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Commercial Real Estate Lending Criteria « Capital Retail Group

by Tim Berry on June 4, 2011

Ron Gitter: Memo to First Time Buyers: How to Avoid Closing Cost Sticker Shock

by on June 2, 2011

Huffington Post…

Chillaxing… After all that hard work to get there, that’s what a first-time buyer should be doing at the closing. Unfortunately, it’s often not the case. Somehow all those closing costs seem much larger than expected. If you listen closely, you can hear the buyer thinking: “Were all those costs properly explained to me at the beginning of the transaction?” But a better result is possible. The Deer in the Headlights Syndrome It never ceases to amaze me how little first-time buyers know about purchasing a home. All the blogs, resource websites and reality TV shows notwithstanding, it’s just plain difficult for a beginner to digest all the facets of a real estate transaction, particularly the costs associated with a closing. Here’s the typical mindset for some first timers: the purchase price, less the gross amount of the mortgage loan, equals the out-of-pocket exposure. Although buyers should be disabused of this notion as soon as possible, that just doesn’t happen as regularly as it should. There are a number of costs that must be identified and explained upfront, but there are two areas that are particularly troublesome: title charges and loan expenses. Being at Peace with Title Charges Condo or home buyers soon learn that there is an important player at the closing table: the title closer representing the “title company.” There may be a few brave souls who purchase real estate without obtaining a title insurance policy, but for almost all buyers, obtaining title insurance is part and parcel of purchasing a home. If a bank is lending money, there is no choice — the purchaser must obtain title insurance for the benefit of the lender. Title insurance, in theory, protects a buyer from third parties who may claim an interest in the property or who may have a lien against it, such as a bank or other creditor. How it Works In order to facilitate the process, soon after the contract is signed, the title company, at the behest of the buyer’s attorney, searches the title and prepares a report of possible “exceptions” or “objections” that must be “cleared” by the seller before closing. If the title company fails to discover a valid lien against the property and insures the title free of such encumbrance, the buyer would be protected down the road against a claim made by the party asserting an interest in the real estate. Whether the title company will be allergic to paying a claim arising under insured title, is a conversation for another time. Here’s the bottom line of the title insurance process: although a closing can’t take place without it, title insurance is expensive. What Are We Talking About? Let’s take a somewhat typical purchase scenario: a $750,000.00 condo, where the buyer is obtaining eighty percent financing (that is, a $600,000.00 mortgage loan). When you add up the mortgage insurance premiums for the buyer and the bank, the various searches, mortgage recording tax (a substantial fee in New York for recording a mortgage that varies by county throughout the state), charges for recording the deed and other related documents, the title bill will add more than $16,000.00 to the buyer’s closing costs. For most first-time buyers, who have no clue that such an enormous expense is in the pipeline, we’re talking about real money. It is essential, therefore, that the title company prepare an estimated title bill as soon as the title order is placed, so that the buyer has sufficient time to adjust his or her expectations of the funds needed for closing. What About Co-ops? Although a version of title insurance is available for co-ops, in the form of “leasehold insurance,” in most cases, only a lien search will be undertaken at a modest cost (approximately $300). Not a big. But both co-ops and condo buyers have to contend with one additional significant expense generator in common: the bank. The Loan Expense Disconnect Due to changes in banking law, a buyer must receive a “good faith estimate” of closing expenses within three business days after the submission of the loan application. This document has become incredibly cumbersome, with potential deal threatening consequences when there are material cost understatement errors on the disclosure form. Although banking reform intended the changes to the “GFE” to inform and protect the consumer, it’s questionable at this point whether the presentation of closing costs on the form confuses rather than helps. More than anything else, however, first-time buyers often do not appreciate the obvious: that those loan expenses itemized on the good faith estimate will be deducted from the gross amount of the loan proceeds at closing. That $600,000.00 loan referred to above, could yield “net proceeds” of as little as $590,000.00, or even less, depending upon a number of factors. How could that happen? Adding up the Costs of Lending There are a number of standard loan expenses that are paid out of proceeds: origination fees, if any (which could total up to three percent of the face amount of the loan), interest for the month in which the closing occurs, soft costs often called “underwriting expenses” or “document preparation” fees, appraisal or other application costs not paid in advance, the legal fee of the bank attorney, mortgage insurance (if required), escrows for real estate taxes and insurance (for condos, but not co-ops) and various other goodies such as flood zone and tax certifications. When you subtract these expenses from the gross loan amount, its takes a toll on the funds that the buyer will actually receive at closing. Mortgage brokers and loan officers dutifully complete and deliver the GFE to the newbie buyer to comply with tighter lending requirements. It’s unclear to me, however, whether sufficient time is taken to explain the numbers contained in that document and the most important reality of getting a loan — it costs money to borrow money. Residential Reality: Crunch the Numbers Early and Often A first time buyer has a lot on his or her plate once the offer is accepted. In addition to pre-contract due diligence, negotiating the contract and navigating the increasingly complicated loan process, getting a grip on closing costs is always a challenge. Making sure that the buyer understands the expected out-of-pocket expenditures in addition to balance due on the purchase price is the sine qua non of a successful transaction and a happy buyer. So here’s a good rule to remember for both the buyer and the professionals involved: when it comes to explaining closing costs to the first-time buyer: once is not enough…

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Ron Gitter: Memo to First Time Buyers: How to Avoid Closing Cost Sticker Shock

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China’s Facebook Copycat Attracts Investors Despite Big Risks

