doesn’t belong to their country clubs, what can I tell you?” he says, adding a shrug for punctuation. “I won’t accept their comedy of errors.”

The judge, Arthur M. Schack, 64, fashions himself a judicial Don Quixote, tilting at the phalanxes of bankers, foreclosure facilitators and lawyers who file motions by the bale. While national debate focuses on bank bailouts and federal aid for homeowners that has been slow in coming, the hard reckonings of the foreclosure crisis are being made in courts like his, and Justice Schack’s sympathies are clear.

He has tossed out 46 of the 102 foreclosure motions that have come before him in the last two years. And his often scathing decisions, peppered with allusions to the Croesus-like wealth of bank presidents, have attracted the respectful attention of judges and lawyers from Florida to Ohio to California. At recent judicial conferences in Chicago and Arizona, several panelists praised his rulings as a possible national model.

His opinions, too, have been greeted by a cry of affront from a bank official or two, who say this judge stands in the way of what is rightfully theirs. HSBC bank appealed a recent ruling, saying he had set a “dangerous precedent” by acting as “both judge and jury,” throwing out cases even when homeowners had not responded to foreclosure motions.

Justice Schack, like a handful of state and federal judges, has taken a magnifying glass to the mortgage industry. In the gilded haste of the past decade, bankers handed out millions of mortgages — with terms good, bad and exotically ugly — then repackaged those loans for sale to investors from Connecticut to Singapore. Sloppiness reigned. So many papers have been lost, signatures misplaced and documents dated inaccurately that it is often not clear which bank owns the mortgage.

Justice Schack’s take is straightforward, and sends a tremor through some bank suites: If a bank cannot prove ownership, it cannot foreclose.

“If you are going to take away someone’s house, everything should be legal and correct,” he said. “I’m a strange guy — I don’t want to put a family on the street unless it’s legitimate.”

Justice Schack has small jowls and big black glasses, a thin mustache and not so many hairs combed across his scalp. He has the impish eyes of the high school social studies teacher he once was, aware that something untoward is probably going on at the back of his classroom.

He is Brooklyn born and bred, with a master’s degree in history and an office loaded with autographed baseballs and photographs of the Brooklyn Dodgers. His written decisions are a free-associative trip through popular, legal and literary culture, with a sideways glance at the business pages.

Confronted with a case in which Deutsche Bank and Goldman Sachs passed a defaulted mortgage back and forth and lost track of the documents, the judge made reference to the film classic “It’s a Wonderful Life” and the evil banker played by Lionel Barrymore.

“Lenders should not lose sight,” Justice Schack wrote in that 2007 case, “that they are dealing with humanity, not with Mr. Potter’s ‘rabble’ and ‘cattle.’ Multibillion-dollar corporations must follow the same rules in the foreclosure actions as the local banks, savings and loan associations or credit unions, or else they have become the Mr. Potters of the 21st century.”

Last year, he chastised Wells Fargo for filing error-filled papers. “The court,” the judge wrote, “reminds Wells Fargo of Cassius’s advice to Brutus in Act 1, Scene 2 of William Shakespeare’s ‘Julius Caesar’: ‘The fault, dear Brutus, is not in our stars, but in ourselves.’ ”

Then there is a Deutsche Bank case from 2008, the juicy part of which he reads aloud:

“The court wonders if the instant foreclosure action is a corporate ‘Kansas City Shuffle,’ a complex confidence game,” he reads. “In the 2006 film ‘Lucky Number Slevin,’ Mr. Goodkat, a hit man played by Bruce Willis, explains: ‘A Kansas City Shuffle is when everybody looks right, you go left.’ ”

The banks’ reaction? Justice Schack shrugs. “They probably curse at me,” he says, “but no one is interested in some little judge.”

Little drama attends the release of his decisions. Beaten-down homeowners rarely show up to contest foreclosure actions, and the judge scrutinizes the banks’ papers in his chambers. But at legal conferences, judges and lawyers have wondered aloud why more judges do not hold banks to tougher standards.

“To the extent that judges examine these papers, they find exactly the same errors that Judge Schack does,” said Katherine M. Porter, a visiting professor at the School of Law at the University of California, Berkeley, and a national expert in consumer credit law. “His rulings are hardly revolutionary; it’s unusual only because we so rarely hold large corporations to the rules.”

Banks and the cottage industry of mortgage service companies and foreclosure lawyers also pay rather close attention.

A spokeswoman for OneWest Bank acknowledged that an official, confronted with a ream of foreclosure papers, had mistakenly signed for two different banks — just as the Deutsche Bank official did. Deutsche Bank, which declined to let an attorney speak on the record about any of its cases before Justice Schack, e-mailed a PDF of a three-page pamphlet in which it claimed little responsibility for foreclosures, even though the bank’s name is affixed to tens of thousands of such motions. The bank described itself as simply a trustee for investors.

Justice Schack came to his recent prominence by a circuitous path, having worked for 14 years as public school teacher in Brooklyn. He was a union representative and once walked a picket line with his wife, Dilia, who was a teacher, too. All was well until the fiscal crisis of the 1970s.

“Why’d I go to law school?” he said. “Thank Mayor Abe Beame, who froze teacher salaries.”

He was counsel for the Major League Baseball Players Association in the 1980s and ’90s, when it was on a long winning streak against team owners. “It was the millionaires versus the billionaires,” he says. “After a while, I’m sitting there thinking, ‘He’s making $4 million, he’s making $5 million, and I’m worth about $1.98.’ ”

So he dived into a judicial race. He was elected to the Civil Court in 1998 and to the Supreme Court for Brooklyn and Staten Island in 2003. His wife is a Democratic district leader; their daughter, Elaine, is a lawyer and their son, Douglas, a police officer.

Justice Schack’s duels with the banks started in 2007 as foreclosures spiked sharply. He saw a plague falling on Brooklyn, particularly its working-class black precincts. “Banks had given out loans structured to fail,” he said.

The judge burrowed into property record databases. He found banks without clear title, and a giant foreclosure law firm, Steven J. Baum, representing two sides in a dispute. He noted that Wells Fargo’s chief executive, John G. Stumpf, made more than $11 million in 2007 while the company’s total returns fell 12 percent.

“Maybe,” he advised the bank, “counsel should wonder, like the court, if Mr. Stumpf was unjustly enriched at the expense of W.F.’s stockholders.”

He was, how to say it, mildly appalled.

“I’m a guy from the streets of Brooklyn who happens to become a judge,” he said. “I see a bank giving a $500,000 mortgage on a building worth $300,000 and the interest rate is 20 percent and I ask questions, what can I tell you?”

A ‘Little Judge’ Who Rejects Foreclosures, Brooklyn Style, NYT, 31.8.2009, http://www.nytimes.com/2009/08/31/nyregion/31judge.html

As Big Banks Repay Bailout Money,

U.S. Sees a Profit

August 31, 2009
The New York Times
By ZACHERY KOUWE

Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.

The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.

These early returns are by no means a full accounting of the huge financial rescue undertaken by the federal government last year to stabilize teetering banks and other companies.

The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.

But the mere hint of bailout profits for the nearly year-old Troubled Asset Relief Program has been received as a welcome surprise. It has also spurred hopes that the government could soon get out of the banking business.

“The taxpayers want their money back and they want the government out of our banking system,” Representative Jeb Hensarling, a Texas Republican and a member of the Congressional Oversight Panel examining the relief program, said in an interview.

Profits were hardly high on the list of government priorities last October, when a financial panic was in full swing and the Treasury Department started spending roughly $240 billion to buy preferred shares from hundreds of banks that were facing huge potential losses from troubled mortgages. Bank stocks began teetering after Lehman Brothers collapsed and the government rescued A.I.G., and fear gripped the financial industry around the world.

American taxpayers were told they would eventually make a modest return from these investments, including a 5 percent quarterly dividend on the banks’ preferred shares and warrants to buy stock in the banks at a set price over 10 years.

But critics at the time warned that taxpayers might not see any profits, and that it could take years for the banks to repay the loans.

As Congress debated the bailout bill last September that would authorize the Treasury Department to spend up to $700 billion to stem the financial crisis, Representative Mac Thornberry, Republican of Texas, said: “Seven hundred billion dollars of taxpayer money should not be used as a hopeful experiment.”

So far, that experiment is more than paying off. The government has taken profits of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and $414 million on American Express. The five other banks that repaid the government — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — each brought in $100 million to $334 million in profit.

The figure does not include the roughly $35 million the government has earned from 14 smaller banks that have paid back their loans. The government bought shares in these and many other financial companies last fall, when sinking confidence among investors pushed down many bank stocks to just a few dollars a share. As the banks strengthened and became profitable, the government authorized them to pay back the preferred stock, which had been paying quarterly dividends since October.

But the real profit came as banks were permitted to buy back the so-called warrants, whose low fixed price provided a windfall for the government as the shares of the companies soared.

Despite the early proceeds from the bailout program, a debate remains over whether the government could have done even better with its bank investments.

If private investors had taken a stake in the banks last October on par with the government’s, they would have had profits three times as large — about $12 billion, or 44 percent if tallied on an annual basis, according to Linus Wilson, a finance professor at the University of Louisiana at Lafayette, who analyzed the data for The Times.

Why the discrepancy? Finance experts say the government overpaid for the bank assets it bought, because its chief priority was to stabilize the teetering financial system, not to maximize profit.

“Had these banks tried to raise money any other way, they probably would have had to pay quite a bit more than the government received,” said Espen Robak, head of Pluris Valuation Advisors, which analyzes the value of large financial institutions.

A Congressional oversight panel concluded in February that the Treasury paid an average of 34 percent more than the estimated fair value of the assets it received.

Of course, many finance experts suggest that the comparison is academic at best, because there is no way to know what might have become of the banks or the financial system as a whole had the government not acted.

“Taxpayers should heave a sigh of relief that the investment in the banks protected them from even more catastrophic losses from more bank failures,” said Aswath Damodaran, a finance professor at the Stern School of Business at New York University.

A more direct comparison of profits can be made with the investment performance of other governments that poured money into ailing banks last fall.

The Swiss government, for example, said last week that it had pulled in a handsome profit for taxpayers on a $5.6 billion bailout it gave to UBS, the troubled Swiss bank, at the height of the financial crisis in October. The government netted $1 billion on its investment, a gain equal to a 32 percent annual return.

“They are substantially in the money,” Guy de Blonay, a fund manager at Henderson New Star in London, said after the announcement.

American taxpayers could still collect additional profits on their investments in two other big banks that have repaid their preferred stock but not their warrants: JPMorgan Chase and Capital One. They are expected to yield over $3.1 billion in gains for the Treasury in the next month or so, although the full tally will depend on how much they will pay to buy back their warrants.

And the government is owed about $6.2 billion in interest payments from banks that have not yet repaid their federal money.

But all the profits taxpayers have won could still be wiped out by two deeply troubled institutions. Both Citigroup and Bank of America are still holding mortgages and other loans that were once worth billions of dollars but whose revised values are uncertain. If they prove “toxic” because they cannot attract buyers, they could leave large holes in the banks’ balance sheets.

Neither bank is ready to repay its bailout money anytime soon, even though the banks’ stock prices have surged in the last month, leaving the government sitting on paper profits of about $18 billion between them.

Eric Dash contributed reporting.

As Big Banks Repay Bailout Money, U.S. Sees a Profit, NYT, 31.8.2009, http://www.nytimes.com/2009/08/31/business/economy/31taxpayer.html

A Reluctance to Spend

May Be a Legacy of the Recession

August 29, 2009
The New York Times
By PETER S. GOODMAN

AUSTIN, Tex. — Even as evidence mounts that the Great Recession has finally released its chokehold on the American economy, experts worry that the recovery may be weak, stymied by consumers’ reluctance to spend.

Given that consumer spending has in recent years accounted for 70 percent of the nation’s economic activity, a marginal shrinking could significantly depress demand for goods and services, discouraging businesses from hiring more workers.

Millions of Americans spent years tapping credit cards, stock portfolios and once-rising home values to spend in excess of their incomes and now lack the wherewithal to carry on. Those who still have the means feel pressure to conserve, fearful about layoffs, the stock market and real estate prices.

“We’re at an inflection point with respect to the American consumer,” said Mark Zandi, chief economist at Moody’s Economy .com, who correctly forecast a dip in spending heading into the recession, and who provided data supporting sustained weakness.

“Lower-income households can’t borrow, and higher-income households no longer feel wealthy,” Mr. Zandi added. “There’s still a lot of debt out there. It throws a pall over the potential for a strong recovery. The economy is going to struggle.”

In recent weeks, spending has risen slightly because of exuberant car buying, fueled by the cash-for-clunkers program. On Friday, the Commerce Department said spending rose 0.2 percent in July from the previous month. But most economists see this activity as short-lived, pointing out that incomes did not rise. Some suggest the recession has endured so long and spread pain so broadly that it has seeped into the culture, downgrading expectations, clouding assumptions about the future and eroding the impulse to buy.

The Great Depression imbued American life with an enduring spirit of thrift. The current recession has perhaps proven wrenching enough to alter consumer tastes, putting value in vogue.

“It’s simply less fun pulling up to the stoplight in a Hummer than it used to be,” said Robert Barbera, chief economist at the research and trading firm ITG. “It’s a change in norms.”

Here in Austin, a laid-back city on the banks of the Colorado River, change is palpable.

A decade ago, Heather Nelson gained a lucrative job in telecommunications and celebrated by buying a new Ford sport utility vehicle with leather seats and an expensive stereo system. Today, Ms. Nelson, 38, again has designs on a new vehicle, but this time she plans to buy a Toyota Prius, the fuel-efficient hybrid.

In December, Ms. Nelson was laid off from her six-figure job as a patent attorney at a local software firm. Self-assured, she exudes confidence she will land another high-paying position.

But even if her spending power is restored, Ms. Nelson says her inclination to buy has been permanently diminished. Through nine months of joblessness, she has learned to forgo the impulse buys that used to provide momentary pleasure — $4 lattes at Starbucks, lip gloss, mints. She has found she can survive without the pedicures and chocolate martinis that once filled regular evenings at the spa. Before punishing heat and drought turned much of central Texas brown, she subsisted primarily on vegetables harvested from her plot at a community garden, where only one oasis of flowers remains.

Once intent on buying a home, Ms. Nelson now feels security in remaining a renter, steering clear of the shark-infested waters of the mortgage industry.

“I’m having to shift my dreams to accommodate the new realities,” she said. “Now, I have more of a bunker mentality. If you get hit hard enough, it lasts. This impact is going to last.”

For years, Americans have tapped stock portfolios and borrowed against homes to fill wardrobes with clothes, garages with cars and living rooms with furniture and electronics. But stock markets have proven volatile. Home values are sharply lower. Banks remain reluctant to lend in the aftermath of a global financial crisis.

Households must increasingly depend upon paychecks to finance spending, a reality that seems likely to curb consumption: Unemployment stands at 9.4 percent and is expected to climb higher. Working hours have been slashed even for those with jobs.

Economists subscribe to a so-called wealth effect: as households amass wealth, they tend to expand their spending over the following year, typically by 3 to 5 percent of the increase.

Between 2003 and 2007 — prime years of the housing boom — the net worth of an American household expanded to about $540,000, from about $400,000, according to an analysis of federal data by Moody’s Economy.com.

Now, the wealth effect is working in reverse: by the first three months of this year, household net worth had dropped to $421,000.

“Not only have people lost money, but they don’t expect as much appreciation in the money they have, and that should affect consumption,” said Andrew Tilton, an economist at Goldman Sachs. “This is a cultural shift going on. People will save more.”

As recently as the middle of 2007, Americans saved less than 2 percent of their income, according to the Bureau of Economic Analysis. In recent months, the rate has exceeded 4 percent.

Austin has fared better than most cities during the recession. Increased government payrolls enabled by the state’s energy wealth have largely compensated for layoffs in construction and technology. Local unemployment reached 7.1 percent in June — well below the national average. Housing prices have mostly held. Yet even people with high incomes appear reluctant to spend.

“The only time you do a lot of business is when you throw a sale,” said Pat Bennett, a salesman at a Macy’s in north Austin. “You see very little impulse buying. They come in saying, ‘I need a pair of underwear,’ and they get it and leave. You don’t really see them saying, ‘Oh, I love the way that shirt looks, and I’m just going to get it.’ ”

Mr. Bennett attributes frugality to a general uneasiness about the future.

“Our parents had the Depression,” Mr. Bennett said. “This is like a mini-shock for the baby boomers after the go-go years.”

At a mall devoted to home furnishings, many storefronts were vacant, and survivors were draped in the banners of desperation: “Inventory Clearance,” “50% Off,” “It’s All On Sale.”

But at the Natural Gardener — a lush assemblage of demonstration plots that sells seeds, plants and tools for organic gardening — business has never been better.

Sales of vegetable plants swelled fivefold in March over past years. The company added a public address system and bleachers to accommodate hordes showing up for vegetable-growing classes.

Part of the embrace of gardening stems from concerns about the environment and food safety, says the company’s president, John Dromgoole. Momentum also reflects desire to save on food costs.

“People are very interested in shoring up against losing their jobs,” he said.

A Reluctance to Spend May Be a Legacy of the Recession, NYT, 29.8.2009,http://www.nytimes.com/2009/08/29/business/economy/29consumer.html

Editorial

Another Way to Lose the House

August 28, 2009
The New York Times

The foreclosure crisis will get much worse before it gets any better.

That’s the only conclusion to draw from a recent survey by the Mortgage Bankers Association, which found that six million loans were either past due or in foreclosure in the second quarter of 2009, the highest level ever recorded by the group. Worse, loan defaults are not the only cause of foreclosures. In some areas, unpaid property taxes are provoking foreclosures, even for homeowners otherwise current on their payments.

The Times’s Jack Healy reported the other day that in recent years, some cities and counties that are strapped for money have sold their delinquent tax bills to private firms. The firms, which typically charge double-digit interest rates and steep fees, get to keep what they collect. They also get the right to foreclose on the homes, taking priority over mortgage lenders.

Debt collection is always tough. But it is especially fraught when private firms go after unpaid taxes, because private collection distorts the public interest. For example, governments can also foreclose for unpaid taxes, but they are less likely to do so out of concern for property values and quality of life. The auditor in Lucas County, Ohio — which sold more than 3,000 tax liens for $14.7 million — said that the cost to the community from abandoned and foreclosed properties has been greater than the short-term benefit from selling the liens.

Local governments cannot undo their previous tax lien sales. But changes in federal policy can reduce the foreclosure risk from unpaid property taxes. During the mortgage bubble, some lenders kept monthly loan payments low by not tacking on an extra amount to cover taxes and insurance.

For the loans in question — which generally fell into the categories of subprime, Alt-A (a notch above subprime) or jumbo loans — neither federal law nor pressure from mortgage investors compelled the inclusion of taxes and insurance in the monthly payment. Housing advocates say that many homeowners did not realize the amounts were excluded.

