banking

Richard Grenell: Hollywood Follows Wall Street?

March 4, 2011

Hollywood is supposed to be the place where people take risks. It’s the place where the industry types push the limits anew and create something fresh from the faint. It’s not supposed to be a place where yesterday is the standard. But this week, the Hollywood establishment made two choices that puzzled the forward looking — the Oscar for Best Picture went to the safest movie The King’s Speech , and the studio heads picked ethically challenged Chris Dodd to lead the Motion Picture Association of America (MPAA). In the press release announcing his appointment as the new MPAA Chairman and CEO, studio heads credited Dodd as “battle-tested” and experienced at “consensus-building”. But for anyone paying any attention to what’s happening in Washington these days, he’s one of the last people Hollywood needs representing them in the nation’s capital. For the last 30 years, Dodd has been a polarizing partisan in Washington. He’s a “proud Democrat” who considers bipartisanship a talking point rather than a philosophy. In fact, when The Hill — one of two daily newspapers focused on Capitol Hill — surveyed every Senator in 2009 for their opinions on bipartisanship among their ranks, Dodd was named the third least bipartisan member of the Senate. The studio heads are obviously partisans themselves but they shouldn’t also be foolish. A simple study of the political lay of the land for 2012 shows the Democrats in the Senate headed for a major defeat. If polls are accurate, Dodd will be expected to deliver votes from the majority Republican Party he has trash-talked for three decades. While political expediency may seem inconsequential to Hollywood, it’s a critical issue inside the Beltway. The Democratic Party has long embraced Hollywood — supporting legislative agendas, making major campaign contributions and tolerating its creativity when critics complain the entertainment industry is out-of-touch with America. And Hollywood’s outreach to conservatives has been almost non-existent. The one-sided strategy is a big risk and having Dodd lead it is even more dangerous. As revolutions in technology and international distribution continue to risk Hollywood’s current status quo, the last person the industry needs as its spokesman is banking specialist Dodd. Sending Dodd to Washington means Hollywood is looking to replicate Wall Street’s behavior of the last decade. Dodd gave us the multi-billion dollar bailouts and failures of AIG, Bear Stearns and Countrywide from his perch as Chairman of the Banking Committee. Why would Hollywood studio executives want to create the sequel if the original flopped? American taxpayers have seen this movie before. Grenell and Chase are Principals at Capitol Media Partners, an international strategic media affairs firm based in Los Angeles.

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Meagan Johnson and Larry Johnson: Generation Y Buys What Their Friends Influence Them to Buy

March 2, 2011

Recently, my dad and I appeared on a TV talk show to promote our new book, Generations Inc. While we waited in the green room (that’s where they stash you until it’s your turn to go on camera), several beautiful young women came in, accompanied by a makeup artist, hairdresser and fashion consultant. The lady from the station told us they were there to tape a segment that would follow our interview. It was about how to look like Blake Lively. How to walk like Blake, talk like Blake, do your makeup like Blake, do your hair like Blake and pick the kind of clothing Blake would wear. “Who’s Blake Lively?” my Baby Boomer dad asked, “And why would anyone want to look like her?” I explained she is a 20-something actress who was recently named the most desirable woman on the planet by AskMen.com. She also stars in the television show Gossip Girl , which is watched by almost every female between the ages of 13 and 25 on the planet. This got us talking about what drives the buying habits of Generation Y. They represent more than 20% of the U.S. population and spend close to $200 billion a year. They also influence another $300-400 billion spent by their own families. Since infancy, their parents have asked them what cereal they want to eat, where the family should vacation, what computers they should buy, which Internet providers are best, and what automobiles to purchase. Gone are the days when children were to be seen and not heard. Today, they are the family’s consumption consultants. Ironically, as consumers themselves, Gen Yers are also highly receptive to the influences of family and friends — especially friends. According to a study conducted by Deloitte titled, “Gaining Speed: Gen Y in the Driver’s Seat,” almost 90% of Generation Y will ask a friend’s advice before buying a car. In a recent Cisco Retail Banking Survey, it was found that Generation Y is three times more likely to ask for financial advice from family and friends than older generations. And according to MarketingCharts.com, double the amount of Generation Y women, compared to Generation X women, are likely to try a new product that has been recommended by a friend via social media. And, of course, the incredible connectivity provided by social media, texting and cell phones has supercharged this phenomenon. If you’re wondering what outfits will make you look more like Blake Lively, you can post the page link from the online store at which you are shopping, and instantly receive tons of advice from your Social Media “friends.” And if you happen to be in a brick-and-mortar store trying on the outfits (yes, Gen Y still shops at them), you can take pictures of yourself in the dressing room with your smart phone, post them, and get sage advice from thousands of friends right there in the store. And speaking of friends, Gen Yers, it seems, also want to buy from friends. According to Cosmo Girl magazine, 60% of young women would call a store where they shop “a friend.” At this point, my Dad snorted and said, “I’ve had lots of friends in my life, and have considered several dogs and even a couple of cars as my friends, BUT A STORE? Give me a break.” But if this is the new reality, it only makes sense to do everything you can to allow Generation Y to personalize your products or service so they feel a bond of friendship with you. For example, at WetSeal.com, you can be your own stylist and possibly get paid for your efforts. You can even download an app that allows you to design your own outfits on the go. How friendly is that? Fox Searchlight films realized that to make the quirky film Napoleon Dynamite connect with Generation Y, it needed to allow Gen Yers to make the movie as much about them as the characters. The company set up a website that allowed viewers to create custom Napoleon Dynamite iron-on transfers to make each Napoleon Dynamite t-shirt a personalized work of art. Also, keep in mind that Generation Y is the greenest cohort to come along. According to a Cone & AMP survey, almost 70% of Gen Yers will decide where to spend their money based on a company’s environmental commitments. Visit Starbucks.com and you will find as much information on ethical sourcing, recycling, community youth outreach, and building green stores as you will about your non-decaf, lite cappuccino. Most Gen Yers wouldn’t be friends with someone they considered to be an environmental pig, so it only makes sense to avoid environmentally piggish behaviors as a company — and it’s better for the planet. The bottom line is that if you want Gen Yers to advise their friends to shop with you, you need to be a friend to them, even if you can’t make them look like Blake Lively. Meagan and Larry Johnson are the daughter-father co-authors of Generations Inc. – From Boomers to Linksters, Managing the Friction Between Boomers at Work (AMACOM Books, 2010.) They speak to thousands of business people every year on how to maximize relationships among generations at work. They can be reached at www.generationsincbook.com

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Bernanke: Don’t Sweat The Oil Stuff

March 1, 2011

WASHINGTON (Reuters) – Federal Reserve Chairman Ben Bernanke said on Tuesday the surge in oil prices is unlikely to hurt the U.S. economy unless it is sustained, even as investors sold off equities on fears of a slowdown. Bernanke, making his first comments since the turmoil in Libya drove U.S. crude oil above $100 a barrel, said he would expect higher prices to lead to only a modest, temporary increase in U.S. inflation “at most.” The Fed chief told the U.S. Senate Banking Committee he saw increasing evidence that the economic recovery has enough momentum to become self-supporting. But job growth remains far too anemic, he said, indicating the Fed was unlikely to cut short its $600 billion bond-buying stimulus. “We do see some grounds for optimism about the job market over the next few quarters,” Bernanke said, citing a steep recent decline in the jobless rate among other factors. Bernanke, who will testify for a second day before a House of Representatives committee on Wednesday, also reiterated a warning that a failure by Congress to raise the U.S. government’s $14.3 trillion debt ceiling could lead to a devastating debt default. “It would be extremely dangerous and very likely a recovery-ending event,” he said. The U.S. Treasury Department on Tuesday said the debt limit could be reached as early as April 15, 10 days later than its previous estimate. Bernanke’s warning came just hours before the House approved a short-term funding bill that would avert a looming government shutdown and buy time to fashion a longer-term budget. The Senate was expected to quickly take up the measure. Some Republicans have vowed to use the need to raise the debt ceiling as a lever to push for deep spending cuts. Bernanke told the panel that downside risks to growth had eased and, for the first time, said the prospect of deflation was now “negligible.” The threat of deflation, a downward spiral in wages and prices that could derail the economy, was a key justification for the Fed’s bond-buying spree. “It’s encouraging to see that the risk of deflation is moderating according to the Fed,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. “That’s one of the keys that will be necessary for the Fed to wind down its quantitative easing program.” NO SPILLOVER At the same time, Bernanke did not appear concerned that the recent spike in the price of crude oil, driven in part by a wave of pro-democracy revolutions in the Middle East and North Africa, would do much harm to the U.S. economy. “The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation,” Bernanke said. However, he warned that if expectations of future inflation were to build, the Fed may need to act. “We will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability,” he said. U.S. crude oil futures rose 2.7 percent on Tuesday to settle at $99.63 a barrel, not far from highs hit late last month. Crude had traded at roughly $86 a barrel before protests swept through Egypt in late January. ( For graphic on oil’s effect on world growth, see bit.ly/hsRlo R) Financial markets showed little reaction to Bernanke’s comments, but the jump in oil prices weighed on stocks, with the Standard & Poor’s 500 index closing down 1.57 percent. Wall Street’s so-called fear gauge, the CBOE Volatility Index, jumped 13.1 percent. U.S. government bond prices rose as investors sought safety. With official interest rates held near zero since December 2008, the Fed in November embarked on a controversial program to buy government debt to keep down long-term interest rates. Bernanke said buoyant financial markets suggest the policy is working, but the labor market still has a long way to go. In January, the jobless rate stood at 9 percent. “Until we see a sustained period of job creation, we cannot consider the recovery to be truly established,” Bernanke said. MANDATE BATTLE BREWING Much of the discussion at the hearing centered around Washington’s heated budget debate. Bernanke refrained from offering detailed advice on fiscal matters, but urged lawmakers to get the deficit under control. “The long-term imbalances are not just a long-term risk,” Bernanke said. “They’re a near and present danger.” The banking committee’s chairman, Democrat Tim Johnson, kicked off the session with a strong defense of the Fed’s dual mandate of price stability and maximum sustainable employment. Some Republicans who have been critical of the Fed’s ultra-easy monetary policy have vowed to introduce legislation forcing the central bank to focus solely on inflation. Johnson suggested that would not be an easy fight. “As the economy continues to struggle to recover, we should be using every tool in the toolbox to create jobs and spur growth,” he said in a statement. “Taking tools away from the Fed now is the wrong idea at the wrong time.” (Additional reporting by Emily Kaiser, Doug Palmer, Lucia Mutikani and Tim Ahmann; Editing by Tim Ahmann, James Dalgleish and Leslie Adler) Copyright 2011 Thomson Reuters. Click for Restrictions .

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3M Chief Executive: ‘Obama Is Robin Hood-Esque’

February 28, 2011

The CEO of industrial giant 3M has blasted Obama as “anti-business,” joining the ranks of executives who accused the White House of not understanding “what it takes to create jobs.” George Buckley, chief executive of the Maplewood, Minn. company which makes everything from Post-Its to respirators, said U.S. companies could leave the country for Canada or Mexico, the Financial Times reported. “I judge people by their feet, not their mouth,” Buckley said, according to the FT . Speaking about President Barack Obama, he told the FT : “We know what his instincts are – they are Robin Hood-esque. He is anti-business,” he added. Executives have previously compared the President to Hitler and Mussolini. “There is a sense among companies that this is a difficult place to do business,” Buckley told the FT . “It is about regulation, taxation, seemingly anti-business policies in Washington, attitudes towards science,” he added. In January, 3M’s fourth-quarter results revealed management didn’t expect the U.S. market to improve until the unemployment rate, now 9 percent, fell significantly: “”There’s still a lot of smoke without fire,” CEO George Buckley about economic conditions in the U.S. 3M’s U.S. sales rose 8 percent in the fourth quarter. But that was half the rate at which worldwide sales picked up. Sales in Asia, which have been driving 3M’s growth, jumped 35 percent from a year ago. Buckley said mild improvements in unemployment and retail sales data are positive signs, but he advocates a cautious approach in the U.S.” In an attempt to embrace criticism from executives, and to convince U.S. companies to start spending the $1.93 trillion in cash and liquid assets they are currently sitting on, last month, the administration announced the Council on Jobs and Competitiveness. The President named General Electric’s chief executive, Jeffrey Immelt head of the council. Immelt was one of the executives who criticized the Obama administration, telling an investors meeting in Rome last year: “We [the US] are a pathetic exporter… we have to become an industrial powerhouse again but you don’t do this when government and entrepreneurs are not in sync.” In the run up to November’s mid-term elections, the Obama administration faced scathing criticism from leading CEOs. “I think this group does not understand what it takes to create jobs,” said Intel CEO Paul Otellini, last year,

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Richard Powell: Background-Check Business Booms Thanks to China

February 21, 2011

Firms that provide background checks on businesses and individuals, from university applicants to management candidates, have never been in high demand thanks to a flood of fraudulent claims by Chinese businessmen and applicants. Some of the world’s leading commercial and private information services have reported that the growing problem of academic and work qualification fraud in China has lead to a huge hike in business for them. Worldbox Business Intelligence founder Adrian Ashurst says a range of international company clients operating in China have found that senior people they had hired on the strength of their CVs did not have the experience and/or academic qualifications required to fulfil their positions, after checking their credentials. The Swiss-based boutique intelligence-gathering service, with Asian bureaus in Beijing and Hong Kong, checks all details in an applicant’s CV on behalf of its customers and fills information requests that cannot be served by web-based subscription services or traditional search giants, such as Experian. Their personalised service and network of ground agents aims to provide a more comprehensive picture than their larger rivals at a time when the level of falsified information by applicants in the business and educational sectors is skyrocketing. Resume fraud in figures The latest Q4 Hudson Report on Employment and HR trends in China surveyed over 1,500 employers across Asia, and found that more than two-thirds (68%) of business respondents across all sectors had encountered candidates being dishonest about their background or experience in their resumes in China, a far higher proportion than in the other markets surveyed in Asia. According to the report, respondents in the Media/PR/Advertising sector were the most likely to have experience of candidates exaggerating or falsifying information in their resumes: 91% said they had done so. This was attributed to the very high churn rate of workers in this industry, who often make bold claims to present themselves as being less deserving of the axe than their co-workers. Second was the Tech sector, with the highest proportion of respondents saying that candidates are dishonest about their job responsibilities/achievements and years of experience at 61% and 43%, respectively. At 66%, the Banking and Financial Services sector had a very high proportion of respondents saying that candidates submit false information about their remuneration packages. This sector has expanded rapidly in recent years as many international banks have entered the market. Candidates are keen to switch jobs to increase their remuneration and tend to exaggerate pay levels to strengthen their negotiating position. At 64%, the Consumer sector had a relatively low proportion of respondents who have encountered dishonesty on the part of candidates. This industry is well-established and companies often have experienced HR teams that can identify falsified resumes. In addition, recruitment specialists operating in this business are highly effective at verifying candidates’ backgrounds before making recommendations to employers. The Manufacturing and Industrial sector reported the same relatively low figure as the Consumer sector at 64%. Employers in this sector often have highly technical requirements when filling vacancies and there is a significant crossover of candidates between companies, making it relatively simple to verify the information provided by candidates. ‘These factors mean that candidates are more likely to be honest when preparing their resumes,’ the report said. Respondents who said they had encountered candidates falsifying their resumes were also asked about the specific areas in which dishonesty or exaggeration occurred. Remuneration packages, job responsibilities and achievements are the areas in which candidates are most likely to distort the facts. Overall, these factors were mentioned by 59% and 55% of respondents, respectively. Stories of professional CV and academic qualification falsifying in China have been reported widely in the international press… Here are some recent examples: After a plane crash killed 42 people in northeast China last August, officials discovered that 100 pilots who worked for the airline’s parent company had falsified their flying histories. In an editorial published last year, The Lancet, the British medical journal, warned that faked or plagiarized research posed a threat to President Hu Jintao’s vow to make China a ‘research superpower’ by 2020. When the Zhejiang University in Hangzhou released results from a 20-month experiment it conducted by running plagiarism-detection software across a number of scientific journals last fall, nearly a third of all submissions were suspected of being pirated from previously published research. In some cases, more than 80 percent of a paper’s content was deemed unoriginal. In a study of 32,000 scientists by the China Association for Science and Technology conducted in summer 2009, more than 55 percent reported they knew someone guilty of academic fraud… Educated gamble? Chinese educators say the culture of cheating takes root in high school, where the competition for slots in the country’s best colleges is unrelenting and high marks on standardised tests are the most important criterion for admission. The Ministry of Education announced two major anti-fraud campaigns in the 90s, but the bodies they established to tackle the problem have yet to mete out any punishments. Dishonesty about academic qualifications, cited by 42% of respondees in Hudson’s report, was more than twice as common in China as in the other markets surveyed. This chimes with Worldbox’s reports that they are experiencing a sharp uptrend in the number of falsified qualifications submitted by young Chinese students to international universities they are applying to study at. These student checks can be broken into two tiers; a regular check where the student will have had little or no work history to check; and, checking of MBA students’ claims of qualifications and of their related or attached work experience. The padded resume of Tang Jun, the millionaire former head of Microsoft China and something of a national hero, was widely reported last summer to have falsely claimed to have received a doctorate from the California Institute of Technology. This story was broken by Fang Zhouzi, a Chinese blogger whose website, New Threads, has exposed more than 900 instances of fakery, some involving university presidents and nationally lionized researchers. Tang was subsequently quoted by the Beijing News as saying: “Losers cheat some people and get caught. Winners cheat the whole world all the time.” His supporters argued that it was fine for him to make such a mistake as long as his admirable business success is real. Employers in China have adopted stricter background checks on potential employees following the Tang Jun story and many employers now leave no stone unturned to crosscheck their job applicants’ credentials and credibility. Qiu Jialu, an HR specialist at a real estate investment company, says her company is stepping up investigation on potential employees’ background information. “Our company has strict procedures for recruitment, especially for those applying for high and middle-level positions. Now, we are planning to expand background checks on those applying for rank-and-file positions,” Qiu said. “Tang Jun’s case reflects a social problem. With the increasingly cut-throat competition, many people buy fake academic credentials to advance their careers,” said Zhu Shibo, manager of the recruitment service centre at the China International Intellectech Corporation Shanghai foreign enterprises service company, one of the country’s leading human resources service providers. Zhu said her centre has received unprecedented commissions to investigate job applicants in recent years. “The number of employers who hire our services for background investigation, which usually covers highest educational qualification, criminal record and work experience, has doubled in the past two years.” Corporate manhunt Conducting research on existing directors of Chinese companies is one of Worldbox’s more expensive services, and arises when businesses come to doubt the credentials of a manager they have already employed. Background checks are normally conducted in the final stages of the selection process, but more in-depth research is sometimes required at a later stage. Prices are highest for senior management checks because applicants’ education and work history is generally more extensive than for people applying for normal positions. Worldbox additionally undertakes corporate research services for key accounting and legal firms to provide accurate information on Chinese companies and their subsidiaries and has recently extended its range of reporting services to provide legal documents on Chinese companies as well as Companies Investigation Reports. “From our Beijing and Hong Kong offices, we can supply Research Reports and Company Registration Documents on most Chinese companies, with personalised services tailored to each customer,” Ashurst says. The full range of offerings from Worldbox in China includes Credit Reports, Investigation Reports, Company Profiles, Legal Document Research including Memorandum & Articles of Association, Certificates of Approval, Capital-inspection report, Business licenses, Applications for change in registered information, Annual Inspection Report and extract from the Company Register document (e.g. information related to shares capital, legal representatives, registered office, financial statements). As well as Land Register in Shanghai, Panyu and Guangzhou. Their investigation work often involves the retrieval of information that customers have not been able to find on the giant information providers they first turned to, including the likes of LexisNexis, who Worldbox works with to serve the search giant’s customers that it cannot cater for by itself, launching their investigation processes on the ground, locally. Ashurst says: “We maintain complete databases on the financial statements of Hong Kong-quoted companies as well as full details on their subsidiaries and investments. We are positioned between the expensive services who also use our information at times and the traditional business information companies like Dun & Bradstreet, Experian, and Graydon in the UK,” he adds. — The author of this article, Richard Powell, works for the global communications group, Presswire .

