Obama Strikes Softer Note With Wall Street

President Obama took a more conciliatory stance toward the financial sector in an interview with Bloomberg BusinessWeek, saying he did not “begrudge people success or wealth,” as it was “part of the free-market system.”

The president’s comments come days after the chief executives of JPMorgan Chase and Goldman Sachs received multimillion-dollar bonuses. But during the interview in the Oval office, he pointed out that “there are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.”

Wall Street banks have been pulling their support for Democrats as they come under fire for their role in causing the financial crisis, as well as the huge payouts they make even as the rest of the United States continues to struggle with a sluggish economy and high unemployment.

While Jamie Dimon and Lloyd Blankfein have made gestures of cooperation as Congress looks at the bank practices that preceded the financial crash of 2008, the banking sector as a whole has poured money into fighting efforts to overhaul the system and increase regulation, bringing the chief reform bill to a standstill.

The president said, however, that the fact that Mr. Dimon and Mr. Blankfein took their bonuses in stock instead of cash was an improvement over the way bankers are often paid. He told Bloomberg BusinessWeek that that was a “fairer way of measuring C.E.O. success and ultimately will make the performance of American businesses better.”

China to Sell U.S. Assets

Something big is happening in China which could have a huge effect on the American economy.

On Tuesday, Reuters reported:

Senior Chinese military officers have proposed that their country ... possibly sell some U.S. bonds to punish Washington for its latest round of arms sales to Taiwan.

Now, Asia Times is reporting:

Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.

It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out, and the Chinese institutions may simply be trying to get out of the way of a widening. There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event.

As Alphaville's Tracy Alloway writes:

In terms of overall holdings of US securities, Standard Chartered estimates the country had about $1.44 trillion at the end of August ($34bn more than official data):

Nevertheless, China still needs US debt to help offset its massive FX reserves — which it continues to build. We doubt it has yet found a better place than the US market to recycle its currency inflows. And until there’s concrete evidence of net-selling of Treasuries, threatening to sell US debt remains simple sabre-rattling over American finances.

It does, however, say something about the wider (delicate) Chinese-US relationship.

***

Update: The European FX analysts at BNP Paribas seem to have confirmed the SAFE report:

Dollar-denominated risk assets, including asset- backed securities and corporate, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest themselves of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events. Meanwhile, the Chinese military has urged the government to sell US bonds, boosting defence spending on Taiwan arms deal. Hence, we watch US spreads intensively. A widening of spreads would not bold well for share markets while putting economic recovery at risk. It was US liquidity feeding financial markets until January this year. Hence a decline of risk appetite suggests repatriation flows moving back into the USD.

And see this.

State to delay tax refunds

Individual and corporate tax refunds to Hawaii residents will be delayed until July 1 as a result of the state's $721 million budget shortfall, the state Tax Department said today.

The action complies with the legally allowed 90-day refund period, according to a news release from the department.

Delaying the refunds will provide an estimated one-time savings of $275 million, which will go toward balancing the budget, according to the release.

The Tax Department said it will release refunds beginning July 1 on a first-in-first-out basis.

"This process will ensure that early filers will receive their refunds first," according to the release.

US trade deficit widens to 40.2 billion dollars

The US trade deficit widened sharply in December to 40.2 billion dollars, capping a year that saw a massive drop in the trade gap, government data showed Wednesday.

The Commerce Department reported total US exports of goods and services of 142.7 billion dollars and total imports of 182.9 billion dollars.

The trade gap mushroomed to 40.2 billion dollars after a revised 36.4 billion dollars in November.

For the full year, the US trade imbalance with the rest of the world improved impressively.

The 2009 trade gap amounted to 380.7 billion dollars, a decline of 45 percent from 2008, the official data showed.

In December, US exports rose 4.6 billion dollars from the prior month, while imports were up 8.4 billion dollars.

The goods deficit led the widening of the trade deficit, rising 3.4 billion from November to 51.8 billion dollars. The services surplus slipped 0.4 billion dollars to 11.7 billion dollars.

Exports of goods rose to 99.1 billion dollars, an increase of 4.6 billion dollars from November. Goods imports climbed a hefty 8.1 billion dollars to 150.9 billion dollars.

Exports of services were "virtually unchanged" at 43.6 billion dollars, and imports of services increased 0.3 billion dollars to 31.9 billion dollars, the department said.

