Monday, April 07, 2008

Signs of the Economic Apocalypse, 4-7-08


Gold closed at 913.20 dollars an ounce Friday, down 2.6% from $936.50 for the week. The dollar closed at 0.6356 euros Friday, up 0.4% from 0.6330 at the close of the previous Friday. That put the euro at 1.5734 dollars compared to 1.5798 the week before. Gold in euros would be 580.40 euros an ounce, down 2.1% from 592.80 at the close of the previous week. Oil closed at 106.14 dollars a barrel Friday, up 1.0% from $105.08 for the week. Oil in euros would be 67.46 euros a barrel, up 1.4% from 66.51 at the close of the Friday before. The gold/oil ratio closed at 8.60 Friday, down 3.6% from 8.91 for the week. In U.S. stocks, the Dow closed at 12,609.42, up 3.2% from 12,216.40 at the close of the previous Friday. The NASDAQ closed at 2,370.98 Friday, up 4.9% from 2,261.18 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.46%, up two basis points from 3.44 for the week.

Last week the U.S. Treasury Secretary Henry Paulson announced the new plan to re-regulate finance. Few on any side of the spectrum were impressed. Essentially it codifies what has been already happening lately. The Fed Reserve and the U.S. government will keep hands off the financial system unless there is a “systemic risk” or a risk of collapse. The problem with that is the seeds of the systemic risk that the system faces now were planted back two decades ago with financial deregulation. What the system needs is prudent regulation before systemic risks develop. But that would get in the way of the rampant plundering of wealth by a few that seems to be the real goal of the game.

US Treasury plan shields Wall Street speculators

Andre Damon and Barry Grey

1 April 2008

US Treasury Secretary Henry Paulson on Monday presented a broad plan to revamp the American financial regulatory system. The proposal, while giving the Federal Reserve Board expanded trouble-shooting powers over financial markets and institutions, would actually weaken federal oversight of Wall Street investment banks and leave virtually untouched the vast, unregulated secondary, or “derivatives,” markets.

Speaking barely two weeks after the Fed intervened to prevent the bankruptcy of the investment bank Bear Stearns and announced massive loans to other Wall Street firms to avert a meltdown of the financial system, Paulson’s “Blueprint for Financial Regulatory Reform” underscores the determination of the most powerful sections of the financial establishment to block any measures that would limit their ability to generate profits and multi-million-dollar compensation packages from various forms of financial speculation.

Paulson largely cast the proposal as a response to the bursting of the US housing bubble and the subprime mortgage crisis that have resulted in tens of billions of dollars in losses for major banks and a crisis of confidence in the entire US credit system. In fact, his department began drafting the plan last spring as a proposal to further deregulate the American financial system and make it even more profitable and more competitive against foreign rivals in Europe and elsewhere.

Paulson, a former Nixon aide and Wall Street executive, has long advocated further moves to limit government regulation of the banks and financial houses. He was the CEO of Goldman Sachs, the biggest US investment bank, before taking over as Bush’s treasury secretary in 2006, and personally benefited from the fast-and-loose risk-taking on Wall Street that was encouraged under both Republican and Democratic administrations. His compensation package, according to reports, was $37 million in 2005 and $16.4 million projected for 2006. His net worth has been estimated at over $700 million.

Not surprisingly, neither in Paulson’s remarks nor in the 214 pages of the plan he released is there any suggestion that Wall Street firms or their top executives be called to account and held legally culpable for the economic and social disaster that has resulted from their reckless and often deceptive, if not outright illegal, policies and actions.

Paulson’s remarks contained the typical euphemisms employed to mask the depth of the economic crisis. “Markets are pricing and reassessing risk,” he said, referring to the collapse of the massively inflated values of securities backed by subprime mortgages and other forms of speculation.

He sought to reassure Wall Street by declaring, “I am not suggesting that more regulation is the answer,” and hailed the repeal in 1999 of the Glass-Steagall Act as a great advance. Glass-Steagall, passed at the height of the Great Depression in 1933 in response to revelations of swindling and fraud by major banks and financial houses, made it illegal for a commercial bank, which accepts deposits from individuals, to also function as an investment bank. The removal of this restriction contributed to the super-heated speculative environment that led to the current financial crisis.

