Archive for category Finance
AIG’s board decides not to join lawsuit
By Peter Schroeder - 01/09/13 02:57 PM ET
The insurance company American International Group (AIG) is opting not to sign on to a lawsuit challenging the terms of its bailout after facing withering criticism from lawmakers.
The company announced Wednesday that it had decided to reject a request to join the $25 billion shareholder lawsuit “in full.”
“In considering and ultimately refusing the demand before us, the Board of Directors properly and fully executed our fiduciary and legal obligations to AIG and its shareholders,” said Robert S. “Steve” Miller, chairman of the AIG Board of Directors. “America invested in 62,000 AIG employees, and we kept our promise to rebuild this great company, repay every dollar America invested in us, and deliver a profit to those who put their trust in us.”
first reported that the company’s board has opted not to join the legal challenge.
The company only recently completed its exit from government support in December, having received a total of $182 billion in funds from the Treasury and the Federal Reserve Bank of New York when it was faced with collapse at the height of the financial crisis.
The mere fact that the company was considering joining the suit set off a rapid-fire and furious response from congressional Democrats Tuesday, who accused the company of showing a galling lack of gratitude.
“AIG’s reckless bets nearly crashed our entire economy,” said Sen. Elizabeth Warren (D-Mass.), who before being elected to the Senate served on a task force that monitored the bailout program. “Taxpayers across this country saved AIG from ruin, and it would be outrageous for this company to turn around and sue the federal government because they think the deal wasn’t generous enough.”
A group of House Democrats said joining the suit would make AIG “the poster company for corporate ingratitude,” and Rep. Elijah Cummings (D-Md.), the ranking member of the House Oversight Committee, said the move was “an unbelievable insult.”
AIG had confirmed Tuesday that it was considering joining the suit, filed originally by its former CEO Maurice “Hank” Greenberg, who alleged the government charged onerous interest rates on bailout funds and sought compensation for shareholders allegedly harmed by the government’s rescue.
“AIG has paid back its debt to America with a profit, and we mean it when we say thank you to the American people,” said Robert H. Benmosche, AIG’s president and chief executive officer. “At the same time, the Board of Directors has fiduciary and legal obligations to the Company and its shareholders to consider the demand served on us and respond in a fair, appropriate, and timely manner.”
The insurance giant came to serve as a symbol of much of the public anger surrounding the bailouts, especially after the company doled out millions in bonuses to employees just after receiving funds to save it from bankruptcy.
AIG had recently launched an ad campaign to thank the American people for their support.
- Democrats blast AIG’s ‘outrageous’ threat to sue feds over bailout – The Hill’s On The Money (mbcalyn.com)
- AIG refuses to join lawsuit against govt (bigpondnews.com)
- Amid public rage, AIG opts out of bailout lawsuit (news.yahoo.com)
- AIG backs down, won’t sue the government (kaystreet.wordpress.com)
- AIG blinks, won’t sue over bailout (politico.com)
- Lawmakers warn AIG not to sue Washington (upi.com)
- Fury at possible lawsuit by AIG (politico.com)
- Outrageous! Washington’s jaw drops at possibility of AIG lawsuit… (kaystreet.wordpress.com)
- AIG Debates Joining Lawsuit Against Government (huffingtonpost.com)
- Amid public rage, AIG opts out lawsuit against government (bangordailynews.com)
Top 1% Got 93% of Income Growth as Rich-Poor Gap Widened
Little Guys Lose, Big Guys Win as Fed Takes Action
Since 2009, Anita Reyes’ wages have been as frozen as Lake Minnetonka in January.
“I went backwards,” Reyes said. “Two years ago, three years ago, I didn’t know I’d be looking at being homeless.”
Stephen Hemsley’s salary has been frozen too. His income hasn’t.
The chief executive officer of Minnetonka, Minnesota-based health insurer earned $1.3 million in salary every year since 2007. Still, as the economic recovery took hold from 2009 to 2011, Hemsley, 60, exercised stock worth more than $170 million and made at least $51 million from share sales, making him the object of an “Occupy Lake Minnetonka” protest on the ice outside his lakeside home each winter.
The divergent fortunes of Reyes and Hemsley show that the U.S. has gone through two recoveries. The 1.2 million households whose incomes put them in the top 1 percent of the U.S. saw their earnings increase 5.5 percent last year, according to released last month by the U.S. Census Bureau. Earnings fell 1.7 percent for the 96 million households in the bottom 80 percent — those that made less than $101,583.
The recovery that officially began in mid-2009 hasn’t arrived in most Americans’ paychecks. In 2010, the top 1 percent of U.S. families as much as 93 percent of the nation’s income growth, according to a March paper by Emmanuel Saez, a University of California at Berkeley economist who studied Internal Revenue Service data.
The earnings gap between rich and poor Americans was the widest in more than four decades in 2011, Census data show, surpassing previously in Uganda and Kazakhstan. The notion that each generation does better than the last — one aspect of the American Dream — has been challenged by that average family incomes fell last decade for the first time since World War II.
In this recovery it’s proved better to own stock than a house. For stockholders like Hemsley, the value of all outstanding shares has $6 trillion to $17 trillion since June 2009, the recession’s end. Even after a recent rebound, the value of owner-occupied housing, the chief asset of most middle- income families, has $41 billion in the same period, part of a $5.8 trillion loss in home values since 2006.
“Income inequality of the scale we have today is destroying our democracy,” retired American Airlines CEO Bob Crandall said in an interview. Crandall, 76, says he became so frustrated at what he sees as selfishness among his peers that he started writing a on his Lenovo laptop. “Anyone else willing?” he titled his first entry in August 2011, which argued that people should pay higher taxes.
While the Census income numbers don’t count benefits from some safety-net programs, such as food stamps, which tend to reduce inequality, the has drawn enough attention to become a battleground in the presidential election. Both candidates say they’ll do more to protect the shrinking middle class.