May 1, 2011

* Renren to raise about $690 mln in IPO next Tuesday * IPO would value company at $5 bln vs Facebook’s $70 bln * Censorship, patents, accounting among Renren concerns By Melanie Lee and Clare Baldwin SHANGHAI/NEW YORK, April 29 (Reuters) – When Chinese social networking site Renren goes public next week, investors will likely ignore big risks the company faces, and be lured instead by a combination of the words “China” and “social networking.” Hot Chinese tech companies like Internet search engine Baidu Inc (BIDU.O) and online video site Youku.com (YOKU.N) have risen triple-digit percentages since their IPOs, whetting investors’ appetites for such offerings. And this is in a sector that is hot in the U.S. Facebook, the biggest social network company in the world, has a market value of somewhere around $70 billion, based on a share sale currently being contemplated, making it worth more than companies such as Boeing Co.[ID:nN27185713] The demand for Renren shares was clear on Friday when the company raised the expected price range of its IPO by 30 percent to $12 to $14 per share. “Appetite to invest in China right now is so strong that some investors are willing to ignore factors that they wouldn’t in other markets,” said Mark Natkin, managing director of Marbridge Consulting, a Beijing-based company that advises investors on China’s Internet and telecommunications sectors. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Renren revised filing shows slower growth [ID:nN28228501] Insider on Renren valuation link.reuters.com/zyk39r Breakingviews column on Renren [ID:nLDE73H0EF] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> Renren’s IPO filings do raise a handful of very serious questions. For one thing, Renren doesn’t really seem sure how many users it has. According to its April 27 revised IPO filing, the Chinese Facebook clone’s monthly unique log-in user base grew by only 5 million, or 19 percent, in the first quarter of 2011 — not the 7 million, or 29 percent, it reported in its first filing only 12 days earlier.[ID:nN28228501] Some investors and analysts brush off such red flags — after all China is the biggest Internet market in the world and it is growing rapidly. They justify their cavalier attitude by saying that figures reported by Chinese companies should be used for directional information and not as perfect quantitative measurements. Others say the opaque information is a big problem. “If you can’t validate the numbers or the company proves it doesn’t have a good handle on the numbers, then you’ve got to be concerned,” said Gary Rieschel, founder of Qiming Venture Partners, which is an investor in Renren rival Kaixin001. Another possible risk for investors is the broad government oversight that Renren, and other companies operating in China, face. Chinese authorities keep extremely close tabs on Internet companies, arguing that this is necessary to maintain social harmony. This led to a big bust up between Google Inc. (GOOG.O) and the Chinese government last year that ended with Google curtailing its operations in the country. Renren says in the risk factors section of its IPO prospectus that this means a prohibition against posting content that, among other things, “impairs the national dignity of China” or is “superstitious.” The prospectus doesn’t mention the recent Middle Eastern uprisings, which led to a crackdown on the use of certain words on the Internet in China, but it does say Renren may not post content that is “socially destabilizing.” If Renren fails to comply, the company says that its websites could be shut down. Clearly that could put it out of business. Whether a social network page posting is objectionable is determined by the Chinese authorities. Renren is also required to monitor advertisements on its websites, some of which are subject to special government review before they are posted. Renren must even guard against providing services that may lead to its users finding themselves in “emotionally charged situations.” MATERIAL WEAKNESS The company also said in its filings that while it hasn’t conducted a comprehensive review, it found a “material weakness” and a “significant deficiency” in its internal financial controls: Renren doesn’t have enough people with knowledge of U.S. generally accepted accounting principles. It also lacks a formal policy for investing surplus cash and managing its treasury functions. That’s not unusual for Chinese IPO companies. Neither is the fact that 87 percent of Renren’s leased floor area did not have the proper title documents. But it all paints a picture of a company that is far from risk free. Still, it isn’t difficult to find people who will give it the benefit of the doubt. “Given the investors it has who have board seats and who work closely with it, you would expect any major issues to have turned up by now,” said Nick Einhorn, an analyst at Connecticut-based IPO research and investment house Renaissance Capital. Renren’s investors include private equity firm General Atlantic and venture capital firm DCM. LAWSUIT Renren may also face some heat over intellectual property questions. When social networking website Kaixin001.com started taking off, Renren founder and CEO Joseph Chen launched a matching site with a similar color scheme and layout under the name Kaixin.com. Kaixin001.com won a lawsuit that ultimately resulted in Chen changing the name of another of his social networking sites to Renren, and merging Kaixin.com into Renren. Sources have told Reuters that Kaixin001 is also planning a U.S. IPO. Renren in its IPO filings also said that its social networking platform may be subject to patent infringement claims, and mentions Facebook as one of the potential claimants. Still, while Renren has posted losses in each of the past two years, it could still be a dream growth stock. Its net revenue grew more than fivefold to $76.54 million in 2010 from $13.78 million in 2008. But there will be some who, after reading the prospectus, may wonder whether the risks outweigh the rewards. (Reporting by Clare Baldwin in New York and Melanie Lee in Shanghai, additional reporting by Alina Selyukh and Richard Lee in New York. Editing by Dan Wilchins, Martin Howell) Copyright 2011 Thomson Reuters. Click for Restrictions

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G20 Backs Early-Warning Plan Against Future Crises

April 17, 2011

WASHINGTON (Daniel Flynn and Wanfeng Zhou) – Leading world economies agreed on Friday to put the policies of seven major nations under a microscope as part of a plan to prevent a repeat of the global financial crisis. The pact was agreed by the Group of 20 nations after months of wrangling highlighted by China’s fears that its policy of limiting its currency’s rise was being targeted. Under the deal, the International Monetary Fund will look at national levels of debt, budget deficits and trade balances to determine if a nation’s policies are putting the global economy at risk and should be changed. One potential shortcoming is that countries will not be bound to follow any recommendations that emerge. French Finance Minister Christine Lagarde said the agreement marked “huge progress” on the path to more balanced world growth and said seven major economies would automatically be subject to review. Others could face scrutiny as well if their policies are found to be stoking global risks. “The net is a little bit tighter for those countries that are considered of systemic importance,” Lagarde said. France is president of the G20 this year. Countries representing more than 5 percent of the combined output of the G20 will be examined by the IMF under the deal. The list would include the debt-burdened United States and export-rich China — the two main economies at the heart of the debate over global imbalances. France, Britain, Germany, Japan and India would round out the list, officials said. “Our aim is to promote external sustainability and ensure that G20 members pursue the full range of policies required to reduce excessive imbalances,” G20 finance officials said in a communique issued at the close of a full-day meeting. Many economists say global imbalances — notably the gaping and persistent U.S. trade gap and correspondingly large surplus in China — laid ground for the 2007-2009 crisis, which ended with the worst global recession since World War II. The G20 has become the main forum to prevent similar boom-bust cycles. Agreeing on how best to do that has grown difficult now that the darkest days of crisis have passed. Eswar Prasad, a senior fellow at the Brookings Institution and former IMF official, said the real test of the latest plan from the G20 rich and emerging economies will come once all the numbers are filled in and countries have to answer for policies that are deemed a danger to the world. “Once the numbers are put on the table, that’s when you’ll start to see the pushback,” he said. The G20 appeared to offer room for countries to sidestep criticism. “National circumstances will … be taken into account,” it said without elaboration. It said the global recovery was strengthening but warned of continued risks, including the political unrest in the Middle East and North Africa and the disasters in Japan. PROGRESS ON CAPITAL CONTROLS Officials also agreed to keep working on a framework for determining when countries can use controls over capital inflows — a sensitive topic for emerging market nations that are fighting inflation stoked by “hot money” from countries with low interest rates, such as the United States. Brazil has resisted efforts to restrict the use of capital controls. “We don’t want high levels of global liquidity to turn into problems for the Brazilian economy,” the country’s central bank chief, Alexandre Tombini, said on Friday. European Central Bank Governing Council member Christian Noyer said officials “made enormous progress” on the issue. “We do not any more have two fronts, one saying there should be total freedom and never any measure taken, and the other saying each country should have total faculty to do whatever it feels necessary,” he said. Policymakers from advanced economies, led by the United States, have argued that emerging nations can combat inflows and price pressures by allowing their currencies to strengthen against the dollar. They say if countries such as China were to do so it would help balance world trade. Emerging nations, in contrast, blame near zero interest rates in the United States for sending investors elsewhere in the search for returns. Despite efforts by Brazil to weaken its real currency, it hit a near two-year high this week. While China had been especially wary about the effort to set up a monitoring process, it welcomed the G20 accord. Chinese Vice Finance Minister Zhu Guangyao said the agreement “fully reflects each country’s demands,” including “reforming the international financial system and strengthening financial regulation.” “We’re satisfied with the results,” he said. Lena Komileva, an economist at Brown Brothers Harriman, said officials were still a long way from securing the future of the world economy. “The global recovery has been achieved at the price of a record U.S. budget deficit and overheating in emerging markets such as China,” she said. “This is not a sustainable platform for global economic stability.” (Reporting by Reuters IMF/G20 team; Writing by Steven C. Johnson and Glenn Somerville; Editing by William Schomberg, Leslie Adler and Tim Ahmann) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Charles Gasparino: Duncan Niederauer Calling the Shots for NYSE Is Bad News for Shareholders