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Richard Barrington: Covering Your Assets: 7 Signs Your Bank May Be Failing

February 18, 2011

Even though the banking sector is getting healthier, there were still 157 bank failures in 2010. When a bank fails, FDIC insurance should protect your checking and savings accounts (as long as you don’t exceed the $250,000 deposit limit), but accessing money from a failed institution can be inconvenient. If you’d rather avoid that kind of trouble, you should be alert for signs that your bank is struggling. After all, those 157 bank failures in 2010 exceeded 2009′s figure of 140. The reason 2010 was deemed to be a better year for banks is that there were fewer large bank failures, so fewer customers were affected. Still, bank failures remain a regular part of the banking landscape. Here are seven signs to watch out for if you think your bank is in trouble: Deteriorating financial ratios. You can get detailed financial ratios from the Federal Financial Institutions Examination Council. This information can be extremely complex, but if you call up a Uniform Bank Performance Report, you can see whether the capital ratios of your bank are deteriorating and/or are trailing the bank’s peer group. Deposit migrations. You can look at a year-to-year comparison of total deposits for a bank on the FDIC’s web site. A sharp drop means other people are heading for the exits, and you should be curious about why. Delayed financial reporting. Even if you can’t make heads or tails of the detailed financial reports, if you hear that a bank has delayed releasing earnings or other financial details, it may be a sign they are struggling with extreme changes in valuations. Layoffs. Drastic cuts in employees are a bad sign. Even if the bank isn’t failing, these cuts probably mean you can expect less service than in the past. Branch closures. Look at this as a more extreme version of layoffs. Don’t overreact if your bank steadily reduces the number of branches over time–the trend in banking is towards more electronic banking, with less of a bricks-and-mortar presence. However, a sudden announcement of a drastic reduction of branches is not a sign of an orderly, long-term strategy. Cuts in services. Whether it’s free checking accounts , rewards points, or special savings account rates for large customers, healthy banks make an effort to provide incentives for loyal customers. In a struggling bank, cost-cutting outweighs relationship-building. Sharp hikes in fees. As a general rule, healthy banks are in a mode of actively trying to attract new business–they are advertising regularly, offering competitive savings account rates, and have reasonable fees. Banks that are in trouble tend to go into a defensive posture where they don’t seem interested in new business, and they hike fees to get more out of existing customers. Several banks are adjusting fees because the banking environment overall has changed, but the more extreme the fee hike, the more wary you should be. None of these signs is the definitive kiss of death for a bank, but the more evidence of this kind you see, the more likely it is that your bank is struggling. At the very least, this can mean lousy service and uncompetitive products, and in the worst case, it could mean your bank is heading towards failure. So, if you start to see some of these signs, it may be time to shop for another bank. This post was originally featured on Money-Rates.com

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JPMorgan CEO: Bank Won’t Be ‘Goaded Into Doing Something Dumb’

February 15, 2011

NEW YORK (By Clare Baldwin) – JPMorgan Chase & Co Chief Executive Jamie Dimon said his bank will not be “goaded into doing something dumb” with its capital, even as it prepares an aggressive expansion in consumer and private banking over the next five years. Speaking at the bank’s annual investor day, Dimon said the bank is prepared to withstand any phasing out of mortgage financiers Fannie Mae and Freddie Mac, despite being one of the nation’s largest home loan providers. This is in part because it expects 2011 to be a year of growth for the bank, primarily through existing businesses but especially in Latin America and Asia, he said. Dimon, a Democrat, also downplayed persistent speculation he might leave the second-largest U.S. bank by assets to go into the political arena. “I’m not going into politics and I’m not opening a restaurant. I love what I do. I want to be here. I want to stay,” he said. Dimon added: “There are people here who can take my spot.” BRANCH BANKING GROWTH JPMorgan plans to will add at least 1,000 branches in the next three years and could add up to 2,000 within five years, said retail financial services Chief Executive Charlie Scharf. The bank said it expects “aggressive growth” in California and Florida in particular. It ended September with 5,172 U.S. branches, trailing Wells Fargo & Co’s roughly 6,500 and the nearly 6,000 that Bank of America Corp. operates. Scharf said branch expansion will largely be in areas where Chase operates now. He also said there were few attractive opportunities for Chase to grow by buying another bank. “When you look at our existing footprint, we know exactly who we’d be interested in and not interested in, and we know the same for out-of-footprint and it’s not a long list of names,” he said. “A lot of the smaller transactions that you see for us don’t seem to make a whole lot of sense.” JPMorgan significantly boosted its branch network in 2008 when it bought the banking business of Washington Mutual Inc, the largest U.S. bank or thrift to fail. CONCERNS Despite beating analyst estimates for fourth-quarter earnings, JPMorgan faces questions about declining trading volumes, its long-time ties to imprisoned Ponzi schemer Bernard Madoff, its foreclosure practices and pending financial regulation, which could crimp profits. Scharf addressed part of the regulation issue, saying JPMorgan stood to lose $1.3 billion of revenue from new regulations on debit card processing fees. Shares of JPMorgan closed up 28 cents, or 0.6 percent, at $46.82, compared with a 0.3 percent decline in the KBW Bank Index . Two months after investor days, shares of a bank have historically risen an average of 15 percent, according to a Barclays Capital research note published last week. (Writing by Ben Berkowitz and Jonathan Stempel; Editing by Gunna Dickson and Steve Orlofsky) Copyright 2010 Thomson Reuters. Click for Restrictions .

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‘Too Big To Fail’ Will Never End, Buffett Says

February 11, 2011

No matter what the government does, taxpayer bailouts of the financial sector will sometimes be necessary, according to the nation’s second richest man. As markets crashed in the fall of 2008, government officials feared that if certain financial institutions failed, the entire financial system — or perhaps even the entire economy — would come down with them. In the months after the government extended a $700 billion bailout to the financial sector, lawmakers have striven to ensure that no institution poses such a systemic risk that it would be too big, or too interconnected, to be allowed to fail. But famed investor Warren Buffett, whose own firm profited handsomely from the bailout, said bailouts are an inevitable feature of finance, Bloomberg reports. Buffett, who is personally worth at least $45 billion , told the government panel charged with investigating the causes of the financial crisis that its work would not prevent the phenomenon of “too big to fail.” “You will always have institutions that are too big to fail, and sometimes they will fail,” Buffett told the Financial Crisis Inquiry Commission in May, according to Bloomberg. His recorded comments were released Thursday by the FCIC, Bloomberg notes. (You can read the full set of FCIC documents here .) “We still have them now. We’ll have them after your commission report.” Buffett’s diagnosis joins a chorus of similar warnings. Yale economist Robert Shiller , speaking last fall at The Economist ‘s Buttonwood Conference in New York City, said the Dodd-Frank financial reform legislation would not stop financial firms from being of systemic importance. “What we’ve seen so far is not going to eliminate the problem of systemic risk, because it’s a very difficult problem. It involves the nature of the banking system, which is inherently vulnerable,” Shiller said. “It’s vulnerable to runs and collapses, just like steam engines are vulnerable.” Ending “too big to fail” has been a priority for government officials. Much talk was spent on a so-called “resolution authority,” which would theoretically allow the government to break up banks on the verge of failure. But even before the bill was passed, Federal Reserve chairman Ben Bernanke expressed doubts that such authority would work. As of now, the nation’s four biggest banks are able to get even bigger before they even reach the government-imposed limits, HuffPost’s Shahien Nasiripour reported. Buffett, for his part, made a successful bet that the government would bail out the financial sector. His firm injected $5 billion into Goldman Sachs during the worst of the crisis, as part of a highly lucrative deal . Buffett’s preferred stock earns a 10 percent dividend annually . Last fall, when Goldman was reportedly trying to exit the deal early, the bank was paying Buffett’s firm about $1.3 million every day. As the Wall Street Journal noted, that’s about $15 per second.

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The Rise & Fall Of Florida’s Foreclosure King, David J. Stern

February 7, 2011

FORT LAUDERDALE, Fla. — During the housing crash, it was good to be a foreclosure king. David Stern was Florida’s top foreclosure lawyer, and he lived like an oil sheik. He piled up a collection of trophy properties, glided through town in a fleet of six-figure sports cars and, with his bombshell wife, partied on an ocean cruiser the size of a small hotel. When homeowners fell behind on their mortgages, the banks flocked to “foreclosure mills” like Stern’s to push foreclosures through the courts on their behalf. To his megabank clients – Bank of America, Goldman Sachs, GMAC, Citibank and Wells Fargo – Stern was the ultimate Repo Man. At industry gatherings, Stern bragged in his boyish voice of taking mortgages from the “cradle to the grave.” Of the federal government’s disastrous homeowner relief plan, which was supposed to keep people from getting evicted, he quipped: “Fortunately, it’s failing.” The worse things got for homeowners, the better they got for Stern. That is, until last fall, when the nation’s foreclosure machine blew apart and Stern’s gilded world came undone. Within a few months, Stern went from being the subject of a gushing magazine profile to being the subject of a Florida investigation, class-action lawsuits and blogger Schadenfreude that, at last long, the “foreclosure king” was dead. “What Stern represents is an industry that was completely unrestrained, unchecked, unpunished and unsupervised,” says Florida defense attorney Matt Weidner. “This was business gone wild.” The rise and fall of Stern, now 50, provides an inside look at how the foreclosure industry worked in the last decade – and how it fell apart. It also shows how banks, together with their law firms, built a quick-and-dirty foreclosure machine that was designed to take as many houses as fast as possible. Not long ago, the world of back-office bank procedures was of little interest to the public. But revelations last fall about robo-signers powering through hundreds of foreclosure affidavits a day, without verifying a single sentence, changed all that. Today the banking industry’s eviction juggernaut is under intense scrutiny as allegations of systemic foreclosure fraud mount. The 50 state attorneys general are conducting a foreclosure industry probe. So are state and federal regulators. Class-action lawsuits are gathering force, and, with increasing frequency, state judges are tossing out foreclosure suits in favor of homeowners. The developments are prolonging the housing market depression, casting doubt on mortgage ownership and calling into question whether mortgage-backed securities are, in fact, backed by nothing at all. The Florida attorney general’s economic crimes division is investigating three law firms, including Stern’s, over allegations that they created fraudulent legal documents, gouged homeowners with inflated fees, steered business to companies they owned and filed foreclosures without proving the bank actually had a legal interest in the loan. Florida authorities characterize the foreclosure process at these law firms as a “virtual morass” of “fake documents” and depicted Stern’s operations as something akin to the TV show “Lost” – only instead of people that went missing, it was paperwork. Stern’s employees churned out bogus mortgage assignments, faked signatures, falsified notarizations and foreclosed on people without verifying their identities, the amounts they owed or who owned their loans, according to employee testimony. The attorney general is also looking at whether Stern paid kickbacks to big banks. “There’s a David Stern in every state, sometimes more than one,” says Jacksonville Legal Aid attorney April Charney, who has successfully stopped foreclosure for hundreds of Florida families. Stern denied repeated requests for comment. He did not answer inquiries at his office or at his main residence in Fort Lauderdale. Stern’s lawyer, Jeffrey Tew, agreed to an interview in late December at his Miami office, then canceled it the night before without further comment. Stern’s story, starting with his law degree in 1986 from the South Texas College of Law, can be pieced together through thousands of pages of court documents, myriad depositions and scores of interviews. After working at a law firm for mortgage lenders, Stern started his own practice in Fort Lauderdale in 1994. Four years later, he got a massive break: the mortgage giant Fannie Mae, a government-backed agency that provides market stability for mortgage lenders, named Stern to its exclusive attorney network. That meant Fannie directed banks to use Stern’s firm when foreclosing in Florida. Fannie also named Stern Attorney of the Year in 1998 and 1999. Employees from that era remember an office that liked to party together. Stern enjoyed dressing up for his office bashes. One time he sauntered on stage turned out like Michael Jackson. Almost from the beginning, Stern faced trouble. In 1998, he was named in a class-action lawsuit alleging that he padded fees on foreclosed homeowners. Stern settled for $2.2 million. According to legal testimony at the time from a Fannie Mae official, Fannie was warned about troubles at the Stern firm. But Fannie continued referring cases to Stern. Fannie Mae spokeswoman Amy Bonitatibus says, “At all times, Fannie Mae has had a reasonable expectation that our servicers and the law firms adhere to proper procedures and conduct under the law. In instances where we learn that servicers or law firms are not adhering to our requirements or applicable law, we immediately engage and take appropriate action, which may include termination.” Soon after, Stern was sued again, this time for sexual harassment. A former paralegal alleged that Stern created a “sexually-laden” atmosphere in which he routinely “touched and grabbed and subjected to simulated intercourse” his employees. Stern settled that suit in 2000 for an undisclosed amount. By this time, lawyers and homeowner activists were also warning lenders, federal regulators and the Florida Bar about Stern. In 2002, the Florida Supreme Court reprimanded Stern for submitting “potentially misleading” fee affidavits. None of the accusations stalled the firm’s steroidal growth. After the economy crashed in the fall of 2008 and ravaged the housing market, Florida, along with Nevada, Arizona and California, became foreclosure central. Stern’s caseload rose from 15,000 foreclosures in 2006 to 70,400 in 2009. His staff tripled to more than 1,200. To keep up with demand, Stern set up offices in the Philippines. When the U.S. staff responsible for entering bank data in the foreclosure files logged off, the offshore workers logged on. Revenue swelled from $41 million in 2006 to $260 million in 2009, according to an SEC filing. The firm moved into a plush, marble-floored headquarters near Miami that was all glass and fountains. By now Stern was driving a Bugatti and had bought at least $60 million in property, including a 16,000-square-foot island compound that sits behind two security gates. But all the paperwork Stern’s firm was cranking out to make this fortune would soon come back to haunt him. The foreclosure business is a volume game. Banks typically pay law firms like Stern’s about $1,400 for each successful foreclosure. But the banks can pay a lot less if the firm doesn’t successfully foreclose within a certain time frame, usually around six months. With so many foreclosures flooding in, Stern’s firm couldn’t keep up. Stern took shortcuts by hiring the young and cheap. “The girls would come out on the floor not knowing what they were doing,” says Tammie Lou Kapusta, who worked in Stern’s foreclosure department in 2008 and 2009. “Mortgages would get placed in different files. They would get thrown out. There was just no real organization when it came to original documents.” Employee depositions paint a picture of a firm under constant pressure from the banks to move faster. The longer it took to foreclose, the more money the banks stood to lose. Like so many in the industry, Stern had a strategy to cope with all the volume and velocity: robo-signing. One employee testified that Stern’s chief lieutenant, a one-time file clerk named Cheryl Samons who rose to become the firm’s chief operating officer, signed as many as 1,000 foreclosure affidavits a day without reading a single word. The employee said Samons’ hand got so tired that she told three other employees to forge her signature. Samons also signed numerous mortgage assignments with a notary stamp that didn’t even exist at the time of signing. Notary stamps are only valid for four years. The only way Samons could have signed mortgage assignments at the time they were supposedly notarized was if she had been capable of time travel. Stern rewarded Samons with a new BMW SUV every year, paid all her bills and took care of the mortgage payment on her home, according to testimony from two employees. Samons did not respond to request for comment. Billings surged. So did the dysfunction. Kapusta testified that she received 100 phone calls a day from people who never received their foreclosure notices or who wanted loan modifications but couldn’t get through to the banks. If she talked too long on the phone, Kapusta testified, Samons would yell at her. “Everything was about getting the judgment entered because we had to report to the banks,” Kapusta said. Stern battled to keep the chaos inside his firm a secret. In 2008 and 2009, whenever the Fannie Mae auditors were about to touch down in Miami for their routine monitoring, Stern’s employees sometimes toiled through the night, ripping the stickers and client codes off of Fannie files and replacing them with those of a different lender. Then, as an extra precaution, they hauled the disguised files to a remote back room. Stern then gave Fannie officials the white-glove treatment, with catered meals and chauffeuring. The incomplete files stayed hidden until the auditors left town. Fannie Mae’s Bonitatibus says that, “To our knowledge, no one at Fannie Mae has had their expenses paid by the Stern Law firm.” Early 2010 brought Stern’s biggest coup. He spun off a chunk of his business called DJSP that performed mortgage process services like title searches and lien monitoring and took it public. The deal reportedly made Stern $146 million, including $55 million cash. DJSP stock started trading in January at about $10 a share. Within months, battered by rumors of indiscretions at Stern’s firm, it was worth half. On July 20, two investors filed a securities-fraud class action alleging that Stern knowingly misled them by failing to disclose the problems within the business. “DJSP was a scam,” says Bill Warner, a Sarasota private eye who successfully defended himself against a foreclosure suit brought by Stern. At the end of July, Florida attorney Kenneth Trent, who had blocked Stern from foreclosing on a homeowner who was current on his mortgage, filed a federal lawsuit against Stern’s firm under a statute normally reserved for gangsters, the Racketeer Influenced and Corrupt Organizations Act–or RICO. Days later, the Florida attorney general launched an investigation against Stern’s firm and three other foreclosure mills. The AG’s arguments were similar to those brought in Trent’s class action. At first, Stern railed against the media, saying he would defend the company and its reputation against the allegations. Then, in September, he dropped out of sight. Equally elusive is Cheryl Samons, who is no longer with the firm. She left no contact information. In October, one by one, the megabanks started to withdraw their cases from Stern’s firm. Fannie fired Stern on Oct. 22. Stern’s staff of 1,200 has dwindled to 200. DJSP’s stock, worth as much as $13 in April, now trades for pennies. The firm’s fall has spawned more chaos in Florida’s circus-like foreclosure courts. A slew of homes Stern foreclosed on that sold for $240,000 each during the credit bubble sold at auction as orphaned cases for $200. Recently, even the most infamous “rocket docket,” in Lee County, where judges were reported to have signed off on a foreclosure every 30 seconds, ground to a virtual standstill as the Stern firm withdrew from case after case. Some of Stern’s remaining lawyers show up court with greasy hair, fleece jackets and food-stained clothing. As for Stern, if federal and state prosecutors file criminal charges, he could end up in prison. Meanwhile, Stern’s payment on his $12 million line of credit with Bank of America is late. So is the rent on his headquarters. He’s now in default.