In 2008 — after the bubble had burst — the Federal Reserve altered the rules, but the changes were weak. They require taxes and insurance to be included, but only for subprime loans and only for a year. After that, lenders can let borrowers opt out of paying those charges as part of their monthly bills.

Excluding the charges might help lenders, because it increases the likelihood that borrowers will need to refinance to cover unexpected expenses. But it puts many borrowers and whole communities at risk. What is needed is a rule that requires the inclusion of taxes and insurance in the monthly payment for all types of mortgages and that disallows opt-outs until borrowers have made at least five years of steady payments.

The issue is also one more reminder that the nation badly needs an independent consumer safety regulator for mortgages and other loans — and that the Fed is not the right choice for the job.

Another Way to Lose the House, NYT, 28.8.2009, http://www.nytimes.com/2009/08/28/opinion/28fri1.html

Op-Ed Columnist

Till Debt Does Its Part

August 28, 2009
The New York Times
By PAUL KRUGMAN

So new budget projections show a cumulative deficit of $9 trillion over the next decade. According to many commentators, that’s a terrifying number, requiring drastic action — in particular, of course, canceling efforts to boost the economy and calling off health care reform.

The truth is more complicated and less frightening. Right now deficits are actually helping the economy. In fact, deficits here and in other major economies saved the world from a much deeper slump. The longer-term outlook is worrying, but it’s not catastrophic.

The only real reason for concern is political. The United States can deal with its debts if politicians of both parties are, in the end, willing to show at least a bit of maturity. Need I say more?

Let’s start with the effects of this year’s deficit.

There are two main reasons for the surge in red ink. First, the recession has led both to a sharp drop in tax receipts and to increased spending on unemployment insurance and other safety-net programs. Second, there have been large outlays on financial rescues. These are counted as part of the deficit, although the government is acquiring assets in the process and will eventually get at least part of its money back.

What this tells us is that right now it’s good to run a deficit. Consider what would have happened if the U.S. government and its counterparts around the world had tried to balance their budgets as they did in the early 1930s. It’s a scary thought. If governments had raised taxes or slashed spending in the face of the slump, if they had refused to rescue distressed financial institutions, we could all too easily have seen a full replay of the Great Depression.

As I said, deficits saved the world.

In fact, we would be better off if governments were willing to run even larger deficits over the next year or two. The official White House forecast shows a nation stuck in purgatory for a prolonged period, with high unemployment persisting for years. If that’s at all correct — and I fear that it will be — we should be doing more, not less, to support the economy.

But what about all that debt we’re incurring? That’s a bad thing, but it’s important to have some perspective. Economists normally assess the sustainability of debt by looking at the ratio of debt to G.D.P. And while $9 trillion is a huge sum, we also have a huge economy, which means that things aren’t as scary as you might think.

Here’s one way to look at it: We’re looking at a rise in the debt/G.D.P. ratio of about 40 percentage points. The real interest on that additional debt (you want to subtract off inflation) will probably be around 1 percent of G.D.P., or 5 percent of federal revenue. That doesn’t sound like an overwhelming burden.

Now, this assumes that the U.S. government’s credit will remain good so that it’s able to borrow at relatively low interest rates. So far, that’s still true. Despite the prospect of big deficits, the government is able to borrow money long term at an interest rate of less than 3.5 percent, which is low by historical standards. People making bets with real money don’t seem to be worried about U.S. solvency.

The numbers tell you why. According to the White House projections, by 2019, net federal debt will be around 70 percent of G.D.P. That’s not good, but it’s within a range that has historically proved manageable for advanced countries, even those with relatively weak governments. In the early 1990s, Belgium — which is deeply divided along linguistic lines — had a net debt of 118 percent of G.D.P., while Italy — which is, well, Italy — had a net debt of 114 percent of G.D.P. Neither faced a financial crisis.

So is there anything to worry about? Yes, but the dangers are political, not economic.

As I’ve said, those 10-year projections aren’t as bad as you may have heard. Over the really long term, however, the U.S. government will have big problems unless it makes some major changes. In particular, it has to rein in the growth of Medicare and Medicaid spending.

That shouldn’t be hard in the context of overall health care reform. After all, America spends far more on health care than other advanced countries, without better results, so we should be able to make our system more cost-efficient.

But that won’t happen, of course, if even the most modest attempts to improve the system are successfully demagogued — by conservatives! — as efforts to “pull the plug on grandma.”

So don’t fret about this year’s deficit; we actually need to run up federal debt right now and need to keep doing it until the economy is on a solid path to recovery. And the extra debt should be manageable. If we face a potential problem, it’s not because the economy can’t handle the extra debt. Instead, it’s the politics, stupid.

Till Debt Does Its Part, NYT, 28.8.2009, http://www.nytimes.com/2009/08/28/opinion/28krugman.html?hpw

New Rules Restrict Bank Sales

August 27, 2009
The New York Times
By ERIC DASH and ZACHERY KOUWE

New federal rules that might have encouraged private equity firms to snap up troubled banks could wind up keeping those buyers in their seats.

The Federal Insurance Deposit Corporation board on Wednesday imposed tough new restrictions on private equity firms seeking to buy failed institutions, although they eased more onerous proposals in hopes of luring them to the table.

Facing a dearth of traditional bank buyers, the F.D.I.C. board tried to strike a balance between the need for fresh capital to shore up the banking system, and worries that private equity buyers might engage in aggressive practices that could put its deposit insurance fund at risk.

So far, regulators have allowed only a few groups of private equity firms to take over failed banks, including IndyMac Bank of California and BankUnited of Florida, with assurances that experienced bankers would run the operations.

Private equity firms said the new rules would make them less likely to buy a failed institution on their own. However, a few special exemptions are intended to encourage them to team up with a bank partner or a large group of private investors — strategies often considered last resorts because they must give up control and profits.

“This is going to increase the flow of capital into the community and midsize banking market because there is some certainty about what the rules are, but we may not see some of the larger deals,” said Donald B. Marron, the former head of PaineWebber who now runs the private equity firm Lightyear Capital.

The rules, which were approved by a vote of 4 to 1, would require private equity-controlled banks to pour enough capital into a failed bank so that it has a cushion of at least 10 percent of its assets for three years. While the industry lobbied hard to reduce that from a 15 percent level originally proposed by the F.D.I.C., it is still twice the minimum level that traditional banks would be required to hold.

The F.D.I.C. also dropped a requirement that private equity firms supply additional capital in the event of a severe downturn, a rule that was vehemently opposed by the industry as impractical. But regulators remained adamant in demanding that buyout firms not sell an acquired bank for at least three years, and imposed restrictions barring the acquired bank from lending to companies affiliated with the private equity buyer.

The agency also inserted a clause that would exempt private equity firms from complying with the higher capital standards if they joined forces with a traditional bank buyer, hoping to encourage such alliances.

Federal officials said the new rules applied only to future deals, and agreed to review the impact of the new regulations in six months.

Sheila C. Bair, the F.D.I.C.’s chairwoman, and three other directors of the five-member panel voted in favor of the changes, saying that they struck a compromise between competing policy objectives. John D. Bowman, the head of the Office of Thrift Supervision, cast the lone dissenting vote, saying there was a lack of evidence that the rules would protect the insurance fund.

“I am not a fan, or proponent, of private equity, but it is hard to know whether the restrictions are required,” Mr. Bowman said during Wednesday’s board meeting.

Still, regulators are increasingly concerned about industry’s ability to handle a coming wave of bank failures. Many strong traditional banks are busy digesting acquisitions they made last fall, while weaker institutions have their hands full with growing losses.

The F.D.I.C., meanwhile, has been saddled with tens of billions of dollars of troubled assets and has seen the industry’s once-flush deposit insurance fund become severely depleted. The fund had about $13 billion at the end of the first quarter, down from about $52.8 billion a year earlier. New figures will be available on Thursday when the F.D.I.C. releases its second-quarter report. So far, there have been 81 failures this year, and the pace of new ones is quickening.

The agency received more than 60 comments from private equity firms, law firms and consumer advocacy groups. Some critics feared that private equity buyers might be more prone to gamble on riskier loans in order to bolster their returns or use the banks they controlled to finance their operations. They also expressed concern that private equity buyers would quickly unload their bank investments if they did not turn a quick profit, further destabilizing the industry.

The new private equity rules are only one part of the agency’s strategy to handle the coming wave of bank failures. Regulators have also been trying to lure traditional bank buyers with lucrative loss-sharing deals, where the government agrees to shoulder the bulk of the losses on a failed bank’s riskiest loans in exchange for the acquirer’s selling off those assets.

They have also been testing a program to that would provide financing to encourage private investors to buy troubled loans from failed institutions, which might bid up asset prices.

And F.D.I.C. officials recently proposed what amounts to a melding of the two strategies. Regulators have said they might carve up failed banks into “good” and “bad” pieces, encouraging healthy banks to snap up the “good” assets with a loss-sharing agreement while leaving the most troubled assets for vulture buyers.

New Rules Restrict Bank Sales, NYT, 27.8.2009, http://www.nytimes.com/2009/08/27/business/27bank.html

A Strong Gain in New-Home Sales in July

August 27, 2009
The New York Times
By JACK HEALY

Sales of new homes surged nearly 10 percent in July from a month earlier, another indicator that the country’s long-suffering housing market was starting to turn around.

The Commerce Department reported that new-home sales rose 9.6 percent to a seasonally adjusted rate of 433,000 last month. The numbers came on the heels of other reports that have showed housing prices rising in many big cities and sales of previously owned homes picking up. Sales, however, were still down 13.4 percent from a year ago.

As new-home sales surged in the Northeast and the South, the glut of unsold, newly built homes diminished somewhat.

The inventory of homes for sale fell to a seasonally adjusted 271,000, which would take seven and a half months to sell at the current pace. That is a higher supply of homes than normal, but it is down sharply from a 12 months’ supply earlier this year.

And inventories are falling in part because construction companies are simply not building houses like they were during real estate’s boom years. Credit for builders is still tight, and builders are being undercut in many markets by distressed properties like foreclosures and short sales by homeowners who need to sell.

In a sign of those troubles, new homes were spending more than a year on the market before they sold. That is double the median time of six months it took to sell a new house in 2007.

“It’s really hard to sell a new home if you’re a builder,” said Patrick Newport, an economist at IHS Global Insight. “It’s just a brutal market.”

Wednesday’s report came a day after the latest Standard & Poor’s Case-Shiller home price index showed improvement in 18 of the 2o cities tracked, up from eight in May, four in April and one in March.

In a more measured sign of the economy’s progress, new orders for durable goods like computers, cars and machinery leaped last month by the most in two years, the government reported on Wednesday in a separate release.

Economists said the numbers were less positive than they appeared.

Much of the 4.9 percent increase in orders came from a 107 percent spike in orders for civilian aircraft, a volatile area that can rise and fall dramatically month to month. Economists had forecast a 3 percent increase. Excluding transportation, durable goods orders rose by a more modest 0.8 percent in July, the Commerce Department reported.

Economists are paying close attention to orders for manufactured goods as they look for signs the recession is ending. A sustained increase in shipments and orders of machinery, fabricated metals, electronic equipment and other goods would offer a clue that businesses are increasing production and replacing their depleted inventories.

Orders for durable goods have increased in three of the last four months, but they fell by a revised 1.3 percent in June — up from 2.2 percent decline — a sign that the economy was still struggling to emerge from the deepest recession in decades.

Economists had been expecting a 3 percent increase in durable-goods orders, and despite the muted figures on Wednesday, they said manufacturers had been gradually coming back to life. Industrial production is ticking up, according to the latest figures from the Federal Reserve, and some of the enormous slack in the economy is being drawn taut.

“It looks like business investment in general is turning a corner,” said Kurt E. Karl, chief United States economist at Swiss Re.

For the month, orders for metals, appliances, electrical equipment and communications equipment all increased while those for computers and machinery fell. New orders and shipments of motor vehicles also rose as automakers restarted some assembly lines after idling them earlier this spring.

“There’s a definite turn,” said Stuart G. Hoffman, chief economist at PNC Financial. “It’s not just aircraft. It’s not just motor vehicles. The trend of the last three months is clearly positive. I do think there’s a sign here that the manufacturing sector hit bottom, and we’re showing some improvement.”

A Strong Gain in New-Home Sales in July, NYT, 27.8.2009, http://www.nytimes.com/2009/08/27/business/economy/27econ.html

The Man Who Sells America’s I.O.U.’s

August 24, 2009
The New York Times
By ROBERT PEAR

WASHINGTON — The brightly illuminated room looks like mission control for a space flight. Seven people, wearing headphones, stare intently at computer screens. Three minutes before the deadline, a disembodied voice exclaims, “We have coverage.”

This is no shuttle launch. It is an auction of United States Treasury securities, and $32 billion has just been sold in a blink. It was another successful operation for Van Zeck, the commissioner of the public debt, who has the world’s biggest credit card.

Mr. Zeck has worked for the federal government for 38 of his 60 years. He is a very busy man these days because the government is floating on a sea of red ink, as it borrows more and more money to stimulate the economy, bail out banks, shore up auto companies, aid struggling homeowners and fight foreign wars.

In a city full of pompous politicians and bombastic bureaucrats, Mr. Zeck quietly runs one of the government’s truly indispensable operations. He is not a policy maker. He does not decide how much to borrow. He just makes sure the money is borrowed, in a regular and predictable way, at the lowest possible cost to the government over time.

“We are the back office, the plumbing,” Mr. Zeck said. “We are borrowing a ton of money. It has to be done right.”

Public attention will focus on the debt this week because the White House and the Congressional Budget Office plan to issue dueling estimates of federal spending and revenue for the next 10 years. In a preview, the White House said Friday that it saw the cumulative total of deficits over the next 10 years adding up to $9 trillion, or $2 trillion more than it anticipated in February. That means much more government borrowing.

Last year alone, Mr. Zeck auctioned off $5.5 trillion of Treasury securities, to replace maturing debt and to meet new borrowing needs. Wall Street dealers expect the figure to exceed $8 trillion this year — an average of more than $253,000 every second.

In the first eight months of the current fiscal year, the government issued more Treasury bills, notes and bonds than in all of last year. Mr. Zeck expects to conduct more than 280 auctions this year, up from 263 last year and about 220 a year from 2004 to 2007.

Mr. Zeck and his colleagues have a passion for precision. They keep track of federal debt to the penny.

Debt held by the public stood at $3.4 trillion when President George W. Bush took office in 2001. When President Obama was inaugurated in January, the debt was $6.3 trillion. Since then, it has grown by $1 trillion, to $7.3 trillion.

When Mr. Zeck tells people he works at the Bureau of the Public Debt, he said, they often quip, “You will have work forever.”

Even when the economy begins to expand, the bureau will still have plenty to do, as tax receipts typically lag in a recovery. Moreover, the government will need to borrow money to help finance entitlement programs for baby boomers.

Mr. Obama’s budget predicts that debt held by the public will soar, exceeding 60 percent of the gross domestic product in a few years. The share has never exceeded 50 percent in the last 50 years.

“Debt as a percentage of G.D.P. is rising and nearing a postwar high,” the Treasury said this month.

Treasury auctions are an arcane business, and Mr. Zeck runs them so smoothly that Treasury secretaries and Congress rarely interfere. Mr. Zeck said he had not been called to testify before Congress in about 15 years.

Other agencies have lost track of large sums because their financial records were a mess. “That’s just not acceptable to us,” Mr. Zeck said.

Referring to the accountants who keep a daily tally of the federal debt, Mr. Zeck said: “These are people who reconcile their checkbooks. The idea of missing a penny would drive them crazy.”

Treasury auctions have become larger and more frequent. The auction calendar is extremely crowded. On almost every work day, the Treasury is announcing, conducting or settling auctions.

“Historically,” Mr. Zeck said, “we did not do auctions on Fridays. But now we are doing some.”

In February, the Treasury announced it was bringing back the seven-year note, for the first time since 1993, and it doubled the number of 30-year bond auctions, to eight a year. Just three months later, it announced a further increase in the frequency of 30-year bond auctions, to 12 a year.

On Aug. 5, the Treasury told investors they “should expect auction sizes to continue to rise in a gradual manner over the medium term.”

When Treasury officials plan these auctions, they try to keep the size and mix of securities predictable for investors and prevent any surprises that could disrupt the market and thereby increase borrowing costs.

Mr. Zeck, who received the government’s highest civil service award 10 years ago, borrows huge sums from big investors on Wall Street and around the world. But he is also mindful of small investors who entrust their retirement savings to the government.

“We have a fiduciary responsibility to individuals who have invested $1,000 or $5,000 or $10,000 in savings bonds and other Treasury securities,” Mr. Zeck said.

The Treasury installed a completely automated electronic auction system in April 2008, just in time for the surge in borrowing.

“From an operational standpoint,” Mr. Zeck said, “it’s just about as easy to sell $30 billion as $20 billion” of government securities.

Federal officials have been pleasantly surprised to see the demand for Treasury securities keep pace with the growing supply. Invariably, they get “coverage,” meaning that the bids exceed the amount of securities being offered — a great relief to federal money managers. When the government auctioned $32 billion of four-week Treasury bills last week, the bids totaled $114 billion.

Foreign investors have generally shown a strong appetite for federal debt. China, the largest foreign holder of Treasury securities, sent a chill through credit markets in March when its prime minister said he was “a little bit worried” about China’s investments in the United States. The Treasury secretary, Timothy F. Geithner, quickly assured the Chinese that their assets were “very safe” here.

The federal government enjoys economies of scale, and it is borrowing on a scale never seen before, so the cost per auction has gone down slightly. The cost of running a Treasury auction — an average of $237,636 per auction — is tiny compared with the amounts borrowed. The cost includes safety precautions to make sure auctions are not disrupted by power failures, terrorism, cyberattacks, natural disasters or pandemic illness.

When Mr. Zeck began working for the Bureau of the Public Debt in 1971, he never expected to be there 38 years later.

“I love the organization,” Mr. Zeck said. “Somewhere along the way, I got captured by it, captured by the mission and the customer service we were able to provide, and I realized that I was an operations guy. That’s what I really enjoyed.”

Even when the government runs a surplus, as it did from 1998 to 2001, it still has to auction Treasury securities to replace maturing debt.

Mr. Zeck’s hobbies include computers. “My favorite new toy,” he said, “is the Amazon Kindle, which brings together my love of technology and my enjoyment of reading.” He favors fiction, including mysteries, and books about organizational culture.

The bureau has an annual budget of $187 million and nearly 2,000 employees. Only 65 work in Washington. The rest are at an operations center in Parkersburg, W.Va.