April 12, 2011

Duncan Niederauer, the CEO of the New York Stock Exchange, doesn’t like the people at the Nasdaq and Intercontinental Exchange much these days. He calls them “interlopers,” who are trying to mess up a good thing for NYSE shareholders and its employees with a rival bid designed to do nothing more than obliterate his grand plan to remake the exchange into a global power house by merging it with the Frankfurt-based Deutsche Börse. All of which sounds good until you realize the track record of the guy making those statements, who probably should have resigned or at the very least recused himself from deciding on the NYSE’s next move so a less conflicted and maybe more competent executive can make what might be the biggest decision in the NYSE 219-year history. First a little background on Niederauer : He’s one of a long line of Goldman executives who have been running the stock exchange since then CEO Hank Paulson (later the treasury secretary who failed to see the financial crisis until it was too late) led the effort to oust long-time CEO Dick Grasso in 2003. Paulson & Co., said they were doing the Wall Street equivalent of God’s work (sound familiar?). Grasso received a compensation package of around $140 million, and the public outcry over his oversized salary was endangering the exchange’s status as the world’s premier stock market. At least that was Paulson’s spin; the reality was much different. Goldman had been prodding the exchange to ditch the way it matched buyers and sellers of stocks through human floor traders for years and move to an automated, computerized marketplace. Indeed, once Grasso was out, the firm brazenly engineered the sale of its own electronic stock exchange to the NYSE in one of the most conflicted deals I have ever seen in all my years covering Wall Street. During this time Niederauer emerged as one of the loudest though not necessarily the most articulate advocates of computers over floor traders, which makes his concern about the loss of jobs if the Nasdaq bid is successful even more suspect. Niederauer is infamous for saying that he didn’t want “five guys named Vinny” trading stocks at the NYSE as a way to profess his love of electronic trading, even if it offended every Italian-American trader on Wall Street. That dopey — some would say xenophobic statement — didn’t appear to slow down Niederauer’s career trajectory. Under Grasso’s replacement, fellow Goldman alumn John Thain, Niederauer became the NYSE’s president. In late 2007 when Thain went on to run Merrill Lynch leading the firm while it crashed and burned during the 2008 financial collapse, Niederauer got his shot at running the Big Board, where he promptly apologized for the Vinny remark, and continued the NYSE’s move into computerized market making of stocks. Under Niederauer, the NYSE didn’t implode ala Merrill, but its performance has been nothing to brag about. During the Niederauer years, floor traders continued their exodus, but that doesn’t mean the exchange has become a more efficient marketplace. Indeed there has been at least one “flash crash” under his watch , where prices of NYSE listed stocks declined precipitously because of technical glitches. Meanwhile, NYSE shares, trading under the symbol NYX, have nose-dived more than 50% since he took over. Some of that collapse, of course, can be attributed to the slow down in trading following the 2008 financial crisis. But even as the overall markets have mounted a recover, the NYSE hasn’t. By any measure, the fabled “Big Board,” once the very symbol of global finance, isn’t so big anymore. The NYSE is no longer the primary to match the buyers and sellers of stocks, as it had been for most of its long history. Indeed, many of the firms that once flocked to have their shares “listed” and traded on the NYSE’s “Big Board,” are choosing other venues. The NYSE’s weakened competitive position left the Big Board no other choice but to find in Wall Street parlance “a strategic partner,” which in plain English means it needed to sell itself. Of course, that’s not something Niederauer would admit to; he loves to describe his tie up with Deutsche Börse a “merger.” But the numbers tell a different story: For every share of NYSE stock, his shareholders are getting .47 shares in the new company, while Deutsche Börse shareholders are getting a one-for-one exchange. All of which wouldn’t be so bad until you get into the nitty gritty of the NYSE-DB deal. Niederauer remains as CEO of the newly combined company, which when you crunch the numbers, values the NYSE at $35 a share, $3 less than the consensus of where analysts say the stock is worth. Why would you sell a brand like the NYSE for less than what analysts say its worth? Niederauer would tell you its for the good of the franchise — he has hooked up with a partner that wants to preserve the NYSE franchise while building a bigger brand that will benefit shareholders in the long run. Others might say he’s doing it save his job and remain as CEO at the expense of shareholders. The people who make the latter point include Nasdaq chief Bob Griefeld who has recently teamed up the Jeffrey Sprecher at the Intercontinental Exchange to make a rival bid for the NYSE valued at around $42 a share — a 20 percent premium to the Deutsche Börse bid. They make a compelling argument. It took Niederauer and his board just about a week to summarily reject the Nasdaq/ICE bid. They did so without even having the Greifeld and Spechler make their case in front of the board, or at least hear from top shareholders about what offer might be better. Instead, Niederauer simply brushed aside a a higher offer on the grounds that a combined Nasdaq-NYSE poses massive antitrust issues by merging two US stock markets (funny, Niederauer came to this conclusion even before regulators have had their say) and that the new company wouldn’t be able to “deliver the synergies that the other proposal suggests without a substantial amount of job loss,” according to an interview he gave to the Fox Business Network . By the way, since when is it the job of a CEO to figure job loss into an equation that supposed to focus myopically on what is best for his shareholders? I’m sure there are legitimate reasons to be wary of the Nasdaq/ICE bid. They would be breaking off chunks of the NYSE, with the Nasdaq taking the stock listing business, and the ICE taking the derivatives business. If the Nasdaq bid is successful, the new company would be more leveraged, thus Greifeld would have to slash expenses to make the numbers work, something he’s good at, but its still a risk for buy-and-hold shareholders. The problem is you can’t really trust Niederauer to be making the final call because he has too much to lose, and so do shareholders if they listen to him.

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Republicans Threatening Shutdown Over Planned Parenthood