Obama Still Doesn't Get It

Bloomberg today reports President Obama as commenting on the $17 million bonus for Jamie Dimon of JP Morgan Chase and the $9 million bonus for Lloyd Blankfein of Goldman Sachs,

I know both those guys; they are very savvy businessmen,

and

I, like most of the American people, don't begrudge people success or wealth. That is part of the free- market system.

Taken separately, these statements are undeniably true. But put them together in the context of the Bloomberg story - we have to wait until Friday for the full text of the interview - and the White House has a major public relations disaster on its hands. [UPDATE: See the complete transcript and video below.]

Does the president truly not understand that Dimon and Blankfein run banks that are regarded by policymakers and hence by credit markets as "too big to fail"?

This is the antithesis of a free-market system. Not only were their banks saved by government action in 2008-09 but the overly generous nature of this bailout (details here) means that the playing field is now massively tilted in favor of these banks. (I put this to Gerry Corrigan of Goldman and Barry Zubrow of JP Morgan when we appeared before the Senate Banking Committee last week; there was no effective rejoinder.)

Not only that, but the incentives for the people running these megabanks is now to take on reckless amounts of risk. They get the upside (for example, in these compensation packages) and - when the downside materializes - this belongs to taxpayers and everyone who loses a job. (See my testimony to the Senate Budget Committee yesterday; there was no disagreement among the witnesses or even across the aisle between Senators on this point.)

Being nice to the biggest banks will not save the midterm elections for the Democrats. The banks' campaign contributions will flow increasingly to the Republicans and against any Democrats (and there are precious few) who have fought for real reform.

The president's only political chance is to take on the too big to fail banks directly and clearly. He needs to explain where they came from (answer: the Reagan Revolution, gone wrong), how the problem became much worse during the last administration, and how - in credible detail - he will end their reign.

What we have now is not a free market. It is rather one of the most complete (and awful) instances ever of savvy businessmen capturing a state and the minds of the people who run it. Is this really what the president seeks to endorse?

* * * *

The transcript of Obama's exchange on bonuses:

Q Let's talk bonuses for a minute: Lloyd Blankfein, $9 million; Jamie Dimon, $17 million. Now, granted, those were in stock and less than what some had expected. But are those numbers okay?

THE PRESIDENT: Well, look, first of all, I know both those guys. They're very savvy businessmen. And I, like most of the American people, don't begrudge people success or wealth. That's part of the free market system. I do think that the compensation packages that we've seen over the last decade at least have not matched up always to performance. I think that shareholders oftentimes have not had any significant say in the pay structures for CEOs.

Q Seventeen million dollars is a lot for Main Street to stomach.

THE PRESIDENT: Listen, $17 million is an extraordinary amount of money. Of course, there are some baseball players who are making more than that who don't get to the World Series either. So I'm shocked by that as well. I guess the main principle we want to promote is a simple principle of "say on pay," that shareholders have a chance to actually scrutinize what CEOs are getting paid. And I think that serves as a restraint and helps align performance with pay. The other thing we do think is the more that pay comes in the form of stock that requires proven performance over a certain period of time as opposed to quarterly earnings is a fairer way of measuring CEOs' success and ultimately will make the performance of American businesses better.

Banks facing commercial property meltdown

At the height of the property boom in 2006, Shrewsbury's shopping centre was sold for £118m with only six of its 135 units lying empty.

Shrewsbury's shopping centre was sold for a greatly reduced price

The value of shopping centres had soared as money poured into commercial property.

Four years and one slump later, 29 units are empty in Shrewsbury's centre which was sold last month at a price believed to be half of the 2006 figure.

All over the UK, negative equity is now widespread in the whole of the commercial property sector - one informed estimate says it could be as much as £50bn.

In the case of shopping centres, it is now common for centres to be worth less than the cash loaned by banks to allow the owners to buy them during the boom.

"£10bn worth of shopping centres are capable of being put into receivership, should the banks so wish," said Mark Williams, of consultancy DTZ, who charts the buying and selling of shopping centres for BCSC (British Council of Shopping Centres).

He added: "That is one in five shopping centres in the UK.

"I'll stress we don't think the banks will put that volume into receivership."

'Scooby loans'

According to property consultant Andy Lamb, negative equity loans are so prevalent there is even a brand new jargon term in the business, the 'Scooby loan'.

Mr Lamb said such loans refer to companies who re-financed their loans when the market rose but found themselves in negative equity when it fell.

"The income is just about servicing the debt....the loan and the loan values are completely underwater and that is called a scooby loan," he said.