Besides borrowing money from the public, Mr. Zeck manages more than $4 trillion of investments for more than 240 federal trust funds that finance Medicare, Social Security, highway construction and other programs. Assets of these trust funds are invested in special-issue government securities not available to the public.

Outside his office, Mr. Zeck has a collection of government securities dating to the 1770s. Colonists borrowed money to fight the Revolution, and one of the first major decisions of the new national government was to assume debts incurred by the states.

“No pecuniary consideration is more urgent than the regular redemption and discharge of the public debt,” George Washington told Congress in 1793. Mr. Zeck lives by that motto.

The Man Who Sells America’s I.O.U.’s, NYT, 24.8.2009, http://www.nytimes.com/2009/08/24/business/economy/24debt.html

Editorial

About Your 401(k)

August 24, 2009
The New York Times

Even before the financial crisis, most Americans were not saving enough for retirement. But the crisis has highlighted, and heightened, the risk of coming up short, as is clear to anyone who has dared to open his or her 401(k) statements in the past year.

Even with recent stock market upswings, account balances are roughly 25 percent lower than before the crash. Such losses are especially harmful to employees who are near retirement and will not have enough time to rebuild their accounts; they will either have to work longer, if they can, or make do with less.

Market losses aren’t the only danger. Some employees will end up with smaller account balances because they reduced contributions when times got tough. Fidelity Investments, which manages 11.2 million 401(k) accounts, reported recently that from mid-2008 through the first quarter of 2009, more employees reduced their contributions than increased them. That trend reversed in the second quarter, but over all, employees are still contributing less of their pay than they did last year.

To make matters worse, some employers have cut their 401(k) matches as the economy has tanked. So both employees and employers pulled back, just as stocks were getting cheaper.

In good times and bad, account balances are wiped out when job-changers, including laid-off workers, decide to cash out when they leave an employer. And younger workers tend to borrow from their 401(k), slowing the account’s growth and risking big losses — plus taxes and penalty — if they can’t repay the loan in full.

As a result of risks and mistakes, most American workers who are relying on 401(k)’s fail to amass anywhere near what they will need for a secure retirement.

That is not to say that the 401(k) system must be dismantled. But reforms that once seemed far-reaching — like automatically enrolling employees in 401(k)’s unless they opt out — now seem quaint. A more thorough revamping is needed.

Tax incentives must be changed. Under current law, high-income employees receive the biggest tax subsidies, and low-income employees the smallest. Replacing the current tax deduction for contributions with a tax credit would still give everyone a tax break, but would shift the benefit down the income scale, presumably boosting the savings of low-income workers.

The Obama administration should also push for comprehensive retirement coverage. Less than half of employees have a retirement plan at work. The so-called universal I.R.A. advocated by President Obama during the campaign would help make a retirement account available to all workers. Pre-retirement payouts from 401(k)’s and universal I.R.A.’s should be discouraged except in cases of real hardship, like disability. One way to do that would be to require employers to roll over a 401(k) to a new account when an employee changes jobs.

A thornier problem is that even someone who steadily contributes to a 401(k) and makes sensible investments can end up with too little — depending on whether the markets are up or down as retirement nears.

A calculation by Gary Burtless of the Brookings Institution showed that a 401(k) participant who retired in 2008 after contributing 4 percent of pay over 40 years and investing in a conservative mix of stocks and bonds would be able to replace a fourth of his pre-retirement income. That is only half as much as a similar worker who retired during the bull market in 1999, but far better than retiring in 1974 when markets were in a swoon.

The only way to avoid wide variations in outcomes would be to develop a savings plan in which the government shared the risk — say, by providing a guarantee that returns would not fall below a certain level. The issue is complex and deserves further study and debate.

The effect of these and other proposed retirement reforms would be to shift risk that is currently borne by individuals onto corporations and the government. That would be anathema to some entrenched corporate interests and their political supporters. But as the recent crisis has so amply demonstrated, having each and every American bear all of the risk is not the path to a secure retirement.

About Your 401(k), NYT, 24.8.2009, http://www.nytimes.com/2009/08/24/opinion/24mon1.html?hpw

Arrest Over Software

Illuminates Wall St. Secret

August 24, 2009
The New York Times
By ALEX BERENSON

Flying home to New Jersey from Chicago after the first two days at his new job, Sergey Aleynikov was prepared for the usual inconveniences: a bumpy ride, a late arrival.

He was not expecting Special Agent Michael G. McSwain of the F.B.I.

At 9:20 p.m. on July 3, Mr. McSwain arrested Mr. Aleynikov, 39, at Newark Liberty Airport, accusing him of stealing software code from Goldman Sachs, his old employer. At a bail hearing three days later, a federal prosecutor asked that Mr. Aleynikov be held without bond because the code could be used to “unfairly manipulate” stock prices.

This case is still in its earliest stages, and some lawyers question whether Mr. Aleynikov should be prosecuted criminally, or whether a civil suit may be more appropriate. But the charges, along with civil cases in Chicago and New York involving other Wall Street firms, offer a glimpse into the turbulent world of ultrafast computerized stock trading.

Little understood outside the securities industry, the business has suddenly become one of the most competitive and controversial on Wall Street. At its heart are computer programs that take years to develop and are treated as closely guarded secrets.

Mr. Aleynikov, who is free on $750,000 bond, is suspected of having taken pieces of Goldman software that enables the buying and selling of shares in milliseconds. Banks and hedge funds use such programs to profit from tiny price discrepancies among markets and in some instances leap in front of bigger orders.

Defenders of the programs say they make trading more efficient. Critics say they are little more than a tax on long-term investors and can even worsen market swings.

But no one disputes that high-frequency trading is highly profitable. The Tabb Group, a financial markets research firm, estimates that the programs will make $8 billion this year for Wall Street firms. Bernard S. Donefer, a distinguished lecturer at Baruch College and the former head of markets systems at Fidelity Investments, says profits are even higher.

“It is certainly growing,” said Larry Tabb, founder of the Tabb Group. “There’s more talent around, and the technology is getting cheaper.”

The profits have led to a gold rush, with hedge funds and investment banks dangling million-dollar salaries at software engineers. In one lawsuit, the Citadel Investment Group, a $12 billion hedge fund, revealed that it had paid tens of millions to two top programmers in the last seven years.

“A geek who writes code — those guys are now the valuable guys,” Mr. Donefer said.

The spate of lawsuits reflects the highly competitive nature of ultrafast trading, which is evolving quickly, largely because of broader changes in stock trading, securities industry experts say.

Until the late 1990s, big investors bought and sold large blocks of shares through securities firms like Morgan Stanley. But in the last decade, the profits from making big trades have vanished, so investment banks have become reluctant to take such risks.

Today, big investors divide large orders into smaller trades and parcel them to many exchanges, where traders compete to make a penny or two a share on each order. Ultrafast trading is an outgrowth of that strategy.

As Mr. Aleynikov and other programmers have discovered, investment banks do not take kindly to their leaving, especially if the banks believe that the programmers are taking code — the engine that drives trading — on their way out.

Mr. Aleynikov immigrated to the United States from Russia in 1991. In 1998, he joined IDT, a telecommunications company, where he wrote software to route calls and data more efficiently. In 2007, Goldman hired him as a vice president, paying him $400,000 a year, according to the federal complaint against him.

He lived in the central New Jersey suburbs with his wife and three young daughters. This year, the family moved to a $1.14 million mansion in North Caldwell, best known as Tony Soprano’s hometown.

A video on YouTube portrays Mr. Aleynikov as a disheveled workaholic who suffers through romantic misadventures before finding love when he rubs a lamp and a genie fulfills his wish by granting him a wife. A friend, Vladimir Itkin, says the Aleynikovs are devoted to their children and seem very close.

This spring, Mr. Aleynikov quit Goldman to join Teza Technologies, a new trading firm, tripling his salary to about $1.2 million, according to the complaint. He left Goldman on June 5. In the days before he left, he transferred code to a server in Germany that offers free data hosting.

At Mr. Aleynikov’s bail hearing, Joseph Facciponti, the assistant United States attorney prosecuting the case, said that Goldman discovered the transfer in late June. On July 1, the company told the government about the suspected theft. Two days later, agents arrested Mr. Aleynikov at Newark.

After his arrest, Mr. Aleynikov was taken for interrogation to F.B.I. offices in Manhattan. Mr. Aleynikov waived his rights against self-incrimination, and agreed to allow agents to search his house.

He said that he had inadvertently downloaded a portion of Goldman’s proprietary code while trying to take files of open source software — programs that are not proprietary and can be used freely by anyone. He said he had not used the Goldman code at his new job or distributed it to anyone else, and the criminal complaint offers no evidence that he has.

Why he downloaded the open source software from Goldman, rather than getting it elsewhere, and how he could at the same time have inadvertently downloaded some of the firm’s most confidential software, is not yet clear.

At Mr. Aleynikov’s bail hearing, Mr. Facciponti said that simply by sending the code to the German server, he had badly damaged Goldman.

“The bank itself stands to lose its entire investment in creating this software to begin with, which is millions upon millions of dollars,” Mr. Facciponti said.

Sabrina Shroff, a public defender who represents Mr. Aleynikov, responded that he had transferred less than 32 megabytes of Goldman proprietary code, a small fraction of the overall program, which is at least 1,224 megabytes. Kevin N. Fox, the magistrate judge, ordered Mr. Aleynikov released on bond.

The United States attorney’s office declined to comment and the F.B.I. did not return calls for comment.

Harvey A. Silverglate, a criminal defense lawyer in Boston not involved in the case, said he was troubled that the F.B.I. had arrested Mr. Aleynikov so quickly, without evidence that he had made any effort to use or sell the code. Such disputes are generally resolved civilly rather than criminally, Mr. Silverglate said.

“It is astonishing that the F.B.I. arrested this defendant at all,” he said. Other firms have also sued former employees recently over concern about high-frequency trading software, though two similar cases are the subject of civil suits rather than criminal prosecution.

Six days after Mr. Aleynikov’s arrest, Citadel, the hedge fund, sued Mr. Aleynikov’s new employer, Teza Technologies, which was founded in March by three former Citadel employees. While Teza is not yet conducting any trading, Citadel claimed the former employees had violated a noncompete agreement with Citadel and might even be trying to steal Citadel’s code, causing “irreparable harm.”

As part of the suit, Citadel detailed the extraordinary steps it takes to protect its software. Besides encrypting its programs, the firm discourages employees from writing down details about them. Its offices have cameras and guards, and there are secure rooms that require special codes to enter. The precautions are necessary because Citadel has spent hundreds of millions of dollars developing its software, the firm said.

In its response, Teza said that it had never stolen or tried to steal Citadel’s software, did not ask Mr. Aleynikov to take code from Goldman, and had never seen the code he took. A lawyer for Teza did not return calls for comment.

Meanwhile, in March, the giant Swiss bank UBS sued three former members of its high-speed trading group in New York state court. UBS contended that the defendants had lied to the bank about their plans to work for Jefferies, another firm. Also, one defendant sent some UBS code to a personal e-mail account.

Lance Gotko, a lawyer for the men, said that they had not used the code they took and that it might not be valuable to Jefferies in any case. A lawyer for UBS referred calls to a bank spokeswoman, who declined to comment. A spokesman for Jefferies declined to comment.

Arrest Over Software Illuminates Wall St. Secret, NYT, 24.8.2009, http://www.nytimes.com/2009/08/24/business/24trading.html?hp

Past and Future Collide

at a Yard Sale

August 23, 2009
The New York Times
By JENNIFER STEINHAUER

MORENO VALLEY, Calif. — In neighborhoods in economic distress, upheaval comes in bits and pieces, often only recognizable in total much later. But on an unusual Saturday morning this spring, the past and future of Beth Court, a troubled cul-de-sac here, converged in plain view at a multifamily yard sale.

At 8:30 a.m., music was blaring from a house threatened with foreclosure, as children sold homemade baked goods to those who came to look over cribs the children had outgrown. A few doors away, the owner of a house to be sold at a bank auction was unloading a large still-life painting her husband had picked up in Mexico; she had never liked it anyway. Another neighbor, out of work since last summer but still keeping up with the mortgage payments, had his junker Jaguar up for grabs, too.

Yard sales, much like strawberries and report cards, remain pleasant signals of summer’s imminent arrival. But for Beth Court, a block of eight houses that has been shaken by the recession and the foreclosure crisis and that The New York Times has visited since January, this sale was in a way also a moment of planned anxiety, when life’s woes were willingly exposed in exchange for cash.

It was a moment of surprise too, when the block’s newest residents — or soon to be — made an inaugural visit to their new home. Just before 10 a.m., a dark car pulled into the driveway at No. 11066, a corner home with a big window that had been empty since it was foreclosed upon nine months earlier.

“Who is it?” one neighbor asked, as heads turned toward two men and a woman emerging from the car.

“I hope it’s a family,” she continued. “I wonder if she’s pregnant?”

The newcomers, Steven Schneider and his extended family, represented unwanted change and uncertainty, and there was some sense on Beth Court that they were profiting from the neighborhood’s undoing by picking up their home at a fire sale price. Sprawled on the yards around the new arrivals were reminders of the hard times — sweaters, sewing kits missing a few spools of thread, a treadmill and a dress someone wore for confirmation.

Still it was impossible not to herald their arrival, too. The Schneiders’ three-bedroom house had become an eyesore. Vandals once broke in and smashed a window. The lawn was sapped. Home values around it had plummeted, and it was not the only empty house on the block.

In Beth Court’s familiar togetherness, a feature that neighbors have always taken pride in, there was a peculiar mix of trepidation and relief.

“Well, you never want to see an empty house on the block,” said Connie Hanson, who lives at the entrance to Beth Court on the adjoining street and takes nightly walks around the block. “I just hope there isn’t anything transient about them. We’ve had that problem on the block before.”

Mr. Schneider, who had been living in a mobile home in nearby San Bernardino, attracted the curious as he stood surveying the block, awaiting the home inspector.

“We’ve been looking for months,” said Mr. Schneider, who put together a down payment of $30,000 on the $148,000 home with the help of a nephew, Timothy Hughes. Mr. Schneider and his fiancée would live in one bedroom, he explained, Mr. Hughes in another, and Mr. Schneider’s elderly parents would take the third bedroom.

“The prices were right here, and the interest rates are great,” said Mr. Schneider, standing in the midmorning sun. “I think we’re buying at the right moment.”

A small ring of houses in this city 60 miles east of Los Angeles, Beth Court is indicative of the foreclosure crisis that has rocked much of Southern California and the nation. Here in Moreno Valley, a city of 190,000 built on the construction boom of the past three decades, the pain has been particularly acute: 5 of every 100 houses went belly up last year. Of the eight homes on Beth Court, four have been foreclosed on at some point, and the owners of two more are in trouble.

But the spoils of the foreclosure mess are houses on the cheap, making homeownership a possibility for many of those left behind during the boom times. For Mr. Schneider, Moreno Valley was out of reach just two years ago; now he was standing face to face with some of the very people losing their homes.

Yadira Burgueno, the woman selling the Mexican still life, knew the bank had begun to auction off her home. Eladio Soto, whose children were selling the baked goods, would soon sell his home at a huge loss. Olga Hernandez, who had been forced to leave her foreclosed home months earlier, was back that day with a pile of clothes to sell.

But the mountain views remained.

“It is beautiful,” Mr. Schneider said of his new neighborhood. “I’d be kicking myself in the rear if I didn’t buy this house.”

It was 11 a.m., the morning donuts from the yard sale were gone, and there was talk of whipping up a batch of margaritas. Mr. Schneider and his fiancée locked hands and made their way slowly down the block, with his nephew, Mr. Hughes, trailing behind.

They stopped in front of Ms. Sanchez’s home, admiring the wares for sale. She and her husband were among the block’s earliest residents when the houses were built in 1997.

“There’s no return on the kids,” Ms. Sanchez cracked, nodding in the general direction of her two daughters, 10 and 12. Mr. Schneider and his fiancée laughed lightly and wandered down the block. Ice broken.

Next came Mr. Hughes, a Direct TV installer.

“Hi, I’m the new neighbor,” he said to Ms. Sanchez, who squinted up from her chair into the midday sun.

“Oh, so you’re the new neighbor?” she asked, somewhat baffled since she thought she had just met the newcomers. “I’m Ellie. I live here. So is it just you are your wife?”

“No,” Mr. Hughes said. “Me and my uncle own the house. Well, we’re in escrow.”

“Oh, two single guys. So that’s going to be the party house, huh? Everyone on this block has kids. We are not the party houses.”

“No,” said Mr. Hughes, taking his turn at bafflement. Beth Court was used to nuclear families. This would just be a little different.

Though the Schneider-Hughes arrangement was new to the block, it is not uncommon in Riverside County, real estate agents say. Scores of people who have lost their homes are moving into large houses owned by relatives who need help paying the mortgage; others families have pulled together to buy their first house.

As the neighborhood tour continued and the clock hit noon, two of the block’s casualties — Ms. Hernandez and Ms. Burgueno — took the scene in silently from a shared blanket. Ms. Hernandez had lost her four-bedroom home but has harbored fantasies about somehow getting it back. She returns regularly to the block where she raised three children, and participating in the yard sale was natural for her.

Mr. Hughes peered into the window of Ms. Hernandez’s house, still empty at that point, then walked across the street. He introduced himself to Adrian Blanco, who after months of unemployment was working with the bank to modify his mortgage and was deeply worried he might lose the house.

In a big floppy hat, Mr. Blanco was washing his truck in the driveway. No yard sale for him. His belongings were down to essentials.

“Nice truck,” Mr. Hughes said.

“Thank you,” Mr. Blanco replied. “It’s a good one. I like it.”

After waiting for the new neighbor to make his way along, Mr. Blanco said: “The bank doesn’t want to help me. I don’t know what to do.”

By 1 p.m., Mr. Schneider had made the rounds and was back in his driveway and getting ready to leave. But there was one important introduction left. The neighborhood’s unofficial mayor, Ted Hanson, Connie’s husband, came bounding from the adjoining street.

Mr. Hanson does not cotton to getting too involved in his neighbors’ lives. But he was happy that an investor had not bought the house, as so often happens on blocks with multiple foreclosures.

“This is way better,” he said, glancing up the block toward an empty house. “That lawn looks terrible. I might need to get over there and mow it myself.”

By the time Mr. Schneider pulled out of the driveway, the afternoon sun was getting hot and the blankets on the front lawns were being folded up. The treadmill had sold, as had several bits of clothing, a toy here and there, and at least one crib. The still life remained. Its owner would be evicted several weeks later, just as Mr. Schneider and his family began settling in.

Past and Future Collide at a Yard Sale, NYT, 23.8.2009, http://www.nytimes.com/2009/08/23/us/23bethsidebar.html

Millions Face

Shrinking Social Security Payments

August 23, 2009
Filed at 4:32 p.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- Millions of older people face shrinking Social Security checks next year, the first time in a generation that payments would not rise.