President ’s administration has the growth in inequality under his watch to “a deep recession and dramatic fluctuations in equity prices.” Obama advocates the “Buffett rule,” legislation named for billionaire investor that would levy a minimum 30 percent income tax rate on anyone making $1 million or more a year.
Republican nominee Mitt Romney, who was governor of Massachusetts from 2003 to 2007, has said Obama is “dividing America based on 99 percent versus 1 percent.” He calls for cutting government spending and taxes to stimulate job growth, reducing marginal tax rates for all brackets and eliminating the Alternative Minimum Tax and the estate tax.
“The best way to bring more prosperity to more Americans is through economic growth and job creation,” said Andrea Saul, a Romney spokeswoman.
Even as a mending economy generated 4.6 million private- sector jobs since February 2010, almost 40 percent of them were in fields such as hospitality and temporary staffing where the average wage is $15 an hour, according to a report last month by Wells Fargo Securities LLC senior economist . A broken middle class isn’t just an economic challenge — it also erodes political stability, said , chief economist at Mesirow Financial Holdings Inc. in Chicago.
“What is China focused on more than anything? Growing the middle class,” she said.
The income gap between rural households in China under a commonly used gauge known as the Gini coefficient reached 0.3949 last year, nearing a “danger level” of 0.40 set by the United Nations for potential social unrest, according to a study released in August by the state-backed Center for Chinese Rural Studies at Central China Normal University. The figure was 0.47 in the U.S. last year, the highest since at least 1967, the Census bureau estimated.
The patterns reflected by the two recoveries may consign the U.S. to slow growth for years, said Nobel Prize-winning economist , who explored the income gap in his 2012 book, “The Price of Inequality.” Depressed earnings lead to lower consumption, which stems job growth and keeps the risk of recession high, he said.
“We’re all in the same boat,” Stiglitz said. “If our economy doesn’t go well, the 1 percent will suffer.”
So far, the boat has been leaving some in its wake. Fewer Americans own individual stocks than before the recession began, so many have missed the chance for income from the market’s rebound. About 11.7 percent of middle-income families owned stock in 2010, down from 14 percent in 2007, to the . Almost half of the wealthiest 10 percent of American families owned stock in 2007 and 2010, the Fed says.
At the same time, at least 176 companies lit a “sleeping time bomb” of stock-market wealth in 2009 by awarding “mega” grants of stock options to executives, said , chief research analyst at GMI Ratings, a New York corporate governance firm. A mega-grant confers 500,000 shares or more, according to GMI’s reports.
gave CEO Stephen Luczo options to buy 3.5 million shares of the computer disk drive maker in January 2009, when the price had plummeted to less than $4 from $20 about six months earlier. That same month, the company, which is run from Scotts Valley, California, and formally based in Dublin, said it would eliminate 2,950 jobs — or 6 percent of its workforce — and reduce salaries by as much as 25 percent.
The CEO’s salary was cut 25 percent — yet Luczo’s options could be exercised starting at $4.05, a price they within a week of the grant. The options began vesting in 2010 once “specified performance criteria” were met, according to corporate filings. This year, Seagate shares have had an average price of $27.13, and Luczo has sold more than $110 million worth, including some from the 2009 options grant, the say.
“Awarding stock option grants at record lows allows executives to profit handsomely from a market recovery with which they have nothing to do,” Hodgson said. “It divorces pay from performance even more spectacularly.”
Brian Ziel, a spokesman for Seagate, declined to comment.
The GMI report also cited Richard Fairbank, CEO of McLean, Virginia-based , who got options on 970,403 shares in January 2009. The company valued them at $4 million at the time; they would be worth more than $38 million now.
Crandall, the former American Airlines CEO, said that while his blog isn’t a “burning success” — he’s heard from 50 readers — he feels compelled to write about income inequality, taxes and CEO pay. “I wake up every morning and read the newspapers and fly into a rage,” he said. Growing up in Rhode Island during the Great Depression and World War II, he felt a sense of collective effort that’s missing now, he said.
“The whole notion of responsibility kind of went away,” Crandall said. “If the boss is going to get a bonus, then everybody in the company ought to get a profit-sharing check.”
made headlines this year for resisting wage demands at a plant in Joliet, Illinois, after reporting a record $1.7 billion in second-quarter profit. Machinist Kathy Keifer, 56, started there in 1994 after a friend in a geometry class at Joliet Junior College raved about the opportunities. She said she was trained in welding, machining and assembly, and by 2007, was making $25 an hour, enough to support a daughter as a single parent. After a career detour as a real estate agent, she said she returned in 2010 to a changed employer.
Joliet machinists, who make $14.74 to $25.88 an hour, in August accepted a six-year contract that provided no pay increase for those hired before May 2005. Workers hired later receive a one-time 3 percent pay raise or “market-based” increases, whichever is higher. Employees also got a $3,100 signing bonus.
Compensation for Caterpillar’s CEO, the 37-year company veteran Douglas Oberhelman, rose 60 percent to $16.9 million last year. Keifer said that over the next six years, the most she can expect is a 55-cent increase from $17.39 an hour.
“At $25, I was feeling pretty good, definitely middle class,” she said. “Now it’s like the bottom’s giving out.” As the strike depleted her savings, Keifer put off plans to buy a two-story frame house for $99,000 in Joliet.
“I don’t see what good it does our country if companies are hiring at minimum wage,” she said.
Caterpillar takes a “market-based approach” for all employees, and comparing a production worker’s pay to the CEO’s isn’t valid, said Rusty Dunn, a spokesman for the Peoria, Illinois-based company. The contract is fair and necessary to keep the company competitive globally, he said.
“It is not in anyone’s best interests to have the type of labor agreement suited to something you would see years ago,” he said.
Keifer’s postponed home purchase helps explain one factor limiting job growth: Americans don’t have the income to spend as much as they used to. Although U.S. consumer spending climbed to its highest level in four years in August, according to Gallup surveys, it still lags 2008 levels by more than 20 percent. Most of the spending came from higher-income households.
