No Exit in Sight for U.S. As Fannie, Freddie Flail

MCLEAN, Va.—When Charles E. Haldeman Jr. became Freddie Mac's chief executive officer in August, the ailing housing-finance giant had already consumed $51 billion of government money to stay afloat. It's likely to need even more.

Freddie's federal overseers nevertheless have instructed Mr. Haldeman to focus on something that isn't likely to make the bleak balance sheet look any better: carrying out the Obama administration plan to allow defaulted borrowers to hang onto their homes.

On a recent afternoon, employees at Freddie's headquarters here peppered Mr. Haldeman with concerns about the company's future. He responded that they were "fortunate" to have such a clear mission—the government's foreclosure-prevention drive. "We're doing what's best for the country," he told them.

Freddie and its larger rival, Fannie Mae, were among the first big financial institutions to receive massive federal bailouts after the financial crisis hit in 2008. Government officials have been racing to fix bailed-out car makers and banks and are pushing to reshape the financial-services industry. But Fannie and Freddie remain troubled wards of the state, with no blueprints for the future and no clear exit strategy for the government.

Nearly a year and a half after the outbreak of the global economic crisis, many of the problems that contributed to it haven't yet been tamed. The U.S. has no system in place to tackle a failure of its largest financial institutions. Derivatives contracts of the kind that crippled American International Group Inc. still trade in the shadows. And investors remain heavily reliant on the same credit-ratings firms that gave AAA ratings to lousy mortgage securities.

Fannie and Freddie, for their part, remain at the core of a housing-finance system that inflated a dangerous housing bubble. After prices collapsed, sending shock waves around the world, the federal government put America's housing-finance system on life support. It has yet to decide how that troubled system should be rebuilt.

On Dec. 24, Treasury said there would be no limit to the taxpayer money it was willing to deploy over the next three years to keep the two companies afloat, doing away with the previous limit of $200 billion per company. So far, the government has handed the two companies a total of about $111 billion.

The government is willing to tolerate such open-ended exposure for two reasons. First, it sees the companies as essential cogs in the fragile housing market. Fannie and Freddie buy mortgages originated by others, holding some as investments and repackaging others for sale to investors as securities. Together with the Federal Housing Administration, they fund nine in 10 American mortgages. Worries about potential insolvency would cripple their ability to fund home loans, which would hamstring the market.

Second, the companies are a convenient tool for the administration to use in its campaign to clean up the housing mess.

"We're making decisions on [loan modifications] and other issues, without being guided solely by profitability, that no purely private bank ever could," Mr. Haldeman said in late January in a speech to the Detroit Economic Club.

Besides playing a key role in the loan-modification program, Fannie and Freddie have jump-started lending by state and local housing-finance agencies by helping to guarantee $24 billion in debt. They also are lending support to the apartment sector by becoming the main funders of loans to builders and buyers of apartment buildings.

By using Fannie and Freddie for such initiatives, the White House doesn't have to go to Congress for funding. The Treasury and White House can simply issue instructions to Fannie and Freddie via their federal regulator, the Federal Housing Finance Agency, or FHFA.

The government is "running Fannie and Freddie as an instrument of national economic policy, not as a business," says Daniel Mudd, who was forced out as Fannie Mae's chief executive in September 2008 when the government took control.

Assistant Treasury Secretary Michael Barr says that because Fannie and Freddie are "owned by the taxpayers in the middle of the biggest housing crisis in 80 years," it would be unrealistic to expect the companies wouldn't be used to help stabilize the market. He says the administration's actions have been "prudent" and "consistent with taxpayer protection."

The companies are political lightning rods. The government's decision to absorb unlimited losses followed the Treasury's approval of multimillion-dollar pay packages for senior executives at each company. Republican critics have blasted those decisions, demanding investigations and pay cuts.

Massachusetts Democratic Rep. Barney Frank, a longtime supporter of the companies, said last month that ultimately they should be abolished and replaced with an entirely new housing-finance system. Last Thursday, he said he would convene a hearing next month to review the future of housing finance and the federal government's role in it

Some housing experts contend that prolonged government intervention will make it more difficult and costly to eventually wean the companies off government support. "The more aggressively we continue kicking the can down the road, the larger the losses become and the harder it becomes" to address the companies' future, says Joshua Rosner, managing director at investment-research firm Graham Fisher & Co.