The trustees who oversee Social Security are projecting there won't be a cost of living adjustment (COLA) for the next two years. That hasn't happened since automatic increases were adopted in 1975.

By law, Social Security benefits cannot go down. Nevertheless, monthly payments would drop for millions of people in the Medicare prescription drug program because the premiums, which often are deducted from Social Security payments, are scheduled to go up slightly.

''I will promise you, they count on that COLA,'' said Barbara Kennelly, a former Democratic congresswoman from Connecticut who now heads the National Committee to Preserve Social Security and Medicare. ''To some people, it might not be a big deal. But to seniors, especially with their health care costs, it is a big deal.''

Cost of living adjustments are pegged to inflation, which has been negative this year, largely because energy prices are below 2008 levels.

Advocates say older people still face higher prices because they spend a disproportionate amount of their income on health care, where costs rise faster than inflation. Many also have suffered from declining home values and shrinking stock portfolios just as they are relying on those assets for income.

''For many elderly, they don't feel that inflation is low because their expenses are still going up,'' said David Certner, legislative policy director for AARP. ''Anyone who has savings and investments has seen some serious losses.''

About 50 million retired and disabled Americans receive Social Security benefits. The average monthly benefit for retirees is $1,153 this year. All beneficiaries received a 5.8 percent increase in January, the largest since 1982.

More than 32 million people are in the Medicare prescription drug program. Average monthly premiums are set to go from $28 this year to $30 next year, though they vary by plan. About 6 million people in the program have premiums deducted from their monthly Social Security payments, according to the Social Security Administration.

Millions of people with Medicare Part B coverage for doctors' visits also have their premiums deducted from Social Security payments. Part B premiums are expected to rise as well. But under the law, the increase cannot be larger than the increase in Social Security benefits for most recipients.

There is no such hold-harmless provision for drug premiums.

Kennelly's group wants Congress to increase Social Security benefits next year, even though the formula doesn't call for it. She would like to see either a 1 percent increase in monthly payments or a one-time payment of $150.

The cost of a one-time payment, a little less than $8 billion, could be covered by increasing the amount of income subjected to Social Security taxes, Kennelly said. Workers only pay Social Security taxes on the first $106,800 of income, a limit that rises each year with the average national wage.

But the limit only increases if monthly benefits increase.

Critics argue that Social Security recipients shouldn't get an increase when inflation is negative. They note that recipients got a big increase in January -- after energy prices had started to fall. They also note that Social Security recipients received one-time $250 payments in the spring as part of the government's economic stimulus package.

Consumer prices are down from 2008 levels, giving Social Security recipients more purchasing power, even if their benefits stay the same, said Andrew G. Biggs, a resident scholar at the American Enterprise Institute, a Washington think tank.

''Seniors may perceive that they are being hurt because there is no COLA, but they are in fact not getting hurt,'' Biggs said. ''Congress has to be able to tell people they are not getting everything they want.''

Social Security is also facing long-term financial problems. The retirement program is projected to start paying out more money than it receives in 2016. Without changes, the retirement fund will be depleted in 2037, according to the Social Security trustees' annual report this year.

President Barack Obama has said he would like tackle Social Security next year, after Congress finishes work on health care, climate change and new financial regulations.

Lawmakers are preoccupied by health care, making it difficult to address other tough issues. Advocates for older people hope their efforts will get a boost in October, when the Social Security Administration officially announces that there will not be an increase in benefits next year.

''I think a lot of seniors do not know what's coming down the pike, and I believe that when they hear that, they're going to be upset,'' said Sen. Bernie Sanders, an independent from Vermont who is working on a proposal for one-time payments for Social Security recipients.

''It is my view that seniors are going to need help this year, and it would not be acceptable for Congress to simply turn its back,'' he said.

------

On the Net:

Social Security Administration: http://www.ssa.gov/

National Committee to Preserve Social Security and Medicare: http://www.ncpssm.org

Millions Face Shrinking Social Security Payments, NYT, 23.8.2009, http://www.nytimes.com/aponline/2009/08/23/us/politics/AP-US-Social-Security-Smaller-Checks.html

This Land

Living in Tents,

and by the Rules,

Under a Bridge

July 31, 2009
The New York Times
By DAN BARRY

PROVIDENCE, R.I.

The chief emerges from his tent to face the leaden morning light. It had been a rare, rough night in his homeless Brigadoon: a boozy brawl, the wielding of a knife taped to a stick. But the community handled it, he says with pride, his day’s first cigar already aglow.

By community he means 80 or so people living in tents on a spit of state land beside the dusky Providence River: Camp Runamuck, no certain address, downtown Providence.

Because the two men in the fight had violated the community’s written compact, they were escorted off the camp, away from the protection of an abandoned overpass. One was told we’ll discuss this in the morning; the other was voted off the island, his knife tossed into the river, his tent taken down.

The chief flicks his spent cigar into that same river. There is talk of rain tonight.

Behind him, the camp stirs. Other tent cities have sprung up recently around the country, but Rhode Island officials have never seen anything like this. A tea kettle sings.

A heavily pierced young person walks by without picking up an empty plastic bottle, flouting the camp compact that says everyone will share in the labor. The compact may be as impermanent as this sudden community by the river, but for now it is binding. The chief speaks, the bottle is picked up.

The chief, John Freitas, is 55, with a gray beard touched by tobacco rust. He did prison time decades ago, worked for years as a factory supervisor, then became homeless for all the familiar, complicated reasons.

Layoffs, health problems, a slip from apartment to motel room. His girlfriend, Barbara Kalil, 50, lost her job as a nursing-home nurse, and another slip, into the shelter system. A job holding store-liquidation signs beside the highway allowed for a climb back to a motel, but it didn’t last.

Weary of shelters, the couple pitched a pup tent in Roger Williams Park, close to a plaque bearing words Williams had used to describe this place he founded: “A Shelter for Persons in Distress.” But someone complained, so Mr. Freitas set off again in search of shelter. The March winds blew.

Down South Main Street he went, past the majestic court building and the upscale seafood restaurant, over a guardrail to a gravelly plot beneath a ramp that once guided cars toward Cape Cod. Foul-smelling and partially hidden, a place of birds and rodents, it was perfect.

He and Ms. Kalil set up camp with another couple in early April. Word of it spread from the shelters to Kennedy Plaza downtown, where homeless people share the same empty Tim Hortons cup to pose as customers worthy of visiting that doughnut chain’s restroom. The camp became 10 people, then 15, then 25. No children allowed.

“I was always considered the leader, the chief,” Mr. Freitas says. “I was the one consulted about ‘Where should I put my tent?’ ”

By late June the camp had about 50 people. But someone questioned the role of Mr. Freitas as chief, so he stepped down. Arguments broke out. Food was stolen.

“There was no center holding,” recalls Rachell Shaw, 22, who lives with her boyfriend in a tidy tent decorated with porcelain dolls. “So everybody voted him back in.”

The community also established a five-member leadership council and a compact that read in part: “No one person shall be greater than the will of the whole.”

It is now late afternoon in late July, a month after nearly everyone signed that compact. The community remains intact, though the very ground they walk on says nothing is forever. Here and there are the exposed foundations of fish shacks that lined the river long ago.

Some state officials recently stopped by to say, nicely but firmly, that everyone would soon have to leave. The overpass poses the threat of falling concrete, and is scheduled for demolition. The officials have shared the same message with a smaller encampment across the river.

For now, a game of horseshoes sends echoing clanks, as outreach workers conduct interviews and raindrops thrum the tent tops. The chief lights another cigar and walks the length of the camp to tell residents to batten down, explaining its structure as he goes.

Here at the end, nearest the road, are the tents of young single people and substance abusers; this way, rescue vehicles won’t disrupt the entire compound.

Here in the center are a cluster of couples, including two competing for the nicest property, with homey touches like planted flowers. Here too are the food table, the coolers, the piles of donated clothes — what can’t be used will be taken by camp residents to the Salvation Army — and the large tent of the chief. Plastic pink flamingos stand guard.

Farther on, the recycled-can area (the money is used for ice and propane); the area for garbage bags that will be discreetly dropped in nearby Dumpsters at night; and, behind a blue tarp hung from the overpass, a plastic toilet. The chief says the shared task of removing the bags of waste tends to test the compact.

Finally, near some rocks where men go to urinate, live a gay couple and some people who drink hard. Timothy Webb, 49, who says he used to own a salon in Cranston called Class Act, cuts people’s hair here. Then, at night, he and his partner, Norman Trank, 45, sit at a riverside table, a battery-operated candle giving light, the moving waters suggesting mystery.

“It’s what you make of it,” Mr. Trank says.

Dark clouds have brought night early to Providence. Heavy drops thump against tarp. Water drips from the overpass, onto the long table of food.

In the last couple of hours the chief has resolved a conflict about tarp distribution, hugged a pregnant woman who mistakenly thought she had been kicked off the island, conferred with outreach workers and helped with dinner preparations. He is also thinking about tomorrow.

Tomorrow, an advance party for the chief will leave to claim another spot across the river that turns out not to be on public property. Many in the camp will decide it’s time to move on anyway, to a spot under a bridge in East Providence. Camp Runamuck will begin its recession from sight and memory.

At least tonight there is a communal dinner: donated chicken, parboiled and grilled; donated corn on the cob; donated potatoes. People line up with paper plates.

The rain falls harder, pocking the river’s gray surface, surrounding the dark camp with a sound like fingers drumming in impatience. The chief hears it, but what can he do? He finishes his dinner and lights another cigar.

Living in Tents, and by the Rules, Under a Bridge, NYT, 31.7.2009, http://www.nytimes.com/2009/07/31/us/31land.html?hp

Recession Eases;

GDP Dip Smaller Than Expected

July 31, 2009
Filed at 9:30 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- The economy sank at a pace of just 1 percent in the second quarter of the year, a new government report shows. It was a better-than-expected showing that provided the strongest signal yet that the longest recession since World War II is finally winding down.

The dip in gross domestic product for the April-to-June period, reported by the Commerce Department on Friday, comes after the economy was in a free fall, tumbling at 6.4 percent pace in the first three months of this year. That was the sharpest downhill slide in nearly three decades.

The economy has now contracted for a record four straight quarters for the first time on records dating to 1947. That underscores the grim toll of the recession on consumers and companies.

Many economists were predicting a slightly bigger 1.5 percent annualized contraction in second-quarter GDP. It's the total value of all goods and services -- such as cars and clothes and makeup and machinery -- produced within the United States and is the best barometer of the country's economic health.

''The recession looks to have largely bottomed in the spring,'' said Joel Naroff, president of Naroff Economic Advisors. ''Businesses have made most of the adjustments they needed to make, and that will set up the economy to resume growing in the summer,'' he predicted.

Less drastic spending cuts by businesses, a resumption of spending by federal and local governments and an improved trade picture were key forces behind the better performance. Consumers, though, pulled back a bit. Rising unemployment, shrunken nest eggs and lower home values have weighed down their spending.

A key area where businesses ended up cutting more deeply in the spring was inventories. They slashed spending at a record pace of $141.1 billion. There was a silver lining to that, though: With inventories at rock-bottom, businesses may need to ramp up production to satisfy customer demand. That would give a boost to the economy in the current quarter.

The Commerce Department also reported Friday that the recession inflicted even more damage on the economy last year than the government had previously thought. In revisions that date back to the Great Depression, it now estimates that the economy grew just 0.4 percent in 2008. That's much weaker than the 1.1 percent growth the government had earlier calculated.

Also Friday, the government reported that employment compensation for U.S. workers has grown over the past 12 months by the lowest amount on record, reflecting the severe recession that has gripped the country.

Federal Reserve Chairman Ben Bernanke has said he thinks the recession will end later this year. And many analysts think the economy will start to grow again -- perhaps at around a 1.5 percent pace -- in the July-to-September quarter. That would be anemic growth by historical measures, but it would signal that the downturn has ended.

Naroff said he now thinks growth in the third quarter could turn out to be much stronger because companies will need to replenish bare-bone stockpiles of goods.

''You could get a huge swing in inventories that could create a much bigger growth rate than anybody expects,'' he said.

If that were to happen, it's possible the economy's growth could clock in around 4 percent in the current quarter, he said.

Obama's stimulus package of tax cuts and increased government spending provided some support to second-quarter economic activity. But it will have more impact through the second half of this year and will carry a bigger punch in 2010, economists said.

Even if the recession ends later this year, the job market will remain weak. Companies are expected to keep cutting payroll through the rest of this year, but analysts say monthly job losses likely will continue to narrow.

Still, unemployment -- now at a 26-year high of 9.5 percent -- will keep rising. The Fed says it will top 10 percent at the end of this year. Businesses will be unlikely to boost hiring until they're certain the recovery has staying power.

In the second quarter, businesses continued to cut all kinds of spending, but not nearly as much as they had been, one of the reasons the economy didn't contract as much.

For instance, they trimmed spending on equipment and software at a 9 percent pace in the second quarter, compared with an annualized drop of 36.4 percent in the first quarter. Similarly, they cut spending on plants, office buildings and other commercial construction at a rate of 8.9 percent, an improvement from the annualized drop of 43.6 percent in the first quarter.

Housing -- which led the country into recession -- continued to be a drag on the economy. Builders cut spending at a rate of 29.3 percent, also an improvement from the 38.2 percent annualized drop reported in the first quarter.

Consumers, meanwhile, did a slight retreat in the spring.

They sliced spending at a rate of 1.2 percent in the second quarter, after nudging up purchases at a 0.6 percent pace in the first quarter. It turns out that consumers didn't nearly have the appetite to spend in the first quarter as the government previously thought, according to revisions released Friday.

With consumers spending less on everything from cars to clothes, Americans' savings rate rose sharply -- to 5.2 percent in the second quarter, the highest since 1998.

A return to spending by governments helped economic activity in the spring. The federal government boosted spending at pace of 10.9 percent, the most since the third quarter of 2008. And state and local governments increased spending at a pace of 2.4 percent, the most since the second quarter of 2007.

An improved trade picture also added to economic activity in the spring. Although exports fell, imports fell more, narrowing the trade gap. That added 1.38 percentage points to second-quarter GDP.

The convergence of a collapse in the housing market, a near shutdown of credit and a financial crisis created what Bernanke and others have called a perfect storm for the economy. Those negative forces -- the scale of which hasn't been seen since the 1930s -- plunged the country into a recession in December 2007. It is the longest since World War II.

Recession Eases; GDP Dip Smaller Than Expected, NYT, 31.7.2009, http://www.nytimes.com/aponline/2009/07/31/business/AP-US-Economy.html

Big Banks Paid Billions in Bonuses

Amid Wall St. Crisis

July 31, 2009
The New York Times
By LOUISE STORY and ERIC DASH

Thousands of top traders and bankers on Wall Street were awarded huge bonuses and pay packages last year, even as their employers were battered by the financial crisis.

Nine of the financial firms that were among the largest recipients of federal bailout money paid about 5,000 of their traders and bankers bonuses of more than $1 million apiece for 2008, according to a report released Thursday by Andrew M. Cuomo, the New York attorney general.

At Goldman Sachs, for example, bonuses of more than $1 million went to 953 traders and bankers, and Morgan Stanley awarded seven-figure bonuses to 428 employees. Even at weaker banks like Citigroup and Bank of America, million-dollar awards were distributed to hundreds of workers.

The report is certain to intensify the growing debate over how, and how much, Wall Street bankers should be paid.

In January, President Obama called financial institutions “shameful” for giving themselves nearly $20 billion in bonuses as the economy was faltering and the government was spending billions to bail out financial institutions.

On Friday, the House of Representatives may vote on a bill that would order bank regulators to restrict “inappropriate or imprudently risky” pay packages at larger banks.

Mr. Cuomo, who for months has criticized the companies over pay, said the bonuses were particularly galling because the banks survived the crisis with the government’s support.

“If the bank lost money, where do you get the money to pay the bonus?” he said.

All the banks named in the report declined to comment.

Mr. Cuomo’s stance — that compensation for every employee in a financial firm should rise and fall in line with the company’s overall results — is not shared on Wall Street, which tends to reward employees based more on their individual performance. Otherwise, the thinking goes, top workers could easily leave for another firm that would reward them more directly for their personal contribution.

Many banks partly base their bonuses on overall results, but Mr. Cuomo has said they should do so to a greater degree.

At Morgan Stanley, for example, compensation last year was more than seven times as large as the bank’s profit. In 2004 and 2005, when the stock markets were doing well, Morgan Stanley spent only two times its profits on compensation.

Robert A. Profusek, a lawyer with the law firm Jones Day, which works with many of the large banks, said bank executives and boards spent considerable time deciding bonuses based on the value of workers to their companies.

“There’s this assumption that everyone was like drunken sailors passing out money without regard to the consequences or without giving it any thought,” Mr. Profusek said. “That wasn’t the case.”

Mr. Cuomo’s office did not study the correlation between all of the individual bonuses and the performance of the people who received them.

Congressional leaders have introduced several other bills aimed at reining in the bank bonus culture. Federal regulators and a new government pay czar, Kenneth Feinberg, are also scrutinizing bank bonuses, which have fueled populist outrage. Incentives that led to large bonuses on Wall Street are often cited as a cause of the financial crisis.

Though it has been known for months that billions of dollars were spent on bonuses last year, it was unclear whether that money was spread widely or concentrated among a few workers.

The report suggests that those roughly 5,000 people — a small subset of the industry — accounted for more than $5 billion in bonuses. At Goldman, just 200 people collectively were paid nearly $1 billion in total, and at Morgan Stanley, $577 million was shared by 101 people.

All told, the bonus pools at the nine banks that received bailout money was $32.6 billion, while those banks lost $81 billion.

Some compensation experts questioned whether the bonuses should have been paid at all while the banks were receiving government aid.

“There are some real ethical questions given the bailouts and the precariousness of so many of these financial institutions,” said Jesse M. Brill, an outspoken pay critic who is the chairman of CompensationStandards.com, a research firm in California. “It’s troublesome that the old ways are so ingrained that it is very hard for them to shed them.”

The report does not include certain other highly paid employees, like brokers who are paid on commission. The report also does not include some bank subsidiaries, like the Phibro commodities trading unit at Citigroup, where one trader stands to collect $100 million for his work last year.

Now that most banks are making money again, hefty bonuses will probably be even more common this year. And many banks have increased salaries among highly paid workers so that they will not depend as heavily on bonuses.

Banks typically do not disclose compensation figures beyond their total compensation expenses and the amounts paid to top five highly paid executives, but they turned over information on their bonus pools to a House committee and to Mr. Cuomo after the bailout last year.

The last few years provide a “virtual laboratory” to test whether bankers’ pay moved in line with bank performance, Mr. Cuomo said. If it did, he said, the pay levels would have dropped off in 2007 and 2008 as bank profits fell.