Easy credit in the last decade propped up consumer spending, masking long-term forces that had been pummeling workers — among them global competition, increased automation and falling educational attainment, said University of Chicago finance professor Raghuram Rajan. His 2010 book, “,” argued that the financial crisis was caused in part by excessive borrowing to make up for falling incomes.
“Now that people can’t borrow, they look at their paycheck and say, ‘What happened?”’ said Rajan, a former chief economist for the International Monetary Fund who was named top adviser to India’s Finance Ministry in August.
From 1979 to 2007, about $1.1 trillion in annual income shifted to the top 1 percent of Americans — more than the entire earnings of the bottom 40 percent, according to Alan Krueger, chairman of Obama’s Council of Economic Advisers and an economics professor at Princeton University. If income were distributed as it was in 1979, there might be $440 billion in additional spending each year — a 5 percent boost to consumption, he said in January.
Such a boost might lower the to 7 percent by the end of next year from her forecast of 7.8 percent, economist Swonk said. “It means a lot” because consumer spending accounts for more than two-thirds of the U.S. economy, she said.
About $350 billion more is lost because savers get low rates on deposits and low-risk — an effect of the near-zero lending rates promoted by the Federal Reserve since 2008, said Todd Petzel, chief investment officer at Offit Capital Advisors LLC in New York. He calculated the amount by comparing current rates of less than 0.5 percent with the historic 3 percent yield on $14 trillion of U.S. debt.
The U.S. central bank’s Sept. 13 statement that it would hold near zero through at least mid-2015 while purchasing $40 billion of mortgage debt each month until the labor market improves significantly sent stocks to their highest since 2007. That doesn’t help everyday savers who are more comfortable with fixed-income investments, Petzel said.
“It’s going to be a headwind for the middle class for a long time,” he said.
Nibbling on buttered bread next to his walker at Tacoma Lutheran Retirement Community in Tacoma, Washington, Ray Morrison, 91, said he got so fed up with low interest rates that he invested in annuities that turned out to be a scam. Now he’s less confident that and his pension from Boeing Co., where he was a machinist, will last.
“Right now, but who knows?” he said. “You step into a doctor’s office and you’ve got a flat pocketbook.”
“Health Care, Not Wealth Care,” read a banner that 20 protesters unfurled next to a temporary shack on frozen Lake Minnetonka in January. The group has hiked across the lake each winter since 2009 to get within shouting distance of Stephen Hemsley’s 7,800 square-foot home, which is assessed at $7.9 million. Their protest — aimed at Hemsley’s stock options — hasn’t drawn much attention. One neighbor told group members they should be more polite, organizer Joel Albers said.
“People should be furious,” said Albers, a pharmacist and health economist, citing a Census Bureau estimate that 80,000 children in his state had no health insurance in 2011. “It’s another example of a two-tiered society.”
Hemsley owed his options to grants made from 1999 to 2002, when he was president of UnitedHealth, which is the largest U.S. health insurer and serves 78 million people worldwide.
A 1974 graduate in accounting from , Hemsley was chief financial officer of Arthur Andersen LLP before joining UnitedHealth in 1997. He still has the quiet, analytical manner of an accountant in contrast to his more outspoken predecessor William McGuire, said David Durenberger, a former U.S. senator from Minnesota and a senior health policy fellow at the University of St. Thomas in Minneapolis. The former senator once ran into the CEO, with his family, on a Christmas Day flight. They were in coach, Durenberger said.
“Every other corporate type in America that makes anything over a couple million bucks a year thinks they’re worth a private jet,” he said.
Hemsley replaced McGuire in 2006, after a scandal over backdated stock options. More than 100 companies including UnitedHealth had to restate results over the practice of picking grant dates in hindsight to make them more favorable to executives. McGuire agreed to return $600 million in cash and options. Hemsley — who wasn’t involved in any impropriety, the company says — agreed to raise the exercise price of options he’d received through 2002 to the highest share price of each year.
In 2009, he exercised options on almost 4.9 million shares dating to the 1999 grant. The exercise price was $8.72 and the market price was $28.94, yielding a gain of $98.6 million. In 2010 and 2011, his gains on exercised options totaled more than $70 million, according to corporate filings.
Hemsley has retained a “significant portion” of the shares he acquired through options exercises and holds stock equal to 118 times his base salary, which “fosters a long-term outlook” and aligns his interests with shareholders’, said UnitedHealth spokesman Tyler Mason.
His gains reflect growth in UnitedHealth’s business since 1999 as well as Hemsley’s success in “leading the company to an impressive performance through difficult economic and political environments in 2010,” he said.
UnitedHealth has had “ongoing public discussion about the issues the protesters were voicing” at Lake Minnetonka and is “working to implement the many changes needed to improve access to health care,” Mason said. Hemsley declined to be interviewed.
Wage-earner Reyes, the youngest of eight siblings of Ojibwe native American descent, bought her 700-square-foot Craftsman house not far from Minnehaha Falls in 1995 for $52,900. “It’s only as big as a checkerboard square, but I like it,” she said.
A cedar bush that fit in her palm when she planted it is 20 feet high now. At 52, and 5 feet tall, Reyes walks with a brisk swagger. She wears sleeveless shirts that show off a tattoo of a heart with wings on her right arm. After two decades of dealing blackjack, Mississippi stud and Ultimate Texas Hold ’em, she makes $14 to $17 an hour, mostly from tips. (One thing she said she’s learned: It’s better to work the low-stakes tables because rich people don’t tip as well.)
As her income from the Grand Casino Mille Lacs in Onamia, Minnesota, dropped in 2009, she sometimes camped overnight in her GMC Safari van in the casino’s parking lot to save on gas. She suspected salt in her canned-soup dinners was aggravating her diabetes. Last year, after her hours were cut, Reyes said she developed vertigo that made her so dizzy it was dangerous to drive. A doctor told her the diabetes wasn’t under control and she had to take time off work, she said. Reyes fell behind on her mortgage.