He also declared, “I do not believe it is fair or accurate to blame our regulatory structure for the current market turmoil.” This “blameless” structure allowed, for example, credit-rating agencies, paid by financial firms to rate securities issued by the same firms, to give AAA ratings to subprime-backed debt, and accounting firms to allow mortgage lenders to book losses as profits.

The Treasury Department blueprint is divided into proposals for the near, medium and long term. In the near-term, it calls for an expansion of the authority and membership of the President’s Working Group on Financial Markets, which was initiated following the stock market crash of 1987 and presently includes the chairman of the Federal Reserve Board, the treasury secretary, the head of the Securities and Exchange Commission and the head of the Commodity Futures Trading Commission.

The plan also calls for the establishment of a Mortgage Origination Commission to increase federal oversight over the licensing and conduct of mortgage brokers.
Intermediate-term recommendations include greater Federal Reserve oversight of US payment and settlement systems, and the merger of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). This latter proposal would effectively lessen federal oversight of stock, bond and commodities exchanges as well as investment banks, since the more lax procedures of the CFTC would prevail.

The plan also calls for measures to increase federal oversight of insurance companies and closing down of the Office of Thrift Supervision, which presently oversees savings and loans institutions.

In the longer-term, which Paulson acknowledged would take years to carry through, the Treasury plan envisions a tri-partite federal regulatory system, with the Fed largely stripped of its current day-to-day oversight of commercial banks and instead given expanded powers to trouble-shoot over the entire array of financial institutions and markets. Under the Treasury plan, the Fed could inspect the books of any bank, investment bank, hedge fund, private equity firm or insurance company and order remedial action—such as greater capital reserves—but only if the Fed deemed the practices of the company in question to pose a “systemic threat” to the financial system.

The Fed’s current role in overseeing commercial banks and other depository institutions would be taken over by a new Prudential Financial Regulator. Significantly, the mandate of this new agency would not extend to investment banks, even though investment banks have now been given access to government-backed loans at the Fed’s discount window.

Finally, there would be a Conduct of Business Regulator to oversee the conduct of financial firms to protect consumers and investors.

The immense growth of the American financial sector over the past several decades was fueled by a series of asset bubbles and made possible by the US dollar’s preeminent role in the structure of world capitalism, which allowed the US to run deficits and accumulate imbalances of a size unthinkable in any other country. But the period in which the US ruling elite could rack up profits while letting its infrastructure and productive capacity crumble was by its very nature transitory. The current crisis represents the beginnings of a global readjustment and the formation of a new balance of economic power, to the detriment of American capitalism.

The current crisis is the culmination of a protracted decline in the global economic position of American capitalism, partially masked in the past by a vast growth of financial speculation and parasitism. It is not, as Paulson said in his remarks on Monday, merely one of the “periods of market stress” that recur “every five to ten years.”

The financial crisis we are facing now was completely predictable. And the people who deregulated the system are smart enough to have seen it, too. But why not make nearly a billion dollars first, like Henry Paulson did, especially when, as an insider, you will know when to get out. No, plunder is not too strong a word for what happened. As for the predictability, it was predicted back at the beginning of this phase:

"The next time we have Black Monday"

Andrew Leonard

April 4, 2008

In the most unexpected demonstration of the thesis that all things are interconnected in a myriad of nonobvious ways, I received an e-mail today from a now-retired reporter named Stephen Pizzo.

Back in 1995, Pizzo and I were colleagues at the Pleistocene-era online magazine Web Review, a daring experiment in the new world of online journalism bankrolled by computer book publisher O'Reilly & Associates. I was a freelancer who was writing madly about the Internet for anyone who would pay me. Pizzo was an established reporter who had coauthored a well-received book on the savings-and-loan crisis. His honed hard-news reporting chops were a welcome complement to the rest of the staff's geeky cyber-enthusiasms.

