Friday, October 9, 2009

Whodunit? Sneak attack on U.S. dollar

It’s the biggest mystery in global finance right now: Who conducted a sneak attack on the U.S. dollar this week?

It began with a thinly sourced but highly explosive report Monday in a British newspaper: Arab oil sheiks are conspiring with the Russians and Chinese to quit using the dollar to set the value of oil trades — a direct threat to the global supremacy of the greenback.

Is it true? Everyone from the head of the Saudi central bank to U.S. officials scrambled to undercut the story, but no matter.

With the U.S. economy on the ropes and America by far the world’s biggest debtor, investors aren’t feeling as secure about the dollar as they used to. And the notion of second-tier economies ganging up on Uncle Sam didn’t sound so far-fetched.

For American officials, the possibility of the dollar losing its long-term dominance in global commerce is a nightmare scenario because it would likely mean sharply higher interest rates at home and a declining ability to finance the U.S. debt. No one believes it could really happen right now, but stories like the British report this week make it seem incrementally more likely.

So the piece by Robert Fisk of the Independent shocked currency traders around the world and almost instantly sent the value of the U.S. dollar spiraling downward and the price of gold skyrocketing to an all-time high, as a hedge against a weakened dollar.

The website quickly amplified the impact of the story with a headline atop the site: ARAB STATES LAUNCH SECRET MOVES WITH CHINA, RUSSIA, FRANCE TO STOP USING DOLLAR FOR OIL TRADING ...

“You read that story, and you do two things: You sell the hell out of dollars and you buy gold,” said Les Alperstein, president of the financial research firm Washington Analysis. “The story has a lot of credibility, with some caveats.”

So who wanted dollars diving and gold rising? In other words, who is Fisk’s source, and why did he or she want to tank the dollar? It’s the global currency version of the old Washington parlor game of speculating on the real identity of Deep Throat.

No one knows.

But one thing is for certain: With the price of gold jumping to $1,048.20 per ounce, traders who moved early enough stood to make millions.

So in government circles in Washington, speculation immediately centered on gold traders: With the skyrocketing price of gold, they’d be the biggest beneficiaries of the article.

Fisk’s story itself isn’t much help in solving the mystery — it is sourced vaguely to “Gulf Arab and Chinese banking sources in Hong Kong,” and it included one blind quote, attributed to “a prominent Hong Kong broker.” That doesn’t narrow down the pool very much.


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U.S. Stands By as Dollar Falls

The dollar fell to a 14-month low against other currencies Thursday, intensifying a trend that the Obama administration has publicly suggested it opposes -- but which it appears prepared to tolerate quietly.

AFP/Getty Images

Many of America's trading partners, however, are pushing the other way. In Asia, traders said central banks in South Korea, Taiwan, the Philippines, Thailand, Indonesia and Hong Kong again intervened to slow the dollar's fall against their currencies.

Asian officials fear that the dollar's fall could crimp their export-driven economies. "The [Thai] baht has appreciated a little too rapidly compared with our fundamentals," said Suchada Kirakul, assistant governor of the Bank of Thailand.

In Europe, where the strength of the euro is clouding prospects for export growth, the president of the European Central Bank, Jean-Claude Trichet, said Thursday that the stated U.S. "'strong-dollar policy' is extremely important in the present circumstances."

The dollar, down 11.9% against a basket of currencies since President Barack Obama took office, fell an additional 0.7% Thursday. The yen ended the day at 88.48 per dollar, the lowest level since December 2008. In early trading Friday in Asia, the dollar inched up after Federal Reserve Chairman Ben Bernanke reiterated that once the recovery takes hold, the U.S. will need to raise interest rates. He didn't give any timeframe for the action.

The U.S. Treasury had no comment on the dollar Thursday. In Istanbul this week, following meetings with other finance ministers, Treasury Secretary Timothy Geithner said, "It's very important to the United States that we continue to have a strong dollar....We're going to do everything necessary to make sure we sustain confidence."

[Asia dollar intervention chart and photo]

Except for Mr. Trichet, however, few seem to take that statement at face value. "The U.S. is willing to talk about a strong dollar, but not willing to do anything about it," said Jonathan Clark, vice chairman at FX Concepts, an $8 billion New York hedge fund. "If you're not going to back up words with actions, it's just talk." A Treasury spokesman declined to comment.

There are, as yet, no hints the weakening dollar is ringing alarm bells in Washington -- and that's unlikely to change unless the decline turns into a confidence-shattering crash, a possibility that some analysts have been predicting for years.

For now, a weaker dollar tends to help U.S. exports, by making them cheaper abroad, a welcome development at a moment of domestic economic weakness. Cheaper U.S. goods overseas could help achieve the long-sought "rebalancing" of the global economy where the U.S. exports more, and others, including China, import more. The rebalancing "is a healthy, necessary transition," Mr. Geithner said last month.