When the bank foreclosed, she said she started packing, even though her symptoms had improved and she’d found a job at a different casino.
A friend connected her with Occupy activists. The group helped her negotiate with the bank, promoted a petition that accumulated more than 100,000 signatures on Change.org and got neighbors involved. Several put up “Stop Foreclosures” yard signs. Another reads, “We Are the 99%.” Two dozen neighbors and activists walked with Reyes to the bank in August to hand over the stack of petitions.
“We’re all one payment away from losing our house,” said neighbor Julie Johnson, sitting in Reyes’ cramped dining room.
The community also banded together for a different reason, to get the police to investigate a house where drug dealing was becoming common, Johnson said.
On a sunny August day in Wayzata 20 miles away, BMWs and other luxury cars prowled for parking on the main street as speedboats tied up on the lake. The CEO of Target Corp., heirs of the Dayton’s department store chain and McGuire, who’s bought several plots, all live around the lake.
“Bone Adventure,” a pet store, has had 10 percent sales growth so far this year thanks to strong demand for such services as $130 hand-strip grooming for wire-haired dogs, said manager Anna Geisler. Periodic “Sushi With Your Poochie” dinners, with an $18 admission fee, have featured hand-rolled dog-friendly maki sushi and “Tail-Waggin’ Mojitos.”
Down the street, Minnetonka Travel, which offers one-on-one vacation planning, boosted sales 20 percent last year — and 2012 is going well: Three local couples recently paid $100,000 apiece for 60-day European cruises, said travel consultant Jennifer Yokiel.
“Someday, right?” Yokiel said with a smile.
Reyes, who rejected an offer from the bank to lease the home she used to own for $600 a month, got an eviction notice in the mail last week. She jumps when a car door slams, she said, fearing it’s a sheriff.
- Peter Robison – Top 1% Got 93% of Income Growth as Rich-Poor Gap Widened (prn.fm)
- Wealth Gap Widens: Top 1% keep Getting Richer While Americans Suffer (crooksandliars.com)
- Top 1% Got 93% of Income Growth as Wealth Gap Widens (bloomberg.com)
- What about the middle class? (washingtonpolicywatch.org)
- Wealthy Americans Gain Even as Republicans Decry Redistribution – Bloomberg (bloomberg.com)
- The Rich will Only Get Richer (wordscover.me)
- Of COWs, HIGs, And The National Debate That Isn’t But Should Be (themoderatevoice.com)
- Rich-Poor Gap Widens to Most in Four Decades (ilene.typepad.com)
- 10 Mid-Week PM Reads (ritholtz.com)
- Two Americas (houseofthedread.wordpress.com)
Revealed: Romney Campaign’s Attempts to Deny Paul Ryan’s Insider Trading Don’t Add Up
Team Romney wants you to believe Ryan didn’t really profit from privileged information. Don’t buy it.
August 14, 2012
Photo Credit: AFP
Over the weekend, the Richmonder blog broke what looked like a whopper of a story: that Republican vice-presidential hopeful Paul Ryan had lined his pockets from information he had obtained from a now-legendary meeting that took place on September 18, 2008. On that day, Fed Chairman Ben Bernanke and then-Treasury Secretary Hank Paulson broke the news to congressional leaders that they would have to approve a bailout to avert a complete meltdown of the financial system.
America was lurching toward catastrophe. But some folks were apparently thinking about their stock portfolios.
Checking through Ryan’s financial disclosure reports, the Richmonder discovered that Ryan had sold the stocks of several major banks that day, while purchasing – surprise! – stock in Paulson’s old firm Goldman Sachs. The story quickly circulated through the media.
The Romney campaign rapidly issued denials, based on three separate — and clearly false — claims: 1) the trades were not individual stock trades, but trades made as part of an index that trades big blocs of stocks according to preset formulas; 2) the meeting took place in the evening, after markets were closed, so the meeting could not have played a role in Ryan’s trading decisions; and 3) the stocks traded within a trust over which Ryan had no direct authority.
In many quarters, acceptance of the denials came almost as fast as the news of the original report. Benjy Sarlin of Talking Points Memo issued a report“debunking” the Richmonder story, stating that “the rumor, which spread rapidly across the Internet, doesn’t hold up to scrutiny.” Matt Yglesias over at Slate, who had first credited the story, backtracked, apologizing that he had been too “credulous” in accepting the Richmonder report.
First of all, the Romney campaign’s claim that the transactions were index trades is not consistent with what’s in the original disclosure reports. AlterNet discussed the controversy with money and politics expert Thomas Ferguson, who has written extensively on the bailout. He explained, “Ryan did own some index-based securities, but they stand out in the summaries. They are different from the many trades Ryan was making in individual stocks. It is perfectly obvious that he sold shares in Wachovia, Citigroup and J. P. Morgan on September 18 and he bought shares in Paulson’s old firm, Goldman Sachs, on the same day. If these were index trades, what’s on the form is nonsense.”
While it’s not possible to pinpoint exactly what Ryan knew and when he knew it, the whole episode becomes more disturbing the deeper you look into it.
Citing accounts from congressional circles, Ferguson explains that Paulson had been told by the White House not to discuss the darkening situation with Congress. But sometime between 2:30 and 3pm on September 18, Paulson finally spoke with then-Speaker of the House Nancy Pelosi. He told her that a very bad situation had developed, and that it could involve something much worse than the failure of a giant bank, possibly even a broad collapse of the whole economy. Pelosi immediately demanded that Paulson come over and brief congressional leaders. He agreed. Ferguson reports that his sources say the meeting did indeed begin after markets closed. But he also notes that word of the meeting circulated to the leaders well before markets closed at 4pm.