"What it means is a scuba diver i.e. he's underwater but he's still breathing, just!

"Because he can meet the interest payments, all other banking criteria are shot to pieces."

William Newsom of property consultancy Savills has been trying to estimate how much negative equity there is in British commercial bank loans.

Basing his research on six monthly data compiled by DeMontfort University Leicester, Mr Newsom estimates a figure of £38bn worth of negative equity on investment properties. But this could rise to £50bn if the drop in land values on development property is considered.

"It is enormous," he said, "but it could be significantly more."

"It has never been seen before to this order of magnitude. It is 25% of the entire lending book in round terms."

Concealing losses

Such losses would devastate the balance sheets of the banks who offered the loans, according to Mr Newsom, who says banks are doing all they can to help under-pressure borrowers keep afloat.

The alternative is that if the company goes bust, the losses on the loans will turn up on the bank's accounts.

"There a lot of banks out there who are burying their heads in the sand and not admitting the extent of the problems that they have, for obvious reasons," said Mr Newsom.

The could be up to £50bn worth of negative equity in the sector

But the British Bankers' Association rejects claims bankers are hiding their losses.

"UK banks are subject to one of the most open and robust accounting regimes in the world and the full extent of their liabilities is open for everyone to see when they publish their accounts annually."

The association added: "Banks make commercial decisions about the loans they grant and the repayment terms they impose. They lend based on the ability to repay.

"For large scale commercial property deals terms and conditions are individually negotiated and unique to that project."

Forced sales

Banks have been renegotiating loan terms and extending loan periods hoping that the problems would be resolved in what is known as "extend, amend and pretend" or "delay and pray".

Conor Downey, a specialist banking and commercial property lawyer with city firm Paul Hastings said not all loans could easily be extended.

During the boom a large number of so-called securitised loans were issued for property investors, and he said they were far less flexible.

He warned that a spate of forced sales was likely when these complex loans mature in the next two years.

"It is estimated there are 150 of these transactions across Europe, and about half are British.

"Each one runs to hundreds of millions of pounds in some cases billions," he said.

He said securitisations accounted for between 15 and 25% of all property lending at the peak of the market.

As the number of these forced sales grows this will further depress prices in the commercial property sector making it harder for banks to cover their losses, squeezing the cash they have available to lend to businesses.

'Duff' debts

"Banks are required by government to maintain certain amounts of cash....to protect them against the risk that a very large amount of their investments go bad.

"As these loans go bad the amount of capital they have available to the banks will decrease unless they can raise it again on the markets to in the long term it will reduce the ability of banks to make loans at the same levels as they have historically," said Mr Downey.

Economist Roger Bootle said banks were in a double bind, "I think it looks pretty bad whatever they do."

He added, "I don't think there is any way the government can dig the banking sector out of the difficulties with regard to commercial property whatever happens.

"There have been some pretty duff loans, the banks are going to register some pretty nasty losses and it's not really a big surprise because it was a massive boom stroke bubble and someone's got to pick up the tab."

Hawaii may delay payments to Quest health plan

Insurers, providers warn that cash flow problems may affect access to care

The state Department of Human Services has warned health insurance companies that the state may not make payments for Quest — the state's health plan for low-income families — for the last quarter of the fiscal year, leaving insurers to absorb about $300 million in medical expenses until at least July.

The potential delay in payments has stunned insurers and alarmed health care providers, who worry a delay could jeopardize the ability of insurers to cover claims, which would cause cash flow problems and influence how some providers care for Quest members.

"That would be extremely frightening, because if the state isn't paying the plans, then the plans are not going to be paying all of the people who actually deliver the health care services," said Beth Giesting, the chief executive officer of the Hawai'i Primary Care Association, a nonprofit that represents community health centers.

"Of course, that provides a ripple all the way down. If the providers are not getting paid, many of them will not be able to provide the services to the most vulnerable people."

Lillian Koller, the director of the state Department of Human Services, did not return telephone calls left with her spokeswoman seeking comment. But she outlined the situation in January briefings before the Senate Ways and Means Committee and the House Finance Committee.

The department has an estimated $84 million shortfall for the fiscal year that ends in June. Quest — the state's version of Medicaid — is funded with federal and state money, with the federal government now covering about two-thirds of the cost.

The shortfall, however, could prevent the state from providing the matching funds necessary to draw down federal money, forcing the state to delay payments to insurers in April, May and June.