While the statement appears to contradict the administration's official position of favoring a strong dollar, Mr. Obama and other administration officials have said the U.S. needs to become less dependent on domestic consumption. Although they won't say this means a weaker dollar, many traders and economists take it is an implicit condition for achieving this rebalancing, and it is one reason why few take the strong dollar talk at face value.

Despite the dollar's plunge, stock prices have held up. Indeed, given that 40% of pretax profits of companies in the Standard & Poor's 500 stock index come from abroad, according to BofA Merrill Lynch Global Research estimates, a weaker dollar can fuel a rise in U.S. stocks.

At the same time, interest rates that the Treasury has to pay on its borrowing have stayed down. As long as that is the case -- and the dollar's decline is gradual -- Obama administration officials are likely to stay on the sidelines while they stick to a "strong dollar" mantra. The dollar was left notably unmentioned in the communiqué issued by the Group of Seven finance ministers this week after meeting in Istanbul.

[U.S. Stands By as Dollar Falls]

A weakening dollar would worry Federal Reserve officials if it appears to be raising market and consumer expectations of higher inflation. So far, such expectations don't appear to be widespread, though gold prices, sometimes seen as an inflation harbinger, hit a record this week and are up to $1,056 an ounce.

Still, some argue a weakening currency could destabilize the financial system. "With the exploding federal debt, the enlarged Fed balance sheet, and proposals by [some] countries to look for dollar substitutes, a policy of benign neglect is particularly risky now and could lead to more instabilities," said John Taylor, a Stanford economist and prominent critic of U.S. financial rescue policies.

The daily ups and downs of the dollar, a preoccupation of traders, are dismissed by some policymakers.

"Foreign exchange markets are manic-depressive mechanisms just like every other market I've ever operated in. You have to be careful not to read too much into short-term movements," said Richard Fisher, president of the Federal Reserve Bank of Dallas. "If we get it right, meaning if we get our economy back up and we don't do it with any risk to price stability on the downside or the upside, then I think the dollar will be fine."

In Washington, the recent weakening is seen as a sign that markets are normalizing. During the financial crisis, investors around the world fled to the safety of U.S. Treasury bonds, pushing the value of the dollar up. Now, some are shedding dollars to buy other assets.

In addition, some economies are recovering faster than others. Australia's central bank, for instance, raised interest rates earlier this week as its economy regains its vigor. The Australian dollar Thursday rose to a 14-month high against the U.S. dollar, and is up 3.6% since the central bank raised rates.

[U.S. Stands By as Dollar Falls]

Higher interest rates tend to boost a currency's value by luring global investments. With the Fed holding short-term rates close to zero, a move by another central bank to boost rates will tend to lift its currency against the dollar. During the crisis, the Fed flooded the world with dollars to help get financial markets moving, a move that largely drew applause. But the increase in the supply of dollars, at some point, will reduce its value, particularly as the U.S. government borrows more from abroad to finance its budget deficit.

If foreign investors lose faith in the U.S. currency and slow their purchases of U.S. government debt, interest rates could rise and that would hurt growth.

At times in the past, U.S. officials have tweaked their rhetoric to signal concern. Former Treasury Secretary Robert Rubin repeated the mantra "a strong dollar is in the U.S. interest" so often that traders stopped listening. One day he added "and we have had a strong dollar for some time now," to send a signal the dollar was rising too much.

—David Roman contributed to this article.

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Bankruptcy Filings Spiking: Chapter 7 Booming and 8 Years of Credit Card Industry Lobbying and $100 Million in Fees.

There is probably no bigger sign of economic distress than bankruptcy. It can be in the form of a business unable to pay debt obligations or an individual simply unable to keep up with former obligations. Most people that file for bankruptcy are not in a good economic spot. In fact, if you want a better indicator of economic health bankruptcy filings are a good measure. It is interesting what passes for good news in today’s market. For example, Alcoa announced a profit for the third quarter. Good news right? Well if you look into the details the company has cut 18,000 jobs in the 12 months ending on June 30th and also planned on cutting an additional $2.4 billion in costs. In this economic crisis people need to look at the details before assuming something is just good news.

Bankruptcy data doesn’t hide this. Since new legislation went into law in 2005, bankruptcy has been harder to file. So the recent increase in filings makes it all the more troubling:


Since 2005 the rise in quarterly bankruptcy filings has been steady. This is indicative of the nature of the current deep recession. The average American is feeling the strain of the high unemployment rate and the country is combating a market that is not willing to hire (i.e., Alcoa cutting jobs). And recent bankruptcy filing data is showing the trend still moving up. The latest data that we have is for August and it showed 119,874 consumer bankruptcy filings and that is a jump of 24 percent from last year.

You would think that with the massive amount of capital in banks, that lending would be easier so that would mitigate filings in the short-term but banks are not lending to consumers. Early this week we saw the continuing contraction in consumer credit:


Now these data points are important because they show what is really happening on Main Street. Wall Street is being pumped up by easy credit provided by the U.S. Treasury and Federal Reserve but most Americans don’t pay their monthly bills because the S&P 500 went up 10 points. Bankruptcy is the ultimate sign of distress. That is, someone has reached the point of financially being unable to meet obligations. This isn’t like missing one bill payment. This is someone sitting and looking at all their obligations and throwing in the towel.