Edward DeMarco, acting director of Fannie and Freddie's regulator, the FHFA, says efforts to modify loans and to stabilize the housing market ultimately will help the two companies' bottom lines. "The businesses are trying to mitigate the losses and remediate the problems that led to conservatorship in the first place," he says.

As mortgage delinquencies rise, Fannie and Freddie are required to set aside more capital to cover anticipated losses. Each quarter, if their revenues are insufficient to meet those financial needs, the Treasury has to kick in more money.

With delinquencies still rising, the outlook is grim. At Freddie, 3.87% of single-family mortgages were at least 90 days past due at the end of December, up from 1.72% a year earlier. Fannie is worse: 5.29% were 90 days past due in November, up from 2.13% a year earlier.

For decades, both Fannie and Freddie were highly profitable. The housing bust hit both hard, sharply reducing the values of the mortgages they guaranteed, along with their investment portfolios, which were stuffed with riskier loans.

By September 2008, their capital reserves were so depleted that the government seized control of both companies, using a legal process known as conservatorship. In exchange for injecting money, the government has received preferred shares that pay a 10% dividend, along with warrants to purchase up to 79.9% of the common stock of each company.

The Obama administration had said it would weigh in on how to revamp the companies when it released its proposed budget earlier this month. Instead, the budget contained only a single line about the companies' future, promising to "monitor the situation" and to "provide updates…as appropriate." That stance reflects policy makers' uncertainty about how to proceed and a lack of urgency about resolving the problem.

Lawrence Summers, the president's chief economic adviser, has said the companies shouldn't be run permanently by the U.S. or be allowed to "return to the failed model of the past, where Fannie and Freddie relied on an implicit government [debt] guarantee to borrow cheaply."

Some Republicans have said the government should play no role whatsoever in the companies in the future, meaning no implied debt guarantee and no government directives to support affordable housing. The other end of the spectrum would be to turn the companies into government agencies.

Many housing-industry leaders believe the eventual plan will fall somewhere in between. Housing-policy experts assembled by the Center for American Progress, a think tank that has provided the White House input on past policy and personnel decisions, recently proposed that Fannie and Freddie be transformed into two or more companies whose profits would be capped like those of public utilities. There would be explicit federal guarantees on certain mortgage-backed securities. The new entities would be required to ensure that mortgages are available to low-income borrowers.

Others have proposed turning the companies into cooperatives owned by lenders, but subject to strict regulation.

With the fate of the two companies now largely in the hands of the government, employees have shifted their attention to the administration's loan-modification effort, called Home Affordable Modification Program, or HAMP. It provides financial incentives for banks and other owners of mortgages to reduce monthly loan payments for at-risk borrowers. Fannie and Freddie's job is to oversee how loan servicers—the firms that collect monthly payments on mortgages—are working with homeowners on the front lines.

The program is off to a slow start. The administration said it would offer three million to four million borrowers the chance to modify loans. Through December, loan servicers have signed up 903,000 borrowers for trial modifications. Just 66,000 have received a permanent fix so far.

Both Fannie and Freddie have struggled at times to adjust to the new marching orders. Fannie has warned in financial filings that the modification program had shifted "significant levels of internal resources and management attention" from other parts of the business, which could lead to a "material adverse effect" on the business.

At Freddie, David Moffett, the chief executive who took over when the federal government assumed control, left last March after only six months, partly because it became clear that regulators would be calling the shots.

He says he and others warned administration officials that the loan-modification goals were unrealistic, that borrowers whose homes weren't worth what they owed were unlikely to take part, and that many participants would be likely to re-default within months. "They really didn't want our views," Mr. Moffett says.

Treasury's Mr. Barr says that isn't true. The Fannie and Freddie officials he worked with, he says, "were quite supportive of the program, of the structure and the basic design," and "were integral to the formulation."

Since then, Freddie has taken some heat for problems with part of the loan-modification drive. In an October report, the government said Freddie failed in its job as the program's auditor. Its task is to make sure loan servicers deal correctly with applications from borrowers for payment relief. Freddie says it has reassigned the vice president responsible for the effort.

Freddie's current chief executive, Mr. Haldeman, 61 years old, says it was immediately "very clear" to him that the loan-modification program was a top priority of the Obama administration. But the program isn't his only headache. As foreclosures mount, Freddie finds itself with title to more and more homes. The company wants to price them to sell, but doesn't want to put downward pressure on overall housing prices.