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Bank Watch: New Mexico’s Largest Bank Fails, Acquired by U.S. Bank

February 3, 2011

U.S. Bank has acquired the banking operations of First Community Bank in Taos, NM, from the Federal Deposit Insurance Corporation (FDIC). First Community Bank was closed by the New Mexico Financial Institutions Division, which appointed the FDIC as receiver. Under the terms of this transaction, U.S. Bank will receive approximately $2.1 billion of assets and assume approximately $2.1 billion of liabilities, including $1.8 billion of insured and…

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Brett King: Let’s Get Rid of Internet Banking

February 2, 2011

If you think about the way we have digital banking and web presence structured today, it is actually wrong. Most banks today already have a well developed ‘public’ presence in the form of www site, and a separate ‘secure’ portal as a transaction or services platform “behind the login” — normally called “Internet Banking.” The problem is, that this basic structure is not the optimal configuration for customers, nor for the bank moving forward. Why is it so? Largely the reason for separating public website and internet banking comes down to historical elements. The major driver is purely evolution of two separate platforms. While there had been early attempts at some sort of transactional platform for banking through dedicated networks, these largely failed until the internet provided a common infrastructure for simple online access to services. While transactional banking was an obvious fit to the IP world, when the internet emerged commercially it was more about brochureware — and thus the content was less about functionality and more about marketing and sales. Thus emerged two disparate platforms — one was functional or transactional technology, and the other was about revenue and sales. Traditionally speaking the “dot com” presence was owned by the marketing, or in some misguided cases corporate communications who mistook the home page as a staging ground for press releases and investor relations messages. Internet Banking, however, being largely about a front-end to transactional services (such as viewing a statement, getting account balances, transferring funds and paying bills) was driven by the IT teams who were in charge of integrating the browser with the bank core systems through some sort of middleware. To this day, these teams just don’t understand each other, so the hope that one day public and secure web presence could work together, is hard to visualize. The Biggest Revenue is Behind the Login The problem with these two separate views of the world, is that it no longer makes sense for the customer. 90% of daily traffic to most bank website goes to the login button, so conceivably your most attractive targets (i.e. existing customers) are ignoring all of the marketing spend on nice sales messages, flashy graphics and landing pages, and they’re going straight through to the tasks they want to complete behind the login. Behind the login, most banks adopt a quite sterile marketing environment, with very limited sales communications, largely focusing on execution. The fact is, based on these analytics, you probably need to be spending at least 90 per cent of your Web marketing budget on building offers and campaigns for existing customers through the Internet banking secure portal, but the IT guys don’t get any of that. The core advantage to selling behind the login is that the acquisition process is dead easy. You already have all the customer information (KYC), so compliance is simply a click-based existing customer acquisition, rather than copious forms or entry to provide proof of who they are, their credit risk assessment, etc. These are simply the easiest customers to convert. However, shifting marketing spend to behind-the-login is not really the answer either. Tomorrow’s web presence will be very different… The future of using IP to connect with customers is understanding that there isn’t and shouldn’t be two separate web-based platforms. The fact is that if you think about content I need everyday from the bank, stuff like my account balance, my transaction history, upcoming payments, etc — this probably doesn’t need to be subject to a full-blown, two-factor authentication model. In most cases, this information could be shown contextually into my banking experience just based on a cookie and ‘remember me’ authentication model (think hotmail.com or Facebook). Marketing journeys could start one of two ways. For example, if I come to your site as a result of a search on mortgages, the homepage needs to respond to your interest in mortgage immediately, along with recognizing if you are an existing customer. For example, if you are an existing customer, you’d see immediately what you are pre-approved for, or if you are an existing mortgage customer then you might see a refinancing option or a competitive offer for bundled home insurance. Much of the content we need is going to be contextual too. So I need you to tell me my credit card balance when I’m on a third-party credit card site, about to use my card, instead of just refusing the transaction because I’m over the limit. I need you to start getting me offers for products and services when and where I need them, not waiting for me to come back to the site or a branch. I need to have a place I can go which centralizes this relationship and defines when and we can work together, what communications I receive from you, and a place where I have a tailored view of my footprint with the bank, etc. So rather than the public site and internet banking, the future looks a little different. The future of the multi-channel content environment will be: The Customer/Bank Dashboard – beyond PFM, this is the relationship control panel Journeys – Product and service engagement opportunities that could start through mobile, search, social, and migrate to acquisition Contextual – Understanding triggers and behaviors as an opportunity to commence a journey Execution – The day-to-day functional stuff such as transferring money, paying bills, etc. Customer Dynamics – Building out the supporting processes, cross-silo metrics, IT Integration, etc This will be distributed across mobile, tablets, desktop, PC, ATM and other interfaces. This is all has the potential to happen within the next 3 years. The thing is – I can guarantee there are at least two department heads who are going to find this transition very difficult to deal with…

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Chinese Lender To Buy Stake In U.S. Bank

January 21, 2011

Industrial and Commercial Bank of China (1398.HK) agreed to acquire a majority stake in the Bank of East Asia’s (0023.HK) U.S. unit, making it the first Chinese lender to buy into a U.S. retail bank, The Wall Street Journal reported on its website on Friday. ICBC and Bank of East Asia were mentioned in a preliminary list of companies that were expected to participate in a contract signing ceremony at the U.S.-China Trade and Economic Cooperation Forum. The U.S. head of Bank of East Asia was not immediately available to comment. The bid by China’s largest lender is likely to be closely scrutinized by U.S. regulators and could draw some political backlash, given the spotty relationship between the two countries and the history of attempts by Chinese companies to enter the U.S. market. But if approved it could pave the way for other Chinese banks to buy into the U.S. market and bring fresh capital to the banking industry which recovering from the financial crisis. “I don’t think this announcement would have been made unless they had been talking to the Fed in advance,” said Chip MacDonald, a banking lawyer at Jones Day, referring to the U.S. Federal Reserve. To approve a deal, the Fed will need to determine that ICBC is subject to comprehensive supervision or regulation on a consolidated basis in its home country. In other words, the Fed would have to recognize the adequacy of the supervision by Chinese banking regulators — something they have not been able to do as late as 2008. “They said (Chinese regulators) were moving in that direction but hadn’t gotten there yet,” MacDonald said. “That will open up the opportunities for other banks in China.” Bank of East Asia’s U.S. subsidiary reported net income of $1.9 million in the quarter ending Sept. 30, according to regulatory data. It had total assets of $717 million and deposits of $425.2 million. Hong Kong-based-Bank of East Asia formed its U.S. subsidiary in August 2001 through the acquisition of Alhambra, California-based Grand National Bank. The U.S. subsidiary has 13 branches in New York and California, according to its website. (Reporting by Paritosh Bansal; Editing by Derek Caney and Matthew Lewis) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Dennis Santiago: A Deepening Dearth of Lending

January 21, 2011

I was on Canadian network BNN last week. It is earnings time for banks and as much as I loathe talking about economic safety and soundness through the distorting lens of equities I attempted to field questions. It seems that “earnings per share” is looking better at some banks this quarter and people are asking if the time is “now” to get in on the gamble. The buzz must be hot to get people to pony up because I’m getting emails asking if I think this is the bottom of the well. Just a reminder, brokerages earn a living by charging commissions on the volume of transactions, not on the gain or loss of the investment. As I tried to explain on air, picking through the lint in my belly button I’m not sure that today is the equivalent of the day Ford was at $1.00/share for the banking sector. We’re still seeing a lot of accounting based earnings coming from numbers in a computer being moved from one ledger to another creating what – in the time of Sarbanes-Oxley (remember that?) – would be categorized as one-time events. As for me, I still see banking as a supporting cast service provider to the economy. I’m waiting to see indicators of fundamental change in the direction of Main Street. Everything else is what the Wall Street townies call “optics” when happy hour comes around. The continuing decline of domestic economic reinvestment It’s not looking all that great on Main Street. Domestic economic reinvestment continues to slumber like Sleeping Beauty waiting for true love’s kiss. It’s weird really. How else can one explain the juxtaposition of “exceeds analysts expectations” with “six one-hundredths of a percent of real growth” in the same news cycle? These are the times when the solace of perspective is best found by ignoring volatility and focusing on the deeper trend lines. Just so you know the overall amount of commercial and industrial lending by banks in the United States eroded by about 1/3rd from roughly $1.4 trillion in Dec-2007 to a bit over $1 trillion at the end of Sep-2010. Not to make light of a $400 billion dollar loss in going concern domestic economic investment by the banking system, but the really shocking numbers are in the unused line of credit commitments of banks to U.S. business. This is the canary number I like to look at because it is a direct expression of banking and finance confidence in Main Street industry. It’s gone from $92 billon in Dec -2007 to just $24 billion as of Sep-2010. More importantly, the vast majority of this contraction of credit availability to American industry has been by the larger banks, C&I LOC from $87B down to $18.8B by the institutions with assets over $10B. Poof! We are now entering the fourth year of our saga. The kicking the can down the road approach to preserving banking infrastructure as a vital national resource continues. It’s now been husbanded by both a Republican and a Democratic White House. Both have succeeded in preserving banking. The “can” itself – the US domestic economy — is still getting smaller. Is that really the best plan we can come up with? So what can you do? Next time you interact with your bank, ask them to tell you more about they are doing about expanding loan production. Ask specifically to tell you some details about what they are actively doing to clear away their remaining impediments to new lending. Are they modifying or disposing of whatever non-performing assets they have to get them back on track? How else are they using their resources to invigorate the Main Street economy? How are those line of credit commitments to small business commercial and industrial borrowers coming along towards recovering to pre-2008 levels? Some bankers will balk that you’d dare to ask such questions. Others will gladly wax on about all the things they are doing to make things better. You’ll certainly learn something about who’s being a responsible banker and who isn’t. Be prepared to be both disapppointed and pleasantly surprised. Bear in mind that these questions aren’t about small versus large. They are about discovering where decency and responsibility still are in America. It’s there. The task at hand is to find and reward it. Remember that in America the voices of ordinary people still matter. Don’t let anyone tell you otherwise.

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AP: Year Ahead Looms As Toughest Yet For State Budgets

January 15, 2011

SACRAMENTO, Calif. — If 2011 is hinting at a national recovery, there is little sign of it in statehouses across the country. States that already have raided their reserve funds, relied on borrowing or accounting gimmicks, and imposed deep cuts on schools, parks and public transit systems no longer can protect key services in the face of another round of multibillion dollar deficits. As governors roll out their budget proposals and legislatures convene this month, they do so amid a sputtering economic recovery and predictions of slow growth for years to come. State and local governments face lackluster revenue projections, worries from Wall Street over looming debt and the end of federal stimulus spending. In the first weeks of 2011, Republican and Democratic governors alike have begun detailing across-the-board pain for education, health care, transportation, public safety and other programs. Some say the year of reckoning for state and local governments is at hand, with calls for structural changes that could radically shift expectations of what services government provides. Many believe the months ahead will be the most challenging in memory, with consequences for millions who depend on government funding. “We need to send a message to the governor: We’re real, and we depend on all these services,” said Sergio Garibay, a 41-year-old Southern California resident who relies on state disability payments and recently protested deep cuts to Medi-Cal programs proposed by California Gov. Jerry Brown. “There are other alternatives to the budget. Why don’t we tax the rich, these corporations?” In releasing his budget proposal, Brown told California lawmakers “the year ahead will demand courage and sacrifice” as the state faces a deficit projected to hit $25.4 billion over the next 18 months. His proposal combines spending cuts to Medi-Cal, in-home services for the elderly and higher education with a five-year extension of income, sales and vehicle taxes. New York Gov. Andrew Cuomo proposed eliminating 20 percent of state agencies by combining duties, such as merging the Insurance Department, Banking Department and the Consumer Protection Board into the Department of Financial Regulation. It’s part of “radical reform” to pull his state out of its fiscal crisis. And Gov. Chris Christie in New Jersey skipped a $3.1 billion payment to the state’s pension system in a push to cut benefits for public workers, while proposing higher employee contributions and a boost in the retirement age from 62 to 65. In Illinois, lawmakers voted for a dramatic 66 percent hike in personal income tax, from 3 percent to 5 percent, in a bid to resolve a $15 billion deficit, which amounts to more than half of the state’s entire general fund. The tax increase will be coupled with strict 2 percent limits on spending growth. “It’s important for their state government not to be a fiscal basket case,” Gov. Pat Quinn in defending the major tax hike. And on and on it goes: _ In oil-rich Texas, where education and social service spending is relatively low and Republican Gov. Rick Perry has railed against government spending, hard times are looming. The shortfall is projected to be between $15 billion and $27 billion over the coming two-year budget cycle. _ In South Carolina, outgoing Gov. Mark Sanford has proposed a spending plan that would end funding for museum and arts programs, slash college funding and give many state employees a 5 percent pay cut. _ In Georgia, deep cuts appear to await the state’s popular HOPE scholarship program that provides public college tuition to students who earn good grades. Rising tuition and enrollment have outpaced the lottery revenues that fund the program and Gov. Nathan Deal has not proposed any additional state money to bail it out. Even as tax revenue in many states shows signs of a rebound, states are expected to collect 6.5 percent less than they did in 2008, according to the National Association of State Budget Officers. And any revenue gains could be more than offset by the expected loss of federal stimulus money. Most of the $814 billion stimulus program was designed to help states provide essential services and give a boost to the economy, but will start to run out this summer. A new round of stimulus funding is unlikely with Republicans controlling one house of Congress. Top GOP lawmakers say they will try to provide states with relief by reducing mandated programs, not by giving them more money. “States came into this recession with relatively large rainy day funds. Now that states have done the accounting gimmicks and the relatively easier stuff, each year gets harder and harder because those one-time things are gone,” said Nicholas Johnson, director of the state fiscal project at the Center for Budget and Policy Priorities, a think tank in Washington, D.C. Despite lower tax revenue since the recession began, the level of service expected from state and local governments remains, often creating a disconnect between public perception and the reality of the fiscal crisis confronting elected officials. Public schools face rising enrollments, more people are seeking government health care because they have lost jobs or their employers have dropped coverage, and millions of those thrown out of work are receiving unemployment checks. One possible solution is revising tax structures, even with an anti-tax mood persisting across much of the nation. In Georgia, some lawmakers are considering a 4 percent state sales tax on groceries and boosting the tax on cigarettes as part of an overhaul of the state’s outdated tax code. The increases would be paired with reductions in the personal and corporate income taxes. But any proposal for tax increases will run into opposition from Republicans, who were swept into office in large numbers last fall on a message of reducing the size and reach of government. Republicans picked up 690 state legislative seats Nov. 2 – the largest shift since 1966, according to data compiled by the national legislative group. The GOP now controls both chambers of the state legislature as well as the governorship in 21 states. “When you’ve got an unemployment rate at 10 percent, I don’t think that’s a good time for us to tell Georgians that we need more of their money,” Georgia House Speaker David Ralston said. “I’m going to resist that again this year.” As states struggle to balance their books, Wall Street is watching rising debt burdens, although analysts so far have not sounded many alarms. Federal law does not allow states to file for bankruptcy protection, but states can default on their debt if their financial condition worsens considerably. That move is extremely rare. Arkansas was the last state to default on its debt payments, a move it took during the Great Depression. Moody’s predicts that no state government will default on its debt in 2011. Moody’s Managing Director, Naomi Richman, said states generally borrow for long-term infrastructure projects. They don’t usually borrow to pay debt and fund operating budgets. Those that have, including California, Illinois and Arizona, already have been penalized with low credit ratings, which increases their borrowing costs. It’s possible, however, that more cash-strapped cities and counties could seek bailouts from states, as Harrisburg sought help from the commonwealth of Pennsylvania. “I think you’re more likely to see it cascade up, rather than down,” said Steve Malanga, a senior fellow at the Manhattan Institute, during a discussion about state budgets at George Mason University. Kail Padgitt, an economist with the nonpartisan, nonprofit Tax Foundation, said the states with the greatest concerns about their fiscal health are those with costly public employee pensions that are underfunded. Many public pension systems use overly optimistic rates of return and do not provide a true, long-term cost to taxpayers. Padgitt cited a recent study by the Pew Center on the States that found states face a $1 trillion funding shortfall in public-sector retirement benefits, but said that likely underestimate the problem. “The long-term outlook is quite bad,” Padgitt said unless states begin to make pension reforms. Matt Hanson, 50, a civil engineer who has worked for California’s transportation department for 22 years, said he understands that public pension systems could use adjustments but he believes pensions are fundamentally sound. For example, he said he’s open to contributing more to cover retiree health care costs, which have been rising. “If there’s some shared pain that has to be felt than I want it to be constructive,” Hanson said. “There’s a difference between going out for a run and feeling pain right after – at least you’ll be in better shape in the long run, rather than hitting your hand with a hammer. Pain for pain’s sake doesn’t make a lot of sense.” ____ McCaffrey reported from Atlanta. Associated Press writer Robert Jablon in Los Angeles contributed to this report.