Keep in mind that this new change comes in light of the 2005 tougher bankruptcy laws. That is why in the above, the chart shows a dramatic spike. What changed in 2005? A wide group of consumer advocates, legal scholars, and retired bankruptcy judges questioned the soundness of the legislation and recommended against it. The credit card industry lobbied hard. The contention was that bankruptcy was wrought with fraud. There wasn’t much data backing up that assertion but remember that in 2005 the good times were going on so hardly anyone was paying attention and the legislation was jammed through. The major changes included means testing but also shifting people into Chapter 13 instead of Chapter 7. The big difference here is with Chapter 13 people filing have to work out some kind of agreement to rework their obligations while in Chapter 7, current debts are paid from current assets. Of course this shifts the burden completely on the consumer instead of lenders actually spending the time to be more diligent. This worked perfectly in a mega housing bubble world. Take a look at Chapter 7 even in light of the tougher legislation:


The biggest proponents of the bill were the credit card industry. In fact, the credit card industry spent 8 years and $100 million in lobbying for this effort. If you look at the legislation, it actually enforces a means test by looking at your state median income. If you are at your state median income, you will not be able to qualify for Chapter 7 if you can pay 25 percent of the unsecured debt. What it does is that it allowed for credit card companies to give anyone and anything credit while shifting the burden to the states and consumers. Once things go bad as they are right now, credit is yanked from the system and now debtors are being forced to pay any penny they have to the credit card companies.

In the new legislation counseling is also required. Yet what about counseling for the credit card companies? The bill is a lobbyist dream and we are seeing the ramifications of this bill today. In fact, if it wasn’t for the bill we would be seeing tens of thousands more filing for Chapter 7 today but people are holding off because what use would it be to go into Chapter 13 and still need to pay off your debts?

What many of the credit card companies didn’t see however was the massive rise in unemployment. In fact, with 26 million unemployed and underemployed I’m sure many will be falling below the state median income test thus allowing people to file for Chapter 7 and liquidate. Unsecured debt like credit card loans are usually washed away in court hence the big lobbying by the credit card industry. So this is becoming a more likely option and as the chart shows above, more are opting for this. Take a look at brief breakdown of how this plays out:


Source: Bankruptcyaction

Only in some bizarre universe is spiking bankruptcies, foreclosures, and unemployment some sign of a rebounding economy.

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I-Believe-in-Strong-Dollar Turns Relic as China Begs (Update2)

Oct. 8 (Bloomberg) -- More than a decade after former Treasury Secretary Robert Rubin made the “strong dollar” national policy, currency traders say the same words coming from the Obama administration have little meaning.

Timothy Geithner, the current Treasury secretary, has tolerated the greenback’s 12 percent slide from its peak this year in March as measured by the Federal Reserve’s trade- weighted Real Major Currencies Dollar Index. While he said as recently as Oct. 3 that “it is very important to the United States that we continue to have a strong dollar,” the last time the U.S. intervened in markets to support its currency was 1995.

The weaker dollar may boost America’s exports as the economy recovers from the deepest recession since the 1930s. The risk is that it may also drive away America’s largest creditors just as the Treasury relies more than ever on foreign investors to buy the bonds financing Barack Obama’s stimulus spending. The dollar’s share of global currency reserves fell in the second quarter to 62.8 percent, the lowest level in at least a decade, the International Monetary Fund in Washington said on Sept. 30.

“Since the dollar has been weak and weakening for years, Geithner was using a code phrase, a carry-over from the Bush administration,” said David Malpass, president of research firm Encima Global in New York. “It means that the U.S. approves of a constantly weakening dollar but doesn’t want a disruptive collapse,” said Malpass, the former chief economist at Bear Stearns Cos. and deputy assistant Treasury secretary from 1986 to 1989.

Poorer Americans

The dollar’s 15 percent decline against the euro and 11 percent depreciation versus the yen since early March are increasing concern among world leaders. At the same time, Americans are getting poorer.

Per capita net wealth tumbled to $172,749 in August from a peak of $212,599 in September 2007, government figures show. A United Nations Human Development Report released Oct. 5 showed America’s quality of life dropped to No. 13 in a 2007 global ranking from No. 5 in 2000.

European Central Bank President Jean-Claude Trichet said today in Venice that a strong dollar is “important,” repeating remarks made in Brussels on Sept. 28. Toyoo Gyohten, an adviser to Japan’s new finance minister, said the same day there is “no better alternative to the dollar.” Bank Rossii First Deputy Chairman Alexei Ulyukayev said Sept. 29 that Russia will keep buying Treasuries because there’s no realistic alternative.

The Dollar Index, which tracks the currency against six U.S. trading partners, fell to its lowest level in almost 14 months today. The greenback slid as much as 0.9 percent against the euro before trading at $1.4777 at 3:06 p.m. in New York.