So far this year, Morgan Stanley has set aside about $7 billion for compensation — which includes salaries, bonuses and expenses like health care — even though it has reported quarterly losses.

At some banks last year, revenue fell to levels not seen in more than five years, but pay did not. At Citigroup, revenue was the lowest since 2002. But the amount the bank spent on compensation was higher than in any other year between 2003 and 2006.

At Bank of America, revenue last year was at the same level as in 2006, and the bank kept the amount it paid to employees in line with 2006. Profit at the bank last year, however, was one-fifth of the level in 2006.

Still, regulators may have limited resources for keeping pay in check. Only banks that still have bailout money are subject to oversight by Mr. Feinberg, the pay czar. He will approve pay for the top 100 compensated employees at banks like Citigroup and Bank of America as well as automakers like General Motors.

Big Banks Paid Billions in Bonuses Amid Wall St. Crisis, NYT, 31.7.2009, http://www.nytimes.com/2009/07/31/business/31pay.html?hp

Chevron Profit Tumbles 71%

July 31, 2009
Filed at 9:15 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

NEW YORK (AP) -- Chevron Corp. says its second-quarter profit fell 71 percent as demand for crude oil and gasoline plunged.

Chevron, the second-largest U.S. oil company, said Friday its net income amounted to $1.75 billion, or 87 cents per share, for the three-month period that ended June 30. That compared with $5.98 billion, or $2.90 per share, in the same period last year.

The company said its net income suffered from a weak U.S. dollar, amounting to $453 million in reduced earnings. That compares with an income benefit of $126 million in the same period last year.

Analysts surveyed by Thomson Reuters expected earnings of 95 cents per share. Those estimates typically exclude one-time items.

San Ramon, Calif.-based Chevron says total revenue fell 51 percent to $40 billion from $81 billion a year ago.

''The demand for refined products remained generally weak,'' Chairman and CEO Dave O'Reilly said in a statement.

The company said a barrel for crude oil and natural gas liquids fetched $53 in the second quarter, compared with $110 in the second quarter of 2008.

Chevron's production numbers, however, really stood out when compared with other major oil companies reporting earnings this week .

Chevron boosted net oil-equivalent production by 5 percent. On Thursday, Royal Dutch Shell, Europe's biggest oil company, said its production dipped 6 percent. Exxon Mobil, the world's biggest publicly traded oil company, said its production fell 3 percent.

During the quarter, Chevron's subsidiaries started drawing crude and natural gas from deepwater production facilities in the Gulf of Mexico and off the coasts of Angola and Brazil.

The company also boosted capital and exploratory operations, spending $11.4 billion in the first half of the year, compared with $10.3 billion in the first six months of 2008.

Chevron continues to be dogged by questions about whether it's responsible for environmental damages in the Amazon rain forest. Ecuadoreans say Texaco Inc., which Chevron acquired in 2001, dumped billions of gallons of toxic wastewater from its petroleum operation into unlined waste pits.

A judge in Ecuador is expected to rule later this year on whether Chevron should pay as much as $27 billion in damages. Chevron said it would likely try to have the case brought back to the U.S.

Company shares fell 85 cents to $66.85 in premarket trading.

Chevron Profit Tumbles 71%, NYT, 31.7.2009, http://www.nytimes.com/aponline/2009/07/31/business/AP-US-Earns-Chevron.html?hpw

Profit Dropped 66% in Quarter

at Exxon Mobil

July 31, 2009
The New York Times
By JAD MOUAWAD

Exxon Mobil, the world’s biggest publicly traded oil company, said Thursday that its profit dropped 66 percent in a second quarter after a sharp fall in oil prices in the last year.

The oil giant reported that its net income fell to $3.95 billion, or 81 cents a share, from $11.68 billion, or $2.22 a share, in the period a year ago.

Capital spending fell 6 percent to $6.56 billion in the quarter.

“Global economic conditions continue to impact the energy industry both in the volatility of commodity prices and reduced demand for products,” the company’s chairman and chief executive, Rex W. Tillerson, said in a statement.

The company’s combined oil and gas production fell 3 percent in the quarter, because of restrictions imposed by OPEC producers and lower output from mature fields. Exxon’s oil production in the quarter averaged 2.35 million barrels a day and gas production was about 8.01 billion cubic feet a day. The company said it increased its output from new projects in Qatar and in the United States.

Profit at the company’s production and exploration unit fell to $3.81 billion in the second quarter, down $6.2 billion compared with a year earlier. In its refining business, Exxon saw its profit drop to $512 million, down $1.05 billion from a year ago. That included a loss of $15 million at Exxon’s domestic refining business.

Despite the lower profit, Exxon continued its program to reward shareholders by buying back shares and paying dividends. The company spent $5.2 billion in the second quarter to buy back 75 million shares.

Exxon’s report caps a week of lower earnings across the energy industry after oil prices tumbled from last year’s record levels and the global economy slowed down. Oil prices, which had reached a record closing price of $145.29 a barrel last July, recently traded around $63 a barrel.

The global recession is expected to reduce oil consumption around the world for a second consecutive year, the first time that’s happened since the early 1980s. Oil companies, which are struggling to adapt to a new environment of lower prices and slower demand, have responded by slashing costs, paring down drilling activities and shutting some operations.

Earlier on Thursday, Royal Dutch Shell reported that its net profit fell 67 percent in the second quarter, to $3.82 billion, from $11.6 billion in the period a year ago. Sales were $63.9 billion, down from $131.4 billion in the quarter a year ago. The company said that it planned to reduce capital spending by more than 10 percent next year to about $28 billion and that it would cut jobs.

Earnings at Shell’s exploration and production unit dropped 77 percent, to $1.33 billion, from $5,9 billion a year ago, mostly on lower oil prices. Production declined 6 percent, to 2.9 million barrels of oil and equivalents a day, while prices were $52.62 a barrel, down from $111.92 in the period a year ago.

“Our second quarter results were affected by the weak global economy. Shell’s chief executive, Peter R. Voser, said. “This weakness is creating a difficult environment both in upstream and downstream.”

On Wednesday, ConocoPhillips, the third-largest American oil company after Exxon and Chevron, said that its quarterly profits tumbled 76 percent, to $1.3 billion, after a loss in its refining business. Chevron reports its earnings on Friday.

The British oil giant BP said earlier this week that its profit declined 53 percent, to $4.39 billion. The company said it would reduce its costs by $3 billion this year, $1 billion more than it had initially planned. The company’s chief executive, Tony Hayward, also signaled that he expected oil prices hover in a range of $60 to $90 a barrel.

Julia Werdigier contributed reporting.

Profit Dropped 66% in Quarter at Exxon Mobil, NYT, 31.7.2009, http://www.nytimes.com/2009/07/31/business/global/31oil.html?hp

New U.S. Home Sales

Rise Sharply as Prices Fall

July 28, 2009
The New York Times
By JACK HEALY

Sales of new homes in the United States posted their largest monthly gain in eight years in June, the government reported on Monday, a sign that the housing market is bottoming as buyers take advantage of lower prices.

The Commerce Department reported that new single-family home sales rose 11 percent in June, an increase that dwarfed economists’ expectations of a 3 percent increase. The pace of home sales rose to a seasonally adjusted rate of 384,000 a year, the highest level since November.

But the figures offered no sign that the housing market had returned to health.

Despite the monthly increase, sales of new homes were still down 21 percent from June 2008. The market is still swamped by a glut of for-sale houses. And new homes, facing competition from cheap foreclosures, are sitting on the market for close to a year before they sell, compared with a median time of six months on the market in 2007.

“These are still really bad numbers,” an economist at IHS Global Insight, Patrick Newport, said. “The market just couldn’t have dropped much further.”

As sales rose, median prices of new homes continued to fall, slipping to $206,200 from $232,100 in June a year ago.

The figures were the latest evidence that a three-year slump in the country’s housing market was leveling off as prices fell back and some builders and buyers began to step tentatively back into the market. Earlier this month, the government reported that housing starts rose 3.6 percent in June from a month earlier, and a trade group reported that sales of previously owned homes also rose for another month.

“Sales are picking up a little,” a senior economist at 4Cast, David Sloan, said. “Whether it’s going to pick up any momentum is really the key. I think we have to be doubtful about that.”

On Tuesday, a closely watched measure of home prices will be released, offering some hints about whether the long plunge in housing values is abating. Economists are expecting a 17.9 percent year-over-year decline in prices in the Standard & Poor’s Case-Shiller Home Price Index.

Although new-home sales have risen for three months, many economists worry that rising unemployment, stagnant wages and continued tightness in lending markets will weigh down the housing market for the rest of the year.

“There’s still worries that the lack of employment growth and lack of wage growth is restraining consumer income, and that’s going to ensure that the recovery is quite modest,” Mr. Sloan said.

New U.S. Home Sales Rise Sharply as Prices Fall, NYT, 28.7.2009, http://www.nytimes.com/2009/07/28/business/economy/28econ.html?hp

To Create Jobs,

Tennessee Looks

to New Deal Model

July 28, 2009
The New York Times
By MICHAEL COOPER

LINDEN, Tenn. — Critics elsewhere may be questioning how many jobs the stimulus program has created, but here in central Tennessee, hundreds of workers are again drawing paychecks after many months out of work, thanks to a novel use of federal stimulus money by Tennessee officials to help one of the state’s hardest-hit areas.

There, on a recent morning, some workers were cutting down pine trees with chainsaws and clearing undergrowth, just past the auto parts factory that laid them off last year when it moved to Mexico. Others were taking applications for unemployment benefits at the very center where they themselves had applied not long ago. A few were making turnovers at the Armstrong Pie Company (“The South’s Finest Since 1946”).

The state decided to spend some of its money to try to reduce unemployment by up to 40 percent here in Perry County, a small, rural county 90 miles southwest of Nashville where the unemployment rate had risen to above 25 percent after its biggest plant, the auto parts factory, closed.

Rather than waiting for big projects to be planned and awarded to construction companies, or for tax cuts to trickle through the economy, state officials hit upon a New Deal model of trying to put people directly to work as quickly as possible.

They are using welfare money from the stimulus package to subsidize 300 new jobs across Perry County, with employers ranging from the state Transportation Department to the milkshake place near the high school.

As a result, the June unemployment rate, which does not yet include all the new jobs, dropped to 22.1 percent.

“If I could have done a W.P.A. out there, I would have done a W.P.A. out there,” said Gov. Phil Bredesen of Tennessee, a Democrat, referring to the Works Progress Administration, which employed millions during the Great Depression.

“I really think the president is trying to do the right thing with the stimulus,” Mr. Bredesen said, “but so much of that stuff is kind of stratospheric. When you’ve got 27 percent unemployment, that is a full-fledged depression down in Perry County, and let’s just see if we can’t figure out how to do something that’s just much more on the ground and direct, that actually gets people jobs.”

Tennessee is planning to pay for most of the new jobs, which it expects will cost $3 million to $5 million, with part of its share of $5 billion that was included in the stimulus for the Temporary Assistance for Needy Families program, the main cash welfare program for families with children. The state did not wait for the federal paperwork to clear before putting residents of Perry County back to work.

Other states are still drawing up plans for how they will spend the welfare money, which is typically used for items like cash grants for families and job training. Some are likely to use part of it to subsidize employment, as Tennessee is doing, but it is hard to imagine many other places where the creation of so few jobs could have such an immediate and outsize impact as it did in this bucolic county of 7,600 people.

A stimulus job came just in time for Frank Smith, 41, whose family was facing eviction after he lost his job as a long-haul truck driver. Then he landed a job with the Transportation Department.

“The day I came from my interview here, I was sitting in the court up here where I was being evicted,” Mr. Smith said after a sweaty morning clearing trees under a hot sun to make room for new electric poles. “Luckily I’m still in the same place. There’s a lot of people that were totally displaced.”

Scott and Allison Kimble married after meeting on the assembly line at the Fisher & Company auto parts plant. When the factory closed last year and reluctantly relocated to Mexico, the Kimbles, along with many of their friends and neighbors, found themselves out of work. Now Mr. Kimble has a stimulus job working for the Transportation Department, and Ms. Kimble has one in what has become a growth industry, taking telephone applications for unemployment benefits.

“I know what they feel like,” she said between calls. “I’ve been in their position.”

Michael B. Smith, 53, who drove a forklift at the plant for 31 years, now drives a Caterpillar to clear land for a developer. Robert Mackin, 55, who lost his job, his health insurance and his home, now has a job with the Transportation Department, a rental home, health insurance and an added benefit: the state employee discount when his daughter goes to a state college.

“With a degree, she can always go somewhere,” Mr. Mackin said.

The impact has been enormous, all across the county. Even the look of the place is changing, following the old W.P.A. model. In addition to the jobs for adults, there are 150 summer jobs for young people, some of whom have been working with resident artists to paint murals depicting local history on the buildings along Main Street in Linden, the county seat.

Over all, two-thirds of the new jobs are in private sector businesses that requested the money. Some, in retail, might be hard to sustain when the stimulus money runs out in September 2010. Other businesses say the free labor will help them expand, hopefully enough to keep a bigger work force.

The Commodore Hotel Linden, a newly restored 1939 hotel that has brought new life to downtown, has seen an increase in its bookings since it has expanded its staff thanks to the stimulus. And the Armstrong Pie Company expects to be able to keep on the new bakery assistants and drivers it hired with stimulus money, saying the new workers have helped the company triple its pie production and expand its reach through central Tennessee.

The county mayor, John Carroll, has been working to lure new industry to the area. Walking through the cavernous, empty Fisher plant, Mr. Carroll pointed to a forgotten display case filled with dozens of awards for safety and manufacturing excellence. “What we can offer,” he said, “is a great work force.”

Mr. Kimble said the new jobs had given him and his wife paychecks, health insurance and a reason to get up each morning. But he said he hoped that a big, long-term employer would move in soon.

“This job here is not a permanent fix,” he said. “We still need some kind of industry to look and come into Perry County. But for right now we’ve got hope, and when you’ve got hope, you’ve got a way.”

To Create Jobs, Tennessee Looks to New Deal Model, NYT, 28.7.2009, http://www.nytimes.com/2009/07/28/us/28county.html?hp

The Safety Net

Jobless Checks for Millions Delayed

as States Struggle

July 24, 2009
The New York Times
By JASON DePARLE

WASHINGTON — Years of state and federal neglect have hobbled the nation’s unemployment system just as a brutal recession has doubled the number of jobless Americans seeking aid.

In a program that values timeliness above all else, decisions involving more than a million applicants have been slowed, and hundreds of thousands of needy people have waited months for checks.

And with benefit funds at dangerous lows even before the recession began, states are taking on billions in debt, increasing the pressure to raise taxes or cut aid, just as either would inflict maximum pain.

Sixteen states, with exhausted funds, are now paying benefits with borrowed cash, and their number could double by the year’s end.

Call centers and Web sites have been overwhelmed, leaving frustrated workers sometimes fighting for days to file an application.

While the strained program still makes more than 80 percent of initial payments within three weeks — slightly below the standard set under federal law — cases that require individual review are especially prone to delay. Thirty-eight states are failing to make those decisions within the federal deadline.

For workers who survive a paycheck at a time, even a week’s delay can mean a missed rent payment or foregone meals.

Kenneth Kottwitz, a laid-off cabinet maker in Phoenix, waited three months for his benefits to arrive. He exhausted his savings, lost his apartment and moved to a homeless shelter.

Luis Coronel, a janitor at a San Francisco hotel, got $6,000 in back benefits after winning an appeal. But in the six months he spent waiting, there were times when he and his pregnant wife could not afford to eat.

“I was terrified my wife and daughter would have to live on the street,” Mr. Coronel said.

Labor Secretary Hilda Solis said: “Obviously, some of our states were in a pickle. The system wasn’t prepared to deal with the enormity of the calls coming in.”

The program’s problems, though well known, were brushed aside when unemployment was low.

“The unemployment insurance system before the recession was as vulnerable as New Orleans was before Katrina,” said Representative Jim McDermott, Democrat of Washington, who is chairman of a House panel with authority over the program.

Now the number of unemployed Americans has doubled since 2007 to 15 million and the program is more than tripling in size. About 9.5 million people are collecting benefits, up from about 2.5 million two years ago. Spending is expected to reach nearly $100 billion this year, about triple what it was two years ago.

Given how suddenly the workload has increased, some analysts say the delays might have been even worse.

“Payments are later than they should be, and later than they used to be, but states have been overwhelmed,” said Rich Hobbie, director of the National Association of State Workforce Agencies, which represents the program’s administrators. “Considering the significant problems in the program, unemployment is responding well.”

The recovery act passed in February provided states an additional $500 million for administration. It also suspended interest payments through 2011 for states paying benefits with federal loans.

Unemployment insurance began as a New Deal effort with dual goals: to sustain idled workers and stimulate weak economies. States finance benefits by taxing employers, typically building surpluses in good times to cover payments in bad.

In 2007, the average state paid about $290 a week and aided 37 percent of the unemployed.

As downturns over the last 20 years proved infrequent and mild, states cut taxes, and the federal government, which pays administrative costs, reduced its support by about 25 percent. The states’ performance sagged.

In a recent report to the Department of Labor, Ohio said its computer problems “kept the system performance at a snail’s pace.” Louisiana said its call center was staffed with “temporary workers, with little knowledge” of unemployment insurance.

North Carolina said a wave of retirements had left it “unable to maintain pace or volume of work.” Virginia wrote “performance continued to be very stagnant” and called the odds of improvement “bleak.”

By 2007, 11 states were paying benefits so slowly they violated multiple federal rules, up from just two at the start of the decade.

While most eligibility reviews can be done by computer, about a quarter require a caseworker — to ensure, say, the applicant was laid off, rather than quit.

In the last year, states processed just 61 percent of these cases within three weeks — well below the federal requirement of 80 percent. More than a half-million cases, 6 percent, took more than eight weeks, and 350,000 took more than 10 weeks.

Of the 12.8 million eligibility reviews that have occurred during the recession, 4.6 million took more than three weeks. That is 2.1 million more than federal rules allow.

Appeals take even longer, with 28 states violating timeliness rules, many of them severely.

Perhaps no state is as troubled as California, which has not met timeliness standards for nine years. As in most other states, its 30-year-old computer runs on Cobol, a language so obsolete the state must summon retirees to make changes.

Yet a major overhaul in California has been delayed for five years, with $66 million in federal funds still waiting to be spent. In part, the shelved project was meant to upgrade the call centers, which were “completely swamped” last winter, a legislative analyst wrote, with “desperate unemployed Californians dialing and redialing for hours.”

Deborah Bronow, who runs the state’s unemployment insurance program, said, “The systems were antiquated to begin with,” and “we were unprepared.”

In April, Gov. Arnold Schwarzenegger declared a state of emergency, saying the failure to efficiently process checks posed “extreme peril to the safety of persons and property.”