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Bryce Covert: Wall Street Isn’t Paid Enough

January 14, 2011

Cross-posted from New Deal 2.0 . A Bloomberg article from yesterday compared some numbers that should serve as a stark wake-up call: traders and investment bankers (read: people on Wall Street) make more in this country than neurosurgeons, cancer researchers, engineers, and four-star generals. That’s right, folks — if you go into the noble profession of trying to eradicate one of the most pernicious diseases, you can’t expect to get paid nearly as much as someone trading derivatives of oil prices. I also suspect that General Patraeus feels his sacrifice to our country and his four-star status should earn him more than someone on the floor of the stock exchange. But of course you can’t look to the banking industry for some humility in recognition of their sky-high checks. “The bottom line is all the people in investment banking understand that they work harder and are under more stress,” Jeanne Branthover, a managing director at Wall Street recruitment firm Boyden Global Executive Search, told Bloomberg . “Many don’t think they’re paid enough.” What a terrible life that must be! If only they could afford to buy yachts and go relax in the Caribbean. But the outrage doesn’t end there. Compare the estimated $2 million in pay that an M&A banker with 10 years of experience can expect to the $80,970 per year the average teacher in the top 10% will get. (Median teachers will be paid between $47,100 and $51,180 per year.) What’s the value a dedicated teacher adds to our society? Educated children, who can expect higher incomes, greater productivity, and a better chance at coming up with the new ideas that take our country forward. Not to mention the harder-to-calculate benefits of children who learn to share, make friends, abide by social norms, and understand their role as citizens. What’s the value that we get from a derivatives trader? It’s still unclear. Not to mention that those truly suffering right now (as opposed to the stressed out bankers who demand more zeroes on their bonus checks), i.e. the unemployed, when lucky enough to find a job are now landing ones that have dismal pay . Sixty percent of new jobs last year were in temp work, leisure and hospitality, and retail. Leisure pays an average hourly wage of $13.14 and retail will get you $11.84, while temp packagers only get $8.62. Sign up for weekly ND20 highlights, mind-blowing stats, event alerts, and reading/film/music recs. All of this sends a signal to young people as we live through this great recession. As I’ve mentioned before , we face some serious financial insecurities, greater than what many of our parents had to face when they were growing up. This means many of us will be calculating when we choose what to study in college and where to aim our career goals. Should I become a cancer researcher or a banker? The pricetag comes into play. Add to this the debt students are asked to take on at every step of their education, and the prospect of being awarded $2 million for two years in an MBA program versus $571,000 for 2-3 years in medical school and 6-8 years in residency that neurosurgeons must go through seems pretty enticing. Primary care doctors, which we desperately need more of, can expect to earn $186,044 per year for about the same amount of school and residency it takes to get into surgery. No wonder, then, that the smart calculate that they’re better off going into specialties when looking at their student loan bills. The even smarter skip medicine and head straight to lower Manhattan. Compensation is a way of valuing an employee. As the bankers rightly point out, harder work should usually lead to higher pay. So should the value put back into society. Bankers work hard, and we need them to facilitate lending and make the gears of the economy run smoothly. But does that value outrank the work a neurosurgeon does to save someone’s life, like Dr. Rhee’s miraculous work that led to Rep. Giffords opening her eyes two days ago? Should a banker make 20 times what a cancer researcher does? Our compensation scales are out of whack.

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Video: Cassidy Sees `Big Wave’ of Bank Mergers and Acquisitions

January 14, 2011

Jan. 14 (Bloomberg) — Gerard Cassidy, analyst at RBC Capital Markets, talks about fourth quarter earnings at JPMorgan Chase & Co. and the outlook for the banking industry. JPMorgan, the second-biggest U.S. bank by assets, posted a record $4.83 billion profit, buoyed by $2 billion in reserves added back to earnings as credit quality and the U.S. economy improved. Cassidy talks with Mark Crumpton on Bloomberg Television’s “Mark Crumpton.” (Source: Bloomberg)

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The 14th Banker: Year-End Perspective on Corruption

December 27, 2010

Perhaps it is time to explain the tone of my holiday greeting, in which I expressed optimism. Happy Holidays to all. It has been an eventful year. This is the season of hope and, despite all the matters that we have criticized over this past year, I am full of hope. There are well-meaning people all around us. Those that are not well-meaning, are generally uninformed, misinformed, or unskillful in their thinking. All of these things can change. We are in an evolutionary process. At times it will seem like we are stepping back. Yet we are moving forward. While I have been enjoying the presence of friends and family and relaxing in the spirit and ambiance of the season, the media and blogosphere have continued to do heavy lifting.  We will get to that in a minute.  But first, my reason for optimism. Given the religious nature of Christmas itself, it is entirely appropriate to look to our spiritual traditions to consider the circumstances of our present day. The trend that encourages me has been a theme of all major spiritual traditions, which emphasize the ideas of “light” and “truth” as essentially redemptive. They are redemptive in our present day lives in two ways. The first is that the realization of truth is essentially healing inwardly (spiritual world). The second is that the truth moves us to action and provides impetus to heal ourselves and others outwardly (material world). And these two are synergistic. Inward strength enables outward action. (As an aside, I would invite readers to share along these lines from their spiritual traditions or personal reflections) So while I have rested, others have reported. The steady exposure of corruption in our system, the light that shines unwavering on the regimes of corruption, will have its effect. There is developing a common understanding that the system we have today is broken and that we must find the means to make it constructive.  Here are some of the worthy stories of the last 10 days. First off, on the theme of corruption, it would be silly to assume that the corruption we see in the financial system is anything other than a reflection of the corruption of power more generally. Here are two examples. In this first, it is reported that the revolving door between government and industry is as active in the realm of the military as in the financial realm. The Boston Globe highlights that the normal path for retiring senior military officers, whose pensions are already generous, is to go to work in influential and non-transparent ways for defense contractors. The Globe analyzed the career paths of 750 of the highest ranking generals and admirals who retired during the last two decades and found that, for most, moving into what many in Washington call the “rent-a-general” business is all but irresistible. From 2004 through 2008, 80 percent of retiring three- and four-star officers went to work as consultants or defense executives, according to the Globe analysis. The article goes on to illustrate how these retiring officers have inside tracks into the Pentagon and wield influence without disclosure of their financial conflicts of interests. This does remind me of one aspect of the banking business, which is that “Don’t Ask, Don’t Tell” is much more than a policy regarding gays in the military. It is the practice of people who know that there are ethical issues or conflicts of interest and consciously choose to do nothing about them because of mutual benefit. A second example of corruption generally is in relation to academia and industry.   This is a video interview so I can’t quote it here, but the gist is that economists that opine on regulatory matters, have undisclosed financial conflicts of interest with the companies that would be affected by regulation. Another outstanding piece from recent days is this written interview with Bill Black , from Parker and Spitzer. It is succinct and readable. The emergence of Black as a very articulate and visible critic of the culture of fraud is significant. One feature of our system of media is that for messages to get out, they have to be repeated over and over. Many academics do their research, publish a paper, perhaps write a book, and then their voice fades. Black is showing an endurance that provides hope that he can move the needle of perception. What is different about Black’s approach is that he is very clear and specific in his charges. He does not generalize. He is very specific about how certain frauds work. This will make general denials less effective. There was also a meaningful judicial ruling against Wells Fargo . Hat tip Naked Capitalism . What makes this ruling interesting is that although it set aside a minor part of the jury award, a $1.6 million issue, to be subject to a new trial, is that it was punitive as a result of the judge’s determination that the fraud was systematic. It is unusual to award the payment of the plaintiff’s attorney’s fees, or to order disgorgement of fees paid for services (the other component of the additional $15 million plus is interest on the $29.9 million). The basis for awarding attorneys’ fees? The bank is such a menace to society that having counsel root it out is a public service. From the  Minneapolis Star Tribune (hat tip reader Ted L): The judge said that the nonprofits’ lawyers, led by Minneapolis litigator Mike Ciresi, provided a “public benefit” by bringing the bank’s wrongdoing to light. Thus, Monahan said, the bank must pay the plaintiffs’ attorneys fees and costs, which Ciresi’s firm estimated at more than $15 million… Terry Fruth, a Minneapolis attorney who has been watching the case closely on behalf of his clients, said Monahan’s post-trial order could help other investors prove similar claims against the bank. “The judge didn’t just find that Wells Fargo acted with disregard to the rights and interests of the particular plaintiffs,” Fruth said of Monahan. “He said the way it ran the program was with disregard to the rights of the customers. … He has made a finding that is going to bind Wells Fargo in other cases.” The judge made very astute observations about how business works these days. Executives create the environment in which unethical business practices can flourish, but want to keep a level of plausible deniability. That is a pretense. Finally for today, this article about how the FinReg was effectively diluted. The source is a Barron’s article but Yves Smith provides the commentary. Here’s a quote to whet your appetite. But since there has been a singular lack of appetite to do adequate forensics into what caused the crisis, since it might prove to be embarrassing to people still in powerful positions, regulators can follow the inertial course of listening to the palaver that the financial services industry puts forward to allow it to continue looting. So back to my original premise, all this bad news is reason for hope, in that it shines light in dark, hidden places. This light will shape the common understanding, and the common understanding will shape future choices. However, it will be up to us to make those choices. If there is any unifying theme to these articles, it is that those in positions of power are not the ones that will support change in the system. Rather change in the system can only come through action on the part of the vast majority of citizens who do not have a stake in the status quo.

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Art Levine: No Home for Xmas: Can Labor — or Anyone — Stop the Foreclosure Mess?

December 24, 2010

As Americans head home for the holidays or look forward to a Christmas meal with friends and family nearby, it’s worth remembering that over two million people have had their homes repossessed in the last few years — and another 6.5 million are in foreclosure or will face it soon. Thousands of current and pending foreclosures may have been carried out due to forged documents, bank negligence or lack of court authority to do so. And as NPR reported recently, people like Jennifer Ryan-Voltaire may be spending their last Christmas in the home that Wells Fargo now owns after it allegedly lost her tax paperwork needed to stay in a loan modification program. As NPR noted: “We’re trying to make it as fun for the kids as possible without them knowing or having to worry about what we’re going through,” says Voltaire, an office manager at a medical practice. She hasn’t told her three kids that they don’t own their house anymore.

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Another EU Country Has Its Debt Downgraded

December 23, 2010

LONDON — Portugal had its credit rating downgraded Thursday by the Fitch Ratings agency amid mounting concerns over the country’s ability to raise money in the markets to finance its hefty borrowings. Fitch said it was reducing its rating on the country’s debt by one notch to A+ from AA- and warned that further downgrades may be in the offing by maintaining its negative outlook. “The downgrade reflects an even slower reduction in the current account deficit and a much more difficult financing environment for the Portuguese government and banks than incorporated into Fitch’s previous rating (in March), as well as a deteriorating near-term economic outlook,” Fitch said in a statement. Fitch’s downgrade follows a warning earlier this week from rival Moody’s Investor Services that it may cut its A1 rating on Portugal by a notch or two because of uncertain economic growth, the high cost of borrowing on global markets and worries about the banking sector. Fitch’s reasoning is very similar and is likely to stoke renewed speculation that Portugal could well be the next country using the euro in need of financial help from its partners in the European Union and the International Monetary Fund – Greece and Ireland have already suffered the ignominy of being bailed out. The agency said the Portuguese government would likely meet its target of reducing its budget deficit to 7.3 percent of national income this year, but voiced concerns that this is heavily dependent on one-time measures, which don’t make a dent on the long-term state of the public finances. As a result, Fitch said the government will find it “extremely challenging” getting the budget into shape, especially if, as the agency expects, the economy falls into recession next year. The Portuguese government aims to reduce the budget deficit to 3 percent of GDP by 2012 and to just 2 percent of 2013, which would be extremely difficult if the eurozone’s smallest economy starts to contract again – in effect, lower growth means lower tax receipts and higher social spending, hardly conducive to budgetary health. “Failure to meet its 2011 budget headline and structural deficit targets would erode confidence in the medium-term sustainability of public finances that underpins Portugal’s current sovereign ratings,” Fitch said.

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Video: Bove Likes US Bancorp, PNC Financial, BB&T, Fifth Third

December 20, 2010

Dec. 20 (Bloomberg) — Richard Bove, an analyst at Rochdale Securities, talks about merger and acquisition activity within the banking industry and the performance of BB&T Corp., PNC Financial Services Group Inc., Fifth Third Bancorp and US Bancorp. Bove speaks with Mark Crumpton on Bloomberg Television’s “Bottom Line.” (Source: Bloomberg)

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Brett King: The 14 Best Innovations in Banking and Payments for 2010 (SLIDESHOW)

December 16, 2010

2010 was a bumper year for innovations in the banking and payments space. Below are some of the top innovations this year. Let me know how you rank these in respect to their ability to be real game changers for the banking arena. Which innovations do you think will survive on, and which will flame out? My big bet for 2011 is NFC (Near-Field Contactless) payments capability integrated into Mobile, but the impact of social media can’t be underestimated.

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Richard Barrington: 8 Best Banking Trends of 2010

December 15, 2010

It seems like the words “good news” and “banking” haven’t gone in the same sentence since the start of the financial crisis in 2008. Although there’s no doubt that bank customers got a raw deal in the recession, there were many positive developments in banking during 2010. Here were the eight best trends in banking for consumers this year: Mortgage rates were cheaper than ever. Historically, 30-year mortgage rates have averaged around 8.91 percent. For the first 11 months of 2010, they averaged 4.69 percent. This cuts the interest expense of buying a house almost in half. Perhaps even better, the drop in mortgage rates sparked a surge in mortgage refinancing, giving a boost to the budgets of many a cash-strapped household. The great thing about these historically low mortgage rates is that while they may not last long, homeowners who were able to lock in 30-year mortgages this year will benefit from this dip in rates for many years to come. Financial reform. The Dodd-Frank Wall Street Reform and Consumer Protection Act — commonly known as financial reform — was a mixed bag for consumers. Chief among the negatives: higher compliance costs may cause higher fees on checking accounts and/or lower interest rates on CDs, savings accounts and money market accounts in the years to come. In the big picture, though, the new law’s consumer protections and restoration of elements of the old Glass-Steagall legislation should make the banking system more stable and secure . Looking ahead, it remains to be seen how long these reforms survive the efforts of the banking lobby to chip away at them. Millions of Americans stopped paying protection. It’s not extortion, but it is exorbitant — overdraft fees had become a huge profit center for banks in recent years. New rules gave customers the latitude to say no to overdraft protection programs and, according to Moebs Services, over 30 million customers did just that. Unfortunately, a great many more chose to continue overdraft protection. Even these customers got a small break, though. The average overdraft fee dropped by 50 cents in the latter half of 2010, according to Moebs. Free checking survived. Some predicted that the compliance costs of Dodd-Frank, the loss of some overdraft fee revenue and previously implemented limitations on credit card practices would drive banks to drop services like free checking. Indeed, a Moebs survey found that the availability of free checking dropped 11 percentage points. However, that still left nearly three-quarters of banks and credit unions offering free checking. With thousands of FDIC-insured institutions out there, customers still had plenty to choose from. A poll in late 2010 by MoneyRates.com and GetRichSlowly.org found that 95 percent of respondents were able to avoid monthly checking account fees one way or another. The hike in FDIC insurance was made permanent. For years, Federal Deposit Insurance Corporation (FDIC) insurance was $100,000 per depositor at any given institution. This was temporarily hiked to $250,000 during the banking crisis, and in 2010 this higher insurance limit was made permanent. This was a triple win for consumers. First, this emphatic government backing demonstrated that the federal government is prepared to stand behind deposits in the U.S. banking system. Second, the increase in the insurance ceiling reflected the fact that the previous $100,000 limit had been significantly devalued by inflation since it was established in 1980. Third, raising the insurance limit to $250,000 increases the ability of customers to consolidate funds and take advantage of “jumbo” rates on deposits (offered on balances of $100,000 or higher) and other benefits available to large depositors. The dollar limit for FDIC insurance was increased. In a less publicized move, FDIC insurance on non-interest-bearing transaction accounts, which includes checking accounts that don’t pay interest, was temporarily expanded without limit. These accounts also will not count against the $250,000 limit for other deposits, making it easier for customers to have checking accounts at the same bank as their savings accounts or money market accounts without exceeding the insurance limit. Two caveats: This unlimited insurance is available only from December 31, 2010, to December 31, 2012, and it only applies to accounts that don’t pay interest. Of course, with interest rates as low as they are now, customers would not have to forgo much interest for the benefit of obtaining unlimited insurance on their accounts through 2012. Consumers fought back against credit card debt. A streak of 40 straight years in which revolving credit balances, which chiefly includes credit card debt, increased was broken in 2009. Federal Reserve figures through October 2010 showed that revolving credit debt was on track to decrease again in 2010. This sudden reversal in a decades-long debt binge doesn’t mean that revolving credit balances are now low, but at least they are finally headed in the right direction — back to the neighborhood of 2004 levels. It is also possible that consumers are taking advantage of low interest credit card rates to reduce their total debt spend. Americans began to build savings. Paying down debt is just half the battle for American households. After years of lax savings habits and disappointing investment returns, Americans were far behind in their retirement savings. In 2010 there were some steps in the right direction. According to the Federal Reserve, savings deposit accounts increased during each of the first 10 months of the year. This added a cumulative total of more than $400 billion to savings deposit balances — despite the fact that these balances were getting little help from low interest rates on savings accounts. As with the trend in revolving credit balances, this increase in savings so far represents only a short-term reversal of some long-standing bad habits. Still, the road to rebuilding savings accounts has to begin somewhere, and the figures indicate that in 2010 Americans have at least made a start. Which banking customers didn’t benefit in 2010? Most notably, those who were victimized by slapdash foreclosure procedures by some banks and mortgage processing companies, and the customers in deposit accounts who lost billions of dollars to inflation in an environment of unnaturally low CD rates, savings account rates and money market rates. Maybe 2011 will be the year when these customers get a better deal. The original article can be found at MoneyRates.com: 8 best banking trends of 2010

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Possible Larry Summers Replacements Said To Be Narrowed To 3