Pizzo had been reading my coverage recently of Wall Street's economic misadventures, and wanted to draw my attention to testimony he gave in Congress in 1991, at a hearing exploring proposed legislation aimed at deregulating the commercial banking industry.

Prescient is too mild a word to describe Pizzo's testimony. I recommend reading it in its entirety, so as to savor the full flavor of his brimstone and fire. But here is a choice excerpt, featuring Pizzo's prediction as to the likely baleful consequences of allowing commercial banks to play with securities.

As we autopsied dead savings and loans, we were absolutely amazed by the number of ways thrift rogues were able to circumvent, neuter, and defeat firewalls designed to safeguard the system against self-dealing and abuse. One of the favorite methods was to link up like-minded thrifts in the daisy chains through which they could circulate inflated assets and hide their rotten loans to each other and to each other's customers from regulators.

Banks that need to get money to a troubled securities affiliate will do exactly the same thing. By linking up three or more banks, each with its own securities subsidiary, a daisy chain will facilitate a round robin of reciprocal loans in times of need. Then, the next time we have a Black Monday on Wall Street, this daisy chain will swing into action as a handful of mega-banks try to prop one another's securities subsidiaries and their customers as the market plummets.

In such a scenario, billions of federally insured dollars will disappear in the twinkle of a few program trades.

That will happen, not might happen but will happen, and when it does these too-big-to-fail banks will have to be propped up with Federal money. In the smoking aftermath, Congress can stand around and wring its hands and give speeches about how awful it is that these bankers violated the spirit of the law, but once again, the money will be gone, the bill will have come due, and taxpayers will again be required to cough it up.

Nice work, Stephen. Too bad they didn't listen to you.
As for the plunder, what about this: the infamous Countrywide Financial CEO Angelo Mozillo is getting paid $10 million in stock this year:

SEC: Countrywide execs to get millions in stock

Sat March 29, 2008

NEW YORK (CNN) -- The two top executives at struggling Countrywide Financial Corp., the nation's largest mortgage lender, are slated to receive a combined $19 million in payouts, a regulatory filing shows.

The payments are part of the company's pending takeover by Bank of America.
Countrywide CEO Angelo Mozilo is set to receive $10 million in stock, and President David Sambol will get about $9 million, according to documents Bank of America filed this week with the Securities and Exchange Commission.

Sambol will receive another $28 million in cash and stock to stay with the combined company, the document states.

Their compensation is tied directly to the performance of the company via stock and options that the executives have held over time, according to the filing.
Bank of America agreed in January to buy Countrywide for $4 billion.

Mozilo and Sambol, along with ex-Citigroup chief Charles Prince, came under fire this month by members of the House Oversight and Government Reform Committee, who chastised the executives for helping foster the current mortgage crisis.

Lawmakers accused the executives of leaving homeowners at risk of losing their homes while fattening their own wallets. In their defense, the executives said they also lost billions of dollars in the subprime meltdown.

Mozilo, Sambol and Prince made headlines in the past year for their lofty compensation after their companies suffered heavy losses in the U.S. housing market.
Between 2002 and the close of 2006, the three executives were paid $460 million, according to a report issued by the House committee in March.

Mozilo, who grew Countrywide from its modest beginnings into the nation's largest mortgage lender, reportedly stood to collect a windfall of $115 million after his firm agreed to a yet-to-be-completed sale to Bank of America.

After facing heavy criticism from lawmakers, Mozilo forfeited $37.5 million in payments tied to the deal.
Here’s how it works:

Meanwhile empty houses are piling up and jobs are disappearing.

Huge Job Losses Set Off Recession Alarms

Jeannine Aversa

April 5, 2008

WASHINGTON (AP) -- It's no longer a question of recession or not. Now it's how deep and how long. Workers' pink slips stacked ever higher in March as jittery employers slashed 80,000 jobs, the most in five years, and the national unemployment rate climbed to 5.1 percent. Job losses are nearing the staggering level of a quarter-million this year in just three months.

For the third month in a row total U.S. employment rolls shrank -- often a telltale sign that the economy has jolted dangerously into reverse.