California has not met federal standards for adequate reserves since 1990. Still, it cut taxes and raised benefits in the last decade. It is now paying benefits with federal loans, with its debt projected to reach nearly $18 billion next year.

Among those hurt by delays was Mr. Coronel, the San Francisco janitor who lost his hotel job in January. With the phone lines jammed, it took him two days to file an application and a month to learn it had been denied.

Then the waiting really began, as Mr. Coronel filed an appeal and heard nothing for three months. Luckless as he applied for new jobs, he borrowed to pay the rent, then moved in with his mother, and joined his pregnant wife in skipping meals.

“The worst day was when my daughter was born,” he said. “I had no clothes for her, and no car seat.”

While federal rules require states to decide 60 percent of appeals cases within a month, in recent years, California has met that deadline for just 5 percent. A report by the state auditor last year found the appeals board rife with nepotism and mismanagement.

Mr. Coronel won the appeal, but is soothing a marriage strained by a six-month wait. “It’s extremely stressful when you don’t know how you’re going to support your family,” he said.

Nationally, the program is the worst financial shape since the early 1980s, when back-to-back recessions left more than half the states borrowing from the federal government. Tax increases and benefit restraints gradually rebuilt the funds, then states changed course and pushed taxes well below historical levels.

From 1960 to 1990, the tax rate averaged about 1.1 percent of overall payroll. Over the last decade, it fell to 0.65 percent. That represents a tax cut of 40 percent.

Measured against a decade’s payroll, that saved employers $165 billion. But by 2007, when the recession began, the average state had just six months of recession-level benefits in reserve, half the recommended sum.

“The attitude became, ‘We don’t need a firehouse — we can buy hoses when the fire starts,’ ” said Wayne Vroman of the Urban Institute, a Washington research group.

Some analysts defend the tax cuts, saying they helped both employers and workers, by spurring the economy and creating jobs.

“Lower tax rates make it easier to attract business,” said Doug Holmes, president of UWC, a group that advocates on behalf of employers. “We don’t want to spend a whole lot of time beating ourselves up because we didn’t raise taxes enough. Nobody anticipated a recession this size.”

A big reason the reserves fell, Mr. Holmes said, is that the jobless now spend more time on the rolls — 15 weeks in recent years, up from 13 weeks several decades ago. Each extra week costs the program about $3 billion a year. The solution, he said, is stronger job placement provisions.

But others see an irresponsible past that now promises future pain.

“Workers who had nothing to do with the funds becoming insolvent are going to be asked to pay for that with benefit cuts,” said Andrew Stettner, an analyst at the National Employment Law Project, a workers’ rights group. “That’s the worst thing states can do — it takes money straight out of the economy.”

Among those who say timely benefits are essential is Mr. Kottwitz, the Arizona cabinet maker, who lost his job just before Christmas. He filed a claim and promptly received a debit card, with no money on it. It took him weeks to reach a program clerk, who told him to keep waiting.

“They said, ‘We’re behind — be patient,’ ” he said.

With little savings, no family nearby, and a ninth-grade education, Mr. Kottwitz, 42, had limited options. He got $100 a month in food stamps, collected cans and applied for jobs. When his landlord put him out, he moved to a shelter so overcrowded he spent his first few nights on the ground.

“I felt like I was the scum of the earth,” Mr. Kottwitz said.

In March, the shelter referred him to Ellen Katz, a lawyer at the William E. Morris Institute for Justice, an advocacy group, who secured his benefits. By the time the money arrived, Mr. Kottwitz had lost nearly 40 pounds. His first stop was an all-you-can-eat buffet.

Now back in an apartment, he said he was sharing his story in the hope that someone might read it and offer him a job.

“You think that someone would have seen this coming and been more prepared,” he said.

Jobless Checks for Millions Delayed as States Struggle, NYT, 24.7.2009, http://www.nytimes.com/2009/07/24/us/24unemploy.html

Editorial

Where the Jobs Are

July 24, 2009
The New York Times

An estimated 2.8 million employees will get a raise on Friday, as the federal minimum wage rises from $6.55 an hour to $7.25. Another 1.6 million whose hourly pay hovers around $7.25 are also expected to get a boost as employers adjust their pay scales to the new minimum. The raise is badly needed. It is also wholly inadequate.

With the latest increase, the minimum wage is still no higher now, after inflation, than it was in the early 1980s, and it is 17 percent lower than its peak in 1968. That means that no matter how hard they work, many low-wage workers keep falling behind. The latest increase will slow the decline in living standards, but it doesn’t reverse the overall downward pull.

Even that understates the broader dimensions of the problem.

The minimum wage also sets a floor by which other wages are set. Keeping it low keeps wages lower than they would be otherwise, especially for jobs that are just above the minimum-wage level. That’s a big problem for American workers because low-wage fields are the ones that are adding the most jobs.

According to the Labor Department, 5 of the 10 occupations expected to add the most jobs through 2016 are “very low paying,” up to a maximum of about $22,000 a year. They include retail sales jobs and home health aides. Another 3 of the 10 are “low paying,” from roughly $22,000 to $31,000, including customer-service representatives, general office clerks and nurses’ aides.

During the presidential campaign, Barack Obama proposed lifting the minimum wage to $9.50 an hour by 2011 and, from there, adjusting it annually for inflation. He should press that goal. At $9.50 an hour, the minimum wage would be restored to its historical highs — about 50 percent of the average wage. And it would restore the minimum wage to its broader function — helping boost pay across the economy.

President Obama talks a lot about a bright future with high-paying green technology jobs. It is imperative to plan and work for that future. But a concerted effort must also be made to improve the opportunities for workers in the types of low-wage jobs that are going to be most plentiful for years to come.

That means working with unions, professional associations, community colleges and employers to build so-called career ladders so workers can attain the skills they need to advance, say, from a very-low-paid home care aide, to a low-paid nurse’s aide, to a higher-paid licensed vocational nurse. Partnerships between unions and employers in hospitals, casinos and factories have pioneered such skill-building efforts, combining on-the-job training with classroom instruction.

The Labor Department must also ensure that low-paid workers are not exploited by vigorously enforcing workplace safety rules and fair pay practices.

Low-paid jobs are a fact of working life in America. Unlike so many of the nation’s higher-paying jobs, they are not going away. One of the big challenges of our time is to ensure that for some workers, they are a stepping stone to better jobs and that for all workers, they are safe and fairly compensated.

Where the Jobs Are, NYT, 24.7.2009, http://www.nytimes.com/2009/07/24/opinion/24fri1.html

Stores Go Dark

Where Buyers Once Roamed

July 21, 2009
The New York Times
By CHRISTINE HAUGHNEY

Among the marks of Manhattan’s prosperity in recent years were the thousands of restaurants and shops that opened to meet an ever-growing demand. Confident in the appetite for spending — on expensive shampoo at 24-hour drugstores, cheese plates at sleek wine bars and clothes at minimalist boutiques — store owners signed high-rent leases with little haggling.

But as New Yorkers have drastically cut back, the shops that line the streets, from chain outlets to family-run shops, have started to disappear.

The storefront vacancy rate in Manhattan is now at its highest point since the early 1990s — an estimated 6.5 percent — and is expected to exceed 10 percent by the middle of next year, according to data gathered by Marcus & Millichap Research Services, a national real estate investment brokerage based in Encino, Calif.

And those numbers do not capture the full story. Some of the more desirable shopping districts are littered with empty storefronts. For example, Fifth Avenue between 42nd Street and 49th Street, the stretch just south of Saks Fifth Avenue, has a vacancy rate of 15.3 percent, according to the brokerage Cushman & Wakefield.

In SoHo, from West Houston Street to Grand Street and Broadway to West Broadway, among the high-end boutiques, art galleries and restaurants, 1 in 10 retail spaces are now empty or about to be.

“I’ve never seen such an across-the-board problem,” said Lorraine Nadel, a lawyer who has represented tenants and landlords for 18 years. “Store owners can’t pay their rent, and they can’t keep their businesses going.”

It has long been difficult to run a small business in Manhattan, but a number of struggling store owners cite high rents and their landlords’ unwillingness to negotiate as the leading obstacles to their survival.

“It’s a crisis,” said Stephen Null, director of the Coalition for Fair Business Rents, which has been promoting legislation to protect small businesses in lease negotiations since 1984. “Lease renewals are the single biggest killer of small businesses in New York City.”

Manhattan, with its high density, high incomes and near-constant foot traffic, has maintained a strong storefront culture while other urban areas have seen their downtowns empty out and lose customers to suburban malls.

Stores and restaurants in New York are open longer hours, increasing the potential for revenue, and residents tend to shop near where they live, if just by necessity.

But because stores are such a part of their neighborhoods, the closings can have more of an emotional impact on residents.

“New York is different than the rest of America because it is the last bastion of storefronts,” said Kenneth T. Jackson, a historian at Columbia University. “You don’t live in a city of eight and a half million people. You live in a city of neighborhoods.”

“We feel a loss when the store is gone,” he added.

In one block alone, on the west side of Lexington Avenue between 74th and 75th Streets, three stores have closed in the past few months: a women’s clothing shop called Cantaloup, a luggage shop and a design store — places that the locals say had thrived for years. Those closings followed that of a sandwich shop across the street.

“The fabric of the neighborhood is up for grabs right now,” said Elaine Abelson, a professor of history at the New School who has lived in the neighborhood for 35 years.

The outlook is even worse in other boroughs. Hessam Nadji, managing director of research services at Marcus & Millichap, estimates that vacancy rates in Brooklyn and Queens, currently at 7 to 10 percent, will rise to 12 to 15 percent by year’s end. He said some neighborhoods have been ravaged by vacancy rates of 25 to 40 percent.

The problem is so bad that the city has become involved. It has offered grants for worker training, and it held a session last Wednesday on how to negotiate leases. Scott M. Stringer, the Manhattan borough president, held a conference called “Rescue and Recovery for Small Businesses” on July 13 that drew 320 people, among them owners of an organic grocery store, a wine bar, and a coffeehouse and bookstore who swapped advice on how to keep their businesses afloat.

High rents in the recession are the “last straw for small business in New York City,” Mr. Stringer said, “and I hear it everywhere I go.”

Without these storefronts, he said, the city loses “our special sauce that gives us our panache.”

The City Council is weighing in, too, considering a Small Business Survival Act that would require businesses to have the option of 10-year leases, renewals and the right to mediation if they cannot reach an agreement.

The legislation does not have the support of the Bloomberg administration, which argues that tracking lease negotiations would be too costly because of expenses like hiring staff, and that the need for such a law has “greatly dissipated” because rents have declined.

But as jobs disappear and neighborhoods suffer, the tide of opinion is growing that the government may need to step in. While data on the challenges of small business owners is limited, a survey of 937 Hispanic small business owners conducted by the U.S.A. Latin Chamber of Commerce between November 2008 and January 2009 found that most of them said they would not stay in the city because their rents had become so high.

The closing of stores has started to chip away at the city’s tax collections. Sales tax revenues have declined by 3 percent through May, to $4.15 billion from $4.3 billion the year before, according to the city’s Office of Management and Budget.

Some neighborhoods seem better positioned to hold on to their storefronts. Times Square has had relatively fewer closings because more people have been staying in town for vacations and attending Broadway shows, said Tim Tompkins, president of the Times Square Alliance. Doug Griebel, president of the Columbus Avenue Business Improvement District and an owner of the Rosa Mexicano restaurants, said there were only two vacant storefronts on Columbus between 67th and 82nd Streets.

Gary Schwartzman, broker with Grubb & Ellis, a commercial real estate firm, said many landlords were trying to find ways to keep retail businesses open.

“The risk of losing a good tenant is something that landlords don’t want,” Mr. Schwartzman said. “Right now, it’s all about tenant retention.”

Ms. Nadel, the lawyer, says that if a landlord tells her that he or she will not negotiate with tenants, she points to a stack of eviction files and says the chances of finding a new tenant are slim.

“You can’t maintain the rents,” she says she tells them. “People have run through their savings. They’ve run through everything.”

Stores Go Dark Where Buyers Once Roamed, NYT, 21.7.2009, http://www.nytimes.com/2009/07/21/nyregion/21vacancies.html

Obama’s Strategy to Reverse

Manufacturing’s Fall

July 21, 2009
The New York Times
By LOUIS UCHITELLE

If the Obama administration has a strategy for reviving manufacturing, Douglas Bartlett would like to know what it is.

Buffeted by foreign competition, Mr. Bartlett recently closed his printed circuit board factory, founded 57 years ago by his father, and laid off the remaining 87 workers. Last week, he auctioned off the machinery, and soon he will raze the factory itself in Cary, Ill.

“The property taxes are no longer affordable,” Mr. Bartlett said glumly, “so I am going to tear down the building and sit on the land, and hopefully sell it after the recession when land prices hopefully rise.”

Though manufacturing has long been in decline, the loss of factory jobs has been especially brutal of late, with nearly two million disappearing since the recession began in December 2007. Even a few chief executives, heading companies that have shifted plenty of production abroad, are beginning to express alarm.

“We must make a serious commitment to manufacturing and exports. This is a national imperative,” Jeffrey R. Immelt, chairman and chief executive of General Electric, said in a speech last month, while acknowledging that G.E. was enriched by its overseas operations too.

President Obama, agreeing in effect, has declared, “The fight for American manufacturing is the fight for America’s future.”

The United States ranks behind every industrial nation except France in the percentage of overall economic activity devoted to manufacturing — 13.9 percent, the World Bank reports, down 4 percentage points in a decade. The 19-month-old recession has contributed noticeably to this decline. Industrial production has fallen 17.3 percent, the sharpest drop during a recession since the 1930s.

So far, however, Mr. Obama’s administration has not come up with a formal plan to address the rapid decline. Instead, it has pursued ad hoc initiatives — bailing out General Motors and Chrysler, for example, and pushing green energy by supporting the manufacture of items like wind turbines and solar panels.

“We want to make sure that we grow a manufacturing base for renewable energy,” said Matthew Rogers, a senior adviser in the Energy Department, explaining that this is being accomplished in part by “accelerating loan guarantees from zero” in the Bush years.

Xunming Deng, a physicist and the chairman of the Xunlight Corporation, sees himself as a beneficiary of what he describes as the Obama administration’s more flexible loan guarantees. His factory in Toledo, Ohio, with 100 employees, is in the early stages of making solar panels, and Dr. Deng is already planning to quadruple the plant’s size. He has applied to the Energy Department for a $120 million loan guarantee. If he gets it, he will not have to pay the hefty fees charged for loan guarantees before Mr. Obama took office.

“Getting rid of that fee makes the loan guarantee very attractive and very helpful,” Dr. Deng said. “We can’t grow as fast without it.”

Beyond energy, the administration’s approach gradually outlines the elements of a manufacturing policy — what Lawrence H. Summers, director of the National Economic Council, described as “a number of things to support manufacturing.”

The auto bailout, for all its improvisations, served notice that the administration would probably rescue any giant manufacturer it deemed too big (or too iconic) to fail, and would help the suppliers of failing giants transition to other industries.

The Buy America clause in the stimulus package pointedly favors the purchase of American-made goods for infrastructure projects. The Commerce Department is adding $100 million, more than double the current outlay, to a program that helps American manufacturers operate more effectively. And trade agreements negotiated by the Bush administration — agreements that would make the United States more open to imported manufactured goods — have been allowed to languish in Congress.

“The administration’s policy is evolving in the right direction,” said Representative Sander M. Levin, Democrat of Michigan, who is particularly concerned about auto imports. “I think they have essentially shed the political chains that prevented government from having a role in manufacturing. They are working their way toward what makes sense.”

Not everyone agrees.

“Bush and Obama,” Mr. Bartlett said scornfully, “one is as bad as the other in terms of manufacturing policy.”

He acknowledged that the recession was the immediate reason for the demise of his family’s business. But what really did it in, he said in an interview, was the competition from less expensive Chinese circuit boards — less expensive, he argued, because the Chinese undervalue their currency and this administration, like the ones before it, lets them get away with it.

“Our orders went from $8 million at an annual rate to $4 million, which was not enough to make money,” he said.

Mr. Bartlett, who is co-chairman of an organization called the Fair Currency Coalition, said that Chinese competitors charged only $1 for each printed circuit board sold in this country, while he charged $1.40. Like many economists and government officials, he says he believes the Chinese currency is artificially undervalued. As a countermeasure, he said the Obama administration should impose a 40 percent tariff on imported Chinese goods.

“I can compete against Chinese entrepreneurs, and Chinese labor cost is not that big a factor,” he said, “but I cannot compete against the Chinese government’s manufacturing policies.”

Manufacturing has long been viewed as an essential pillar of a powerful economy. It generates millions of well-paid jobs for those with only a high school education, a huge segment of the population. No other sector contributes more to the nation’s overall productivity, economists say. And as manufacturing weakens, the country becomes ever more dependent on imports of merchandise, computers, machinery and the like — running up a trade deficit that in time could undermine the dollar and the nation’s capacity to sustain so many imports.

One tactic for strengthening the manufacturing sector, in the administration’s view, would be a shift in tax policy. The research and development tax credit, which is now subject to renewal by Congress, would be made permanent, encouraging much more R.& D. among manufacturers, a senior Commerce Department official argued. And foreign taxes paid on profits earned overseas would not be deductible in this country until the profits were repatriated, a restriction that might discourage locating factories abroad.

The goal is to arrest manufacturing’s dizzying decline. It “was the pillar on which we built the middle class,” said Thea Lee, policy director for the A.F.L.-C.I.O., “and it is hard to see how you rebuild the middle class without reviving manufacturing.”

Obama’s Strategy to Reverse Manufacturing’s Fall, NYT, 21.7.2009, http://www.nytimes.com/2009/07/21/business/economy/21manufacture.html

Food Stamps,

Now Paperless,

Are Getting Easier to Use

at Farmers’ Markets

July 20, 2009
The New York Times
By KATIE ZEZIMA

LYNN, Mass. — Natasha Smilansky comes to the farmers’ market here each Thursday because she enjoys ripe tomatoes and cucumbers. Now there is the added benefit of using food stamps for her purchases.

“It helps me a lot,” said Ms. Smilansky, 53, who is on disability. “I like the freshness of the vegetables here. I spend all year waiting for the market.”

The use of food stamps at farmers’ markets has been authorized for some time. But the program has been limited because the federal government in 2004 replaced the traditional paper food stamp coupons with debit cards that were processed through electronic benefit transfer terminals. The system is expensive, costing about $1,100 for each terminal, plus monthly fees; furthermore, the majority of farmers’ markets operate outdoors, with no means to accept the debit card.

“There’s a large expense associated with putting a terminal in each farmer’s hand,” said Jeff Cole, executive director of the Massachusetts Association of Farmers’ Markets.