December 13, 2010

As Larry Summers nears the end of his term as director of the National Economic Council, the list of potential replacements has been whittled down to three, according to Obama administration officials familiar with the deliberations: Treasury adviser Gene Sperling, Wall Street banker Roger Altman and Yale president Richard Levin . The three represent a range of ideologies, from sympathy for Wall Street to vigilant consumer protection. At this critical point in the economic debate, the president’s choice will send a powerful signal about the administration’s leanings. If it’s Sperling or Altman, critics say, the country can likely expect a continuation of a Wall Street-sympathetic approach to policy for the next two years. The stakes are high, both for how the administration is perceived and how it determines policy. As Peter Orszag, Obama’s former director of the Office of Management and Budget, has taken a senior position at Citigroup, pundits like Joe Klein and Jim Fallows are griping about the government’s ties to Wall Street. “This move only reinforces my growing sense that the Democratic party has to pry control of its economic policy away from the Wall Street caucus — the Rubin, Summers, Geithner, Rattner and now Orszag etc. gang,” Klein writes. On the other hand, Wall Streeters have been whining in recent months that Obama — despite presiding over a policy of historic bailouts and, more recently, record corporate profits — isn’t sympathetic enough to their interests. “He hurt their feelings,” said Dean Baker, co-director of the Center for Economic Policy and Research in Washington. When Summers’ departure was first announced in September, pundits speculated that the replacement would be someone with real-world business experience . Altman, and even Sperling, would fit that bill. The appointment of either Sperling or Altman would cement the administration’s symbolic ties to the financial sector. A Levin appointment, however, would signal a break from previous policy, and a step toward tight Wall Street regulation, with a more muscular job-creation agenda. Judging by Sperling’s record in government and on Wall Street, he would likely favor a policy of lenient regulation of the banking sector. Like Summers, Sperling has ties to Robert Rubin, the former Treasury Secretary, Goldmanite and, more recently, chairman of Citigroup, who pushed for deregulation under President Clinton. After serving as deputy NEC director, Sperling took the commission’s top spot in 1996, overseeing a policy of deregulation of Wall Street. Under Sperling’s watch, Congress repealed the Glass-Steagall Act, a rule-easing that many believe contributed to the financial crisis less than a decade later. Sperling has made his share of Wall Street cash. Before becoming adviser to Treasury Secretary Tim Geithner, he did time at Goldman Sachs. The year before taking office, he reportedly earned nearly $900,000 as a Goldman consultant. If Sperling’s background is mostly policy with some business experience, Altman’s is mostly business with some policy. Altman is the founder and chairman of Evercore Partners, a boutique mergers and acquisitions firm that advised General Motors through its bankruptcy, pulling in fees that the Department of Justice called “unreasonably rich.” In the early years of the Clinton administration, Altman served as a deputy Treasury secretary. It seems likely that Sperling or Altman, if appointed, would continue the policies of their predecessor. But Sperling, for his part, would likely depart from Summers in style. Whereas Summers has been known for his assertiveness in the administration, Sperling is more inclined to defer to others’ opinions, Baker said. “The biggest difference is if they’re a Summers type, calling the shots, or a bureaucratic type, getting the ideas,” Baker said. “[Sperling's] particular views on stimulus probably wouldn’t matter much.” While it’s difficult to say how assertive Levin would be as NEC director, his views make him stand out from the pack. As HuffPost has reported, his appointment would signal a departure from previous administration policies, a move toward the Elizabeth Warren camp of tight Wall Street regulation and proactive job-creation. According to Robert Shiller, Levin’s colleague at Yale, and judging by speeches Levin gave last year, the Yale president would likely support a second stimulus , with job-creation as a focus.

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Richard (RJ) Eskow: Blind Trust: Holder’s Bogus "Operation" and Obama’s Wall Street Justice

December 10, 2010

Here’s something the administration may want to take to heart: Trust is a lot like money. If you spend more than you earn, it could be gone when you need it the most. Consider the Attorney General’s highly-touted announcement of a “crackdown” on financial fraud. Americans have been waiting for this ever since bank crimes shattered the economy, leaving them with millions of lost jobs and billions in lost savings. Finally, after years of inaction against the fraudsters, the Justice Department began dropping hints that a big Wall Street bust was coming. And this week Eric Holder announced that a probe launched in August has already led to more than two hundred arrests and dozens of other investigations. “Where are all the big names?” wrote one observer, who added: “The ‘too big to fail’ are also the ‘too big to prosecute.’” Another commentator called it “Too much form. Too little substance. Too many government officials elbowing for the spotlight. Too little, too late.” A third said “It’s bad enough that there have been no criminal convictions of any of the executives who helped bring the banking system and our economy to its knees. Now the Justice Department is touting trumped-up numbers …” And that was just the business media. (The comments are from a Forbes columnist, another Forbes columnist, and Jonathan Weil from Bloomberg .) The Columbia Journalism Review rounded up some other press reactions in a piece called ” The Obama Administration’s Financial-Fraud Stunt Backfires .” Their citations include a New York Times report which found that Holder’s figures were artificially inflated. As Weil at Bloomberg observed: “First they tracked down every small-fry Ponzi scheme, affinity fraud and penny-stock pump-and-dump they could find that had advanced through the courts since mid-August. Then they totaled them up and called it a sweep …” The Columbia roundup concludes with the hope that “the Obama administration’s laughable attempt to show it’s tough on financial fraud will cause enough of a backlash in the press that it forces them to actually do something …” This mythical sweep, a trumped-up bag of unrelated cases which the administration tried to present as a coordinated crackdown on financial crime, was called “Operation Broken Trust.” The punchline writes itself. Not that unemployed Americans or households with an underwater mortgage are likely to laugh. Meanwhile one of Obama’s key economic advisors just joined Citigroup , and the president’s reportedly interviewing another Wall Street kingpin to run his Council of Economic Advisors. The President promised during his campaign to ” close the revolving door ” between government and big business, but it’s revolving as always. And as bankers pass through it, America’s cops just tip their caps and say “Good morning, sir.” Wild in the Street (Wall Street, that is) The “Broken Trust” target list resembles that of the President’s “Interagency Financial Task Force,” which has concentrated on minor criminals while studiously avoiding the big (and still deadly) fish (see ” A Banker Can’t Get Arrested In This Town “). Most of the Task Force’s indictments involved a category of financial criminal we call “ABB” — “anybody but bankers.” There were software entrepreneurs, family investment firms, some Florida retirement advisors … even a fraudulent psychic who claimed he could predict stock performance! (And no, it wasn’t Jim Cramer .) Holder’s list of alleged “Broken Trust” victories is a similarly Faginesque assemblage of small-time grifters. It would make an ideal cast of characters for a Damon Runyon story or a Bertolt Brecht musical: There’s a Miami-based Ponzi schemer who used his loot to buy basketball tickets and make yacht payments, a retired Ohio cop who scammed fellow police officers and some firefighters, and the New Jersey hustler who scammed people so he could buy three luxury cars and two country club memberships. Throw in a hooker with a heart of gold and you’ve got yourself a show, baby! But there were no indictments for the AIG deceptions that precipitated the worldwide crash (we described the prima facie evidence that a crime had been committed here and here ). There were no indictments at Goldman Sachs. And there were none for Citigroup’s $40 billion subprime lie . It’s true that the CFO was fined $100,000 — but that’s after taking home $19.4 million the same year the crime was committed. Citi’s crooks didn’t just get a free pass. We bailed out their bank, too. That’s good news for former Obama advisor Peter Orszag, who cashed in just this week with a high-paying Citi job as a “senior global banking advisor.” It gets worse. Banks criminally laundered billions in drug money from Mexican drug cartels. Wachovia Bank alone laundered $374 billion, in what was called “a virtual carte blanche” for “cocaine cartels.” Number of criminal indictments: Zero. As a Senate investigator observed: “There’s no capacity to regulate or punish them because they’re too big to be threatened with failure.” That policy holds, even when banks conspire with drug dealers who have killed 22,000 people. The free ride for Wall Street criminality helps explains the public outcry earlier this year when a top Morgan Stanley broker committed hit-and-run and left a wounded bicyclist lying in the street with spinal cord and brain injuries. He wasn’t indicted … because of his high income . Even the even-tempered Felix Salmon called that decision “shocking.” A local DA’s terrible decision came to symbolize the immunity crooked bankers are routinely given in Washington. Sure, bankers can probably get indicted for something . The law would presumably still crack down if, say, some Wall Street hotshots wore Satanic robes and ate a live baby in Times Square. But there’s still the nagging suspicion that Washington would indict some nannies in Ohio instead and call it “Operation Baby Wipe.” Right now, somewhere in this country, a banker is committing a crime. And guess what? He’s not worried about going to jail. Your home, their castle Historians now say that droit de seigneur — the right of a Lord to invade any home on his estate to take a young woman’s virginity — never really existed. But our banking lords can invade the sanctity of a private home to screw their serfs in other ways. The “your home is your castle” principle has been around since the Magna Carta and was the foundation for centuries of property rights law – until now. As we and others have reported, bankers have used the MERS system and other tools to systematically violate property rights laws and procedures around the country. So far, the Obama administration’s response to this systematic criminality has been to say that it’s not interested in looking at past abuses , and to deny the existence of systematic abuses while publicly insisting that shady foreclosure practices must be declared legal “to get the market moving again.” Meanwhile the Attorneys General of all fifty states have gotten into gear. These Democratic and Republican AGs alike (bipartisanship at last!) have combined their efforts in a joint probe designed to bring this criminality under control. But the 51st Attorney General — the most powerful of them all — is barely visible. After getting pressure from House Democrats and Nancy Pelosi, he finally announced a foreclosure investigation in October. There’s been no movement since then. Don’t worry, though. The guy with the boat in Miami is gonna face the music, and that ex-cop in Ohio is going down . Full Faith and Credit This week we saw the President become visibly angry when his good intentions were doubted as he announced the tax deal. Yet this was also the week Orszag took that Citi job. And it was also the week his Attorney General bragged about the results of an “operation” that began August 16 — “results” that included an arrest in 2009 and others in May and July. With announcements like that, the administration better get used to being doubted. It’s wrong — and a terrible blunder — to dishonestly present a smattering of small-time cases as the fruits of some bold new Federal initiative. But the real breach of trust is the government’s unwillingness to go after the Wall Street fraudsters who ruined the economy. Once again we’re seeing the administration’s approach to financial crime: Target petty hoodlums and let the capos go free. If the White House wants to restore the public’s faith it needs to get serious about investigating bank fraud — real bank fraud, the kind that brought down the economy once and could do it again. Administration officials seem perpetually surprised when they’re not taken at their word, and this week was no exception. They should have known that a skeptical, burned public would see through “Operation Broken Trust.” If they didn’t see that coming, then they shouldn’t have busted that Wall Street “psychic.” They should have hired him. _______________________________________________________ Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America’s Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light . He can be reached at “rjeskow@ourfuture.org.”

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Daniel Wagner: China’s Real Estate Syndrome

December 10, 2010

If something looks like a duck, walks like a duck and quacks like a duck, it is usually a duck — except in China. In China, you can have 30 billion square feet of unused office and residential capacity — the equivalent of 23 square feet for each of China’s 1.3 billion people — and the “China can do no wrong” crowd will call it evidence of a permanent long-term boom. In most countries, that kind of excess would be called evidence of an imminent collapse. Not in China. Western pundits are divided about whether such statistics foretell continuation of China’s perma-boom or imminent collapse, but China is a country where market forces have less impact than the will of the Chinese government, so the boom should remain sustainable as long as the government says it will — or ensures that it is. In a country that needs to grow 9 percent per annum just to keep up with the ranks of new entrants into the job market, and that had an average growth rate of 10 percent over the past decade, a long-term boom prediction may just be right, even though official statistics may be suspect. If we have learned anything about China since it adopted “socialism with Chinese characteristics” in 1993, it is that the country has defied all conventional logic and reasonable predictions about how it would grow and come to impact the global economy. One benefit of being an authoritarian government is that it doesn’t have to care what its people, or the rest of the world, think. Thus far, the government has done a stellar job of keeping the juggernaut that is the Chinese economy humming. It has naturally made mistakes along the way — just as every other government has — but at the beginning of the current economic crisis, the Chinese government acted like the bastion of fiscal conservatism when compared with the U.S. Federal Reserve. Although the Chinese government can certainly be criticized for its heavy hand, it can also be argued that the heavy hand is what has enabled China to weather the crisis relatively unscathed, and to continue to do so. The world has become dependent upon China to drive the global economy, so we should all wish the government well in its task. So is the duck on which Chinese economy is built on sustainable fundamentals or is it a pile of quicksand? There is much conventional evidence that the foundation of China’s fantastic growth is unsustainable, but that has been the case for years, and it continues to grow and grow. For example, bank lending nearly doubled between 2009 and 2008, the sale of residences rose by 44 percent in 2009 and two-thirds of the country’s gross domestic product consists of fixed-asset investment; this is clearly unsustainable. But these statistics mask some hidden strengths, such as that most homes are paid for in cash, urban disposable income has risen an average of 7 percent per year since 2000, and real output per worker rises between 10 and 12 percent per year. It could therefore be argued that there are checks and balances in place that enable China’s economy to maintain equilibrium. Minxin Pei, a senior associate at the Carnegie Endowment for International Peace, notes that China’s banking system, which is dominated by half a dozen enormous state-owned banks, has almost unlimited access to low-cost credit, enabling it to engage in unbridled real estate speculation and giving the banks an incentive to keep the seemingly endless cycle of high growth going. Earlier this year it was reported that there are approximately 65 million empty apartments that Chinese citizens have purchased not to occupy, but to flip at some time in the future. We know how that kind of behavior ended up in the U.S. and elsewhere. But local governments depend on the tax revenue generated from such purchases, so they, too, have a vested interest in keeping the bubble growing. Some western economists predict that the housing bubble will need to be punctured before inflation rises to such an extent that it risks causing social disharmony — something the Chinese government is rather anxious to avoid. Although inflation was officially 4.4 percent in October and 5.0 percent last month, food and other prices are rising at a much faster level, prompting many to question whether inflation is in fact as low as the government claims it is. A variety of economists and think tanks are pointing to a hard landing for China’s economy next year, but it has been in this situation before and has repeatedly confounded the critics with either a soft landing, or no landing at all. A thought provoking article in Forbes earlier this year claims there is no bubble, and that the amount of leverage typically used to purchase real estate around the world — which is the reason so many markets have gotten into trouble — is simply not a major factor in China. Given that such a high proportion of homes are paid for in cash in China, most home buyers can actually afford to buy their homes. It adds that the government has imposed restrictions on the size and number of certain types of homes to erode some of the demand, and that as a result of the housing and office space glut, rental prices have dropped, taking some steam out of the equation. So the Chinese government has a handle on the real estate market as only it can. Why the Steamroller will Continue China’s financial system should be seen as a source of strength for the Chinese economy, however imperfect it may be, because of its ability to support the financing of infrastructure and other investments needed to sustain rapid growth. That the banking sector is dominated by state-owned banks that can lend at will at low cost certainly has its advantages, and is a prime reason why China’s economy may be expected to continue to grow in the 9-10 percent range for the coming decade and beyond. Another reason is that China’s population is becoming wealthier — and not just in the country’s coastal cities. A 2010 report by the Brookings Institution says that China’s middle class is poised to rise significantly not only because of the country’s economic growth rate, but because more Chinese are continuing to break out of the ranks of poor. It is estimated that consumer driven domestic consumption will account for up to 50 percent of GDP by 2015, up from 33 percent last year. That is a guarantee of high growth going forward. Projection of China’s Poor and Middle Class (2009-2030) What all this boils down to is that there is every reason to believe that a combination of government economic control, a high degree of liquidity, rising incomes and consumer spending, and the government’s ongoing ability to tap on the brakes whenever the economy gets too hot should mean that the housing bubble that has developed is unlikely to burst any time soon. If it does, it can be controlled more meaningfully in China than in most other countries. The doomsayers and pessimists have been wrong every time they have predicted the Chinese economy’s imminent demise. They will continue to be wrong.

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Tom Silva: The Great American Payout

December 7, 2010

America is a nation of optimists. Just two years after declaring this the worst financial crisis since the age of Busby Berkeley and speakeasies, it now appears that we are starting to ante up again by releasing our cash. Maybe spending is part of what makes us American–our founding fathers, who were products of the Enlightenment, taught us to reject the old-world notions of asceticism and praying for a better day in favor of enjoying the spoils of our labor and securing our rewards in this life. And now, here we are. Usually depressions are followed by extended periods of hoarding cash and sinking money into only safe investments but recent events seem to suggest we’re moving in another direction. Take the banking industry which declared aggregate profits in the third quarter totaling $14.5 billion, more than seven times greater than last year during the same period, according to the FDIC’s Quarterly Banking Profile (QBP) for the third quarter of 2010. Part of the reason for these buoyant numbers is that banks released their rainy day provisions into earnings causing FDIC chief Sheila Bair to warn bankers that they may be reducing their loan loss reserves too early. Provisions for loan losses dropped to their lowest level in three years–reserves against future slid to 63.9% of noncurrent loans from 65% in the second quarter–even as “troubled loans remain near historic high levels,” Bair said. This is the first time that loan-loss reserves have fallen since late 2006. To be sure, most of Bair’s comments are aimed primarily at mid-sized and smaller banks that have yet to show consistent credit quality improvement unlike the bigger banks. And, no doubt, we need liquidity in the economy and the banks need to provide it but it behooves the industry to be careful to cover the bets at a time when the number of troubled banks is at 860, the most since 1993. In the real estate industry, some of the largest companies, including Simon Property Group Inc., Kimco Realty Corp. and Nationwide Health Properties Inc., raised their quarterly dividends in November and more companies are expected to follow suit in the months ahead. The higher payouts reflect the higher rents and better occupancy levels, which are boosting the income pool for dividends. This a serious about face from the past 36 months, when REITs, along with other public companies, were slashing or suspending dividends to preserve cash. In 2010, 37 REITs have raised dividends; seven have cut them. To compare, 61 companies either cut or cancelled dividends in 2009. REITs aren’t alone in raising dividends. Many large-cap and cash-flushed companies are expected to do the same. A recent report by Markit, a financial information services firm, expects a 50% jump in dividend increases for S&P 500 companies in the fourth quarter from last year. Currently, there is an estimated $2.0 trillion in net cash sitting in non-financial corporate treasuries. The payout enthusiasm has affected even some of the holdouts: Cisco Systems announced plans to pay a stock dividend for the first time in its more than quarter of a century in business. Apple is sticking to its guns by sitting on its nearly $46 billion. One reason for paying dividends, outside of magnanimity, could be the tax rates. Under current federal individual income tax law, both capital gains and corporate dividends are taxed at a reduced 15% rate. However, those reduced rates are scheduled to expire at the end of 2010, raising the hit on dividends to increase to as much as 39.6%. And finally, there’s us, the consumer. Our national savings rate was 5.7 percent in October — still strong when you consider that it was at 0% in 2004. An article in the Christian Science Monitor in 2004 summed it up this way: “Americans have stopped saving for a rainy day. Instead, they are living paycheck to paycheck, depending on credit cards to get them through emergencies, and hoping that the rising value of their homes will give them a retirement nest egg.” However, that 5.7% looks meager when you consider that Europeans hover around a 14% savings rate in the Eurozone. The 5.7% also is a contrast with some of the other recessionary periods, for example the the early 1980s when American savings levels were in the 9% to 10% range. It’s worth noting that this comes at a time when, the government reports, consumer spending rose 2.6% in the third quarter, the fastest pace since the fourth quarter of 2006. Clearly, we’re feeling the same optimism as our corporate and financial counterparts. “One today is worth two tomorrows,” Benjamin Franklin once said. What could be more American?