‘Special Burdens’

“We recognize that the dollar’s important role in the system conveys special burdens and responsibilities on us, and we are going to do everything necessary to make sure we sustain confidence,” Geithner told reporters after attending a meeting of counterparts and central bankers from the Group of Seven in Istanbul on Oct. 3.

The comments came after policy makers from China to Russia called for an alternative to the world’s main currency in foreign-exchange reserves.

“Major reserve-currency issuing countries should take into account and balance the implications of their monetary policies for both their own economies and the world economy with a view to upholding stability of international financial markets,” China President Hu Jintao told the Group of 20 leaders in Pittsburgh on Sept. 25, according to an English translation of his prepared remarks.

Bentsen, Rubin, Summers

When Ronald Reagan was elected president in 1980, his platform called for a “strong NATO,” “strong leadership,” “a strong peace” and a strong currency. “A sound monetary policy will be restored -- one designed to instill confidence in the American dollar abroad, as well as bring down the rate of inflation at home,” according to a 1980 brochure from Reagan’s campaign.

The preference for a strong dollar was brought back under Lloyd Bentsen, Bill Clinton’s Treasury secretary, in 1994, and the phrase was used regularly by his successors, Robert Rubin, a former Goldman, Sachs & Co. co-chairman, and Lawrence Summers, who is now the director of Obama’s National Economic Council.

Intercontinental Exchange Inc.’s Dollar Index, which tracks the currency’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, gained an average of 4.93 percent a year between 1996 and 1999 when Clinton was in office.

Rubin Mantra

“By not varying the statement, an issue never arose about whether a comment involved a subtle change or not in the policy toward the dollar,” former Fed Chairman Alan Greenspan told his colleagues on the Federal Open Market Committee in 2001, according to a transcript of the meeting. “It was boring, it was dull, it was repetitive, it was nonintellectual, and it worked like a charm.”

Rubin, a former senior counselor at New York-based Citigroup Inc., wasn’t immediately available to comment. A spokesman for Summers referred questions to the Treasury.

During the presidency of George W. Bush, the Dollar Index declined 20 percent.

The government has used the phrase for so long that “I don’t think it has much meaning left for the markets,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “Once you have this policy in place, I don’t think there’s any possible choice but for the Treasury to stick to what it’s been saying all this time.”

More Expensive

The decline means it’s becoming relatively more expensive to live in the U.S. The difference in per-capita income with Canada has shrunk 87 percent since October 2008.

A McDonald’s Corp. Big Mac sandwich cost $3.57 in the U.S. in 2009, unchanged from 2008, according to The Economist magazine’s Big Mac Index. That compares with a 13 percent decline in the euro region to $4.62 from $5.34, and a 19 percent drop in the U.K. to $3.69.

One benefit to a depreciating dollar is that it helped shrink America’s trade deficit to $32 billion in July from the record $67.6 billion in August 2006, data compiled by the Commerce Department show.

Exports rose 5.7 percent to $127.6 billion in July from the low this year of $120.6 billion in April, the most recent data show, led by sales of capital goods including cars, civilian aircraft and computers, as well as stronger demand for industrial supplies and consumer goods.

Theory ‘Problem’

“The Washington theory is that dollar weakness will benefit the U.S. by inflating our way out of debt and causing more exports,” Encima’s Malpass said in a Sept. 25 note to clients. “The problem with this theory is that it assumes capital stays put while the dollar devalues.”

While the dollar dropped in global currency reserves, holdings of euros rose to a record, the IMF report shows. The U.S. currency’s portion declined to 62.8 percent from 65 percent in the first quarter. The euro’s share rose to a record 27.5 percent from 25.9 percent while the pound and yen gained.

The share of reserves in dollars declined even after the Fed and the government lent, spent or guaranteed $11.6 trillion to shore up the economy and the financial system. The Fed has increased the size of its balance sheet to $2.144 trillion from $906 billion in September 2008.

Treasury officials rely on foreign investors to buy the record amount of debt needed to finance the more than $1 trillion budget deficit. The gap will grow to $1.6 trillion in fiscal 2010 before narrowing to $1.4 trillion the following year, according to the Congressional Budget Office.

Treasury Sales

The U.S. sold $1.517 trillion of notes and bonds this year, compared with $585 billion at the same point in 2008. London- based Barclays Plc forecast total 2009 issuance at $2.1 trillion, and $2.5 trillion in 2010.

Dollar bears say net purchases of long-term U.S. securities by foreign investors fell below the trade deficit by $46 billion in the first half of the year, one of the only three occasions since 1994 there was a shortfall, according to Treasury Department data.

China has slowed purchases, increasing its holdings 10 percent to $800.5 billion through July after a 52 percent rise in 2008 and 20 percent in 2007, according to the Treasury Department. Foreign ownership overall has risen 11.4 percent to $3.43 trillion, after gaining 31 percent in 2008.