Over the past five years, though, states and the federal government, with help from nonprofit organizations, have made hundreds of thousands of terminals available at farmers’ markets. Two years ago, Montana started a program to introduce terminals at 42 farmers’ markets; in Iowa, the state gives wireless machines to farmers and pays all monthly fees associated with them. New Jersey started giving the machines to farmers this month.

“It opens up the market to a whole new clientele, and it allows the recipients better access to better foods and fresh foods,” said Jane Aiudi, director of the market and production development division of the Maine Agriculture Department.

As of the end of the 2008 fiscal year, 753 farmers’ markets nationwide had accepted food stamp benefits, a 34 percent increase over the previous year, according to the federal Agriculture Department. Sales to customers using food stamps at the markets totaled $2.7 million in the 2008 fiscal year, the most recent period for which records are available.

Those who advocate expanding the program say that doing so is crucial to encouraging the purchase of healthy food.

In Lynn, north of Boston, about 9 percent of the 89,000 residents are on food stamps. The market tries to cater to large ethnic populations by selling the corn husks that the city’s Latino residents buy to make tamales and the fresh honey that Russian residents use in their tea.

Jan Walters, who administers an Iowa program that makes machines available to the markets, said about 15 percent of all farmers’ market transactions in the state last year were run through electronic machines, a figure that included credit and debit card transactions.

But after years of food stamps being inaccessible at farmers’ markets, getting customers back is proving difficult.

“It’s one of those things that’s not nearly as utilized as it should be,” said Melissa Dimond, who manages a market here for the Food Project, a nonprofit organization that has provided electronic benefit transfer terminals to farmers’ markets throughout Massachusetts. “There is still a long way to go.”

Food Stamps, Now Paperless, Are Getting Easier to Use at Farmers’ Markets, NYT, 20.7.2009, http://www.nytimes.com/2009/07/20/us/20market.html

Two Giants Emerge

From Wall Street Ruins

July 17, 2009
The New York Times
By GRAHAM BOWLEY

A new order is emerging on Wall Street after the worst crisis since the Great Depression — one in which just a couple of victors are starting to tower over the handful of financial titans that used to dominate the industry.

On Thursday, JPMorgan Chase became the latest big bank to announce stellar second-quarter earnings. Its $2.7 billion profit, after record gains for Goldman Sachs, underscores how the government’s effort to halt a collapse has also set the stage for a narrowing concentration of financial power.

“One theme here is that Goldman Sachs and JPMorgan really have emerged as the winners, as the last of the survivors,” said Robert Reich, a professor at the University of California, Berkeley, who was secretary of labor in the Clinton administration.

Both banks now stand astride post-bailout Wall Street, having benefited from billions of dollars in taxpayer support and cheap government financing to climb over banks that continue to struggle. They are capitalizing on the turmoil in financial markets and their rivals’ weakness to pull in billions in trading profits.

For the most part, the worst of the financial crisis seems to be over. Yet other large banks, including Citigroup and Bank of America, are still struggling to return to health. Both are expected to report a more profitable quarter on Friday, but a spate of management changes and looming losses from credit cards and commercial real estate have thwarted a stronger recovery.

And then there are the legions of regional and small banks that are falling in greater numbers across the country. While many have racked up large losses, they stand to bleed more red ink if the recession wears on. Fifty-three have failed this year, and the Federal Deposit Insurance Corporation is girding for scores to follow.

Uncertainties over the economy mean that Goldman and JPMorgan may be enjoying a fragile dominance, industry experts said. JPMorgan reported big declines in its consumer business on Thursday, and it has set aside more than $30 billion to cover future losses from surging credit card charge-offs and mortgage and home equity losses.

“Nobody is through this until unemployment turns around,” said Moshe Orenbuch, a Credit Suisse banking analyst.

And if regulation being considered in Washington is passed, banks would face new limits on the amount of their own capital they may trade. That could limit the profits that banks like Goldman and JPMorgan make from their trading businesses, and level the playing field, experts say.

Other former Wall Street stars like Morgan Stanley, which was hurt more by the crisis and has avoided taking big risks in the new era, may also rebound and begin to take on old rivals.

But for now, Goldman Sachs and JPMorgan are surging. “The stronger players are positioned to take advantage of the crisis and they will dominate clearly in the near term,” said James Reichbach, the head of Deloitte’s United States financial practice.

JPMorgan’s renewed strength, like Goldman’s, comes as it vaults ahead of longtime rivals, especially in investment banking, including bond and equity trading, and underwriting debt to help companies issue shares and bonds. Traders took advantage of big market swings and less competition to post big gains in fixed-income and equities.

Michael J. Cavanagh, the chief financial officer at JPMorgan, said its profit and fees from this business were “a record for us in a quarter and a record for anybody at any firm in any quarter.” The bank, he added, was “so very proud of those results.”

It has also profited from the demise of weaker banks to enlarge its market share in mortgages and retail banking. On Tuesday, as the CIT Group, a lender to many small businesses, negotiated with the government to avoid collapse, JPMorgan signaled that it was watching.

“It would be an opportunity for us in these states if CIT was unable to continue lending to borrowers,” Tom Kelly, a spokesman at Chase, was quoted by Dow Jones Newswires as saying.

And revenue from the retail bank Washington Mutual, which JPMorgan acquired last fall, is starting to help earnings. Morgan is also profiting from its government-assisted purchase of Bear Stearns last year. JPMorgan is now No. 1 globally in equity and debt capital markets, according to Dealogic.

Amid the surge, Jamie Dimon, JPMorgan’s chief executive, has cemented his status as one of America’s most powerful and outspoken bankers. He has vocally distanced himself from the government’s financial support, calling the $25 billion in taxpayer money the bank received in December a “scarlet letter” and pushing with Goldman Sachs, Morgan Stanley and others to repay the money swiftly. Those three banks repaid the money last month.

Yet JPMorgan’s transformation into one of the industry’s strongest players is underpinned by the shelter it received from the government: The bank used the money as a cushion until it was able to raise new capital. “There is no doubt all of us benefited from the government help — all of us,” said a senior executive at another Wall Street bank.

A spokesman for JPMorgan said the bank accepted aid at the request of the government but would not comment beyond that.

Few banks have undergone such a turnaround. Only a few years ago, JPMorgan was struggling after years of poor management and a failure to digest a series of big acquisitions. But under Mr. Dimon, it cut costs and strengthened its balance sheet.

The payoff began last year. With the industry teetering on the verge of collapse, JPMorgan snapped up Bear Stearns in March 2008 and Washington Mutual last fall in two government-assisted transactions. Clients say that its growing dominance has given it more leverage to charge for lending and other services.

After aggressively lobbying to repay its taxpayer money, Mr. Dimon has also been driving a hard bargain over the repurchase of warrants the government received from the bank last autumn in exchange for taxpayer support. JPMorgan is now planning to let the Treasury Department auction off the warrants to private investors after the two sides failed to agree on a price.

Mr. Dimon is also gearing up for a series of battles in Washington. One is over tighter regulations for derivatives, a business where the bank generates lucrative fees as one of the industry’s largest players.

Another is the creation of a new consumer protection agency, which could threaten the profitability of the bank’s mortgage and credit card businesses if it introduces tougher regulations.

JPMorgan’s stock has risen 20 percent since early March. It closed Thursday at $35.76.

Eric Dash and David Jolly contributed reporting.

Two Giants Emerge From Wall Street Ruins, NYT, 17.7.2009, http://www.nytimes.com/2009/07/17/business/global/17bank.html

Editorial

Waiting Game

July 15, 2009
The New York Times

Unemployment is rising. Foreclosures are surging. Lending is still constrained. So why exactly is the Obama administration waiting to act?

It is true that more time is needed to show results for policies that are currently in place, including stimulus spending, foreclosure relief and the bank rescue. But it is also clear that joblessness and defaults are worse now than was assumed when those policies were formed. So the need for more federal help is all but inevitable, as are political fights over renewed aid. President Obama may want to avoid those battles until health reform passes, but he still should lay the groundwork in three main areas:

STIMULUS SPENDING One of the arguments against another round of stimulus is that more deficit spending might spook bond investors, forcing up interest rates. The solution to the deficit, however, is not to forgo temporary stimulus in a time of need but to lock in long-term fiscal discipline. The best way for the administration and its Congressional allies to do that is to credibly pay for health care reform. That, more than anything, would show that the budget is in responsible hands.

On the other hand, if health care is “paid for” with gimmicks, the bond market will get understandably nervous — and the administration will lose the credibility it needs to argue for more stimulus spending.

FORECLOSURE RELIEF In a recent letter, Treasury Secretary Timothy Geithner and Shaun Donovan, the secretary of housing and urban development, summoned the top 25 mortgage servicers to Washington later this month, apparently for a dressing-down over the lack of progress on modifying bad loans. It’s still not clear, however, if Mr. Geithner and Mr. Donovan understand what’s really holding up the show.

Their letter said that preventing avoidable foreclosures is an objective “we all share.” In fact, lenders and mortgage investors have several reasons to prefer foreclosures over modifications. Among them, foreclosures allow a bank to postpone taking a loss until the process is complete, which can take a year or longer.

If the administration really wants to kick-start loan modifications, it should revive efforts to allow bankruptcy judges to modify bad loans. At the least, it should impose costs on laggard banks, like higher charges for debt guarantees or higher deposit-insurance premiums.

BANK RESCUE The Obama administration has largely shelved, for now, its plan to finance the purchase of banks’ toxic assets, ostensibly because of the banks’ recent success in raising capital. An alternative explanation is that the banks won’t sell. Recent accounting changes make it less painful for them to keep bad assets on their books. Why admit to losses if you don’t have to?

In any event, the adequacy of banks’ capital cushions hinges, in large part, on success in stimulating the economy and preventing foreclosures: If those efforts fall short, employment, household wealth and consumer spending will not rebound and bank losses will deepen — not only on home mortgages, but on credit cards, commercial real estate and other loans. The result would be a long period of tight lending and of subpar economic growth, if not outright contraction.

If wait-and-see is anything other than a near-term tactic, it’s bound to be a miscalculation. The need for expanded relief and recovery efforts is compelling. Rather than avoid those fights, the Obama team must win them.

Waiting Game, NYT, 15.7.2009, http://www.nytimes.com/2009/07/15/opinion/15wed1.html?hpw

Summer Brings

a Wave of Homeless Families

July 7, 2009
The New York Times
By JULIE BOSMAN

As the school year sailed to a close last month, Arielle Figueras crossed the stage in her cap and gown and proudly accepted her fifth-grade diploma.

The next day, she was homeless.

Arielle, a petite 11-year-old, and her parents, brother and sister packed their belongings and arrived at the intake center for homeless families in the South Bronx. Though they had been fighting with their landlord for months and their gas and electricity had long been shut off, they refused to leave their apartment while school was in session.

“She was graduating, so we had to wait,” Arielle’s mother, Marilyn Maldonado, said. “We just didn’t want to disrupt their routines. We couldn’t do that to them.”

Many New Yorkers view summer as a time for vacations, camp and lazy days at the beach. But city officials have been preparing for quite a different summer ritual: the swelling of the population of homeless families.

They call it the summer surge, and say that this year could be the worst yet.

Because the homeless population this spring was up more than 20 percent over last spring, possibly because of higher unemployment, officials are girding for an all-time high in the number of families in shelters at once, expecting close to 10,000. Already, the number has reached 9,420.

Other cities are noticing a similar trend. In Toledo, Ohio, one overcrowded shelter has been turning away dozens of people each night. In Charlotte, N.C., a shelter that is typically open only in winter has stayed open for the summer to meet demand, which is 20 percent higher than last summer. Across town, a Salvation Army shelter is so full, it has set up mats on the floors.

The reasons are varied but simple. Landlords who are reluctant to evict during winter are less hesitant when it is warmer. Parents like the Maldonados, who have endured poor housing conditions to spare their children agitation and humiliation at school, finally pack up and leave. And relatives who have taken in families in cramped apartments lose patience when children are suddenly underfoot all day long.

“When school’s open, families tend to stay where they are,” said Deronda Metz, the director of social services for the Salvation Army in Charlotte. “And when school’s out, they’re told it’s time to go.”

In New York, the number of homeless families applying for shelter in the summer has been 28 percent higher than the rest of the year the last three years. Their first stop is the intake center, a 24-hour, sprawling 66,000-square-foot brick building in the Bronx. They must walk through metal detectors, must submit to questioning from social workers and, after hours of waiting for their names to be called, are bused to a temporary hotel room or apartment.

Workers have begun to make room for the hundreds of extra families that are expected at the center this summer. On the second floor, all of the cubicles in one room were dismantled, replaced by rows of plastic chairs to make a waiting room for up to 114 people. Rows of boxy light gray metal lockers — each large enough to hold several suitcases — were installed. Employees at the intake center are being limited to one week of vacation during July and August.

Just a few hours after the public schools let out for summer, families began trickling into the center, their faces tight with stress. One woman walked briskly inside with her young son, who wore a bright blue backpack and held an armful of books. Another woman, who would not give her name, waited outside with her daughter, who had just finished second grade. “My sister said we couldn’t stay with her anymore,” she said, fanning herself for some relief from the humidity. “I said once she’s done with school, we’d get out.”

Arielle’s father, Douglas Maldonado, said that their landlord had stopped making repairs and had altered the building’s electric billing to make the Maldonados pay for other apartments’ power, up to $8,000 a month. But they held onto their apartment just long enough for Arielle’s graduation and for their son, Sabino Figueras, to graduate from eighth grade the week before.

The Bloomberg administration has run into trouble before with its handling of the summer influx of homeless families. In 2002, there was a public relations debacle when officials allowed hundreds of parents and children to wait in the intake office each day, more than three times the number that city fire codes allowed. Other families were placed in an empty men’s jail in the Bronx that was later discovered to have been contaminated with lead paint.

This summer, the administration will use a combination of existing homeless shelters that are not quite full and vacant apartment buildings that have been fixed up for homeless families, said Robert V. Hess, the commissioner of homeless services.

“We have a variety of options, so that we can be as nimble as possible,” Mr. Hess said. “We keep some reserve.”

One essential part of the city’s plan is to place families in hotels temporarily, some of which are used for both homeless people and paying customers.

Mr. Maldonado’s family spent its first few nights in a hotel on 145th Street in the Bronx. One of the mattresses in the room, Mr. Maldonado said, was filthy and stained with urine.

On June 28, Tarshima Dixon, a mother of four, went to the intake center with her 14-year-old son, Jason. Two more sons, Craig Dixon, 13, and Nahjee Johnson, 8, waited outside with their grandmother and cheerfully bounced a basketball on the sidewalk as Michael Jackson’s “Billie Jean” played from their minivan’s stereo.

The family was evicted in April, and Ms. Dixon’s mother did not have room for all of them. So Ms. Dixon, along with Craig, Nahjee and another son, Gregory, 16, moved into a shelter in Brooklyn soon after. Jason had been living with his father in Camden, N.J., but Ms. Dixon wanted him back with his brothers. They had to come to the intake center to let the city know there would be one more homeless person needing a bed.

“He just finished school this week,” said Ms. Dixon, who added that she was determined that the whole family would move into an apartment by August. “I wasn’t going to bring him here until he was done.”

Summer Brings a Wave of Homeless Families, 7.7.2009, http://www.nytimes.com/2009/07/07/nyregion/07summer.html?hp

MOUNTAIN OF DEBT:

Rising Debt May Be Next Crisis

July 3, 2009
Filed at 11:21 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- The Founding Fathers left one legacy not celebrated on Independence Day but which affects us all. It's the national debt.

The country first got into debt to help pay for the Revolutionary War. Growing ever since, the debt stands today at a staggering $11.5 trillion -- equivalent to over $37,000 for each and every American. And it's expanding by over $1 trillion a year.

The mountain of debt easily could become the next full-fledged economic crisis without firm action from Washington, economists of all stripes warn.

''Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,'' Federal Reserve Chairman Ben Bernanke recently told Congress.

Higher taxes, or reduced federal benefits and services -- or a combination of both -- may be the inevitable consequences.

The debt is complicating efforts by President Barack Obama and Congress to cope with the worst recession in decades as stimulus and bailout spending combine with lower tax revenues to widen the gap.

Interest payments on the debt alone cost $452 billion last year -- the largest federal spending category after Medicare-Medicaid, Social Security and defense. It's quickly crowding out all other government spending. And the Treasury is finding it harder to find new lenders.

The United States went into the red the first time in 1790 when it assumed $75 million in the war debts of the Continental Congress.

Alexander Hamilton, the first treasury secretary, said, ''A national debt, if not excessive, will be to us a national blessing.''

Some blessing.

Since then, the nation has only been free of debt once, in 1834-1835.

The national debt has expanded during times of war and usually contracted in times of peace, while staying on a generally upward trajectory. Over the past several decades, it has climbed sharply -- except for a respite from 1998 to 2000, when there were annual budget surpluses, reflecting in large part what turned out to be an overheated economy.

The debt soared with the wars in Iraq and Afghanistan and economic stimulus spending under President George W. Bush and now Obama.

The odometer-style ''debt clock'' near Times Square -- put in place in 1989 when the debt was a mere $2.7 trillion -- ran out of numbers and had to be shut down when the debt surged past $10 trillion in 2008.

The clock has since been refurbished so higher numbers fit. There are several debt clocks on Web sites maintained by public interest groups that let you watch hundreds, thousands, millions zip by in a matter of seconds.

The debt gap is ''something that keeps me awake at night,'' Obama says.

He pledged to cut the budget ''deficit'' roughly in half by the end of his first term. But ''deficit'' just means the difference between government receipts and spending in a single budget year.

This year's deficit is now estimated at about $1.85 trillion.

Deficits don't reflect holdover indebtedness from previous years. Some spending items -- such as emergency appropriations bills and receipts in the Social Security program -- aren't included, either, although they are part of the national debt.

The national debt is a broader, and more telling, way to look at the government's balance sheets than glancing at deficits.

According to the Treasury Department, which updates the number ''to the penny'' every few days, the national debt was $11,518,472,742,288 on Wednesday.

The overall debt is now slightly over 80 percent of the annual output of the entire U.S. economy, as measured by the gross domestic product.

By historical standards, it's not proportionately as high as during World War II, when it briefly rose to 120 percent of GDP. But it's still a huge liability.

Also, the United States is not the only nation struggling under a huge national debt. Among major countries, Japan, Italy, India, France, Germany and Canada have comparable debts as percentages of their GDPs.

Where does the government borrow all this money from?

The debt is largely financed by the sale of Treasury bonds and bills. Even today, amid global economic turmoil, those still are seen as one of the world's safest investments.

That's one of the rare upsides of U.S. government borrowing.

Treasury securities are suitable for individual investors and popular with other countries, especially China, Japan and the Persian Gulf oil exporters, the three top foreign holders of U.S. debt.