"Imagine having to keep the lawns mowed, the lights on, and the property secured for one house, let alone more than 40,000 homes all over the country," says Mr. Haldeman. "It's not an easy process."

John A. Koskinen, a turnaround specialist who became chairman of Freddie's board when the government stepped in, says that in all his years working for government agencies and troubled companies, "I've never been in one with as many challenges."

Journal Community

• discuss

“ Cut the umbilical cord. The government should not be involved in the housing market. It leads to intense speculation and risk due to congressional meddling with programs aimed at their particular districts. ”

—Rian Davis

Last spring and summer, as interim CEO, he had to recruit executives to fill the top three jobs. Filling those jobs has put the company on firmer ground, he says, and having a clear mission—even a government-mandated one—is helping morale. "At least the getting yelled at by your neighbor in the grocery store is behind us," he says.

Loan standards today are tighter than they have been in decades. That means the default risk on loans guaranteed recently by Fannie and Freddie is much lower than it was a few years ago. But their mistakes during the housing boom are expected to continue burning holes in their balance sheets.

The Mortgage Bankers Association estimates that mortgage delinquencies won't peak any sooner than the middle of this year. At the current pace, around 6% of Fannie's loans and 4.9% of Freddie's are expected to go into default over the next 18 to 24 months, producing losses that would raise the price tag on Treasury's bailout to $175 billion, according to October estimates by investment bank Keefe, Bruyette & Woods Inc. The bank has since said that even that dire forecast is too optimistic.

Former FHFA head James Lockhart, the companies' top regulator until last August, says the U.S. is unlikely to ever fully recoup its investment in the two companies.

—Bob Davis contributed to this article.

Recession pushes teens, young adults to the edge

DETROIT - On one of the coldest days of the new year, Antonio Larkin found himself without a place to stay -- again.

So the 22-year-old called a familiar number and was greeted by a familiar voice: "You wait there. We'll be there to get you."

When outreach manager Stephanie Taylor and other staffers from Covenant House Michigan pulled up, Larkin was standing in the gray snow outside his ex-girlfriend's apartment building; his world's possessions in three, beat up travel bags.

Larkin is among the untold thousands of Detroit's teens and young adults struggling to get by in a disastrous economy that has left their families without jobs or homes. Making matters worse is the organizations that help them are grappling with tough financial issues of their own.

Some are cutting programs, others are scaling back on how many people they serve, but none of them is giving up.

"The neighborhoods we go in are the ones we know are very distressed ... burned buildings, abandoned buildings, areas that are high in crime," Taylor said. "Those kids need to know that we love them and we care about them and we're here to help them. We need to go into areas that others might be afraid to go in."

Covenant House serves youth between 13 and 22 and their contributions totaled $2.7 million in 2009 -- $1.6 million less than the $4.3 million raised in both 2008 and 2007. It has cut out some GED preparation courses, but continues to provide 75 emergency and transitional beds, officials said.

And then there's the kind of help they give to people like Larkin.

He first stayed there months ago, but was kicked out for disciplinary reasons. He then began "couch-surfing" -- staying with other relatives or friends.

The day he called Taylor at Covenant House, Larkin's girlfriend had kicked him out.

"If I only had stayed at Covenant House, I think my life would have been much better," Larkin said. Covenant House has been working to find him a new place to stay, but the resources out there aren't as plentiful as they were before the recession struck.

Other groups in the city are hurting, too.

A shelter for young girls has cut staff and reduced its beds from 30 to 20, said Lindsey MacDonald, fund development manager for Alternatives for Girls. Its annual dinner raised about $125,000 in 2006. That dropped to $87,000 two years ago, before plummeting to $34,000 in 2009.

Nationally, it's estimated that up to 1.5 million teens and young adults are homeless. There could be tens of thousands in Detroit because of the city's enormous economic and social problems, according to Wayne State University psychology professor Paul Toro.

Nearly one in three working-age adults is jobless in Detroit. Job cuts -- many tied to the failures of General Motors Corp, Chrysler LLC, Ford Motor Co. and other manufacturers -- have led to thousands of home foreclosures. The poverty rate is more than 33 percent and climbing.

The 84,000-student Detroit Public Schools projects it will serve 3,894 fitting the federal homeless classification by the end of the school year. That's up from 2,976 in 2008-2009, and 2,326 the year before, according to school district records.

Finding those teens and young adults can be tough, Toro said.