Chinese Premier Wen Jiabao said in March that the Asian nation was “worried” about the safety of its investment in U.S. debt, as a weakening dollar eroded the value of its record $2.1 trillion of foreign-exchange reserves.

Dollar Index

The Dollar Index traded as low as 75.767 today, still above the lows in March 2008, when it fell to a record 70.698. The decline isn’t as steep as in the late 1980s, when it tumbled 48 percent to 85.33 in January 1988 from 164.72 in March 1985.

There’s no sign slower purchases of U.S. debt are leading to higher borrowing costs. The yield on the benchmark 10-year Treasury, which helps determine everything from mortgage rates to auto loan payments, has averaged 3.17 percent this year, compared with 5.6 percent since 1989.

“The dollar will fall against the euro into the year-end as investors reallocate funds in search of higher yields,” said Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, the most accurate forecaster of 2007. “This is only capital export though, not capital flight. There is no evidence whatsoever that the weak dollar will lead to capital flight.”

No Inflation

There is no inflation in the U.S. that would deter foreign investors from Treasuries. Consumer prices fell 1.5 percent in August from a year earlier, and have dropped for six straight months, the Labor Department in Washington said Aug. 16.

“Inflation is still declining in the U.S., so it’s wrong to say that the dollar is losing its purchasing power,” Redeker said. “The U.S. is a domestically driven economy. It has huge output gaps, and these are going to keep inflation subdued for at least two years.”

G-7 finance chiefs stopped short of singling out the dollar for criticism in a statement after talks on Oct. 3, saying that “excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.” That’s the same language they used in April, when the Dollar Index rose to 86.871.

“You can definitely read a worry among the non-U.S. participants in the G-7 meeting about the stance of U.S. authorities, and whether there’s any meaning to the strong- dollar policy,” said Carl Hammer, a senior global analyst at SEB AB in Stockholm. “Behind the scenes, there are definitely more deliberations and pressure for seeing the U.S. being really outspoken in defending its strong-dollar policy.”

By Matthew Brown and Oliver Biggadike

Banks fail to absorb commercial real estate loan losses

Remember the havoc in the financial markets when the residential bubble burst last year? Are we in for a rerun this year or next year?

You are probably thinking that such an event could not occur. Well think again. There is a report that says that we may be in for another crisis.

The report was initiated by Federal Reserve analyst, K.C. Conway. Conway is a senior real estate analyst at the Federal Reserve Bank of Atlanta. The Federal Reserve has acknowledged the report but said that it is not part of its formal opinion. What does the report say?

The report states that banks have not been taking their losses on commercial real estate loans. Conway's report predicted that commercial real estate losses would reach roughly 45% next year.

Most of the toxic assets are from interest-only loans. These loans have no benefit from amortization. Banks are also preserving capital, which is another reason for not taking their losses.

One thing is for sure. The bubble has burst and its only a matter of time before all of these losses come crashing down, much like the avalanche that we had last year.

Is there another bank bailout coming?

Fed Ratchets Up Warnings on Commercial Real Estate Debt

CRE Under Pressure Due to Sharp Erosion in Fundamentals, Grubb & Ellis Economist Bach Less Bearish on Sector Outlook

Two officials from the U.S. Federal Reserve issued strong signals this week that the central bank is very concerned over the banking industry's exposure to commercial real estate loans and considers it to be a major stumbling block to the road to economic recovery.

In a speech Monday assessing the state of the U.S. economic recovery, Federal Reserve Bank of New York President and CEO William Dudley said he expects that "more pain lies ahead" for the commercial real estate sector and for banks with heavy exposure to CRE loans.

"The commercial real estate sector is under particular pressure because the fundamentals of the sector have deteriorated sharply and because the sector is highly dependent upon bank lending," Dudley said in the speech at the Fordham Corporate Law Center in New York.

Unemployment remains much too high and "it seems the recovery will be less robust than desired," with "significant excess slack" in the economy, Dudley said. Also, in something of a departure from recent Fed pronouncements, Dudley said the economy faces "meaningful downside risks to inflation over the next year or two."

Additionally, on Wednesday, The Wall Street Journal reported that a Fed official told banking industry regulators in a Sept. 29 presentation that "banks will be slow to recognize the severity of the loss" from commercial real estate loans, "just as they were in residential."

The presentation by K.C. Conroy, an Atlanta Fed official who is reportedly part of the central bank's "rapid response" program to spread information about looming economic problem areas to federal and state bank examiners, indicated that slumping property values and rising vacancy rates have exceeded those seen in the early 1990s recession and CRE losses would reach about 45% next year. Further, a WSJ analysis of regulatory filings found that banks with heavy exposure to CRE loans set aside just 38 cents in reserves during the second quarter for every $1 in bad loans -- a sharp decline from $1.58 in reserves for every $1 in bad loans from the beginning of 2007.

Grubb & Ellis Chief Economist Robert Bach told CoStar that, although he's far from optimistic about the market, he doesn't share the Fed's high level of pessimism, either.