Since Ryan is a Republican, he may well have gotten word from the White House about the gravity of the situation even earlier. If you knew that Hank Paulson and Ben Bernanke were coming to brief you as stock markets fell around the world, that’s really all you needed to know to do the trades in Ryan’s portfolio.
If you swallow the idea that Ryan just happened to buy Goldman stock that day — a day he just happened to have a meeting with Hank Paulson, the firm’s former CEO, well, then I have some unicorns I’d like to introduce you to.
Ferguson scoffs at the notion: “There’s a lot we don’t know about the famous waiver that Paulson is said eventually to have gotten to talk to his old firm. When I asked about it under a Freedom of Information request, virtually everything I got back was blacked out. But I’ll tell you this. It was not exactly an Einsteinian inspiration to guess that Paulson’s old firm might be a good bet if things were so bad that Hank Paulson was coming to the Hill.”
Sometimes you win, sometimes you lose. But if you’re a member of Congress, the odds are curiously in your favor. As I reported on AlterNet several months ago, in-depth research undertaken in 2004 considered to be the baseline work in the field revealed that from 1993-1998, US senators were beating the market by 12 percentage points a year on average. Corporate insiders only beat the market by a measly 5 percent. Typical households, in contrast, underperformed by 1.4 percent.
And as to the Romney campaign’s claim that Ryan was not legally in control of his investments, let’s just say that this idea gives the notion of the “Invisible Hand” new meaning.
What’s most disturbing is the notion of a man like Paul Ryan focusing so heavily on his portfolio while his country was in peril. Ryan’s surely a guy who would answer the phone at 3am – provided it’s his stockbroker calling.
- Revealed: Romney Campaign’s Attempts to Deny Paul Ryan’s Insider Trading Don’t Add Up (alternet.org)
- Yes, Paul Ryan’s Flacks Snookered Benjy Sarlin: Republicans Lie, All the Time, About Everything Blogging (delong.typepad.com)
- Is Paul Ryan A Terrible Stock Trader, Is His Broker Confused, Or Is There Something Else Going On Here? (businessinsider.com)
- Paul Ryan Dumped A Bunch Of Bank Stocks The Same Day As Congressional Leaders Met With Hank Paulson During The Crisis (businessinsider.com)
- Can You TRUST Him? Paul Ryan sold shares on same day as private briefing of banking crisis (sgtreport.com)
- Paul Ryan sold shares on same day as private briefing of banking crisis (guardian.co.uk)
- Hey Paul Ryan haters, your congressional insider trader suspect actually is Sheldon Whitehouse (legalinsurrection.com)
- Reflections on Paul Ryan’s Transactions in Individual Bank Stocks in 2008 (delong.typepad.com)
- Ryan Made Series of Bank Trades in 2008 During Financial Crisis (news.firedoglake.com)
- Brad DeLong: Reflections on Paul Ryan’s Transactions in Individual Bank Stocks in 2008 (huffingtonpost.com)
Fighting Foreclosure Fatigue
posted by Jean Braucher
Folks in Washington tell me there is a general sense of “foreclosure fatigue” in our nation’s capital. It’s just so boring to keep thinking about all the people losing their homes year after year. Can’t we move on to something new? This attitude goes along with a failure to do anything meaningful to get out of the five-year-old mortgage crisis, still very much with us. More charitably, the people who would like to do something see no political opening in an election year.
Looking back on all that time, there has been no shortage of good ideas; what has been lacking is will. Remember principal write-down in bankruptcy (aka, cramdown)? Peter Swire, who coordinated housing finance policy at the National Economic Council in 2009-2010, recently admitted that the administration should have pushed for it early on. “Cram-down, on balance, today, would have been a good idea,” he said.
But there is still floating around the idea of the principal paydown plan in chapter 13, which could be implemented by the Federal Housing Finance Agency. But remember Ed DeMarco . . . here, here and here.
If it is hopeless to do anything on the federal level now, how about local initiatives? Just this week, Robert Shiller (of the Case Shiller price indices) in a New York Times piecepromoted state and local government efforts to use eminent domain to seize underwater mortgages, pay their fair market value, and then write them down, making new loans for the public purposes of stabilizing the housing market and reducing blight caused by vacant homes.
There is plenty of reason to develop some will for action. It should not go unnoticed here that both foreclosure starts and repossessions went up in the most recent monthlyreport of Realty Trac. Foreclosure starts in May resulted in the first 12-month increase nationally in more than two years. The highest rates of foreclosure activity, from one in 300 to one in 340 housing units, were, in order, in Georgia, Arizona, Nevada, California, Illinois, and Florida. The top three metro areas for foreclosure starts, in order, were Riverside, CA, Atlanta, and Phoenix. So not surprisingly, the idea of using eminent domain seems to be most seriously under consideration in San Bernardino County, CA, where Riverside is located.
For any local effort using eminent domain, there are at least two legal issues—whether eminent domain can be used to take intangible property such as mortgage notes and security instruments (including mortgages themselves and deeds of trust) and whether taking the property in question to deal with the mortgage crisis is somehow covered in state law as a public purpose. The California law on this seems to be already in place; a quick look at the Arizona statutes on eminent domain did not suggest to me that the idea could be implemented to deal with the Phoenix mess without new legislation on public purposes, and I am not holding my breath for that to happen. But maybe an expert on Arizona law of eminent domain would conclude otherwise.
As noted, not just foreclosure starts, but also bank repossessions were up in May. Recent increases in short sales indicate many of the new foreclosure starts will not end in foreclosure sales. But short sales are still distressed sales, and, in general, more distressed sales make for more softness in the housing market; short sales are better than foreclosures, but they still exert downward pressure on housing prices.