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WATCH: Bernanke Defends Bond Buys On ’60 Minutes’, Says Years Until ‘Normal’ Unemployment

December 6, 2010

WASHINGTON (Associated Press) — Federal Reserve Chairman Ben Bernanke is stepping up his defense of the Fed’s $600 billion Treasury bond-purchase plan, saying the economy is still struggling to become “self-sustaining” without government help. In a taped interview with CBS’ “60 Minutes” that aired Sunday night, Bernanke also argued that Congress shouldn’t cut spending or boost taxes given how fragile the economy remains. The Fed chairman said he thinks another recession is unlikely. But he warned that the economy could suffer a slowdown if persistently high unemployment dampens consumer spending. The interview is part of a broad counteroffensive Bernanke has been waging against critics of the bond purchase plan the Fed announced Nov. 3. The purchases are intended to lower long-term interest rates, lift stock prices and encourage more spending to boost the economy. WATCH: Critics, from Republicans in Congress to some officials within the Fed, say they fear the Fed’s intervention could spur inflation and speculative buying on Wall Street while doing little to aid the economy. On other issues in the “60 Minutes” interview, Bernanke: _ Argued that unemployment would have been far higher – “something like it was in the Depression, 25 percent” – had the Fed not provided extraordinary aid to Wall Street firms, banks and other companies to ease a credit crisis. _ Said it could take four or five more years for unemployment, now at 9.8 percent, to fall to a historically normal 5 percent or 6 percent. _ Reiterated that the Fed is prepared to buy even more than $600 billion in Treasury bonds over the next eight months, should it decide the economy needs the fuel of even lower interest rates. _ Argued that the risk of inflation is overblown. Bernanke said he’s “100 percent” confident the Fed will be able to ward off inflation, when the time is right, by raising interest rates and unwinding its stimulative programs. _ Called the risk of deflation – a prolonged drop in prices, wages and the values of homes and stocks – “pretty low.” He said the likelihood would have been greater if the Fed weren’t maintaining super-low interest rates. _ Urged Congress to improve the nation’s tax code “by closing loopholes and lowering rates” for individuals and companies. He said doing so would create greater incentives for people to invest. Critics who fear the Fed is raising the risk of inflation have complained that its bond purchases mean the Fed is, in effect, printing more money. In the interview, Bernanke called that a “myth.” He insisted the Fed isn’t printing money when it buys Treasurys and said the program won’t expand the amount of money in circulation in a “significant way.” Lou Crandall, chief economist at Wrightson ICAP, said Bernanke is right that the Fed’s purchases won’t significantly change the amount of money circulating in the economy. That’s mainly because banks aren’t lending most of the money they already hold in reserve. When the Fed buys Treasurys, it increases the reserves in the banking system. For those reserves to actually “create” money, the banks would have to lend it. Still, Crandall suggested that the bond-buying program creates the appearance of printing money, something that could put the central bank’s credibility at stake. Bernanke’s apperance Sunday night is part of a public-relations blitz he’s mounted since the Fed announced the program Nov. 3. In private and public appearances, Bernanke has sought to explain and defend the program to ordinary Americans, investors and lawmakers on Capitol Hill. His efforts have included an Op-Ed article in The Washington Post and discussions with students in Jacksonville, Fla., economists in Jekyll Island, Ga., business people in Columbus, Ohio, central bankers in Europe and members of the Senate Banking Committee. Criticism has come from both home and abroad. Officials in China, Germany, Brazil and other countries have argued that the Fed’s plan is a scheme to give U.S. exporters a competitive edge by keeping the value of the dollar weak. A weak dollar makes U.S. goods cheaper abroad and foreign goods more expensive in the U.S. It’s rare for a sitting Fed chairman to grant an interview, whether for broadcast or print. But this was Bernanke’s second appearance on “60 Minutes.” His first was in March 2009. At the time, he was facing anger over Wall Street bailouts and rising anxiety about the economy. In the interview that aired Sunday, Bernanke pointed out that the economy is growing at an annual pace of around 2.5 percent – far too slow to reduce unemployment. For a self-sustaining recovery, consumers and businesses would need to spend more, so the economy could grow faster. Bernanke has said he hopes the Fed’s bond-buying program will help lift stock prices. In part, that’s because lower yields on bonds would cause some people to shift money into stocks and also because lower corporate bond rates will spur business investment. Higher stock prices would boost the wealth and confidence of individuals and businesses. Spending would rise, lifting incomes, profits and economic growth. Bernanke has referred to this as a “virtuous cycle.” Asked whether the recovery is self-sustaining, Bernanke responded: “It may not be. It’s very close to the border.” Given the economy’s still-weak growth, he said: “We’re not very far from the level where the economy is not self-sustaining.”

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Video: Flowers Says He May Buy More U.S. Banks, Assets in U.K.

December 3, 2010

Dec. 3 (Bloomberg) — Financier J. Christopher Flowers talks about the outlook for private equity, the banking industry and his investment strategy. He speaks with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

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Kevin Lawton: SEC Regulations Barricade The Crowdfunding Floodgates

November 30, 2010

Joseph Pulitzer used a form of crowdfunding to finance the Statue of Liberty. Obama used crowdfunding to bankroll his presidential campaign in 2008. Crowdfunding is such a pervasive concept that today more than 175 crowdfunding sites exist online. Seemingly, a new crowdfunding site pops up every other day. So it may be surprising to learn that none of them allow entrepreneurs to raise money in exchange for equity in their business. That’s because regulatory organizations like the SEC ban it. SEC regulations that date back to the 1930′s usurped entrepreneurs’ ability to pitch their business ideas to the general public with the aim of securing funding. Ostensibly, this was done to protect unsophisticated investors from fraudsters, but in any case effectively handed the role of financing new companies over to the wealthy. These days, the regulations don’t make sense given the Internet’s ability to add transparency to the opaque venture capital model. In the same way that social networking changed how we allocate time, crowdfunding will change how we allocate capital. Crowdfunding, generally speaking, is the merger of group funding and social networking. While group funding dates back millennia, the social networking aspects of crowdfunding are quite new, and are a major driving force behind this revolutionary form of financing. Building on social networking, crowdfunding creates a vehicle for people to invest or pledge money to projects for which they have an interest, a passion and an attachment. In doing so, it creates a marketplace opportunity for a diversity of players. Whether financing an indie movie, a fashion line, an around-the-world sailing adventure, or the next Lance Armstrong, crowdfunding is being applied everywhere. Still, the human race hasn’t even come close to integrating the collective wisdom of our multi-billion person crowd with ways to allocate capital. 2 billion people already use the Internet, and that number is increasing rapidly. Until recently, capital allocation was largely the province of a small and entrenched minority. But with the explosive growth of connectivity and technological complexity, the classical models of capital allocation are folding and becoming dysfunctional. What are the weaknesses of old methods, especially the sheer scale of information and ideas, are the strengths of a new model of funding which has the potential to tap an almost unfathomable collective intelligence. Therein lies the immense future of the crowdfunding revolution. Ironically, while nearly every other market sector has incurred disruption by new technologies, venture finance, which funds many of these new technologies, has innovated little itself. That shows in the downward-trending performance of venture capital, now negative across the industry. In many ways, the financing of new ventures has shared ailments that we’ve seen in the banking industry: centralization and intermediation. The solution to these issues is decentralization and disintermediation — exactly what crowdfunding offers. Whereas classic financing places a premium focus on relatively few financiers, crowdfunding derives its value from the ability to coalesce the collective IQ of many. But that’s not to say crowdfunding is a replacement for classic financing. It’s actually something much bigger, and something new. In fact, nimble players, hailing from classic business financing, will use it as a signaling mechanism to access hot new deals they would have never seen. As exciting is the fact that the value of a person’s social networks is undergoing an enormous upside transformation. That’s because, as David Geertz of the SoKap crowdfunding platform says, “Influencers drive crowdfunding campaigns. These curators of cool ideas are poised to become the new power brokers.” With crowdfunding, zero network equates to zero funding, so it follows that those with networking influence enjoy a new form of value. Efforts are afoot in other countries to enable the massive potential of crowdfunding, recognizing that small businesses are the job-creation engine of the economy. In fact, crowdfunding looks to be one of the most important socio-economic forces of our time. The question is: Which nations will be held back by their unwillingness to change regulations? I discuss a much deeper and broader look at the crowdfunding phenomena in my book, The Crowdfunding Revolution , and will continue with a series of related posts on The Huffington Post .

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New ‘Stress Tests’ Coming For Banks

November 18, 2010

WASHINGTON — The nation’s largest banks must undergo new stress tests to show they can weather another recession, and the Federal Reserve said those that pass them can boost dividends paid to investors. Banks would need to show the Fed’s bank examiners that they’re in good financial health and that they have adequate capital to absorb potential losses over the next two years. The Fed oversees Wall Street’s biggest banks, including Citigroup, Bank of America, JPMorgan Chase & Co., and Wells Fargo. Banks have to file plans to the Fed showing that they would have sufficient capital cushions to cover any losses under different economic scenarios – including if the economy were to fall back into a recession, Fed officials said. All of the 19 largest banks overseen by the Fed must file the plans – even if they don’t intend to increase their dividend payments. The plans must be filed by Jan. 7, 2011. The upcoming round of “stress tests” are a key part of the Fed’s ongoing efforts to make sure that banks – and the entire financial system – are stable. The safety and soundness of the banking system is an important ingredient to the economy’s health. Banks that don’t pass the stress tests will have to take steps to raise new capital to build up their cushions. On Wall Street, banks’ stock prices tumbled after the Fed released the guidelines. Bank of America’s stock price dropped 2.68 percent. Wells Fargo’s fell 1.21 percent, JPMorgan Chase’s declined 1.09 percent and Citigroup’s stock price slid 0.71 percent. The Fed’s first stress tests were conducted in 2009 as the country was still reeling from the worst recession and financial crisis since the 1930s. Those results were made public in a move to boost confidence in the then-fragile U.S. banking system. The results of the upcoming exams, however, won’t be made public, Fed officials said. That’s in line with banking regulators’ long tradition of keeping such information confidential. Banks wanting to boost their dividends also would need to show the Fed they have a plan to comply with stricter global capital requirements recently agreed to in Basel, Switzerland. And banks would need to repay the federal government any bailout money received during the financial crisis before they can boost their dividend payments. During the financial crisis, banks cut their dividend payments. By boosting their payments, banks may be able to attract new investors. JPMorgan Chase is among the banks interested in boosting dividend payments. JPMorgan Chase CEO Jamie Dimon has said he’d like to increase the bank’s annual dividend to between 75 cents and $1 a share. It is currently 20 cents a share. The Fed hopes to move quickly to complete the stress tests. Banks that satisfy the guidelines should be able to boost their dividends in the first quarter of 2011, Fed officials said. ___ Pallavi Gogoi in New York contributed to this report.

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Brett King: Trust in Banks…gone! How to get it back?

November 18, 2010

During the global financial crisis, governments spent billions to bail out banks in an effort to keep liquidity in the banking sector, largely so that lending could continue at a time when businesses needed as much help as they could get. However, in a financial crisis when the economy is in recession, it is counter-intuitive for a bank to lend money to customers who might get into further trouble. So the bail out didn’t work in stimulating the economy the way it was intended. The autopilot ‘internal’ risk function kicked in and prevented it from doing so. Some could argue that the ‘risk’ function within banking, while acting to protect institutions, may have actually negatively impacted the speed of recovery. While we have all sorts of classifications around risk within the business environment today (operational, legal, socio-political, financial and market) the greatest risk we potentially face in the banking sector is actually none of these. Our risk “compass” needs to be re-tuned in the light of customer behavioral shift. Industry Reputational Risk Bankers often talk about the ‘trust’ consumers have in banking as a defining characteristic of why customers give us their money instead of simply keeping it under a mattress. It’s also why many bankers have difficulty understanding why customers of today seem perfectly happy to give money to the likes of PayPal, M-PESA, Lending Club or Zopa. The fact is trust in banking is stubbornly stuck in the doldrums, largely as a result of the whole sub-prime, CDO debacle. So will trust return? This is a big theme this year. We are essentially dealing with reputational risk. Not for an individual brand or institution, but the collective reputation of the industry as a whole. That’s the regulator’s job… To assume we can fix this problem is to ascertain that we can have a coordinated approach to restoring consumer confidence as an industry. There are a few issues with this, namely that we generally leave such broader issues to the regulators. After all, what can one bank do about this on it’s own? The problem with this approach is that regulators can only regulate, they can’t make us do good things for our customers. Despite strong regulation, 11 banks (Including the Big 4) are facing class action in Australia by customers over fees . Despite toughening regulation in the United States, the “Move Your Money” campaign continues to live on to this day. It is also why peer-to-peer lending networks are flourishing, why Mint and Blippy are garnering the trust of millions, and why PayPal is the world’s leading online payment network. Customers are moving on, plainly because the industry is no longer differentiated by a reputation built on trust. Let’s face it – regulation is not going to restore trust. The only two things that will fix this gap is building transparency and delivering great service at the coal face. Restoring trust requires us to be un-bank-like… I’ve heard many banks talk about service and being more transparent, but the reality is this is a tough target. When we look at service as a sector we see costs and those costs have to be justified – the question always will be; will an increase in service bring more revenue or simply translate to costs? When we look at transparency , this is counter-intuitive for banks. We have spent our entire existence finding ways to hide margin, fees, and to justify those elements as part of the banking ‘system’ in order to return EPS. The problem is if you screw up with customers today when they’re standing in the branch in a lengthy queue during their lunch break, they are just as likely to start Tweeting or shouting out to friends on Facebook about how “hopeless bank ABC is in the city branch today, this queue is massive!” How do banks respond to such communications? Most ignore these Tweets as inconsequential – does that restore trust? Some respond positively to the tweet, explaining how sorry they are and what they are doing to resolve it… Unfortunately, some Respond negatively ; I’m sorry the customer feels this way, but this is not what we are like – really, some people are just never happy! The only of these responses that will work positively to rebuild trust in the sector is to suck it up, respond positively, and figure how to create a better service culture or resolve the process problems that created them. You can’t do that if you aren’t listening. Excellence is trustworthy When you build a great service environment, then there is no need to worry about being transparent. Customers these days will pay a premium for great service. If service is not your thing, then be transparent about that, but explain you don’t charge as much as those other banks and that is the benefit of your bank. If, however, you want to keep fully loaded fee structures in place, then you’ll have to be transparent about the cost of delivering great service. If you aren’t delivering great service, and you are still leveraging fees like it was the 90s, you’ll find out that this strategy doesn’t work – just ask the big 4 banks in Australia. NAB, thus far, is the only bank to positively respond to this pressure by taking a new, transparent stance on fees . There are some simple steps to take that will bring rapid improvements: Simplify bank language through a plain-language initiative – refer Centre for Plain Language and Whitney Quesenbery Make it easy to find the best phone numbers to speak to the right area of the bank on your website, circumvent IVR menu trees where possible. Citi in the US does this pretty well. Mystery shop, not competitors, but the most common processes in your multi-channel environment and see where these need to be drastically simplified, and use Observational Field Studies to see how customers work in real-world settings. Put a social media listening post in place and respond positively and openly at every opportunity – check out Gatorade’s Mission Control Review the biggest complaints you get in the call centre, and try to fix those customer journeys proactively. We call these Torch Points… Building trust starts with creating great customer journeys that improve service levels and demonstrate a willingness to be transparent. We can’t rebuild trust without these elements. The biggest risk today, is simply that I don’t trust you enough to give you my money.

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Brett King: Trust in Banks…gone! How to get it back?

November 18, 2010

During the global financial crisis, governments spent billions to bail out banks in an effort to keep liquidity in the banking sector, largely so that lending could continue at a time when businesses needed as much help as they could get. However, in a financial crisis when the economy is in recession, it is counter-intuitive for a bank to lend money to customers who might get into further trouble. So the bail out didn’t work in stimulating the economy the way it was intended. The autopilot ‘internal’ risk function kicked in and prevented it from doing so. Some could argue that the ‘risk’ function within banking, while acting to protect institutions, may have actually negatively impacted the speed of recovery. While we have all sorts of classifications around risk within the business environment today (operational, legal, socio-political, financial and market) the greatest risk we potentially face in the banking sector is actually none of these. Our risk “compass” needs to be re-tuned in the light of customer behavioral shift. Industry Reputational Risk Bankers often talk about the ‘trust’ consumers have in banking as a defining characteristic of why customers give us their money instead of simply keeping it under a mattress. It’s also why many bankers have difficulty understanding why customers of today seem perfectly happy to give money to the likes of PayPal, M-PESA, Lending Club or Zopa. The fact is trust in banking is stubbornly stuck in the doldrums, largely as a result of the whole sub-prime, CDO debacle. So will trust return? This is a big theme this year. We are essentially dealing with reputational risk. Not for an individual brand or institution, but the collective reputation of the industry as a whole. That’s the regulator’s job… To assume we can fix this problem is to ascertain that we can have a coordinated approach to restoring consumer confidence as an industry. There are a few issues with this, namely that we generally leave such broader issues to the regulators. After all, what can one bank do about this on it’s own? The problem with this approach is that regulators can only regulate, they can’t make us do good things for our customers. Despite strong regulation, 11 banks (Including the Big 4) are facing class action in Australia by customers over fees . Despite toughening regulation in the United States, the “Move Your Money” campaign continues to live on to this day. It is also why peer-to-peer lending networks are flourishing, why Mint and Blippy are garnering the trust of millions, and why PayPal is the world’s leading online payment network. Customers are moving on, plainly because the industry is no longer differentiated by a reputation built on trust. Let’s face it – regulation is not going to restore trust. The only two things that will fix this gap is building transparency and delivering great service at the coal face. Restoring trust requires us to be un-bank-like… I’ve heard many banks talk about service and being more transparent, but the reality is this is a tough target. When we look at service as a sector we see costs and those costs have to be justified – the question always will be; will an increase in service bring more revenue or simply translate to costs? When we look at transparency , this is counter-intuitive for banks. We have spent our entire existence finding ways to hide margin, fees, and to justify those elements as part of the banking ‘system’ in order to return EPS. The problem is if you screw up with customers today when they’re standing in the branch in a lengthy queue during their lunch break, they are just as likely to start Tweeting or shouting out to friends on Facebook about how “hopeless bank ABC is in the city branch today, this queue is massive!” How do banks respond to such communications? Most ignore these Tweets as inconsequential – does that restore trust? Some respond positively to the tweet, explaining how sorry they are and what they are doing to resolve it… Unfortunately, some Respond negatively ; I’m sorry the customer feels this way, but this is not what we are like – really, some people are just never happy! The only of these responses that will work positively to rebuild trust in the sector is to suck it up, respond positively, and figure how to create a better service culture or resolve the process problems that created them. You can’t do that if you aren’t listening. Excellence is trustworthy When you build a great service environment, then there is no need to worry about being transparent. Customers these days will pay a premium for great service. If service is not your thing, then be transparent about that, but explain you don’t charge as much as those other banks and that is the benefit of your bank. If, however, you want to keep fully loaded fee structures in place, then you’ll have to be transparent about the cost of delivering great service. If you aren’t delivering great service, and you are still leveraging fees like it was the 90s, you’ll find out that this strategy doesn’t work – just ask the big 4 banks in Australia. NAB, thus far, is the only bank to positively respond to this pressure by taking a new, transparent stance on fees . There are some simple steps to take that will bring rapid improvements: Simplify bank language through a plain-language initiative – refer Centre for Plain Language and Whitney Quesenbery Make it easy to find the best phone numbers to speak to the right area of the bank on your website, circumvent IVR menu trees where possible. Citi in the US does this pretty well. Mystery shop, not competitors, but the most common processes in your multi-channel environment and see where these need to be drastically simplified, and use Observational Field Studies to see how customers work in real-world settings. Put a social media listening post in place and respond positively and openly at every opportunity – check out Gatorade’s Mission Control Review the biggest complaints you get in the call centre, and try to fix those customer journeys proactively. We call these Torch Points… Building trust starts with creating great customer journeys that improve service levels and demonstrate a willingness to be transparent. We can’t rebuild trust without these elements. The biggest risk today, is simply that I don’t trust you enough to give you my money.