"One reason I'm not as pessimistic is that I don't think that it's comparable to the residential crisis," Bach said. "Banks will have to declare more losses, but is it the type of crisis that will re-threaten the global financial architecture? I don't think so."

Bach notes that about $3.4 trillion in commercial mortgage loans are outstanding -- about one-third of the $10-$11 trillion in outstanding residential mortgages. A lot of the CRE loans losses will be concentrated in regional banks, and the FDIC has a time-tested procedure for shutting down, stabilizing and reopening such institutions with "a minimum of drama."

When the residential and subprime asset-backed securities market crumbled more than two years ago, the collapse threatened the major "too big to fail" institutions and caught everyone by surprise, sending the Treasury, the Fed and the world's other central banks scrambling for a plan to deal with the emergency, Bach said.

"Now, we know what to do. It's not going to be pleasant, it will be slogging through more losses" for two or three more years, he said.

In his remarks Monday, Dudley noted that financial markets are performing better and the economy is now recovering, if not at the rate regulators would like. He cited three forces restraining the pace of the recovery. Household net worth hasn't yet recovered from the housing price decline. Second, the fiscal stimulus that is currently providing support to economic activity is temporary rather than permanent and will abate over the next year.

Third, and perhaps most importantly, bank credit losses lag the business cycle and are still climbing, and the banking system has still not fully recovered. While banks’ access to the capital markets has sharply improved, institutions are still capital constrained and hesitant to expand their lending. Most significantly, significant classes of borrowers -- namely commercial real estate and small business -- are almost wholly dependent on the banking sector for funds that are not easily forthcoming, Dudley said.

Dudley said two main problems plague CRE fundamentals. First, capitalization rates had climbed sharply during the boom. At the peak, cap rates for prime properties were in the range of 5%. Today, the average cap rate appears to have risen to about 8%. Second, income generated by commercial property has generally been falling, Dudley noted. As the recession has pushed up the jobless rate, office demand has declined, and as the recession has led to a reduction in discretionary travel, hotel occupancy rates and room prices have declined. Retail sales have weakened, reducing demand for prime retail property.

Dudley said the decline in valuations has created a significant amount of rollover risk when loans and mortgages mature and need to be refinanced. The slump in valuations pushes up loan-to-value ratios, making lenders wary about extending new credit -- even in the case when these loans are performing on a cash-flow basis, the New York Fed president noted.

34 banks don't pay their quarterly TARP dividends

The U.S. taxpayers' investments in smaller banks are increasingly at risk.

In a sign that more banks are under great pressure from the recession, 34 financial institutions did not pay their quarterly dividends in August to the Treasury on funds obtained under the Troubled Asset Relief Fund (TARP). The number almost doubled from 19 in May when payments were last made, and also raised questions about Treasury's judgment in approving these banks as "healthy," a necessary step for them to get TARP funding.

"The banks are not paying their dividends because they are worried about preserving capital," says Eric Fitzwater, associate director of research at SNL Financial.

The Treasury Department says it cannot force an institution to pay dividends. "For some banks, it may be prudent to exercise their right not to pay dividends in a particular month, and we respect their right to do so," says Meg Reilly, a Treasury spokeswoman. "To draw any broader conclusions about the state of the banking sector from one month is highly premature and speculative."

However, a lot of smaller banks are already under stress. Weighed down by foreclosures and delinquencies, 98 banks have failed so far this year, vs. 25 for all of last year. Besides insurer American International Group and lender CIT Group, most of the other non-payers are smaller institutions that received $400 million or less in TARP funds.

Top Republican on the House Financial Services Committee, Rep. Spencer Bachus, R-Ala., says: "We must ensure taxpayers are repaid."

Some say Treasury might have been too hasty in approving some banks for TARP funds.

"Perhaps the Treasury made assumptions that were a little bit too rosy," says Walter Todd, who invests in banks at Greenwood Capital. "My question is also whether the Treasury is staffed adequately to handle this tremendous undertaking."

Treasury has given $365 billion to 700 institutions from TARP. AIG, to which the government has pledged $180 billion, has accumulated $1.6 billion in unpaid dividends. And CIT, which received $2.3 billion from TARP, said in a regulatory filing that it is restructuring its debt and seeking approval from bondholders for a pre-packaged bankruptcy. If that happened, it would wipe out the entire government investment.

By Pallavi Gogoi and Paul Wiseman, USA TODAY

10,000 apply for 90 factory jobs

In the latest sign of weakness in Louisville-area employment, about 10,000 people applied over three days for 90 jobs building washing machines at General Electric for about $27,000 per year and hefty benefits.

The jobs dangle medical, eye care, prescription and dental benefit packages, as well as pension, disability, tuition assistance and more, said GE spokeswoman Kim Freeman. And despite the recession, no union workers have been laid off from Appliance Park since the company negotiated lower wages with workers in 2005.

“There are no jobs out there paying these kinds of wages that also offer these kind of benefits,” said Jerry Carney, president of IUE-CWA Local 761 at Appliance Park.