April 8, 2011

WASHINGTON — The United States government is on the verge of shutting down over a dispute about subsidized pap smears, according to sources familiar with the budget negotiations. The White House and Senate Democrats have publicly capitulated to ever-increasing Republican demands for spending cuts, but negotiations over the budget for the remainder of the fiscal year have shifted their focus from money to so-called riders — provisions that restrict the federal government from spending money on certain projects or entities. Riders are used by members of Congress to make social policy without going through the regular congressional committee process, or they are used to benefit business interests by specifically blocking the government from spending money to write or enforce certain regulations. At a late-night White House meeting between the president and key congressional leaders, House Speaker John Boehner (R-Ohio) made clear that his conference would not approve funding for the government if any money were allowed to flow to Planned Parenthood through legislation known as Title X. “This comes down to women’s health issues related to Title X,” a person in the meeting told HuffPost. The negotiations are dominated by men: All of the principal negotiators in both parties are male, as are most of the senior staff involved . (House Democrats, led by Minority Leader Nancy Pelosi (Calif.), have largely been left out of key talks.) House Republicans have been insisting the roadblock to cutting a new budget deal is not just the culture-war riders attached to the spending plan, but a source familiar with a top-level White House meeting earlier Thursday said most of the discussion in fact was about the riders. Senate Majority Leader Harry Reid (D-Nev.), House Speaker John Boehner (R-Ohio) and President Barack Obama met at 1 p.m., and while the discussion started with the numbers, a senior Democratic aide said it soon turned to non-budgetary provisions like defunding Planned Parenthood, Environmental Protection Agency rules — and then some. “They started talking about the money, but most of meeting was spent on the riders,” a senior Democratic source said. “It wasn’t just the top-line stuff. They got down into the smaller details and provisions — things like mountaintop mining and other rules.” A similar dynamic played out late Thursday night in a meeting that led to no agreement. Following the midday meeting, Senate Democrats met to chart a course forward and emerged united in opposition to any riders regarding Planned Parenthood — which does not use federal funds to pay for abortions — or the EPA. “The riders that have nothing to do with deficit reduction have sort of taken over Boehner and the Republican Party,” Sen. Charles Schumer (D-N.Y.) told reporters. “And unless they back off those riders, it’s going to be impossible pretty much to avoid a shutdown. It’s that simple.” Sen. Dick Durbin (D-Ill.), the number-two Democrat in the upper chamber, said that Boehner was under pressure on social issues not from the Tea Party, but from senior Republicans. “It’s not about reducing the deficit. It’s about hitting programs. He’s gotta cut programs. And we think still we can reach agreement on the money. But he is under enormous pressure and he says it’s not from the Tea Party, it’s from the old guard, the Republican guard, that wants to once and for all show that they can force through some of these social issues, like abortion,” Durbin told reporters Thursday evening in the Capitol. “The rider list gets longer and longer and non-negotiable.” A GOP aide confirmed Durbin’s claim that it’s the senior members who are insisting on riders. Polls show that the public is likely to blame the Tea Party for any shutdown, but ironically, most new members are more passionate about spending than social issues. Yet the public is likely to conflate the Tea Party with the culture wars if the government ultimately shuts down due to a dispute over funding for family planning. “It’s mostly a few older members who have seen an opportunity,” said the GOP aide. “If you were to ask the freshmen individually, only a few would say this is all about the riders. And even amongst that smaller group, they would be split,” with some focused on the EPA and others on restricting funds for health care. “The true Tea Party guys in our conference are all about spending. That’s it. Whatever the final deal is — even if we got [the National Right to Life Committee] to score it — we’d lose some guys because it didn’t meet the full $100 billion,” the aide added. HuffPost spoke to a number of GOP freshmen, many of whom said they were more committed to funding cuts than policy riders. Although most voted for Republican-sponsored policy riders, some said they were willing to compromise as long as the final figure for cuts was large enough. “My motivation is reducing the threat of the federal budget deficit, and I am flexible as to what gets cut so long as things get cut sufficient to avoid a federal government bankruptcy,” Rep. Mo Brooks (R-Ala.) told HuffPost in March. House Majority Leader Eric Cantor (R-Va.) said Thursday that the spending-cut difference between the two parties was minuscule. “If you look at the amount of money that we’re actually talking about, in terms of the difference of where the White House is and where the House Republicans are, it’s equal to maybe one penny of the entire federal budget,” Cantor said at a press conference. “So that means that you can’t find one penny to cut out of every dollar that the IRS spends? You can’t find one penny out of every dollar that the post office spends? That’s what we’re talking about here.” Pelosi identified the distinction between the newer Tea Party members and the old guard weeks ago. “I had followed the debate very carefully on [the previous spending bill] and the 200 amendments. The newer members are about money, the more senior members are about riders,” Pelosi said in mid-March. A GOP leadership aide, however, told HuffPost that the culture wars were not the sticking point. “Spending, spending, spending — that’s the big issue,” said the aide, adding that the GOP wanted more than $33 billion in cuts. Either way, Democrats have no plans to defund Planned Parenthood at the insistence of House Republicans, Schumer said Thursday night. “We have been against them from the beginning and we’re not changing, nor should we. These are fights that have nothing to do with the deficit,” he said. Schumer said earlier Thursday that Democrats were ready to meet Boehner’s number, but that Boehner was using money as a distraction so that the public wouldn’t realize his members were fighting over cultural issues. “The only reason the numbers aren’t solved is because Speaker Boehner knows that if he did that, then everyone would know that it’s the riders, and he doesn’t want that out. But if you look at how many hours in the rooms of negotiators that discussing riders, it’s predominant,” he said. “The Speaker’s folks have admitted that we’ve been fair on the numbers.” “At one point we had an agreement on money, even though Boehner denies it,” said Durbin. “It’s hard to believe they would shut down the government because they can’t get a vote on family planning and Planned Parenthood. Honest to goodness. Is that what the last election was about? I don’t think so.” Cecile Richards, the president of Planned Parenthood, told HuffPost that the funding cut would be a threat to women’s health. “We have three million come to us every year and two million come through some kind of federal program either for an annual pap or for birth control or for a breast exam or even prenatal care,” she noted, adding that the cuts would disproportionately impact rural areas with relatively few medical options. “More than 70 percent of our health centers, more than 800 centers in the country, are located in rural America or communities that are medically underserved communities. That’s what’s getting lost here.” Conservative activists have long been pushing for cultural riders and, with Republicans back in control the House, have a chance to push them forward. “Why can’t you slash Planned Parenthood and NPR and these — these non-vital programs? Why can’t you slash them?” Fox News host Bill O’Reilly demanded of Rep. Charlie Rangel (D-N.Y.) Thursday evening. “Well, we’re talking about health care. We’re talking about education,” Rangel replied. “Health care is another matter,” O’Reilly said. “That has to be taken very methodically because people’s lives are affected. Nobody’s life is affected by NPR. Nobody’s life is affected by Planned Parenthood. These are options.” Mike McAuliff, Elise Foley, Laura Bassett and Amanda Terkel contributed reporting

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Nicholas Carroll: How Men and Women Deal With a Home Walkaway

April 4, 2011

A Trulia/Harris survey in 2010 found that 57% of men would consider strategic default, but only 40% of women would. In the real world of mortgage default, where walkaways are far more often for survival than strategy, I found the opposite. Here’s how it plays out. Taking one paragraph to get past the hypothetical strategic defaults and on to real survival walkaways, this is an educated guess at why men might be more willing to default simply because a house is underwater: men have less emotion invested in a house. Where women decorate, choose the furniture, and add the touches that make a house a home, to men a house can look like a never-ending to-do list. In survival walkaways, the man/woman ratio is reversed, in my experience. In the course of many face-to-face conversations with debtors, often right at their kitchen table with the numbers laid out on paper, when “the kids are on the table,” so to speak, the women are more willing to walk. The men always bring up the issue of their credit score, usually accompanied by unlikely scenarios about being fired from their job — but when the numbers say that staying in the home means no shoes for the kids, the women are remarkably unsentimental — in fact their facial expressions look like they’re thinking about packing, garage sales, and how to stay in the same school district. The latter was confirmed at one kitchen table session when the first thing the mother said was “The townhouses on Elm Street are in our school district.” Then she went on to look at the furniture they didn’t need. Momma Bear was all business: it’s the family . With single mothers the lack of sentiment is even more dramatic — credit scores hardly enter the conversation. In fact the lack of drama was so surprising that I later called three of the single mothers I’d worked with and asked if they hadn’t give any thought to their credit, and whether they missed the house they’d given up for an apartment. All three said they had thought about credit, and deeply missed their house, but those weren’t primary issues at the time. Then I met Poppa Bear, a “single dad” as he called himself. He was as unsentimental as a single mother. Walking away from the mortgage was emotionally like water running off a duck’s back, when it came to a choice between a contract and the children. As with single mothers, credit rating was a “deal with it later” issue. Since then I’ve spoken to more single fathers, and the most consistent comment has been “I have more time to spend with the kids.” When it came to the home, if anything the single fathers’ attitude was “good riddance to the maintenance.” With no children in the picture, in my experience, men and women act about the same: their behavior depends on how much they link their self-esteem to their FICO score. This is not cynicism, simply observation, and as Yogi Berra said, you can observe a lot by just watching. “Morality” doesn’t really seem to come into the picture much, except for a few religious denominations that place a heavy emphasis on paying off debts. So away from the surveys and out on the streets, neither gender nor the breadwinner role are what counts when it comes to looking out for the family. When push comes to shove, it’s the caregiver who makes the wise financial decisions.