The state makes about $100 million in payments each month to five health insurance plans: Hawaii Medical Service Association, Kaiser Permanente and AlohaCare for Quest; and Ohana Health Plan and EverCare for Quest Expanded Access, the plan for the aged, blind and disabled.

The department asked insurers to float two months' worth of payments to get through the last fiscal year, and also delayed payments in December.

The department has said that one of the reasons insurers are required to have reserves is to ensure prompt payment to providers in the event of such delays.

Koller told lawmakers that the shortfall is primarily the result of an increase in enrollment in Quest, and an increase in reimbursements because the cost of medical care continues to rise.

Quest and Quest Expanded Access, which is for those with disabilities or over 65, cover about 245,000 people.

Cost containment

Koller said that the state should start to have a discussion about reducing the benefit package in Quest, which she said may be the only realistic way to contain costs over time.

Pushing payments forward until next fiscal year, and eventually catching up when state finances improve, is one of the tools the Lingle administration is using to manage through the state's budget crisis.

Gov. Linda Lingle has announced, for example, that the state will delay income tax refunds from April to July, which on paper saves $275 million this fiscal year.

Steve Van Ribbink, the executive vice president, chief financial officer and treasurer at HMSA, sent Koller a letter last week that warned that HMSA "cannot continue to provide access to quality care for the Quest members we serve without the funds to do so."

Van Ribbink said using the delayed payment strategy as a solution to the budget deficit is "illusory" since he believes it cannot be sustained even for a short period of time.

He said payment delays have already forced HMSA to borrow from credit lines and liquidate portions of its investment portfolio to continue uninterrupted payments to providers.

He described it as an "unfair burden" on HMSA and warned that further delays could lead the state's largest insurer to put off payments to providers, which would "place a substantial financial stress on many health care providers."

Jennifer Diesman, vice president of government relations at HMSA, said insurers have not been given any guarantees by the department that they would receive a lump-sum payment in July.

Diesman said the Department of Human Services is also projecting a deficit for the next fiscal year, which Koller put at $146.5 million in her testimony to lawmakers. "There is no clarity about when we would be paid back," she said.

George Greene, the president and chief executive officer of the Healthcare Association of Hawaii, a nonprofit that represents hospitals and long-term care providers, said the delayed payments could leave providers with more uncompensated health care.

Hospitals lost $78 million on Quest care last year, according to an Ernst & Young report.

"What you have here is the beginning of something that could crumble the system," Greene said. "Some of our smaller members that depend on Medicaid payments, they're not going to be able to make payroll, they're not going to be able to buy supplies.

"So as this continues, you really have a detrimental impact to not just the patients, but the providers and also the plans. The longer it goes on, we as an industry have to step back and take a look and say 'What should our positioning be and what should our next steps be?'

"Because at the end of the day, nonpayment, if it gets too lengthy, goes into impacting the quality of patient care."

State solutions

Insurers and providers have reached out to state lawmakers.

State Sen. Suzanne Chun Oakland, D-13th (Kalihi, Nu'uanu), the chairwoman of the Senate Human Services Committee, said one idea would be to tap the state's hurricane-relief fund to help cover a portion of the delayed payments.

But others privately believe that is unlikely, especially after Moody's Investors Service lowered Hawai'i's bond rating outlook last week to negative from stable, in part because of a lack of reserves.

"That's a lot of money to carry for this state. That will impact providers and, of course, the patients," Chun Oakland said of the potential payment delay.

Chun Oakland has a briefing scheduled on the issue later this month.

"We're very concerned about the impact on access to care, as well as the type of services that can be provided," said state Rep. Ryan Yamane, D-37th (Waipahu, Mililani), the chairman of the House Health Committee.

State Sen. Josh Green, D-3rd (Kohala, Kona, Ka'u), an emergency-room doctor, said the Department of Human Services should rethink its strategy.

"I have grave concerns about the impact this DHS decision may have on health care in Hawai'i, specifically on physician care, hospitals and long-term care facilities statewide," he said.

"Worst still, this will profoundly affect access to care for our children. We need DHS to rethink this decision."

According to the Hawai'i Primary Care Association, 41 percent of all patients seen at community health centers in 2008 were covered by Quest.

Darrin Sato, the chief operations officer at Kalihi-Palama Health Center, said delayed payments could limit the ability of health centers to handle all the patients who need care, possibly forcing some to refer more patients to more costly hospital emergency room visits.

"We cannot continue to run as a business if we don't get paid," he said.