Just four years ago, the same jobs paid $19 per hour. But that was before Local 761 approved wage cuts for new workers aimed at preventing the closure of Appliance Park.

“People still value these jobs,” Freeman said.

With the Jefferson County unemployment rate at 10.6 percent in August and more than 38,000 unemployed people looking for work, the opportunity for moderate pay and health care was an attractive lure.

“In this recession, there are lot of people who are just about to run out of unemployment benefits,” said Richard Hurd, a labor relations professor at Cornell University. The national average of time unemployment benefits collected now stands at 26 weeks, Indiana University Southeast Professor of Business Uric Dufrene said.

That’s about a third of the maximum that can currently be collected.

Larissa Roos, 38, never worked in a factory, but was one of the thousands who bid on jobs assembling appliances.

Until she was laid off from Bank of America in February, Roos said she made $18 per hour fielding calls, often from irritated merchants, about credit card glitches. Roos took that job just out of high school. But severance payments end this month, and Roos said she is looking everywhere to try to replace the income.

“I need something so I can live day to day. The job market is horrible,” Roos said Thursday, adding the family relies on her husband’s job as a printer to pay the mortgage on their Fern Creek home as well as utility, fuel and other bills.

With 10,000 vying for GE line jobs, “I am sure my application won’t even get looked at,” she added.

The rush of applicants came as no surprise to Carney, who noted that another recent GE advertisement for 13 maintenance workers, who are paid a union skilled trades rate of $23 hourly, drew 700 job seekers.

Carney credited GE’s reputation for union job security and blue chip benefits as a powerful lure.

GE announced the new jobs last week and started accepting applications through a website Monday. Wednesday was the deadline. The jobs are being added to a new second shift early next month to assemble Energy Star washing machines in Building 1 at the historic Louisville complex.

Roughly 80 percent of applicants report factory experience, Freeman said. That is not surprising, given the recession so far has slashed 8,000 manufacturing jobs from the region’s economy, Dufrene said.

“There is an abundance of potential employees with manufacturing-related skills,” Dufrene said.

The rough profile of applicants, most of them former factory workers, suggests many lack sufficient education to apply for more than minimum wage jobs in the current job market.

Half lacked a high school diploma. Just 5 percent of the applicants said they had a bachelor’s degree or higher. and

GE employs roughly 2,100 hourly and 2,000 white collar workers at Appliance Park. Now, about 440 workers labor on the first shift making washing machines in Building 1.

Applicant Shane Hopkins, 48, hopes his factory experience provides an edge.

Until mid-August, Brooks said he maintained presses at a plastics factory. Now, Hopkins said he picks up occasional work as a flooring contractor for a cousin.

He still pays $300 per month to keep health care benefits for himself and his wife, an independent contractor for a Ford Motor Co. parts supplier at the Louisville Assembly Plant. Brooks anticipates she’ll be out of work next year, when the plant closes for retooling.

A year from now, “her job ain’t going to be there,” Brooks said. “I am thinking seriously about going to McDonalds, just for the benefits if nothing else.”

Banks 1, America 0

The plight of millions of unemployed US workers exposes the folly of trillion-dollar gifts for America's spendthrift banks

Last Friday's job report showed that most of the US is experiencing enormous economic pain, even if America's economy is now in a recovery. Overall unemployment rose to 9.8%, with the unemployment rate for men hitting a new post-depression high. The economy shed another 260,000 jobs in September and the previous figure for jobs lost in the recession was revised up by more than 800,000. The average workweek continues to shorten. With real wages falling, this ensures that most workers will be taking home shrinking wages.

For the vast majority of people in the country, who derive the vast majority of their income from working, the economy looks really awful. But the economy is not looking bad for everyone.

As we are constantly reminded, the financial crisis is behind us and the banks are back in their feet. In fact, they are more than just back on their feet. In many ways they are doing better than ever. The most recent data from the commerce department shows that the financial industry profits now account for more than 31.5% of all corporate profits. This is a higher share than at any point during the housing bubble years.

Of course, it is not that hard to make profits when you get to borrow money from the Fed at almost no interest and then lend it back to the government at 3.5% interest. Suppose the state of California was given the privilege of not only borrowing $1 trillion from the Fed at near zero interest but also using the money to buy Treasury bonds paying 3.5% interest. The $35bn in annual interest rate subsidies would take care of California's huge budget deficit pretty quickly.

But hey, California is just a big state. It's not a Wall Street bank. Congress is not going to tolerate special treatment for state governments.

The "save the banks" crew continues to peddle a seriously misleading story, mostly without challenge. They tell us that we had no choice. If we didn't give the banks trillions of dollars in their hour of desperate need, then the situation would be even worse.

There is no doubt that a complete collapse of the financial system would have complicated the recovery. However, handing the banks trillions, no questions asked, was not the only alternative.