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State Workers/Mega Millons Winners REVEALED

March 31, 2011

SCHENECTADY, N.Y. — The seven state workers from the Albany, N.Y. area who won last week’s $319 million Mega Millions jackpot may have gotten some extra luck from the patience and appetite of the man delegated to buy the winning ticket. Mike Barth was at a newsstand in downtown Albany to buy the random Quick Pick ticket for the group when he decided to pick up a candy bar. “I was at the counter. It was my turn to buy a ticket when I reached down to grab a Snickers bar from the candy display and someone reached over me, actually cut in front of me to buy a ticket,” the 63-year-old from suburban Bethlehem said Thursday. “I thought about saying something but decided to just let it slide. I bought the next ticket.” On Friday night, Barth’s co-worker Gabrielle Mahar, 29, of Colonie, learned that she and her fellow information technology workers at the state Division of Housing and Community Renewal had the winning numbers “I was up late reading and wanted to catch the numbers but missed them. I was dialing up the Lottery website on my phone when the numbers scrolled across the screen. I was dumbfounded,” she said. Word spread quickly among the group. When Leon Peck, 62, of Johnstown got the call Saturday morning, he assumed there must have been a problem at work. “We’re IT people. We get calls all the time about malfunctioning servers so I figured that was why my phone was ringing so early in the morning,” he said. Tracy Sussman, 41, of Colonie said she took the good news call after initially thinking, “What’s wrong now?” The other winners are John Hilton, 57, of North Greenbush; John Kutey, 54, of Green Island; Kristin Baldwin, 42, of Clifton Park. The group said they haven’t decided if they’ll leave their state jobs, but they’ve got plans for things like buying a dishwasher, tires and college educations for their kids. They’re each collecting checks for $19.1 million after taxes. The jackpot was the fifth-largest in the multistate game’s history.

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Jim Schuchart: 4 Steps To Pricing Like A Pro

March 29, 2011

“Nowadays people know the price of everything and the value of nothing.” -Oscar Wilde Too often startups take a dangerous route to setting price by just looking at how much a product or service costs to provide and how much competitors are charging, and then setting the price in between. The ambitious may even include a “willingness to pay” survey to justify the numbers ( but we now know better than that .) While costs and the competitive alternatives are certainly relevant inputs to pricing decisions, these companies are missing a critical component of pricing that causes them to leak profits. The reality is, if you’re having trouble understanding and estimating your economic value, more than likely you’re facing the bigger problem of not understanding how your product positively affects your customers financially . Follow these four steps to quantifying customer value and you’ll be on the path to pricing like the pros. Step One: Identify the Alternative Better pricing is achieved by understanding how much more or less economic value you drive relative to the other options that are available. Accordingly, the first step to understanding your value is to identify, from the customer’s point of view, the competition (the Next Best Competitive Alternative, also known as the NBCA). Let’s say we are in the software business, and one potential customer is currently using IBM’s solution which costs $250 per month, while another customer is doing “nothing” (or managing in house, depending on how you look at it). In the first case, we’ll need to look for ways we can provide differentiated value above and beyond IBM’s $250 solution in order to capture a premium. In the second example, our story needs to illustrate how we are better than doing nothing and illustrate the value we provide above current practices in order to get customers to sign up. There are two important lessons here. First, the competition is your friend! We will build upon the NBCA’s offer and identify ways we deliver more value. It is much easier to find small additional value above the IBM offer than it is to find a ton of value from the ground up, as is the case when the NBCA is “do nothing.” This is a major challenge for startups in a new space. Try to overcome it by looking for realistic but favorable NBCAs for your product. For example, instead of “do nothing,” are they really managing internally? What does that cost them in salary? Second, as we see in this example, different customers have different NBCAs, so your value story will change from customer to customer. You may be 5 percent better than IBM but 50 percent better than in-house, which leads to different levels of differentiated value. Identifying your competition may seem like a no-brainer, but it has big implications for segmentation, offer design, customer targeting, and sales proposition (all topics for another day). So put some thought into this and pick an NBCA that is relevant to a current sale and will be useful down the road. Step Two: Quantify Your Superiority This is where it gets fun. We are ready to really dig into how your product is better than what is happening today (the NBCA). Back to the software example: our product helps our customers’ systems work 5 percent faster than if they use the IBM solution. But what does faster mean? Why do companies want faster? In 2008 at eBay, faster systems meant more revenue per listing. The site was loading too slowly and eBay was losing out on buyer bids in the final seconds of an auction. A faster system captured more last second bids in time, creating higher sell prices, happier sellers, and a higher fee for eBay. In a call center, faster systems might lower call time and reduce telecomm and labor costs. The same feature can drive different amounts, and different types, of value for different customers. Let’s dig into the eBay example. How do we put a number to this value? The simpler the math, the better. You will want to show your customers how you came up with the number, so it’s best to avoid partial differential equations and other forms of analytical confusion. Start with some reasonably conservative assumptions and basic customer knowledge. Let’s say a system that is 5 percent faster than the IBM offer means there is a 1 percent better chance an additional bid is placed on any given auction item (compared to the performance with IBM’s solution), and the average bid increment is $1.00. eBay gets a 5 percent commission on sales, and handles 10 million auctions per month. These assumptions let us roughly quantify the performance above and beyond IBM, the NBCA. There is always more than one way to quantify this value, so consider how your customer will think about it, what data you have, and what data you can easily provide potential customers with. Feature: System runs 5% faster than IBM Probability of additional bid: 1% (source: performance tests, assumption) Average incremental bid: $1.00 (source: customer research) eBay commission (%): 5% (source: customer website) eBay auctions per month: 10,000,000 (source: customer research) Value delivered: $5,000 per month (source: calculated) Based on this math, we believe we add $5,000/month of positive differential value (what is above and beyond what IBM offers for $250/month). This demonstrates that we are impacting such a massively important value driver to eBay that even a slight performance advantage over IBM allows us to justify a significant price premium. At this point, don’t worry too much about perfecting the numbers, just be conservative. Roughly right is better than precisely wrong. As you move forward, customer conversations, annual reports, pilot programs, and field tests will help refine the inputs. The important thing is to understand how we are driving value, and roughly how much it is worth. Step Three: Acknowledge Your Deficiencies Your story must be fair and believable to gain any traction with the customer, and a key step is to acknowledge that the NBCA does have some economic advantages. If a customer thinks we didn’t look at the entire picture, they may think we’re cooking the books in our favor and not providing a real view of the world. I have never seen a situation where there is no negative differential value, so be careful skipping this step. If the NBCA has superior performance on a different feature, you can replicate math like we used above. Another very common negative differentiator is the switching cost from the current solution, often in the form of installation time or employee training. Let’s look at how we may quantify the installation cost in our example: Feature: Installation & Training Cost (Negative) IT Man hours to install and train: 120 (source: assumption) Fully loaded IT staff cost per hour: $50 (source: market research) Amortization period (months): 36 (source: assumption) Negative Differential Value: $166 per month (source: calculated) Just like in our calculations on positive differential value, we want to use numbers that make a conservative case. The value here is very small compared to the positives, so use numbers your customer will believe. Step Four: Put it Together and Capture Your Value In most cases, you’ll have multiple positive and negative drivers to consider, but for now we’re keeping it simple. We have our NBCA identified as the $250/month IBM solution. We have determined that we provide an additional $5,000/month in positive value, but have a negative differentiation of $166/month. So now what? Our net differentiated value (positive value minus negative value, in this case $5,000 – $166) is $4,834/month. Since we are more valuable than the IBM offer, their price of $250/month becomes a hard floor for our pricing. Anything below this number can be very dangerous. Our ceiling is that differentiation plus the price of the NBCA, or $5,084 ($5,000 -$166 + $250). Above this price you are asking your customer to make an economically irrational decision. So here we have created our pricing band – from $250 to $5,084 per month. Decisions on how to share that value creation band with your customers (e.g. where to set your price) depend on your company’s strategy, the industry dynamics, and degree of innovation. In mature and highly competitive markets where innovation happens on the fringes, I typically see companies capture 10 percent of that differential value. In this case, that would mean 10 percent of $4,834 (net differentiation) on top of the NBCA price, or roughly $733/month ($250 + $483). More aggressive companies who focus on profit or operate in younger markets often captured roughly 30 percent of the net differential value. In some cases, such as highly innovative products where psychological drivers are in play or unquantifiable pain points exist, nearly 100 percent of that value can be captured. With this analysis in hand, your company can make informed commercial strategy decisions. Value-based pricing is not just about coming up with a price. It can help expose the core value of your business and provide a deeper understanding of how you are affecting your customer base, and how that effect varies from customer to customer. It will change the way you think about your competition, marketing and sales and product development. At a minimum, you can maybe prove Oscar Wilde wrong and understand the value of at least one thing – your own product. This post originally appeared on the MIT Entrepreneurship Review .