The biggest reason for the pick-up in foreclosure activity nationally may be that major banks were holding off during the negotiations over the national mortgage settlement, finalized in March. Now servicers have clear guidelines on process. If the settlement actually meant a big increase in modifications, we might expect a reduction in foreclosure starts. Under the settlement with 49 state attorneys general and the federal government, Chase, Bank of America, Citigroup, Wells Fargo, and Ally/GMAC are supposed to offer at least $10 billion in principal reduction over the next
three years. Some lucky homeowners are getting offers out of the blue, see here, but there is no application process for principal reduction mods and numbers on their production have yet to be released. Foot dragging on mods . . . reminds me of something, HAMP, so 2010. Feeling a yawn coming on? Fight it.
- Robert Hockett Paper on Using Eminent Domain to Solve the Mortgage Overhang (pubcit.typepad.com)
- Economic View: Real Estate’s Collective Action Problem (nytimes.com)
- Yet Another Loan Mod Program: Municipal Condemnation for Mortgage Principal Writedowns (confoundedinterest.wordpress.com)
- I Got Your Eminent Domain RIGHT HERE, Pal! (dancingonseaside.wordpress.com)
- Water district eyes eminent domain on 5 properties for tunnel project (ocregister.com)
- Hockett on Using Eminent Domain to Beat the Housing Crunch (lawprofessors.typepad.com)
- A solution for underwater mortgages: Eminent domain (blogs.reuters.com)
- North Kansas City hires Zerger & Mauer for more eminent domain work (bizjournals.com)
- Should Governments Use Eminent Domain to Acquire Underwater Mortgages? (njcondemnationlaw.com)
- Norfolk, Virginia, While Abusing Eminent Domain To Seize 78-Year-Old Business, Attempts To Silence Free Speech (openmarket.org)
Making Banks Boring
posted by Adam Levitin
Bloomberg has an editorial arguing that making banks boring won’t prevent a crisis; only increasing bank capital will do so.
To the extent that its big point is that banks will suffer during an economic downturn and the only protection against that is more capital (or insurance, including from the government), it’s hard to disagree. But what this editorial misses is that 2008 wasn’t just some periodic economic downturn that occured for reasons beyond our comprehension or control, like El Niño and La Niña weather patterns. Instead, the 2008 financial crisis was made by the banks themselves. The 2008 financial crisis was the inevitable result of the financial services’ industry’s behavior in the 2000s. And that‘s why we have to make banking boring. Boring banks might be hurt by economic crises, but they don’t make them. We cannot prevent every economic downturn, but there’s no reason we should suffer the preventable ones.
So how is boring banking a solution? It matters for two reasons, one widely understood, and the second entirely overlooked.
First, boring banking does a reasonably good job of aligning risks and rewards for the parties actually making loans, and this helps control against asset price bubble. Boring banking, in its simplest, most stripped down form means that banks make loans and hold them on their balance sheets. (There are problems that can stem from this, namely from the asset-liability duration mismatch, but that’s another issue, and the other banking crises cited by Bloomberg didn’t pose systemic threats like 2008.)
The primary reason that the banks ran into trouble in 2008 was not because they were making bad loans that they held on portfolio. Instead, they made bad loans because they knew those loans would be securitized. The problem was that the banks then went and bought into those very same securitizations, which they then used as collateral for their short-term borrowings (such as repo), making them intensely exposed to the performance of their MBS.
The overprovision of underpriced credit enabled borrowers to bid up asset prices, which then meant that subsequent loans looked better than they were in terms of LTV. Once lax securitization practices ignited the bubble, it affected not only securitized loans, but also balance sheet loans. And then it was pretty much inevitable that someone would get spooked as evidence of poor loan performance speed in and a run and then a market-freezing panic would result that would hit all uninsured short-term credit as no one could be sure which institutions were impaired and which were money good. The fact that the banks were heavily leveraged didn’t help things, and Bloomberg is right that more capital would have softened the blow. But better to avoid the problems in the first place than to hope that capital will be sufficient.
The second reason for making banking boring is one that is continually overlooked in the New Glass-Steagal debate, namely the political benefit of separating commercial from investment banking, which helps ensure against deregulation. Commercial and investment banks can both get into trouble when they’re not regulated. Indeed, the stories of the S&L crisis and of 2008 are fundamentally stories about deregulation. Glass-Steagal made commercial banking boring by divorcing it from securities. Glass-Steagal also split the financial services industry politically and enabled the different parts of the industry to be played against each other. Commercial banks, investment banks, and insurance companies fought each other for turf for decades. This mattered in terms of regulation because regulation is a political game.
Because of Glass-Steagal, the financial services industry did not present a monolith in terms of lobbying, and a Congressman could afford to take a stand against one part of the industry because there would be campaign contributions forthcoming from the other parts of the industry. This is how William O. Douglas got the Trust Indenture Act of 1939 passed–he made concessions to the commercial banks in order to get their support for legislation that kept the investment banks out of the indenture trustee business. In the agencies, each part of the industry had its pet group of regulators who would push back against other regulators when they thought that there was an encroachment on their turf, which is the basic nature of deregulation—allowing greater activities than previously allowed. And it even mattered in the courts, as the insurance and investment banking industries financed major litigation challenges to commercial bank deregulation. The result of a politically fragmented financial services industry was to hold deregulation at bay for quite a while. This started to unwind in the 1980s and by the Gramm-Leach-Bliley Act, it was over. It didn’t take long before we all reaped the fruits of deregulation.
If you want to see more modern examples of the benefits of divided industries, see the FDA’s recent decision on the naming of high fructose corn syrup. It’s going to keep going by that name, rather than by “corn sugar” because in part from intense lobbying pushback from another part of the sweetener industry–the cane and beet sugar manufacturers. Sarbanes-Oxley passed in part because of a split between the Business Roundtable and the US Chamber of Commerce. And in the financial institutions space, the Durbin Interchange Amendment passed because it posed banks against another heavy duty group, retailers.
In short, yes, we need more capital and/or insurance as a cushion for banks during downturns. But we also need to make sure that the banks are not fueling the behavior that leads to economic crashes and downturns. That means in part ensuring that there is adequate regulation of the financial sector, and that requires breaking the political power of the banks. Glass-Steagal accomplishes a political breakup of the banks; neither the Volcker Rule nor capital requirements do. That’s why we need to make banking boring.