But as the U.S. spends trillions to stabilize the recession-wracked economy, helping to force down the value of the dollar, the securities become less attractive as investments. Some major foreign lenders are already paring back on their purchases of U.S. bonds and other securities.

And if major holders of U.S. debt were to flee, it would send shock waves through the global economy -- and sharply force up U.S. interest rates.

As time goes by, demographics suggest things will get worse before they get better, even after the recession ends, as more baby boomers retire and begin collecting Social Security and Medicare benefits.

While the president remains personally popular, polls show there is rising public concern over his handling of the economy and the government's mushrooming debt -- and what it might mean for future generations.

If things can't be turned around, including establishing a more efficient health care system, ''We are on an utterly unsustainable fiscal course,'' said the White House budget director, Peter Orszag.

Some budget-restraint activists claim even the debt understates the nation's true liabilities.

The Peter G. Peterson Foundation, established by a former commerce secretary and investment banker, argues that the $11.4 trillion debt figures does not take into account roughly $45 trillion in unlisted liabilities and unfunded retirement and health care commitments.

That would put the nation's full obligations at $56 trillion, or roughly $184,000 per American, according to this calculation.

------

On the Net:

Treasury Department ''to the penny'' national debt breakdown: http://tinyurl.com/yrxrsh

Peter G. Peterson Foundation independent assessment of the national debt: http://www.pgpf.org/

''Deficits do Matter'' debt clock: http://tinyurl.com/l6mvjb

MOUNTAIN OF DEBT: Rising Debt May Be Next Crisis, NYT, 3.7.2009, http://www.nytimes.com/aponline/2009/07/03/us/politics/AP-US-Mountain-of-Debt.html

Joblessness Hits 9.5%,

Deflating Recovery Hopes

July 3, 2009
The New York Times
By PETER S. GOODMAN

The American economy lost 467,000 more jobs in June, and the unemployment rate edged up to 9.5 percent in a sobering indication that the longest recession since the 1930s had yet to release its hold.

“The numbers are indicative of a continued, very severe recession,” said Stuart G. Hoffman, chief economist at PNC Financial Services in Pittsburgh. “There’s nothing in here to show that the economy and the market are pulling out of the grip of recession.”

The Labor Department’s monthly snapshot of employment, released Thursday, challenged visions of a recovery already taking root. The numbers intensify pressure on the Obama administration to show returns on programs aimed at improving national fortunes — not least its $787 billion stimulus plan.

Some economists are now calling for another dose of government spending to stimulate the economy, though the White House maintains that enough money is in the pipeline already.

“Not all the recovery money has been put to work yet,” said the labor secretary, Hilda L. Solis. “We’re making progress.”

But Ms. Solis acknowledged that joblessness was already much worse than the administration projected in January when it created its stimulus spending bill, suggesting then that joblessness would peak at about 8 percent.

Asked why the unemployment rate is already much higher, Ms. Solis noted that much of the stimulus money was moving slowly, with construction projects in particular requiring time-consuming government permits.

“Over all, it’s been a challenge,” Ms. Solis said. “We still have a ways to go.”

That explanation echoed criticism that some initially leveled at the spending package when it was debated in Congress: many of the projects would take too long to get going, creating too few jobs in the near term. Still, Ms. Solis portrayed the program as a success.

“We would have done much worse had we not put the recovery plan in place,” she said.

In recent weeks, positive signs have emerged that automakers are beginning to see stronger sales, factories are gaining more orders, and housing prices have stopped falling in some markets. But the jobs report injected the sense that paychecks are disappearing so swiftly that consumer spending is likely to be tight, limiting economic activity. The gloomy news caused the Standard & Poor’s 500-stock index to tumble more than 2 percent.

Indeed, the report reinforced a consensus that high levels of unemployment are likely to afflict American life for many months and perhaps much longer. That will dump more jobless people into a weak job market, making it harder for those already unemployed to find work and pressing down wages and hours.

After a May report that showed the pace of deterioration was moderating, some economists expressed hopes that an economic recovery might finally be emerging. But the June report tempered such thoughts.

For another month, manufacturing jobs disappeared, dipping by 136,000, while construction jobs shrank by 79,000 and retail by 21,000. Health care remained a rare bright spot, adding 21,000.

The losses for June lifted net jobs shed since the beginning of the recession to 6.5 million — equal to the net job gain over the previous nine years.

“This is the only recession since the Great Depression to wipe out all jobs growth from the previous business cycle,” Heidi Shierholz, an economist at the labor-oriented Economic Policy Institute in Washington, said in a research note. She called this fact “a devastating benchmark for the workers of this country and a testament to both the enormity of the current crisis and to the extreme weakness of jobs growth from 2000 to 2007.”

The June figures did show continued slowing in the pace of job losses. From November to March — after the collapse of some prominent financial institutions — the labor market lost an average of 670,000 jobs each month. From April to June, the decline slowed to 436,000 a month.

The Obama administration seized on those numbers to argue that its stimulus spending plan was gradually working.

“We’re seeing a kind of leveling off here,” said Ms. Solis, the labor secretary.

Some economists contend that a recovery is indeed in its early stages, cautioning that the job market tends to lag behind progress in other areas.

Michael T. Darda, chief economist at the research and trading firm MKM Partners, pointed to a recent rally in the corporate bond market as a sign that normalcy was returning to the financial system. He asserted that this presaged the resumption of economic growth in the second half of this year and vigorous activity next year.

“The labor market is going to lag the recovery process to a certain degree,” he said.

But other experts argued that employment was a more crucial source of spending power than in downturns past, given how many alternate sources of cash had been lost.

Consumer spending amounts to 70 percent of overall American economic activity. In recent times, Americans found myriad ways to fuel spending even as incomes for many households stagnated, borrowing against the once-rising value of homes and tapping credit cards.

Now, the paycheck has returned as the primary source of spending. Yet pay is eroding even for those who have jobs.

The average workweek for rank-and-file employees in the private sector — roughly 80 percent of the work force — slipped by a fraction to 33 hours, the lowest level since the government began tracking such data in 1964.

The so-called underemployment rate — which captures not only the jobless but also those working part time because their hours have been cut or they cannot find a full-time job — increased to 16.5 percent.

Some economists contend that while unemployment remains high, millions of Americans will continue to watch their spending.

“It looks really bad,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “There are no green shoots here. People can’t spend when they don’t have the money.”

For another month, the average length of official unemployment increased, this time to 24.5 weeks — the highest level since the government began tracking such data in 1948. The unemployment rate, 9.5 percent, is the highest since 1983.

Layoffs have slowed in recent months, but hiring has yet to pick up, meaning that jobless people face a more frustrating search.

In the Brownsville section of Brooklyn, Jeffrey Jones, 40, has found no work since losing his job as a cook at a senior center in October. He worries about paying rent and caring for his four children.

“I know I’m not supposed to be letting it stress me out,” he said. “The way I’m going now, I won’t be able to make it too much longer. I can’t go this long without doing something for my family.”

Jack Healy contributed reporting.

Joblessness Hits 9.5%, Deflating Recovery Hopes, NYT, 3.7.2009, http://www.nytimes.com/2009/07/03/business/economy/03jobs.html?hp

With Budgets Tight,

Less Flash for the Fourth

July 2, 2009
The New York Times
By WILLIAM YARDLEY

Displays of patriotism and military pride will be robust at the Freedom Over Texas festival on Saturday in Houston. But when the sun goes down, the dazzling centerpiece of the Independence Day event, what organizers call “the largest land-based fireworks show in the nation,” will be a bit less large in this budget-slashed summer of recession.

Of course, even if the budget for the Houston event, about $850,000, is half what it was last year, the show’s organizers point out that at least they are still having fireworks.

Several dozen smaller cities and groups, from New England to California to Florida and the Northwest, have eliminated money for fireworks, in some cases to save city jobs. Skies will be darker over some towns in Massachusetts. Fewer fireworks barges will float on the Columbia River separating Washington and Oregon.

In some cases, donors have rushed in to rescue fireworks displays. In others, neighborhood associations have taken it upon themselves to stage community displays. Yet the budget cuts have also brought something of a shift in message in some places in what can seem like an act of pyrotechnic one-upmanship.

“It does not have to be bigger and better every year,” said Susan Christian, who organizes the Houston event through the office of Mayor Bill White. “What it has to be is creative and fun and entertaining. That’s what it has to be.”

Ms. Christian noted that the Houston event would emphasize recycling for the first time for the 100,000 people expected to attend and that, while there might be fewer fiery bursts in the sky, the fireworks show was not expected to be significantly shorter, around 20 minutes. Some of the bigger booms may linger longer, she said.

“I don’t think the layman will notice anything different,” Ms. Christian said.

The same cannot be said for Vancouver, Wash., where for nearly half a century fireworks have been launched from a barge in the Columbia River across from historic Fort Vancouver, drawing 65,000 people last year and operating on a budget of about $500,000. This year there will be no show at all, while organizers look for ways to bring the event back in 2010 on a smaller scale.

Plans for the 2009 event collapsed last fall. Revenue from local fireworks stands had long paid for the event, but, in the declining economy of last summer, sales fell sharply.

“It kind of took on a life of its own: ‘That was good, but wait till you see what we’ve got next,’ ” said Kim Hash, head of the nonprofit group that organizes the event in conjunction with the City of Vancouver, the National Park Service and other organizations. “Now we’re taking a look and saying, ‘O.K., what’s reasonable? What’s good for families?’ We definitely are going to be all about families. Sustainability is the key word here.”

Ms. Hash said that past events had included big-name musical acts like the Oak Ridge Boys but that, in the future, organizers intended to put more emphasis on local culture and history, “things that take us back to our roots,” as well as three-legged sack races. And while there will be fireworks in 2010, they will be launched from land, which Ms. Hash said was significantly cheaper.

What those 65,000 people do on Independence Day is another matter. Washougal, a few miles east of Vancouver, is bringing in more food vendors and bounce houses for kids. Its fireworks show, preserved in the city budget, is expected to last about 22 minutes, up from 20 in 2008, though for the same price.

“We’ve kind of planned on doubling our numbers,” said Jinger Jacobson, who heads a group that promotes downtown Washougal.

In Seattle, one of the city’s most prominent fireworks shows, held over Elliott Bay, was canceled after its sponsor, Ivar’s Seafood Restaurants, said there was too much competition from other nearby displays. The chain said it would expand "into other areas that really need help," including working with a local charity that feeds the hungry.

The city of Lowell, Mass., said this spring that it was canceling its fireworks display on the Merrimack River. The city was facing an $18 million budget gap and going through layoffs of 48 employees. City officials explained at the time that the cost of the show, about $45,000 including the fireworks and overtime for police, fire and public works, equated to about one full-time job.

“If we hadn’t cut off the fireworks, we would have had to lay off 49,” said Bernard Lynch, Lowell’s city manager.

Now, however, after news of the cancellation received widespread attention, the show is back on, although the city is not paying for it. A local bank, joined by a local nonprofit, raised the money, which is being donated to the city.

“We may even have a little left over,” Mr. Lynch said.

Jim Souza, president of Pyro Spectaculars in Rialto, Calif., which is putting on about 400 shows this Independence Day holiday, including the one in Houston (and the one sponsored by Macy’s on the Hudson River in New York, which is expanding this year, not shrinking), said the company had received cancellations from several smaller cities in California, including Montebello, Hesperia, Downey, Banning, Bellflower and others.

The losses, Mr. Souza said, have been countered somewhat by increases in shows at events like Major League Baseball games. (He noted, however, that Hugh Hefner’s Playboy Mansion in Beverly Hills had canceled its annual show.)

Mr. Souza, whose family has made fireworks displays for five generations, said that regardless of the recession and cutbacks in places like Houston, “everybody still wants something bigger, better, louder.”

“The beautiful thing is we are artists and we’re able to do that,” Mr. Souza said. “It’s the same ingredients, but just a little less of them, and a little less money. No one will notice the difference.”

With Budgets Tight, Less Flash for the Fourth, NYT, 2.7.2009, http://www.nytimes.com/2009/07/02/us/02fourth.html?hp

Retired From G.M. at 54.

Pensionless at 74?

July 1, 2009
The New York Times
By MARY WILLIAMS WALSH

General Motors is using its huge pension fund in a way it never intended.

It had planned — and put money aside — for a steady march of retirees over time. But instead, tens of thousands of blue-collar workers, most in their 40s and 50s, are all becoming eligible for retirement benefits now, as the company rapidly downsizes.

And even as its pension fund faces this giant bulge in payouts, G.M. is not putting any new money in — the company is not required to make any contributions to the fund until 2013.

The longer this goes on, the weaker the fund will be and the more uncertain its long-term viability.

For now, the pension payments to its younger “retirees,” part of a deal G.M. negotiated with the United Automobile Workers union in 2007, allow the company to drastically shrink its work force without having to come up with the cash to pay severance. The payments also relieve some of the burden on social service programs in the countless factory towns and counties around the country with large numbers of G.M.’s newly jobless.

“G.M. basically raided the pension plan, by having a lot of these severance benefits paid through it,” said Douglas J. Elliott, a fellow with the Brookings Institution who specializes in financial institutions and policy.

What G.M. has done is perfectly legal. Nor is this the first time an employer has used a pension fund to pay for pruning its ranks. Well-subsidized early retirements are a time-honored practice in the public sector, where teachers often retire after 30 years and police officers can sometimes claim rich pensions after working as few as 20 years. Many corporations once offered sweetened pensions to people in their 50s and early 60s as well, but they have generally stopped the practice because it locked them into making payments indefinitely.

G.M. never stopped. To the contrary. The question now is whether the plan will run short of money and what effect that might have on the company, its workers and retirees, and the federal government, which insures pensions and is now G.M.’s majority owner.

In the short term, G.M.’s newly minted retirees, those in their 40s and 50s, have the most to lose if the plan is rapidly depleted and fails. But over time, the risk will shift to the government and the dwindling number of active U.A.W. workers still building cars at G.M. For those workers, a secure pension is already becoming an increasingly distant dream.

“They could find that they don’t get their full pensions when they retire, because the plan has had to be terminated because of the payments to current retirees,” Mr. Elliott said. “There are definitely these intergenerational transfer issues with underfunded pensions.”

G.M. declined to discuss the situation, although it has said it intends to keep the plan going when it emerges from bankruptcy.

For decades, G.M.’s blue-collar workers have earned pensions with two components. The first is the “basic benefit,” currently about $1,590 a month, or $19,000 a year, for an auto worker with 30 years’ service. The U.A.W. won this “30-and-out pension” after a strike at G.M. in 1970, and still considers it something close to an inalienable right. In a 30-and-out plan, someone can go to work at 18, work nonstop for 30 years and retire at 48.

The second part is a supplement, worth what each worker’s Social Security benefit will be on the earliest date he or she can start drawing the benefits, currently age 62. (Even then, the workers are joining Social Security three years early, so they qualify for just 80 percent of the full benefits they would get at 65.)

Even in the days when G.M. was healthy, years ago, most of its 30-and-out retirees were too young to qualify for Social Security. The supplements were supposed to make up the difference until the retiree became eligible for Social Security.

The total dollar amounts are not eye-popping. Unlike many pension plans in the public sector, G.M.’s U.A.W. plan cannot be “spiked” by working insane amounts of overtime just before retirement. Nor is it indexed for inflation.

“What we’re getting isn’t enough to live on,” said Dwayne Humphries, a 54-year-old G.M. retiree in Arlington, Tex., who completed his 30 years last year, retired, and is now getting the standard $3,150 a month, or $37,500 a year. Roughly half of the total, $19,000 a year, is the basic benefit. The rest duplicates Social Security.

“It’s tight,” said Mr. Humphries, who was earning $50,000 to $60,000 a year before his retirement. “It takes a different way of living than what you were used to.”

To make ends meet, he helps out with his son’s small business, cleaning swimming pools.

When a G.M. retiree turns 62, he joins Social Security, and the pension fund stops paying him the supplement. So eight years from now, Mr. Humphries will still be getting $37,500 a year, but only about $19,000 will come from the G.M. pension fund. The rest will come from Social Security.

That will greatly lighten the load on the pension fund. But thousands of G.M. workers have taken early retirement in the last few years, and each of those workers’ total benefits come from the fund. So while the benefits may seem inadequate to individual workers like Mr. Humphries, they add up to hundreds of millions of dollars being pulled out of the fund every year.

When a reorganization began to loom at G.M., in 2007, the company faced the choice of offering people cash buyouts or sweetening their pensions, letting them collect their 30-and-out benefits even if they had not yet worked the requisite 30 years.

Mr. Elliott called the decision “a no-brainer,” thanks to the federal rules for funding pensions.

“When you have an increase in benefits in a pension plan, you’re given quite a number of years to fund the increase,” he said. “So by doing it through the pension plan, they could defer paying any cash for this for years.”

How long the fund can sustain this is a mystery. G.M.’s financial reports combine the U.A.W. pension plan with the company’s other big plan, for salaried employees. (It was frozen in 2006 and cannot undergo a sudden increase in benefits.) The U.A.W. plan’s own annual reports, on file with the Labor Department, provide no fresh financial information because they stop at 2006.

At that point, the fund had roughly $67 billion in assets — more than enough to cover the $59 billion in benefits it had promised to pay. The plan was then paying out a little more than $5 billion a year to retirees.

Now the assets are almost sure to be smaller, thanks to the market losses of 2008 and the growing payouts. “My guess is, they can probably go for 20 years before they run out of cash,” Mr. Elliott said. That may sound like a long time, but with so many retirees and spouses still in their 50s, the plan needs resources for at least 50 years.

“If you’re supposed to be paying people for 50 years, it’s actually not that comforting that they have enough cash to pay people for 20,” Mr. Elliott said.

The Pension Benefit Guaranty Corporation declined to comment, but officials there have long worried privately that the collapse of one big automaker pension plan would be the end of the whole federal system of insuring pensions.

Normally, federal law would require G.M. to put fresh money into the pension fund. But G.M. has not had to make any contributions since 2003, when it issued bonds and put the proceeds — $15.2 billion — into the fund. That was more than the required amount, and the pension law allows companies that make bigger-than-required contributions to use the excess to offset the contributions they will owe in subsequent years.

That, and earlier contributions, are allowing G.M. to halt contributions until 2013. By then, the plan may have a significant shortfall. The law gives G.M. seven years to catch up, which could be difficult if the company is not performing well.

Ron Gebhardtsbauer, head of the actuarial science program at Pennsylvania State University, said G.M. and its government stewards could reduce the risk by raising the retirement age in the future.

“They’re a bankrupt company and they shouldn’t be giving overly generous benefits,” he said. “It’s sort of like the banks giving out bonuses when they’re not profitable.”

Retired From G.M. at 54. Pensionless at 74?, NYT, 1.7.2009, http://www.nytimes.com/2009/07/01/business/01pension.html?hp