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Jerry Chautin: The Five Cs of Lending Are Key to Funding Your Business

March 24, 2011

Capacity, capital, collateral, credit, and character are the “Five Cs” that loan offers learn in Lending 101. But to most small-business loan applicants in need of money, it is an esoteric exercise that makes them garner reams of paperwork without a clear path to funding. Financing a business “is based on a simple principle,” Charles Green says. He founded a community bank in Atlanta, Georgia, received a financial services award from the U.S. Small Business Administration for making lots of small business loans and recently published his third edition of The SBA Loan Book . The simple principle, he says, is “lenders always require the borrower to agree that the loan will be repaid.” If it were that simple, of course, all applicants would walk out of banks with wads of cash. Bankers want a comprehensive business plan supporting “your ability to repay the loan,” Green says. “The lender will expect you to provide realistic projections about how the proceeds of the loan will be invested to generate revenues for your business.” Furthermore, the revenues generated, less the business operating expenses, must be sufficient to make the loan payments. Additionally, lenders require a cash-flow cushion should revenues decline or operating expenses increase. The projections and an extensive narrative about how you arrived at your numbers is the crux of your business plan. Yet many loan applicants are stumped when it comes to projecting income and operating expenses. To help, most SCORE chapters are offering a course called, “Financial Projections.” It is part of their QuickSTART workshop series and explains how to project believable numbers. Believable means that your projections and financial ratios must pass muster with the bank’s underwriters. Moreover, the underwriters have to accept your narrative describing how you arrived at the projections. “The integrity and reasonableness of these projections are often the most important factors in granting loans approval,” Green says. Paradoxically, “The lender is not an expert in your field and may not recognize exaggerated revenue projections or inadequate expense estimates.” Even more perplexing for underwriters, small businesses within the same industry can be very different. That is why projecting your numbers and getting the lender to buy into them is as much an art as it is a science. The science is learning the lender’s acceptable range for key financial ratios in your industry. The art is doing impeccable market research and citing it as the rational for getting your projections to fit. In other words, you have to know the benchmarks that your lender uses. Then, extensive research and the resulting narrative will support your projections. Many lenders use the Risk Management Association’s “RMA Annual Statement Studies Users Guide” to glean average financial ratios by industry. Thus they will match your projections against others in similar businesses. Any variances from RMA need to be explained. Furthermore, your proficiency in explaining the variances can mean the difference between approval and rejection. The trade associations in your industry will likely have average and mean financial ratios in your industry. They may also segment businesses within the industry more definitively than RMA. You can find a list of trade associations in the Encyclopedia of Associations . Many libraries have it in their reference section or you can purchase a copy online. Green, the former banker, says, “The company may not compare well with RMA results because of extraordinary local reasons.” So get data from local chambers of commerce, business owners and franchise operators merchandising similar products and services. Interpret the data to explain how your company differs from RMA’s averages. I will write about the other Cs of lending in future columns. Jerry Chautin is a business columnist and SBA’s 2006 national ” Journalist of the Year ” award winner. He is a former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender.

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States Ignored Years Of Warnings On Unemployment Insurance