"Kids under 18 living on the streets in Detroit is very rare," he said. "You have to really look hard. You can go to other places, New York, Los Angeles, San Francisco and Seattle, and you can find them all over the place."

Instead of seeking out the few public shelters that cater to teens, most are dropping in on cousins, aunts and friends. When welcomes wear out, they move on to other sympathetic acquaintances.

Milwaukee, like Detroit, is another rustbelt city with a declining manufacturing base. The 83,000-student Milwaukee Public Schools is serving 2,100 homeless students, although that number is expected to rise by June, said Janis Shogren, district homeless coordinator.

Milwaukee Schools had 2,725 homeless students in 2008-2009, 2,378 the year before and 2,296 in 2006-2007.

"And that's only the tip of the iceberg. These are the families who come to our attention," Shogren said.

Baltimore City Public Schools, also similar to Detroit in size, has identified 1,057 homeless students so far this year. Last year, 1,357 were served. Those numbers only may be a third of the students who actually are homeless, said Louise Fink, director of Interagency Support for the Baltimore district.

"If mom's home is foreclosed and she moves across the street into an aunt's house, they are homeless," Fink said. "Students who want the kind of services we can give them, they will identify themselves. If they don't want our services, they don't bother."

Copyright 2010 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

The global warming guerrillas

Matt Ridley salutes the bloggers who changed the climate debate. While most of Fleet Street kowtowed to the green lobby, online amateurs uncovered the spin and deception that finally cracked the consensus

Journalists are wont to moan that the slow death of newspapers will mean a disastrous loss of investigative reporting. The web is all very well, they say, but who will pay for the tenacious sniffing newshounds to flush out the real story? ‘Climategate’ proves the opposite to be true. It was amateur bloggers who scented the exaggerations, distortions and corruptions in the climate establishment; whereas newspaper reporters, even after the scandal broke, played poodle to their sources.

It was not Private Eye, or the BBC or the News of the World, but a retired electrical engineer in Northampton, David Holland, whose freedom-of-information requests caused the Climategate scientists to break the law, according to the Information Commissioner. By contrast, it has so far attracted little attention that the leaked emails of Climategate include messages from reporters obsequiously seeking ammunition against the sceptics. Other emails have shown reporters meekly changing headlines to suit green activists, or being threatened with ostracism for even reporting the existence of a sceptical angle: ‘Your reportage is very worrisome to most climate scientists,’ one normally alarmist reporter was told last year when he slipped briefly off message. ‘I sense that you are about to experience the “Big Cutoff” from those of us who believe we can no longer trust you, me included.’

So used are greens to sycophancy in the television studios that when they occasionally encounter even slightly hard questions they are outraged. Peter Sissons of the BBC: ‘I pointed out to [Caroline Lucas of the Green party] that the climate didn’t seem to be playing ball at the moment. We were having a particularly cold winter, even though carbon emissions were increasing. Indeed, there had been no warming for ten years, contradicting all the alarming computer predictions... Miss Lucas told me angrily that it was disgraceful that the BBC — the BBC! — should be giving any kind of publicity to those sort of views.’

Of course, reporters have been going native for decades. The difference is that they cannot now get away with it. When acid rain was all the rage in the 1980s, I was a science editor and I relayed all sorts of cataclysmic predictions from scientists and greens about its effect on forests. (Stern magazine said in 1984 that a third of Germany’s forests were already dead or dying and that experts believed all — all! — its conifers would be gone by 1990.) Today, we know that these predictions were wildly wrong and that far from dying out, forests in Germany, Sweden and North America actually thrived during that decade. I should have been more sceptical.

Yet, this time round, despite 20 years of being told they were not just factually but morally wrong, of being compared to Holocaust deniers, of being told they deserved to be tried for crimes against humanity, of being avoided at parties, climate sceptics seem to be growing in number and confidence by the day. What is the difference?

In a word, the internet. The Climate Consensus may hold the establishment — the universities, the media, big business, government — but it is losing the jungles of the web. After all, getting research grants, doing pieces to cameras and advising boards takes time. The very ostracism the sceptics suffered has left them free to do their digging untroubled by grant applications and invitations to Stockholm. The main blog used by the Consensus, realclimate.org, exemplifies this problem, because it was set up by a PR company and is run by an employee of Nasa, who ties himself in knots trying to show that he does the blog in his spare time. It is also characterised by a tone of weary condescension and censoring of dissent that you do not find on most sceptic sites.