Last year we faced a situation in which nearly every major bank faced bankruptcy: they could not pay their debts without the help of the government. Rather than just make below market loans, with few or no conditions, we could have made loans conditional on changing the way the banks did business. This would mean prohibiting them from dealing in complex derivative instruments, limiting leverage and seriously cutting executive compensation. (How does a $2m absolute cap – counting bonuses, stock options and other perks – sound?)

We could have done this because the US government held all the cards. If they didn't get money from us they would have been out of business. We could have told them to run around Wall Street naked, to walk on hot coals, to wear stupid looking hats, the choice was shutting down their banks and looking for new jobs.

Instead, we just handed them the cash, no questions asked. Now the banks are bigger and badder than ever and paying out big bonuses, just like before. As things stand, they will be an even bigger drain on the economy in the years ahead than they were in the years leading up to crash.

And, if anyone thinks that the banks have learned something about safe business practices, they have not been paying attention. What the banks have learned is that if you wreck your bank, and incidentally bring down the economy in the process, you can just send your lobbyists to Congress and the White House with empty bags and ask to have them filled up with money. The lesson is that Congress will say yes.

The politicians and the media can be counted on running to protect the banks in their hour of need. While tens of millions of people losing their jobs or their homes is just an unfortunate aspect of the modern economy, the collapse of Citigroup, Goldman Sachs, or Bank of America is a tragedy that our elites just can't fathom.

So, be prepared to endure many more years of high unemployment, under-employment and declining real wages. Upwards of two million people are likely to lose their homes in 2010 and 2011. But the good news is that the economy is recovering and the banks are alright.

by Dean Baker

Dylan Ratigan On Corporate Communism: "$24 Trillion Of National Capital Is Being Sucked Into A Broken Banking System At Our Expense"

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Another home run from Ratigan. We will complete the post later, but the clip is too important to wait until we had the time to do a write-up. So just enjoy. Runs 5 minutes. First 30 seconds are health care, then it's banking and the bail outs.

  • "The beneficiaries of an ongoing $24 trillion taxpayer-funded bailout...$24 trillion dollars."
  • "That is national capital that is being sucked into a broken banking system at the expense of the rest of our country. They continue to use "Too Big To Fail" as blackmail to the taxpayer in order to get us to provide capital to them."
  • "It is a system that takes resources from the citizenry and redistributes it to a tiny elite."
  • "A handful of weak, un-competitive, outdated companies and industries are purchasing control of the American political system in order to stay in business using their cronyism.
  • "It is coming at the direct expense of the rest of us in this nation. And it's a total betrayal of everything that represents America."

Read Dylan's Accompanying Editorial: Corporate Communism Is Killing America


END THE FED - ACTION 11/22/2009

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NEVER Dial 911

Anthony Arambula acted quickly on the evening of September 17, 2008 after an intruder broke into his house. After the invader crashed through a window in the family’s Phoenix home, Arambula grabbed his personal firearm and held him at gunpoint.

Then he made the nearly fatal mistake of dialing 911.

Three Phoenix PD officers were already in the neighborhood when the call went out. Outside the house, Arambula’s wife Lesley informed Sgt. Sean Coutts that her husband had already taken the intruder into custody and was holding him at gunpoint.

Either out of reflexive contempt for a mundane or criminal incompetence, Sgt. Coutts neglected — or refused — to pass along this vital information to his fellow tax-devourers. Before Mrs. Arambula could relay those important facts to the other officers, Officer Brian Lilly shot Anthony six times in the back — twice after he had hit the floor.

“You just killed the homeowner,” gasped Anthony as he bled into the floor of his house. “The bad guy is in there.”

“We f***d up,” Lilly reported to his dispatcher. Fear not, he and his fellow officers acted quickly to address the most pressing issue — no, not the threat to Anthony’s life, or that posed by the intruder, but rather the risk to the career of the police officer who shot the innocent man.

Displaying natural leadership ability, Sgt. Coutts quickly devised a cover story: In the official version, Anthony had pointed his gun at Officer Lilly, yet somehow managed to take six rounds in the back.

“That’s all right,” Coutts consoled Lilly as Anthony was bleeding to death in front of his children. “I got you back … we clear?”

The entire incident was captured on the 911 recording. The audiotape didn’t record what happened next, according to the family’s lawsuit:

“Tony made what he believed was a dying request to the officers; he did not want his young family to see him shot and bloodied. Officers callously ignored his request and painfully dragged Tony by his injured leg, through the home and out to his backyard patio, where they left him bloodied and shot right in front of Lesley, Matthew and Zachary.”

The officers later dragged the wounded man onto gravel, then shoved him on top of the hood of a cruiser and “drove the squad car down the street with Tony lying on top, writhing in pain.”

In order to preserve their cover story, the police insisted on treating Anthony like the suspect in a drug bust, forbidding family and friends to visit him in the hospital.

Not surprisingly, Anthony — who managed to survive being “protected and served” by Phoenix’s “Finest” — still suffers from chronic pain from his injuries, and most likely will for the rest of his life.