February 19, 2011

WASHINGTON — State officials had plenty of warning. Over the past three decades, two national commissions and a series of government audits sounded alarms about the dwindling amount of money states were setting aside to pay unemployment insurance to laid-off workers. “Trust Fund Reserves Inadequate,” federal auditors said in a 1988 report. It’s clear now the warnings were pretty much ignored. Instead, states kept whittling away at the trust funds, mostly by cutting unemployment insurance taxes at the behest of the business community. The low balances hastened insolvency when the recession hit, leading about 30 states to borrow $41.5 billion from the federal government to pay unemployment benefits to their growing population of jobless. The ramifications will be felt for years. In the short term, states must find the money to pay interest on the loans. Generally, that involves a special tax on businesses until the loan is repaid. Some states could tap general revenues, making it harder to pay for schools, roads and other state services. In the long term, state will have to their replenish unemployment insurance programs. That typically leads to higher payroll taxes, leaving companies with less money to invest. Past recessions have resulted in insolvencies. Seven states borrowed money in the early 1990s; eight did so as a result of the 2001 recession. But the numbers are much worse this time because of the recession was more severe and the funds already were low when it hit, said Wayne Vroman, an analyst at the Urban Institute, a liberal-leaning think tank based in Washington. The Obama administration this month proposed giving states a waiver on the interest payments due this fall. Down the road, the administration would raise the amount of wages on which companies pay federal unemployment taxes. Many states probably would follow suit as a way of boosting depleted trust funds. Businesses pay a federal and state payroll tax. The federal tax primarily covers administrative costs; the state tax pays for the regular benefits a worker gets when laid off. The Treasury Department manages the trust funds that hold each state’s taxes. Each state decides whether its unemployment fund has enough money. In 2000, total reserves for states and territories came to about $54 billion. That dropped to $38 billion by the end of 2007, just as the recession began. Over the next two years, reserves plummeted to $11.1 billion, lower than at any time in the program’s history when adjusted for inflation, the Government Accountability Office said in its most recent report on the issue. Yet benefits have stayed relatively flat, or declined when compared with average weekly wages. “If you look at it from the employers’ standpoint, they’re not going to want reserves to build up excessively high because then there’s an increasing risk that advocates for benefit expansion would point to the high reserves and say, ‘We can afford to increase benefits,’” said Rich Hobbie, executive director of the National Association of State Workforce Agencies. A review of state unemployment insurance programs shows how states weakened their trust funds over the past two decades. In Georgia, lawmakers gave employers a four-year tax holiday from 1999-2003. Employers saved more than $1 billion, but trust fund reserves fell about 40 percent, to $700 million. The state gradually has raised its unemployment insurance taxes since then, but not nearly enough to restore the trust fund to previous levels. The state began borrowing in December 2009. Now it owes Washington about $588 million. Republican Mark Butler, Georgia’s labor commissioner, said his state had one of the lowest unemployment insurance tax rates in the nation when the tax holiday was enacted. “The decision to do this was not really based upon any practical reason. It was based on a political decision, which I think, by all accounts now, we can look back on and say it was the wrong decision,” Butler said. “Now we find ourselves in a situation where we’ve had to borrow money and that puts everyone in a tight situation.” In New Jersey, lawmakers used a combination approach to deplete the trust fund. The Legislature expanded benefits and cut taxes, as well as spending $4.7 billion of trust fund revenue to reimburse hospitals for indigent health care. The money was diverted over a period of about 15 years and helps explain why the state’s trust fund dropped from $3.1 billion in 2000 to $35 million by the end of 2010. The state has had to borrow $1.75 billion from the federal government to keep the program afloat. “It was a real abdication of responsibility and a complete misunderstanding of how you finance an unemployment insurance fund – to make sure you have sufficient money in bad economic times,” said Phillip Kirschner, president of the New Jersey Business and Industry Association. “In good economic times you build up your bank account, but in New Jersey, they said, ‘Well, we have all this money, let’s spend it.’” California took its own road to trust fund insolvency. Lawmakers kept payroll tax rates the same, but gradually doubled the maximum weekly benefit paid to laid-off workers to $450. The average benefit now is about $300 and is paid for about 20 weeks. Loree Levy, spokeswoman for the California Employment Development Department, said lawmakers were warned of the consequences. “We testified at legislative hearings that the fund would eventually go broke and would become permanently insolvent if legislation wasn’t passed to increase revenue,” Levy said. California has borrowed $9.8 billion to keep unemployment insurance payments flowing. It owes the federal government an interest payment of $362 million by the end of September. In Michigan, unemployment insurance tax rates declined from 1994 through 2001. The trust fund prospered during those years because of the healthy economy and low unemployment rate. Then the recession arrived and reserves plunged. In response, Michigan lawmakers passed legislation that lowered the amount of wages subject to unemployment taxes from $9,500 to $9,000. They increased the maximum weekly benefit from $300 to $362. The trust fund dropped from $1.2 billion to $112 million over the next four years. In September 2006, Michigan was the first state to begin borrowing from the federal government. Other states held their trust funds purposely low as part of an approach called “pay-as-you-go.” Texas is a nationally recognized leader of this effort. Its philosophy is that, in the long run, it’s better for the economy to keep the maximum level of dollars in the hands of businesses rather than government. Texas had to borrow $1.3 billion in 2009. State officials have no regrets about their policy. “By keeping the minimum in the (trust fund), Texas is able to maximize funds circulating in the Texas economy, allowing for the creation of jobs and stimulation of economic growth,” said Lisa Givens, spokeswoman for the Texas Workforce Commission. The pay-as-you-go approach goes against the findings of a presidential commission that looked into the issue of dwindling trust funds in the mid-1990s. “It would be in the interest of the nation to begin to restore the forward-funding nature of the unemployment insurance system, resulting in a building up of reserves during good economic times and a drawing down of reserves during recessions,” said the Advisory Council on Unemployment Compensation, which President Bill Clinton appointed. Hobbie, from the association representing state labor agencies, said there’s no way to tell which approach is better over the long haul. He acknowledged that keeping reserves at the minimum in good times goes against one of the original aims of the program – to act as an economic stabilizer in bad times. That’s because businesses are asked to pay more in taxes, which leaves them less money to invest in their company. A survey from Hobbies’ organization found that 35 states raised their state unemployment taxes last year. Hobbie said he suspects that some states allowed reserves to dwindle out of complacency. “I think we just got overconfident and thought we wouldn’t experience the bad recessions we had in, say the mid ’70s, and then this big surprise hit,” he said. ___ Online: Treasury Department accounting of trust funds: http://tinyurl.com/6783qjj Government Accountability Office 1988 report: http://tinyurl.com/5t855fl GAO 2010 report: http://tinyurl.com/69mfc9f National Association of State Workforce Agencies: http://www.workforceatm.org/

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Irene Aldridge: Who Benefits From Rising Inflation?

February 18, 2011

On Thursday, February 17, 2011, the U.S. Bureau of Labor released the latest inflation figures. Inflation, measured as a change in the Consumer Price Index (CPI), registered a slight decline at 0.4% this past month (as compared to 0.5% realized in the previous month), and just 0.2% when food and energy are excluded from the calculation. However small these numbers may seem, the figures sounded plenty of alarms in the last couple of weeks. Some commentators declared this inflation to be unhedgeable (due to traditional inflation hedges such as gold being overpriced), and, therefore, unmanageable. Numbers, however, tell a different story, and as this article shows, inflation has some lucrative and natural hedges in today’s markets. Results of a basic event study on the impact of CPI changes on equities produce clear and stunning evidence that inflation is indeed healthy for many stocks and their investors. Among all equities susceptible to rising CPI, those most affected are shown in Table 1 along with their quantitative price responses to every 1% in monthly inflation figures. With probabilities of the response hitting 99.9%, the numbers speak loud and clear that inflation is great for at least two large sectors of the U.S. economy: financial services companies and commodity companies. Table 1. Quant response of prices of selected firms to a +1 change in CPI. (Probabilities of the response are reported in parentheses). Symbol Expected Response on Day 0: the day of the CPI announcement Expected Response on Day 1: the day after the CPI announcement Expected Response on Day 5: one week after the CPI announcement Expected Response on Day 10: two weeks after the CPI announcement Expected Response on Day 21: one month after the CPI announcement APC +4.7% (99.9%) +7.5% (100.0%) +6.1% (99.6%) +6.1% (92.0%) +17.1% (95.6%) ANR +1.2% (87.8%) +10.5% (99.9%) +10.6% (96.9%) +4.1% (74.1%) +18.2% (82.8%) ACI +2.2% (98.1%) +7.9% (99.8%) +5.4% (95.4%) +6.8% (90.6%) +22.2% (99.3%) CCJ +1.7% (99.6%) +3.9% (99.4%) +7.1% (99.7%) +7.0% (88.4%) +13.9% (87.6%) BK +4.8% (99.3%) +8.3% (100.0%) +1.9% (84.3%) -5.1% (71.1%) +10.6% (95.8%) AXP +5.2% (99.6%) +6.5% (99.6%) +8.7% (99.9%) -0.8% (50.6%) +33.5% (99.5%) First, about commodity companies. True, prices of many commodities like gold and cotton are at their near-record levels and can be hardly helpful for inflation hedging. Other commodities, however, are still fair game, as the numbers show. In particular, petroleum companies (i.e. Anadarko Petroleum: APC), coal producers (i.e. Alpha Natural Resources: ANR, Arch Coal: ACI), aluminum handlers (i.e. Alcoa: AA), and even uranium suppliers (i.e. Cameco: CCJ) persistently rise following increases in inflation. Increasing the concentration of these and similar stocks in one’s portfolio is likely to provide a hedge against inflation. Then, there are the financial services companies like the Bank of New York Mellon Corp. (BK) and American Express (AXP) that statistically benefit from rising inflation. How so? The simplest explanation can be found in the lending rates of these firms: with higher inflation, the banks tend to charge higher nominal rates from their customers, capturing a larger spread between the rates at which they lend and the rates at which they borrow. Popular banking products with variable interest rates such as credit cards, are subject to a rate hike, generating a fair premium for banks. Whether one likes it or not, banks are in a lucrative position as far as inflation is concerned. How good of a hedge can financial services or commodity companies provide? As Table 1 shows, both sets of firms take well to inflation. For example, in response to a 1% monthly increase in the CPI, the price of the Bank of New York Mellon (BK) on average rises by nearly 5% on the day of the CPI announcement and by over 10% in one month following the announcement, with over 95% statistical confidence. Allocating just a fraction of your portfolio to the inflation-driven stocks may be sufficient to immunize your entire portfolio. While fretting about the onset of inflation and speculating about its ramifications in the fundamental space, why not hedge it based on quant analysis?