Contrast it with wattsupwiththat.com, a site founded in November 2006 by a former Californian television weather forecaster named Anthony Watts. Dedicated at first to getting people to photograph weather stations to discover how poorly sited many of them are, the site has metamorphosed from a gathering place for lonely nutters to a three-million-hits-per-month online newspaper on climate full of fascinating articles by physicists, geologists, economists and statisticians.

Or take a book published last month called The Hockey Stick Illusion by Andrew Montford, a rattling good detective story and a detailed and brilliant piece of science writing. Montford has never worked in the media. He is an accountant and science publisher who works from his home in Milnathort in Kinrossshire. He runs a blog called ‘Bishop Hill’.

Montford came to the subject in 2005 when he read a blog post by another amateur non-journalist named Tim Worstall, a scandium dealer who lives in Portugal (I am not making this up), who was in turn passing on news of another blogger’s work: Stephen McIntyre, a retired mining consultant and keen squash player in Toronto. Because he keeps catching errors in their work, McIntyre is the sceptic the climate scientists most love to hate, even though he is scrupulously polite and insists that the followers on his website, climateaudit.org, are too. ‘A certain person’, the Climategate scientists called him in their emails, or ‘Mr Mc “I’m not entirely there in the head”’, or ‘the self-appointed Joe McCarthy of climate science’.

Notice that all of these sceptic bloggers are self-employed businessmen. Their strengths are networks and feedback: mistakes get quickly corrected; new leads are opened up; expertise is shared; links are made. Prejudice and ignorance abound too, but the good blogs get rewarded with scoops and guest essays so they tap into rich seams of knowledge. When Montford first ran his now classic post called ‘Caspar and the Jesus paper’, about the shenanigans the IPCC had to resort to in order to get a flawed paper rebutting McIntyre into the peer-reviewed literature in time to use it in their report, word of mouth caused interest in his website to explode.

Mcintyre’s forensic dissection of the Consensus papers puts cosy scientific peer review to shame. Digging deep into data and computer programs, he has found myriad mistakes in both the statistical technique and the data used to make the famous hockey stick graph, which purported to show that recent temperatures were unprecedented in level and rate of change. But he has also uncovered a mistake in data that conveniently prevented 1934 being warmer than 1998 in America; the splicing together of the records of two Antarctic weather stations as if they were one; the smoothing of sea-level rise in a way that conveniently concealed its recent deceleration; the use of a Swedish lake sediment series upside down so it showed recent warming instead of cooling; and most recently the reliance of an attempt to resuscitate the hockey stick on a ludicrously small sub-sample of just 12 Siberian larch trees. That last one came about when Montford spotted that a scientist who had been refusing McIntyre access to data for ten years had published in a journal with a strict policy of archiving data. Montford tipped off McIntyre, who asked the journal to force the scientist to release the data, which he eventually did.

‘It seems inconceivable to the commentariat,’ says Andrew Orlowski of the online newspaper of the IT industry, the Register, ‘that scientists have prejudices too, and that the publication process (peer review) is not some Kitemark of quality but is vulnerable to being hijacked.’ Chip Knappenberger, who blogs at masterresource.org, believes the rise of blogs as repositories of scientific knowledge will continue if the scientific literature becomes guarded and exclusive. ‘I can only anticipate this as throwing the state of science and the quest for scientific understanding into disarray.’

When Climategate broke, the mainstream media, like knights facing archers at Crécy, mostly ran dismissive pieces reflecting the official position of the Consensus. For example, they dutifully repeated the line that the University of East Anglia’s global temperature record was vindicated by two other ‘entirely independent’ records (from Nasa and NOAA), which was bunk: all three records draw from the same network of weather stations. Editors then found — by reading and counting the responses on their blog pages — that there was huge and educated interest in Climategate among their readers. One by one they took notice and unleashed their sniffing newshounds at last: the Daily Express went first, then the Mail and the Sunday Times, last week the Times and this week even the Guardian.

For those few mainstream journalists who had always been sceptical — like Christopher Booker — it must be a strange experience, like being relieved after living behind enemy lines. Who knows, one day even BBC News may ask tough questions. But it was the bloggers who did the hard work.

Matt Ridley’s book, The Rational Optimist, will be published in May.

Australia close to defaulting on debts: Joyce

Opposition finance spokesman Barnaby Joyce is courting controversy again, warning that Australia is getting to the point where it will not be able to repay its overseas debt.