- Hoenig: Glass Steagall II “Absolutely Necessary” (ritholtz.com)
- Hoenig: Revival of Glass-Steagall necessary to protect financial system (kansascity.com)
- If Glass-Steagall Hadn’t Been Repealed… (firedoglake.com)
- Bank Downgrades Prove No Need for New Glass-Steagall, Right? (forbes.com)
- Reinstating an Old Rule Is Not a Cure for Crisis (dealbook.nytimes.com)
- A Brief History Lesson: How We Ended Glass Steagall (ritholtz.com)
- Bring Back Glass Steagall (forbes.com)
- Could Glass-Steagall Have Stopped JPMorgan Loss? (npr.org)
- Why Zingales Now Endorses Glass-Steagall (economistsview.typepad.com)
- Could Glass-Steagall Have Stopped JPMorgan Loss? (npr.org)
Like a bad soap opera, the European debt crisis never wants to end, and it’s likely to enter a worse phase when Greece holds its next election on June 17. With one week to go, the outcome seems preordained: the major Greek parties want to end the bailouts and the conditions that come with them.
That’s why the next few weeks are so crucial. Instead of waiting on the inevitable, the European Union, the International Monetary Fund, and the Obama Administration – which provided a $100 billion line of credit to the IMF, which is being used for the bailouts – should rethink their “Bailout Universe” strategy. That strategy has failed, and a new one is needed.
The failure is easy to see: while Greece, Ireland, and Portugal have secured over $500 billion in bailout money over the last two years, their debt burden continues to grow. Meanwhile, Spain and Italy face a similar crisis because of too much spending and borrowing. Nearly one-third of the bailout money comes from the IMF, and the largest contributor to the IMF is the U.S. The Obama Administration has quietly endorsed these bailouts because they believe that, while the bailouts are costly, by enforcing “austerity” on Europe, they will also solve the problem.
Now is the time to question that assumption. For starters, Europe is hardly in an “age of austerity.” Last year, 23 of the 27 EU nations increased spending. One of the few that did make cuts, Greece, cut only six percent of its budget – hardly draconian. Meanwhile, Greece continues to run a budget deficit equal to ten percent of its economy. The national debt in France, Spain and Italy continues to increase. This is “austerity”?
And what of “austerity’s” future? In the recent Greek election, 68 percent of the vote went to anti-bailout parties. In France, Socialist Francois Hollande was elected President promising to lower the retirement age from 62 to 60. German Chancellor Angela Merkel recently said she was open to giving Greece an injection of “stimulus.” At the recent G-8 summit, President Obama urged European leaders to enact a new round of “stimulus” for the whole continent.
Clearly, Europe is going in the wrong direction, and the Administration isn’t helping. That’s why it’s so important for global leaders to start working on a Plan B, a simple plan that would have three basic concepts: stop the bailouts, end the spending binge, and balance the budget once and for all.
President Obama can do his part by reducing America’s line of credit to the IMF to pre-2009 levels, protecting almost $100 billion. I have introduced legislation, HR 2313, which would do exactly that. My bill, which has 94 cosponsors, would send a powerful message to Europe: Uncle Sam’s blank check is over. This isn’t meant to punish Europe. Rather, it’s meant to help Europe make the tough choices that are necessary for a true, sustainable recovery. That recovery can’t happen until job creators – in Europe and the U.S. – gain confidence that the world’s governments have the discipline to get spending and borrowing under control and unleash the power of free enterprise.
Those who worry that revoking the $100 billion line of credit would scare the markets should remember two things. First, it’s actually the uncertainty caused by the endless bailouts – and the fear they’ll never end because of the lack of fiscal discipline – which has caused the swings in the market and the underperformance of the world economy since the Great Recession officially ended in 2009. The crushing burden of debt – and the fear that government debt is out of control – is the main reason why this recovery has been so lackluster, in contrast to the Reagan Recovery which was led by the private sector, not government “stimulus,” and was much stronger.
Furthermore, many experts believe that $100 billion won’t make any difference anyway. It’s too small to make a real impact on the EU’s situation, but it’s definitely big enough to leave a hole in the wallets of U.S. taxpayers at a time when we’re about to face our own fiscal crisis. Consider: a bailout of Italy equal to Portugal’s bailout – about half of GDP – would need over $1 trillion. There isn’t enough money in the world for that kind of commitment. That’s why dealing with this problem now is essential. And instead of waiting by the sidelines and quietly funneling money to the EU through the IMF – as the Administration has done – the US should be working constructively with our allies to find a true, long-lasting solution.
Now is the time for action and a renewed commitment to freedom and smaller government. We cannot take the “too big to fail” philosophy to a global level. The only thing “too big to fail” is America itself.
- Spain told it will be under “troika” supervision | – Reuters (reuters.com)
- Spain poised to get up to €100bn for bank bailout (guardian.co.uk)
- How to Survive a Bank Bailout – BusinessWeek (businessweek.com)
- Nobel Prize-Winning Economist: Spain Bailout ‘Not Going To Work’ (huffingtonpost.com)
- IMF says Spanish banks need nearly $50 billion (miamiherald.com)
- Eurozone finance ministers agree to 100 billion euro Spain bailout (business.financialpost.com)
- Spain Denies Seeking Bailout For Banks (news.sky.com)
- Here They Come: Ireland Demands Renegotiation Of Its Bailout Terms To Match Spain : ) (jhaines6.wordpress.com)
- Euro Zone Agrees To Lend Spain Up To 100 Billion Euros (huffingtonpost.com)
- Spanish bailout could reach 100 bln euros – sources – Reuters (reuters.com)
In Economic Deluge, a World That Can’t Bail Together
By FLOYD NORRIS
Published: June 2, 2012
Less than four years ago, with the world’s financial system in danger of collapsing, major countries managed to come together on a coordinated course that averted a global depression.