Read the full article →

Video: O’Leary Says Announcement of Irish Bailout ‘Very Close’

November 17, 2010

Nov. 17 (Bloomberg) — Dermot O’Leary, chief economist at Goodbody Stockbrokers, talks about the outlook for the Irish economy and the banking system. He speaks with Maryam Nemazee on Bloomberg Television’s “Countdown.”

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Laurence J. Kotlikoff: Mervyn King Has It Right — Our Financial System Is the Worst

November 10, 2010

In its October 30 article, “King Plays God,” the Economist denigrates Bank of England Governor Mervyn King for telling the truth about our current banking system. The article is a pity. King has it completely right. We do have the worst possible banking system because it is built on two pillars of straw–proprietary information and leverage. The banks are here to intermediate–to connect lenders to borrowers and savers to investors. They are not here to borrow on their own account, make risky investments, hide the details of those investments, and then arrange for taxpayers to cover their losses when their gambles turn sour. This system is not only a foundation for systemic fraud, it’s a prescription for financial collapse. Since those who lend to the banks, via deposits or the purchase of bank paper, aren’t privy to what is being done with their money, the strong whiff of fraud, whether actual or not, can provoke massive bank runs. What we saw in 2008 was precisely this–a fraud run. It was not a liquidity run, but a run on one major financial institution after another because the creditors to those institutions suspected that they were being taken or that other creditors had reached this conclusion and were going to get their money out first. To prevent this run from taking down every major financial intermediary on the planet, the large central banks rode to the rescue with massive guarantees that tempered the crisis. But, truth be told, those guarantees are themselves subject to a massive run for the simple reason that they are nominal, not real (purchasing power) guarantees. If bank depositors and other creditors of the surviving banks suspect that inflation is taking off or may take off, they will first walk, then trot, and then run to withdraw their funds and buy something real, like canned goods or cars or furniture, before prices rise. Such a run would entail, in the case of the US, the Fed’s printing over $10 trillion to cover its explicit and implicit FDIC, money market, and other guarantees. This money creation would produce precisely what was originally feared–hyperinflation–and thereby make the run in everyone’s narrow self interest. Instead of thoughtfully discussing these fundamental issues, the Economist refers to King’s interest in moving the world off this precipice as “radical.” But what’s radical is not the truth. What’s radical is maintaining the current financial status quo, which, globally speaking, put tens of millions of people out of work and has damaged or destroyed tens of millions of retirements. The Economist also repeatedly suggests that King’s goal is to break up the big banks and that doing so is the only alternative to what we now have. This too is off base. In his Buttonwood Conference speech in New York, Governor King mentioned a number of reform proposals, none of which would entail breaking up big banks. Instead they would change how banks, large and small, function. For example, under Limited Purpose Banking, a plan that I have put forward and one referenced by the governor in his speech, all incorporated banks as well as other financial corporations (e.g., hedge funds and insurance companies) would be reorganized as mutual fund companies with no limit on their size. Individual mutual funds marketed by mutual fund companies are, effectively, small banks with zero leverage. Hence, individual mutual funds and the potentially very large limited purpose banks that sponsor them would never fail. This would put a definitive end to financial collapse, which has been at the heart of so many terrible economic downturns over the centuries. The other critical aspect of Limited Purpose Banking is having a single regulatory body with a very narrow charter, namely to hire non-conflicted companies to verify, appraise, rate, and disclose in real time on the web all securities held by the mutual funds. Thus Limited Purpose Banking doesn’t break up large banks. It limits them to their legitimate purpose, namely intermediation as opposed to gambling. And it forces them to do turn on the lights and operate with full disclosure and complete transparency. The Economist ‘s article got one thing right–its title. When it comes to fixing the banks, Mervyn King is playing God and thank God for that.

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Money-Laundering Crackdown Cuts Mexican Dollar Deposits 75% In Two Months

November 9, 2010

Mexican companies reduced dollar cash deposits by 75 percent since President Felipe Calderon in September restricted some currency exchanges to fight money laundering by drug gangs, said Guillermo Babatz, president of the National Securities and Banking Commission.

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Bank of America and MBNA Veteran Joins Cartera Commerce as Vice President of Client Services

November 8, 2010

Senior Banking Executive Brings More Than 20 Years’ Experience Delivering Innovative Technologies and Services to Fortune 100 Companies

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New Ways Bankers Are Spying On You

November 6, 2010

Big Banker is watching you–more closely than ever. With lenders still skittish about making new loans, credit bureaus and others are hawking services that help banks probe deeply into your financial closet. The new offerings include ways to look at your rent and utility payments, figure out your income, gauge your home’s value and even rate your banking habits based on details like whether your direct deposits have stopped.

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Brett King: How to create a sexy bank

November 3, 2010

Getting to the bank of tomorrow seems daunting. For banks that are entrenched in physical elements such as branch distribution networks, long-held conventions around paper-led compliance procedures, embedded silos and P&L (that are more likely to collapse completely than change) – how can a change to a better bank be navigated? How are you going to issue credit cards when there is no plastic? What will checking accounts be called when you don’t issue check books anymore? The challenges facing the banking sector today are extreme… Gaming and Silos that frustrate Banking This problem of change is amplified by the tendency towards internal gaming in the institution.  As banks we compete department by department for precious budget dollars each year. We compete across product for customer, with no tangible connection between a customer who comes as a credit card account holder to a customer who has a mortgage with the exception of the brand. In this environment, how do we develop a culture of innovation, of unyielding focus on customer excellence? Embedded silos and this type of internal gaming frustrates customer innovation and improvements in the customer experience. We fight annually to retain our silo’s budget for the coming year, without a greater goal considered around whether or not those budgets are actually accomplishing what we need for the customer. We have poor metrics that reinforce existing paradigms. We lack the ability to measure customer behavior and realistically assess how customers are working with us, thus as an industry we largely ignore the obvious massive changes around mobile, social media and Internet adoption. Basically, forget the concept of any spontaneous change in organization strategy that creates an innovative bank, one that intuitively gets the customer behavioral shift – this is going to be very, very hard work. Don’t bet the farm The mantra of senior executives looking at social media, mobile banking and payments, next generation Internet banking, augmented reality or geo-location, and other such technology initiatives reminds us of the classic Jerry McGuire call to “Show Me The Money” ! ROI is a massive focus, but the problem with living in a rapid adoption environment like we do today, is that if you wait to see how business models develop 2-3 years down the track to prove there is ROI, you are already going to be 4 years behind the competition. So how do you innovate when you can’t demonstrate short-term ROI, but you know that you MUST be experimenting with different approaches? How do you foster a culture of break out strategies or approaches when existing silos and gaming leave you with minimal budget to try something new? The trick is that you have to be ready to play with new ideas and test new approaches cheaper, faster and better than the traditional IT or channel deployment approaches of yester years. Your bank has to learn to prototype. Playing with BANK 2.0 models Although as a competency interaction design, usability, behavioral economics, prototyping and other such elements have been around for a couple of decades, the banking sector has largely remained immune from this type of thinking. Predominantly we’ve let bank process, policy, compliance and regulations define how we behave as a bank, and customers have had to yield to this environment. As Facebook credits, PayPal, NFC enabled iPhones and other such innovations continue to ‘bite’ we realize that as an industry we’re going to have to redesign customer journeys and improve engagement. Experimentation is a great model to help us get to where we need to go. IDEO recently attacked the redesign of the humble ATM with BBVA. The project took almost 2 years to get from prototyping to finished product, but in bank terms, this is warp speed. The traditional design process would not have produced the same outcome as what you see is the end result, which is truly a revolution in ATM design. Check out the video that documents the project and the prototyping and the design process complete with vital “human” input. The Future of Self-Service Banking from IDEO on Vimeo . Immersion as an observation technique Experiential immersion and behavioral observation studies are increasingly powerful ways to understand how customers respond to prototype environments. Recently I visited NAB in Australia where I met with Mark Appleford’s team who have built an Immersion and Design Centre for the purpose of testing their NextGen approaches to engagement banking. The Immersion and Design Centre allows for rapid configuration of physical spaces and interaction, without having to actually build a physical retail environment. A large video screen and configurable room enables NAB to create a simulated environment complete with visual feedback, portable signage, ambient sounds, mock-up screens and interfaces (like a cardboard box and touch screen that doubles as an ATM). In the images below you can see a mock-up of a bank shop environment complete with the video wall configured to show shoppers milling in the retail space, and you’ll see a NAB staffer sitting behind an ATM mock-up feeding mock currency through a slot to customers in a test of an ATM design iteration. A retail shopping environment projected on the rear wall of the immersion space The staffer here is manually feeding notes to customers through the ATM mock-up Fail often, fail early, save big bucks… The objective in building the prototype bank is to fail often, re-iterate and get the design of the customer interaction right, while it doesn’t cost you too much to change. If you’re already at User Acceptance Testing and you find a major customer hiccup, the cost of re-architecting the solution is prohibitive – so bad designs often go live just because they are too costly to change when testing reveals problems at the user-end of the journey. If you are going to be a really innovative bank, you have to learn to experiment with different models of engagement in a cheap, but productive manner. Start thinking of ways to prototype the future of your bank.

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European Stocks Closed Mixed as Banking and Technology Weighed Down Good Economic Data

November 1, 2010

European Stocks Closed Mixed as Banking and Technology Weighed Down Good Economic Data

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Robert Auerbach: Why the Federal Reserve’s Contribution to Unemployment and Price Discrimination Continues

October 27, 2010

As I described earlier, the Fed began paying banks interest on their reserves one month after the September 2008 financial crisis struck the United States economy and spread throughout the world. The Fed (actually taxpayers) paid the banks more than $2 billion in 2009 at a small, but risk free, rate of one-quarter of 1 percent. Economists inside and outside the Fed said these payments would be an incentive for banks to sit on their reserves rather than loan the money to businesses in a risky environment. This was the Bernanke Fed’s contribution to unemployment. I suggested that interest payments on reserves should be lowered and short term interest rates targeted by the Fed be allowed to rise to maintain a moderate rate of increase in the money supply. However, Fed policy still persists as the banks sit on $1.047 trillion in reserves on September 1, 2010. This is 53.4 percent of the money (the monetary base) the Fed has issued. Compare this to 5.3 percent on August 1, 2008 before the financial collapse and the interest payments on bank reserves were paid. So what does the Fed want to do now? Three Fed officials, Federal Reserve Bank Presidents, William C. Dudley (New York), Charles L. Evans (Chicago) and Eric S. Rosengren (Boston) have signaled their views making headlines: “Fed Officials Signal New Economic Push.” (New York Times, 10/1/10) The officials reportedly suggest buying longer term Treasury bonds and thus issuing more money. Once such transactions are made the sellers will deposit the money in a bank account. The banks may continue to hold more than half of the new money in reserves and collect more risk free interest. Instead of buying bonds why not follow the suggestion to lower interest payments on bank reserves and raise target interest rates to allow the money supply to increase at a modest rate? Temporary attempts to change long term interest rates on U.S. Treasury bonds have many collateral effects, such as changing the current (spot) and future exchange rates, inducing outflows of capital from the U.S. and causing turbulence in the international money markets. I do not recall that the previous four Fed Chairmen (Arthur Burns, G. William Miller, Paul Volcker and Alan Greenspan) discussed these collateral effects of Fed policies in House Banking hearings where I assisted in preparing questions. Hello, the U.S. is affected by changes in the international money markets that respond to Fed policies. The banks certainly favor the Fed’s interest payments if they can continue to earn sufficient risk free interest on their reserves. Naturally, these Fed Bank presidents would be expected to have a strong incentive to please the banks that elected them to their office and may wish to be reelected at the end of their five-year terms. Two thirds of the nine board of directors that elect the presidents at each of the twelve Federal Reserve district banks are elected by Fed member banks in the district. (All national banks must be member banks. It is optional for banks chartered by state governments.) The election must be approved by the Board of Governors in Washington, but first the applicants must win over the votes of the bankers. I had experience with this political process when a lawyer at the Kansas City Fed bank successfully ran to be its president. I was one of his staff tutors on monetary policy and general economics. It is an important political process that is also a major conflict of interest for the nation’s most powerful bank regulators to be elected by the banks they will regulate. When I testified against the payment of interest at a Congressional hearing, Congressman Pat Toomey (now running for the Senate in Pennsylvania) made a compelling and common argument for the payment of interest on bank reserves required by the Federal Reserve. (3/5/2005) If banks are required to hold reserves, it is a tax on their earnings, from money they cannot invest, that should be offset with interest payments to the banks. Surplus reserves (reserves that are not required) do not qualify under this rationale. Economists have also said that the interest payments on reserves would be passed on to the depositors so that people could earn interest on money rather than wasting resources searching for secure investments that pay market rates of interest. These arguments are not applicable in the current U.S. banking system. First, the interest payments on reserves are unlikely to be fully passed on to “ordinary” depositors by most banks. Rather, it would be a gift to bank stock holders estimated to have a present value of $16.7 billion. The reason interest payments are not fully passed on to depositors is another story about bank pricing practices. An underlying fact is often ignored. Reserve requirements imposed by the Fed on banks are actually optional for many depositors. Vice President Richard G. Anderson of the St Louis Federal Reserve Bank calls them a “voluntary tax.” (“Economic Synopses”, 2008, No. 30) One reason is that many business depositors have “retail deposit sweep programs.” These are zero balance accounts because the money is taken off the banks’ books before the banks close and interest is paid overnight. Then the money is put back into the accounts. That is all phony accounting to pretend there is no money in the account that would require the banks to hold reserves. The banks can pay a higher interest on these accounts because the Fed does not require reserves to be held against the accounts. This a deplorable form of price discrimination that treats the “ordinary” depositors as fools who receive regular accounts that pay lower interest, currently often near zero. The Fed should stop this price discrimination, but why would they hurt the banks that elect the Fed Bank presidents? Sweep accounts are not the only method banks have used to reduce reserve requirements. One example is an accounting scheme called “The Eurodollar Game” that large banks with offshore branches can use to reduce their reported deposits and thus their required reserves. (The game includes counting Friday as three days in calculating average deposits. The deposits can be transferred to offshore accounts so they don’t appear on Friday and then brought back on Monday, another phony accounting trick.) Fed Chairman Paul Volcker replied to a request from Banking Committee Chairman/Ranking Member Henry B. Gonzalez to stop the Eurodollar game. Volcker replied that since there were other ways to bypass reserve requirements it would not be desirable to fix this one problem.

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Robert Lenzner: The Ten Most Serious Problems Facing The Stock Market and Economy

October 27, 2010

The Ten Most Serious Problems Facing The Stock Market and Economy Oct. 26 2010 – 1:19 pm | 609 views | 1 recommendation | 2 comments By ROBERT LENZNER Investor Alert; Here are the major problems you will face in the next ten years of ticklish transition from crisis to attempted normalcy. Call it the WALL OF WORRIES! Excerpted from The Economist Conference on Fixing Finance. And remember; not all problems have quick solutions, like all of the ones below. 1. Economic growth in the US unlikely to pass 2% for the next 3 to 5 years- and maybe even up to 10 years. There can be no stimulus program in light of the expected Republican victory in November. “This is going to be a period of pain,” said Joseph Stiglitz, Columbia University professor. The bottom line: unemployment will plague as because there is a 1% annual growth in labor force- but only 2% economic growth. 2. QE2 or Quantitative Easing, the expectation of pouring another trillion dollars into the banking system is seen likely to only trigger inflation, but create no new jobs. Proof positive; yesterday, the Treasury sold inflation protection bonds at negative interest rates- a major sign that investors expect treasuries to drop in price as inflation rises. 3. Expect a new bubble in sovereign debt. The sign; Mexico is ready to sell a 100 year duration bond at 6%. A very risky investment in a nation rent by a civil war with the drug lords, in the opinion of Wilbur Ross, Jr., chairman of W L Ross & Co., one of the nation’s most successful investors. 4. Large corporations are only part of private sector benefiting from cutting overhead(reducing employee count) and bringing more revenues to bottom line. 5. The Fed will be sitting on its $2 trillion in cash for a long time without any practical use for it. There is very little demand for bank loans from the private sector. Adding reserves to the banks wont accomplish any more economic activity. 6. The economics profession let the world down because it had the tools that were politically acceptable. 7. No solution in sight for the housing market. Wilbur Ross suggested a plan to reduce the amount of principal owed on homes to below the mortgage debt still owed, and then let the parties share in whatever upside can be earned on the homes. But, no plausible mechanism to get this accomplished. 8. The shadow banking system trying to escape from the regulators. Hedge fund industry official pleaded with Deputy Treasury Secretary Neil Wolin to allow hedge funds to regulate themselves. Wolin was far too polite and non-0commital. Since hedge funds gobbling up all the proprietary traders from big Wall St. investment banks. 9. China and India are graduating 7 times more engineers a year than the U.S. 10. We are papering over the structural problems in finance with bubbles. There is still great uncertainty about the efficacy of regulation by Dodd-Frank and Basel 3. Final note; at yesterday’s session, Vikram Pandit, CEO of Citigroup, gave what many believe was a most bizarre performance. For several minutes he went on at length about how worried Citi was about the ability of poor Americans to be able to borrow money in light of Dodd-Frank, the finance reform bill. Yet, he went overboard in his adamant support of the Consumer Finance part of the bill, seeming to separate himself and Citi from the opposition to the bill from other large banks, namely JP Morgan.