Senator Joyce says the Federal Government is borrowing billions of dollars from overseas to fund stimulus spending and programs like the National Broadband Network.

And he has questioned whether the Government is in a position to repay those loans.

"We're going into hock to our eyeballs to people overseas," he said.

"You've got to ask the question: how far into debt do you want to go? We are getting to a point where we can't repay it.

"Let's look at exactly what they're doing now and ask this very simple question: are you paying back your money, are you even meeting your interest component, and can you keep the debt stable?

"Or is the debt racing ahead by more than even the interest expense? And if it is, any household budget will tell you that's a very dangerous place to be."

Senator Joyce has already been attacked by Labor for suggesting the states are close to being unable to repay their debts.

Federal Finance Minister Lindsay Tanner has rejected Senator Joyce's latest comments.

He says Australia's public debt levels are among the lowest in the developed world and the Government has a plan to pay off the debt in just over a decade.

"Barnaby Joyce's comments again today show he is totally unfit for any kind of position of economic responsibility in this country," he said.

"They are totally ridiculous and grossly irresponsible."

Prime Minister Kevin Rudd said the remarks showed that Senator Joyce would be a risk to the economy if he was installed as finance minister.

"This is a most fundamentally irresponsible remark by someone who puts himself forward as the alternative finance minister of Australia, a man put in that position by a leader of the Opposition who says he has no interest in economics whatsoever," said Mr Rudd.

"So you ask sometimes about risk for the future, risk to the economy. Risk is here personified in an alternative finance minister who thinks you can play fast and loose with public language on Australia's sovereign debt."

Arctic G7 meeting ends with a whimper

IQALUIT -- The Arctic meeting of global financial leaders over the weekend was as much about what wasn't said as what was.

While there was no shortage of photo opportunities for finance ministers and their central bankers -- dogsledding in heavy parkas, or casually clad at a fireside chat -- the two-day Group of Seven meeting ended with few words.

The G7 host, Finance Minister Jim Flaherty, delivered a brief closing statement that set directions but offered few details:

• Stay the course on economic stimulus spending until recovery is well entrenched, but there were no forecasts for stability;

• Push ahead with financial reforms, but no details were offered on how each country plans to level the regulator playing field, especially when it comes to bank capitalization, by the end of the year;

• Provide development and health-care aid for poorer countries, but only Haiti debt forgiveness and reconstruction were mentioned specifically; and

• Maintain G7 relevance as "first responders in an economic crisis."

On the debt crisis facing Greece, Flaherty said the situation "is largely a matter to be managed not by the G7 but by the European Union."

In a later interview with Canwest News Service, he added: "What we're talking about here is not threatening the world financial system."

Flaherty was less specific on foreign exchange concerns -- in particular, complaints that the Chinese yuan is undervalued -- telling reporters: "We discussed currencies, as usual."

Ahead of the Iqaluit meeting, there was much buzz about how European leaders -- who have banned the import of seal parts -- would react to the Inuit cuisine on offer.

But at the closing news conference, the European delegates were mum on the seal issue, leaving Flaherty to respond on their behalf.

"The European Union makes a specific exception with respect to the Inuit people who, for thousands of years, have relied on the seal as part of their survival, and that is the view of the European Union and it's certainly our view in Canada."

On Haiti, Flaherty confirmed that all G7 nations had forgiven Haiti's debt following the country's devastating earthquake Jan. 12, which killed more than 200,000 people.

The minister called on international lenders to do the same.

"The debt to multilateral institutions should be forgiven, and we'll work with these institutions and other partners to make this happen as soon as possible," Flaherty said.

"And we discussed the long-term reconstruction assistance that Haiti will need as it emerges from the current urgent situation as a result of the earthquake."

Douglas Porter, deputy chief economist at BMO Capital Markets, said: "It seems that the primary theme was that officials want to ensure that the recovery fully takes root."

"Whether it was pledging to continue with stimulus measures, calling for any new bank regulations not to be overly onerous, or making encouraging noises about Greece's deficit-reduction efforts, the main point seemed to be that G7 officials did not want to disrupt the fledgling recovery."

Porter added that "probably the biggest question for the markets, still, however, will be to what extent some of the troubled smaller European countries [most notably Greece] can actually follow through on deficit-reduction policies, especially in the face of an already-weak economy."