At the same time, the jobless rate rose three-tenths of a percentage point, a sharp increase usually associated with times of deep economic stress.

The grim picture described by the Labor Department on Friday provided stark evidence of just how much the jobs market has buckled under the weight of the housing, credit and financial crises. Businesses and jobseekers alike are feeling the pain.

"It is now very clear that the fat lady has sung for the economic expansion. The country has slipped into a recession," said Stuart Hoffman, chief economist at PNC Financial Services Group. Indeed, there is widening agreement that the first recession since 2001 has arrived. Even Ben Bernanke, in a rare public utterance for a Federal Reserve chairman, used the "r" word, acknowledging for the first time this week that a recession was possible.

Job losses were widespread last month, hitting workers at factories, construction companies, retailers, banks, real-estate firms and even temporary-help agencies. Also mortgage brokers, hotels, computer design shops, accounting firms, architecture and engineering companies, legal services, airlines and other transportation as well as telecommunications companies.

Those cuts swamped employment gains elsewhere, including at hospitals and other heath-care sites, educational services, child day-care providers, bars and restaurants, insurance companies, museums, zoos and parks. And the government, which is almost always up.

In fact, private employers have shed jobs for four straight months, though December showed an overall gain for the economy because the government increase outweighed the private loss.

March's losses were the most since the same month in 2003, when companies were still struggling to recover from the last recession. Adding to the angst: Revised figures showed losses were actually deeper than first reported for both January and February.

All told, the economy now has lost 232,000 jobs in the first three months of this year.
On Wall Street, investors took the weak employment figures in stride. The Dow Jones industrials lost just 16.61 points, while other indexes edged higher.

All the economy's problems are forcing people and businesses to hunker down, crimping spending and hiring, a vicious cycle.

"Across the board, businesses have become very, very conservative," said Joel Naroff, president of Naroff Economic Advisors. More downbeat about their own sales prospects because of cautious consumers, employers are cutting back. "It only makes sense for them to run leaner if we are going into a recession or already in one" as Naroff now believes.

The new employment figures were much weaker than economists were expecting. They were anticipating a drop of 50,000 payroll jobs.

Michael Gregory, senior economist at BMO Capital Markets Economics, said the employment report was "emitting recession signals."

The national unemployment rate of 5.1 percent, relatively modest by historical standards, is nonetheless the highest since September 2005, following the devastating blows of the Gulf Coast hurricanes.

Bankruptcy filings jumped 30% in March.

Bankruptcy filings jump 30%

Bloomberg News

April 5, 2008

An increase in March bankruptcy filings is another indication that the U.S. economy is in recession, led by states where the housing boom turned to bust.

More than 90,000 bankruptcy filings were made in March, the highest since insolvency laws became more restrictive in October 2005, according to statistics compiled from court records by Jupiter ESources. Filings in March were 30% above the pace in 2007.

California led the nation with a 42% increase in bankruptcy filings at an annual pace in the first quarter, according to Jupiter ESources.

Rising bankruptcies, together with mounting foreclosures and fewer jobs, are further signs the biggest housing slump in a generation is hurting consumers and businesses. Federal Reserve Chairman Ben S. Bernanke this week for the first time acknowledged that the economy might be facing a recession and vowed to act to cushion the slowdown."

We're seeing fairly high readings in these measures of distress like bankruptcies, foreclosures and mortgage defaults," said Chris Low, chief U.S. economist at FTN Financial in New York. The most affected states are "also where the most housing-related business growth was," Low said.

The states most affected by the housing recession, including California, Nevada and Florida, were among those with the largest increases in bankruptcies.

They also are among states where unemployment rates exceed the national average. The jobless rate in California was 5.7% and Nevada's was 5.5% in February. Nationally, 5.1% of workers were unemployed in March, the highest level since September 2005, the Labor Department reported Friday.

Tailing California's 42% rate, Florida had a 35% increase in bankruptcy filings at an annual pace in the first quarter and Nevada saw a 32% rise, according to Oklahoma City-based Jupiter's Automated Access to Court Electronic Records service.

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