Jock Fistick/Bloomberg News
Chancellor Angela Merkel of Germany has urged greater austerity.
Thierry Charlier/Agence France-Presse — Getty Images
Europe’s central bank president, Mario Draghi, has called for a common form of deposit insurance and regulation.
Central banks pumped vast amounts of cash into economies, and banks were bailed out, with vows that they would be subject to stronger regulation.
By early 2009, financial markets had bottomed out and begun strong recoveries. Economies were slower to follow; by last year, slow growth seemed to be the global pattern, spurring hope that the crisis had passed.
But within the last few weeks, much of that hope seems to have faded.
In Europe, the crisis has grown worse, not better, and the disputes among European leaders have intensified as much of the Continent appears to have drifted into a new recession. In China, growth remains robust by Western standards. But concern is rising over the possible end of a property boom that had been fueled in part by local government borrowing and spending.
In the United States, which had been an oasis of relative calm with a growing economy and rising employment, job growth in May, reported Friday, was a puny 69,000. To make the outlook even gloomier, earlier numbers were revised lower. That capped a series of three disappointing monthly reports.
Moreover, there seems to be little willingness — or perhaps lit-tle ability — for the major countries to act together again. Squabbles have grown, some countries are in fiscal distress, and others face daunting domestic problems. The European situation is the most pressing. Banks are under pressure in many countries, for a combination of reasons. They did not raise as much capital as they might have when markets were more buoyant last year. In some cases, they appear to have been slow to recognize their real estate loan losses.
But the most important factor may be that national governments are weak — in every way possible. There is no doubt that some countries could not afford to bail out their banks again; some, in fact, now rely on those same banks for loans to keep the governments functioning at a time when private investors are unsure about their creditworthiness. The president of the European Central Bank, Mario Draghi, suggested last week some type of common European deposit insurance and bank regulation, but there seems to be no consensus.
Nearly every major government in Europe has been thrown out by unhappy voters when an election rolled around, the latest being France. It is not a matter of left versus right. The only major leader to have been re-elected since 2008 is Chancellor Angela Merkel of Germany, but recent state elections there have been won by the opposing party, and even the German economy seems to be losing strength.
The most worrying electoral situation is in Greece, which seems to be mired in permanent recession and unable to comply with the rigid demands for austerity made by its European partners. With one election ending in deadlock among a variety of parties, it will try again on June 17. Many fear that the result could be a disorderly exit for Greece from the euro zone. Others think it could lead to the end of the euro altogether.
For governments that need to borrow money, this is either the best or the worst time ever. It is hard to believe just how low rates are for Germany and the United States. The yield on two-year United States Treasury notes is about one quarter of 1 percent. But comparable German notes this week were yielding one one-hundredth of a percent. At that rate, the government could borrow a million euros and pay 100 euros a year in interest.
But other countries have difficulty borrowing money at all, and pay far higher interest rates to get what money they can. It is not that anyone thinks the yields available on German and United States government bonds are attractive. It is that those bonds are deemed safe by fearful investors.
If throwing cash at the problem was the solution to the last crisis, now many deem that the cause of the current problems. Greece spent its way into its predicament while failing to collect the taxes it was owed and hiding the problem from the rest of Europe. But Spain was running budget surpluses before its own real estate bubble burst, leaving the government reeling. Yet all the troubled countries are being told — largely by Germany — to adhere to rigid austerity. With a common currency, it is hard to see how some of the countries can return to international competitiveness.
In the United States, the ease of borrowing has not made it politically easier to increase the pace of spending. Instead, there is the possibility of “Taxmageddon,” the threat that the unwillingness of politicians to compromise could lead to a combination of big automatic spending cuts and tax increases in 2013 that could devastate economic growth. All this is taking place in the midst of an election campaign that is widely expected to be the nastiest ever.
Moreover, the consensus that financial regulation should be strengthened and standardized has evaporated. In Europe and the United States, banks say that institutions across the Atlantic have unfair advantages, and regulators complain that the other continent has not taken the needed steps.
In the United States, a major push by the banks to weaken rules may or may not have been badly damaged by the multibillion-dollar trading loss suffered recently by JPMorgan Chase. But many in Congress, primarily but not exclusively Republicans, have gone back to the old belief that it was excessive government regulation that created the problem.
The widespread pessimism could dissipate as rapidly as it accumulated. Some surprisingly good economic news in the United States and China would help. More important would be for Europe’s leaders to reach agreement on a course of action that offered hope for recovery in the most stricken areas of the Continent while assuring that the common financial system would have the support of common institutions if needed. Europe has previously managed to cobble together something when disaster appeared to loom, and perhaps it could do so again.
Germany — the country that would have to pick up most of the bill to rescue its neighbors — could decide that not spending the money created greater dangers. The United States could find ways to help out despite fiscal pressures and Congressional hostility to foreign aid. A new consensus on common bank regulation could emerge. But, for now at least, the outlook is far darker than it seemed to be only a couple of months ago.
- In Economic Deluge, A World That’s Unable To Bail Together (mysanantonio.com)
- News Analysis: In Economic Deluge, a World That’s Unable to Bail Together (nytimes.com)
- As Soros Starts A Three Month Countdown To D(oom)-Day, Europe Plans A New Master Plan (zerohedge.com)
- A central-bank failure of epic proportions (economist.com)
- ECB may cut rates as eurozone crisis deepens (ekathimerini.com)
- Euro currency setup unsustainable, bank chief warns (ctv.ca)
- Eurozone is ‘unsustainable’ warns Mario Draghi (jhaines6.wordpress.com)
- Mario Draghi Provides the Right Analysis, But the Wrong Solution (txwclp.org)
- Is It (Finally) Crunch Time in Europe? (blogs.the-american-interest.com)
- The Emerging Markets Slowdown Trifecta (247wallst.com)