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Shiller: Dodd-Frank Does Not Solve Too Big To Fail

October 26, 2010

The Dodd-Frank financial reform law does not solve the problem of “too big to fail,” the implicit government protection of large financial institutions, prominent Yale economist Robert Shiller said Tuesday. Speaking on a panel at the Buttonwood Gathering in New York City, Shiller said that while Dodd-Frank and the recent Basel III agreement will be helpful, they aren’t enough to solve the problems they address. Systemic risk, which prompted government bailouts in 2008, is inherent in the modern financial machine, Shiller said. He said Dodd-Frank goes in the right direction, but warned that it doesn’t go far enough. “What we’ve seen so far is not going to eliminate the problem of systemic risk, because it’s a very difficult problem. It involves the nature of the banking system, which is inherently vulnerable,” Shiller said. “It’s vulnerable to runs and collapses, just like steam engines are vulnerable.” However, Shiller said, the reform bill was the best Congress could do with the tools they had. “The regulation changes I’ve seen seem to be more enlightened than I would have expected,” he said. “It [Dodd-Frank] is almost a thousand pages long, in the current form. People think that is a problem. I don’t think that is a problem at all. I’m impressed with Dodd-Frank. It’s doing what they could do, to deal with a very complicated problem.” Shiller’s fellow panelist David Rubenstein, chief financial officer of the investment firm BlueMountain Capital Management, expressed similar skepticism. More important than the existence of any specific pieces of legislation, which “maybe don’t get it right 100 percent of the time,” Rubenstein said, is that regulators are thinking in a new way. They’re aware of the risks and, even if they can’t prevent a crisis, they’re at least trying to address the problems. “People who are charged with protecting the system are taking seriously the idea of risk, maybe for the first time in a really long time — for the first time in my lifetime,” he said. Another helpful development, Rubenstein said, has come from the financial sector, as bankers and traders are thinking about the downside of bets as much as the upside. Rubenstein said large financial institutions are taking a lesson from hedge funds, which by definition attempt to be “market neutral” — making a diverse enough set of investments that fluctuations in the market don’t affect them. “What I’m encouraged by is that even those at the largest institutions, whether it’s … JPMorgan or Goldman Sachs, I think, are focusing as much on how you can lose money as how you can make money,” he said. Among other innovations, the Dodd-Frank Act established the Financial Stability Oversight Council , whose function is to identify and respond to threats to the financial system. Both Shiller and Rubenstein said that while FSOC could prove helpful, it won’t solve the system’s problems. “It takes some personal judgment to see that a bubble is getting out of control. It can’t be formulaic, and that means somebody has to be responsible and focused on that, and it’s going to be an act of courage,” Shiller said. “The FSOC is a committee of people who have primarily other responsibilities.” Rubenstein had a similar view. “It’s comforting that they exist,” he said of the FSOC. “But I don’t take a tremendous amount of comfort that they’re going to stop the next bubble. “I think people need to have a healthy skepticism about any one group’s ability to see the next bubble,” he added. “That’s kind of the mystery of the bubble, that when you’re in it, nobody sees it.” Shiller, for the record, predicted the housing market crash back in 2005, when his opinion was dismissed by the larger financial community. Back then, New York Times economics columnist David Leonhardt — himself a Yale alumnus — called Shiller “Mr. Bubble” and said he was enjoying his “15 minutes of gloom.”

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Georges Ugeux: It’s the Dollar, Stupid

October 26, 2010

As hard to believe as it might be, the US authorities have discredited themselves in the handling of the so-called “currency crisis” and at the recent meeting of the G 20 Finance Ministers. For months, the Administration has tried to convince us that the future of the world economy was dependant on the exchange rate of the Yuan. The reality is very different. The United States keep its interest rates at historically low levels in order to stimulate the economy, and to indirectly support the banking system in its racketeering of consumers. By doing so, its interest rates no longer cover the “risk factor” that the markets consider to reflect its over-indebtedness. Such a policy is an answer to the slow economic recovery and high unemployment. It is perfectly coherent from a pure domestic viewpoint. At the international level, the insufficient remuneration of US Treasuries has a disastrous effect. First, it confirms the irresponsibility of the United States towards its international obligations. Nothing new. Since the “benevolent neglect” of the United States towards the dollar in the seventies, all US Administrations have neglected their responsibilities as the issuer of the most important currency in the world. It is their way to make the rest of the world pay for their defense umbrella. Or so the story goes. Regularly, the United States (and Larry Summers was the first engineer) went to visit foreign countries so that they act “responsibly” by increasing the value of their currency. Japan and China have been the prime targets of such policies. We fail to recognize that there might be some reasons why the dollar is structurally weak and neglected by its issuer: the Federal Reserve. Behind the currency debate, lies a somber reality. Most of China’s exports are the result of the relocation of production outside of the United States. It is American corporations that fuel the balance of payment deficit. Apparently this is for “competitive reasons.” To be clear, they want to increase their profits by producing cheaper goods abroad, and so do their competitors. By doing so, they strengthen the Yuan to the detriment of the dollar. What the Chinese are telling the United States is that they are unwilling to increase the value of the Yuan at the pace that the United States demands. They will not let the US increase their competitiveness while losing value on their holdings of US Treasuries. They are indeed the largest lender to the US Treaury. It is the weakness of the dollar that is the cause of currency disorders, not the disorder of other currencies. The United States has the right to have a currency policy totally driven by its self-interest. What does not work, is when the United States blames others for what is its own irresponsibility. That is plainly dishonest. Adding to that situation, Secretary Tim Geithner at the meeting of the Ministers of Finance presented a “plan” that the Administration should be ashamed of. Not only was it inapplicable, but it exhibited how little this Administration knows about international issues. As the single largest debtor country in the world, a country which depends heavily on foreign lending, the US simply cannot act this way. Geithner’s plan is to limit the balance of payment surplus to a certain percentage of the GDP of each country. The balance of payment deficit/surplus is the difference between exports and imports and currently the US deficit is at least 10%. The surplus of China is above 10%. How can champions of the market economy behave in such a contradictory manner? I suppose it’s easier to blame other countries than to convince US corporations to produce more domestically?! Maybe renouncing some of their bad habits (such as outrageous compensation) will make America competitive?! Or perhaps we should export more and import less? The answers to these questions lie in the United States, not abroad. A weak dollar will make US exports more competitive and imports more expensive. Casting blame on the world for your sins, while committing the most sins of all, is pure hypocrisy! It’s the dollar, stupid.

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Ben Bernanke: Regulators Looking Into Foreclosure Mess

October 25, 2010

WASHINGTON — Federal banking regulators are examining whether mortgage companies cut corners on their own procedures when they moved to foreclose on people’s homes, Federal Reserve Chairman Ben Bernanke said Monday. Preliminary results of the in-depth review into the practices of the nation’s largest mortgage companies are expected to be released next month, Bernanke said in remarks to a housing-finance conference in Arlington, Va. “We are looking intensively at the firms’ policies, procedures and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures,” Bernanke said. “We take violation of proper procedures very seriously,” he added. The central bank’s decision adds weight to federal and state investigations into whether banks used flawed documents to foreclosure on homeowners. Attorneys general in all 50 states plus the District of Columbia are jointly investigating whether paperwork and legal procedures were handled properly. At the federal level, the Treasury Department’s Office of the Comptroller of the Currency last month asked seven big banks to examine their foreclosure practices. The OCC and the Federal Deposit Insurance Corp. are also working with the Fed on its examination. In addition to probing the banks handling of foreclosure documents, Fed staffers and other federal agencies are evaluating the potential effects of the foreclosure debacle on the real-estate market and on financial institutions, Bernanke said. The Federal Reserve oversees bank holding companies – typically Wall Street’s biggest banks – including Citigroup, Bank of America, JPMorgan Chase & Co., and Wells Fargo. The inquiries come as Bank of America and Ally Financial Inc.’s GMAC Mortgage have resumed processing foreclosures, after halting them temporarily to review documents. Both lender face allegations that employees signed but didn’t read foreclosure documents that may have contained errors. Other companies, including PNC Financial Services Inc. and JPMorgan, have halted tens of thousands of foreclosures after similar practices became public. The federal agencies have a range of options at their disposal. They include issuing a “cease and desist” order requiring a company to stop engaging in a specific practice. They can impose fines on the companies. Agencies also can take less drastic actions, such as crafting a plan with the company to fix any problems. Bernanke didn’t provide details in his speech. According to people familiar with the examination, the banking agencies are looking into whether companies had controls in place when foreclosure documents were signed, what procedures were in place to proper handle documents, and whether employees involved in the foreclosure process were adequately trained. Dubious mortgage practices and lax lending standards were blamed for contributing to a housing bubble that eventually burst and thrust the economy from 2007-2009 into the worst recession since the 1930s. Many Americans took out home loans that they didn’t understand and bought homes that they couldn’t afford. As a result, foreclosures have soared to record highs. It’s one of the negative forces restraining the economy’s ability to get back on sounder footing. Now more than 20 percent of borrowers owe more than their home is worth, and an additional 33 percent have equity cushions of 10 percent or less, putting them at risk should house prices decline much further, Bernanke said. “With housing markets still weak, high levels of mortgage distress may well persist for some time to come,” Bernanke warned.

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Community Banks Find ‘Once In A Lifetime Opportunity’ In California

October 19, 2010

The Huffington Post’s Willow Bay sits down with Opus Bank’s Stephen Gordon to discuss what makes today a ‘once in a lifetime opportunity’ for community banks in California, and those challenges still faced by the banking industry at large.

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Video: Bair Says Banks Should Prepare for Higher Interest Rates: Video

October 5, 2010

Oct. 5 (Bloomberg) — Sheila Bair, chairman of the Federal Deposit Insurance Corp., talks about U.S. interest rates and the banking industry. She speaks with Carol Massar and Matt Miller on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

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The Most Sought-After Employers In The World: Universum (PHOTOS)

October 1, 2010

Where does the world want to work most? Employer branding firm Universum asked a group of 130,000 student job seekers living in the world’s 12 largest economies to select an “ideal employer.” The company then ranked the top 50 global companies based on the frequency with which they were selected. This year Universum’s target group selected IT and auditing firms as their ideal employer most frequently, while companies in the banking, investment and consulting industries dropped the most in Universum’s ranking. “Due to the banking and investment sector being perceived as responsible for one of the world’s largest economic meltdowns in history, employers in the industry have lost their appeal as a great place to kick-start one’s career,” Universum’s CEO Michal Kalinowski said in a statement. Have they? Goldman Sachs, possibly the one bank still operating that is most often associated with the crisis, ranked tenth on Universum’s list. JP Morgan was ranked just above them. It’s possible that, in answering Universum’s survey, students paid less attention to the toxic securities Goldman and JP Morgan sold to the public, and more attention to the attractive bonuses their traders earn. Click here for a complete list of Universum’s top 50 most attractive employers in the world, and below are the 12 most attractive employers in the world, according to Universum:

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Video: Donovan Sees ‘High’ Chance Ireland Will Tap EU Funds

October 1, 2010

Oct. 1 (Bloomberg) — Paul Donovan, deputy head of global economics at UBS AG, talks about the outlook for Ireland’s economy following the government’s recapitalization of the banking system. He speaks with Mark Barton on Bloomberg Television’s “Global Connection.” (

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Geir Haarde, Iceland Ex-PM, Indicted For Role In Financial Crisis

September 29, 2010

REYKJAVIK, Iceland — Iceland’s former Prime Minister Geir Haarde has been referred to a special court in a move that could make him the first world leader to be charged in connection with the global financial crisis. After a heated debate Tuesday, lawmakers voted 33-30 to refer charges to the court against Haarde for allegedly failing to prevent Iceland’s 2008 financial crash – a crisis that sparked protests, toppled the government and brought the economy to a standstill by collapsing its currency. Haarde faces up to two years in jail if found guilty. The court, which could dismiss the charges, has never before convened in Iceland’s history. A hearing date has not yet been set. Haarde, ex-leader of the Independence Party, is no longer in parliament and stepped down from office last year following widespread protests and treatment for esophageal cancer. “I will answer all charges before the court and I will be vindicated.” Haarde, 59, told the Icelandic Broadcaster RUV. “I have a clean slate. This charge borders on political persecution.” Iceland, a volcanic island with a population of just 320,000, went from economic wunderkind to fiscal basket case almost overnight when the credit crunch took hold. After dizzying economic growth that saw banks and companies in this tiny Nordic nation snap up assets around the world for a decade, the global financial crisis wreaked political and economic havoc in Iceland. Its banks collapsed in October 2008. Unemployment has soared since then and the country has lurched from crisis to crisis. In April, an eruption at Iceland’s Eyjafjallajokull volcano triggered a giant ash cloud that disrupted global air travel for weeks and later restricted travel to and from the island nation. In the same month, a report into the banking collapse accused Haarde and the central bank chief of acting with “gross negligence” in allowing the financial sector to overheat without adequate oversight. The 2,300-page government-commissioned report detailed a litany of mistakes made in the lead-up to the bank meltdown. Pall Hreinsson, the supreme court judge appointed to head the Special Investigation Commission that issued the report, singled out seven former officials including Haarde and central bank chief David Oddsson for particular criticism. No other officials besides Haarde were referred for prosecution to the court on Tuesday. Lawmakers decided Tuesday not to charge three other former ministers, which angered some who felt the blame extended beyond Haarde. “You could say that all of the four former ministers should have been charged or none at all,” says Thorkell Sigvaldason, 35, a university student. “But on the other hand, Geir Haarde was the leader and sometimes they have to pay for the mistakes of their men.” Teacher Bragi Johannnsson, 41, agreed that all four should face charges. He said the laws are too lenient and must be toughened. “I think there is a need for reform on the laws on politicians,” he said. Haarde has blamed the banks in the past, and said he felt government officials and regulatory authorities tried their best to prevent the crisis. The report found that the country’s three leading banks – Glitnir, Kaupthing and Landsbanki – got too big and overwhelmed the financial system when they ran into trouble with excessive risk-taking. By the time the banks dropped in a domino-like sequence within a week of one another in October 2008, the banking sector had grown to dwarf the rest of the economy by around nine times. In one major blunder detailed in the report, staff at the Icelandic central bank forgot to extend a $500 million loan agreement, reached in March 2008, with the Bank of International Settlements in Basel, Switzerland. A belated attempt to receive an extension was not granted by the international bank. The report said that it was a key error at a time when few things were more important than building up Iceland’s foreign currency reserves. The central bank then turned to the Bank of England in April 2008, seeking a currency swap agreement. Mervyn King, the British central bank’s governor, refused, but offered to help Iceland to reduce the size and burden of its banking sector. Iceland rejected the offer at the time. Before Haarde was prime minister, he also held the posts of finance minister and foreign minister. The special court will consist of 15 members – five supreme court justices, a district court president, a constitutional law professor and eight people chosen by parliament every six years.

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Preeti Vissa: Fight Brewing Over the Best Law You’ve Never Heard of

September 28, 2010

What if there was a law that told big corporations that they have responsibilities to the communities they serve? A law that told companies that if they take profits out of a community, they need to put some investment back into it, and treat that community’s residents fairly? There is. It’s called the Community Reinvestment Act, first passed in 1977. And a fight over CRA’s future is brewing in Congress. CRA is directed at the banking industry, which once was notorious for failing to invest in low-income and minority communities. CRA has successfully encouraged banks to invest over $4.5 trillion — yes, that’s trillion with a ‘T’ — in these communities. By any rational standard, it’s among the most successful government programs ever. Because of CRA, new, affordable housing has been constructed and businesses have gotten a start. Vital community services such as medical centers have been built. A good way to learn more about CRA is from this video that The Greenlining Institute produced a while back. Some on the far right hate CRA, as they hate anything the government does to push businesses to help people or communities in need. And opponents have spread some out-and-out lies, like the false notion that CRA forced banks to make bad loans that helped bring about the housing crash and recession. That’s nonsense, as regulatory authorities have consistently stated. FDIC Chair Sheila Bair, for example, said earlier this year that such claims have ” absolutely no basis in fact. ” In fact, CRA has operated as a restraint, discouraging risky behavior by the banks it regulates. In contrast to the casino mentality on Wall Street, CRA requires banks’ actions to be “consistent with… safe and sound operation.” It’s not an accident that seventy-five percent of subprime loans were issued by institutions not covered by CRA: independent mortgage brokers and lightly-regulated bank subsidiaries. These institutions not covered by CRA were far more likely than banks to make high-cost, subprime loans, and far more likely to have those loans end up in foreclosure. If these independent mortgage companies had been covered by CRA, the subprime meltdown might have been averted. According to recent reports, some Democrats in Congress want to strengthen CRA, and legislation may be introduced soon. That’s a good idea. It’s time to give the law’s enforcement mechanisms more teeth, and improve the quality and detail of CRA ratings that banks receive. And CRA should recognize how much the financial industry has changed since 1977: Vast amounts of activity are now handled by mortgage brokers, investment banks and other institutions not covered by CRA, and that should change. On the other hand, some Republicans are itching to weaken the law or even repeal it altogether. They don’t have a chance right now, but if the GOP makes big gains in the upcoming congressional elections, they could be emboldened. CRA is that rare animal, a law that helps the most vulnerable among us and holds big corporations accountable. And it strengthens our whole economy by encouraging productive investment where it’s most needed. It’s worth protecting and expanding. Expect the fight to begin soon.

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