Long Terms for Fraud Out of Tech Bubble

MANHATTAN (CN) - The former owners of Amerindo Investment Advisors were sentenced Friday to 12 and 5 years in federal prison for fraud. Alberto Vilar got 12 years, Gary Tanaka 5. They "guaranteed" investors fixed rates of return and then blew millions when the tech bubble burst in 2000.
Vilar, 69, of New York was also fined $25,000. Tanaka, 66, of London, England, was fined $20,000. They were convicted after a 9-week jury trial.

Unemployment taxes slam businesses

NEW YORK (CNNMoney.com) -- Employers are getting hit with a massive tax hike at a time when they can least afford it.

Companies in at least 35 states will have to fork over more in unemployment insurance taxes this year, according to the National Association of State Workforce Agencies.

The median increase will be 27.5%. And employers in places such as Hawaii and Florida could see levies skyrocket more than ten-fold.

Many of these hikes happened automatically as prolonged joblessness triggered state laws governing their unemployment insurance systems. But at least seven states voted to raise their taxable wage bases, the level of income subject to unemployment tax. And another 10 are looking at upping the wage bases or tax rates.

The states are scrambling to restore their unemployment insurance trust funds, which cover claims.

State trust funds have been decimated by the Great Recession, forcing a record 26 states to borrow a total of more than $30 billion from the federal government. The numbers are expected to grow to 40 states borrowing $90 billion by 2012, said George Wentworth, policy analyst at the National Employment Law Project.

"States are going to be facing higher unemployment tax rates for some period of time," Wentworth said.

In addition, employers pay federal unemployment taxes. If states don't repay their federal loans, businesses could see their federal tax go up as well in coming years, said Rich Hobbie, executive director of the National Association of State Workforce Agencies.

Higher taxes, however, dampen employers' ability to hire new workers, crimping any nascent economic recovery. Companies pay taxes on each employee on the payroll.

"There's no doubt it discourages hiring," said Douglas Holmes, president of UWC-Strategic Services on Unemployment and Workers' Compensation, an employers' trade group. "In fact, it leads to increased unemployment."

Cognizant of this, some states are looking to soften the blow through legislation that would delay the hikes.

States suffering

Texas is one of the hard-hit states. Though its unemployment rate is a relatively low 8.3%, jobless claims have soared. In December, Texas paid 330,000 residents a total of $325.7 million, up from 228,000 people claiming $216.8 million a year earlier.

The state began borrowing from the feds in July to pay unemployment benefits and now owes Washington $1.6 billion, said Ann Hatchitt, spokeswoman for the Texas Workforce Commission.

So employers in the Lone Star State will have to pay at least $64.80 in tax per worker this year, up from $23.40 a year ago. This is the highest rate in 20 years.

"After having a period of high demand on the unemployment trust fund and rising unemployment, we had to set the rates for 2010 to replenish the trust fund," Hatchitt said.

Employers in some other states could face even steeper hikes, unless their legislatures act quickly.

In Hawaii, taxes automatically increased from an average of $90 per worker in 2009 to $1,070 this year. Part of the problem stems from the fact that the state was generous to businesses during prosperous times. In fact, lawmakers lowered the tax rate in 2007, when unemployment did not exceed 3.1%. The state's jobless rate now stands at 6.9%.

Concerned that this hike will crush local businesses, Republican Gov. Linda Lingle is urging lawmakers to limit the increase to 60% of the proposed hike.

"We believe strongly that anything beyond this 60% threshold will cause large job losses," Lingle said last month.

Florida, meanwhile, has increased its minimum payroll tax to $100.30 per employee this year, up from $8.40. About half of the state's employers pay the minimum. The state also raised the taxable wage base to $8,500, from $7,000.

When lawmakers approved an increase in unemployment taxes a year ago, they didn't realize what the impact would be, said Rep. Dave Murzin, who heads the state's Economic Development & Community Affairs Policy Council. The state's unemployment rate was 7.6% at the end of 2008, versus 11.8% in December.

Now that lawmakers see the numbers, they are working to minimize the effect on businesses. The council plans to take up legislation this week that would restore the taxable wage base level to $7,000 and allow companies to pay the tax in installments over the next two years.

This means the Sunshine State's trust fund won't return to solvency until 2015, instead of 2012. But the governor and lawmakers feel this deal will keep more workers on company payrolls.

"It's still going to be an increase, but it won't be as dramatic an increase and it won't hit as hard," Murzin said. "You tell businesses to pony up and write a big check and that puts more people out of business."