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EURUSD Reversal Hinges on 4Q GDP, GBPUSD on CPI Numbers

February 15, 2011

EURUSD Reversal Hinges on 4Q GDP, GBPUSD on CPI Numbers

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Gina Harman: Scaling Microfinance: An Economic Imperative

February 11, 2011

These are troubling times, as the spotlight on microfinance has recently led to unfortunate mischaracterizations and a rush to judgment. Emotions have been confused for facts and character assassination is used to negate the very real contributions in the fight against poverty. In the current media cycle, commercialization — rather than unsavory business practices — has been identified as the cause in the case to discredit microcredit. While the lives of hundreds of millions worldwide have been enriched by opportunity once unimaginable, the words of a few threaten to change the opinions of many — a dangerous situation, indeed. The achievements of microfinance on the international stage have been very real, with collective efforts bringing positive change to 150 million of the world’s poor and the industry as a whole aiming to reach the two billion people who lack access to basic financial services. As a recent article in The Guardian made clear : what’s hurting the reputation of the industry is “unscrupulous operators — wolves in sheep’s clothing flying the flag of microfinance, but employing the tactics of loan sharks.” The wholesale refutation of an entire nonprofit and social business sector that has helped millions worldwide is clearly not the answer. As my colleague Michael Schlein suggested in a recent New York Times letter to the editor , the solution is not to abolish microlending — but to demand sound and transparent regulation. As the microfinance industry has grown, approaches have also changed to reflect real opportunities, market differences, pressures, and real grievances. Some of these strategies include commercialization, IPOs and increased competition. Here in the U.S., domestic microlending strives to put the elements of that successful model to work in very different circumstances. From unregulated to highly regulated markets, domestic microlending has grappled with the enormous need — over 10 million small business lack access to fairly priced capital — to grow, sustain or start a business. That lack of access has resulted from many factors from business type, to risk profiles and to the very high cost of delivering both the dollars and the support services needed to improve success. For many years, much of the discussion surrounding U.S. microfinance has been about how different the model and the customers are from the international scene. Those comparisons have focused on the size of the loans made, the presence of banking institutions in the domestic market, loan default rates, and an underlying assumption that the land of opportunity simply provides for those willing to work hard. Though differences exist between domestic and international models, there is also great commonality. Broadly speaking, U.S. and international microlenders share an underpinning philosophy that sufficient access to small business capital can have lasting, positive change on communities and individuals, and be a source of larger social good. Domestic microfinance organizations have grappled with defining a delivery method that will dramatically increase the numbers of businesses they can serve. That means personal relationships that begin at the application and are sustained over the life of the loan, such as providing resources from coaching to networking and financial education. All of this adds costs, and can make scaling to meet that need very challenging. But scale we must because the rewards to the economy, communities, families, and individuals are simply too large for the country to ignore. A Bureau of Labor Statistics report issued in early January showed the economy added 103,000 jobs in December . While these figures were lower than several private surveys had predicted , it is worth noting from where those job gains originated. Local governments shed 10,000 workers in December, state employers neither added nor terminated workers, and corporations didn’t do much hiring, either. That means all of December’s modest gains came from private industry, with most of those new jobs coming from small and midsize businesses. With U.S. hiring making incremental inroads, small business owners and would-be entrepreneurs — many of whom live and work outside of the financial mainstream — will be looking for sources of capital in order to grow. These recent job trends only underscore the importance of domestic microfinance efforts — and suggest how it can play an enormous role in helping to bolster the nation’s economy, providing access to financial resources, education, and training.

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Susan Buchanan: Private Seafood Tests Uncover Toxins Missed By Feds

February 9, 2011

Consumers used to worry about ordering seafood fried, instead of the healthier broiled-or-stewed option, but since the BP spill they’re unsure about whether to eat it at all. Independent testing by environmental groups and individuals has accelerated since last April, and they’ve found toxins — from oil, dispersants and other sources–in the local catch. Government agencies, meanwhile, say seafood from reopened, Gulf fishing areas is safe to eat. The upshot for consumers is that when buying fish, ask questions and listen to any information that comes your way. Peter Brabeck, environmental monitor at the nonprofit Louisiana Bucket Brigade, said last week, “we received test results a week ago from samples of oysters collected in Terrebonne Bay and Grand Bayou Felicity in Lafourche Parish.” Those samples were tested by a Wisconsin lab run by Pace Analytical Services, which also has a sediment-and-water lab in St. Rose, La. The Bucket Brigade sent three, separate samples to Wisconsin, where they were chemically tested in batches of 7 to 9 oysters each. “To my horror, the results showed extremely elevated levels of cadmium — which is associated with oil from the BP spill,” Brabeck said. The cadmium detected was 150 to 200 times what’s considered safe for human consumption by the Environmental Protection Agency’s carcinogenicity ‘RfD’ or oral reference doses for food, he said. When asked about reference doses, a U.S. EPA spokesman in Washington, said “information can be found at the RfD table on our Integrated Risk Information System web page for cadmium.” The agency’s RfD for human studies involving chronic, cadmium exposure is 1E-3 mg/kg/day for food. “The E in those numbers refers to exponents in scientific notation,” he said. Health information is posted on the agency’s IRIS, based on reviews of chronic, toxicity data by EPA scientists. Brabeck said “the reason we had oysters tested for cadmium is that it’s a carcinogen that can linger in the body for 20 to 30 years, and the National Oceanic and Atmospheric Administration and the Food and Drug Administration labs don’t test for it.” Manufacturing facilities might have been the source of the cadmium, he said, but added “since these oysters came from a heavily oiled area, I would lean toward them being contaminated from BP’s finest.” He continued, “Now we’re waiting for lab results to come back on samples of oysters, shrimp, crabs and snails collected in Barataria Bay and Terrebonne Bay.” Brabeck visits the coast frequently and ventures into the water. “A week and a half ago in Barataria Bay, the area where I was collecting samples had visible oil sheen, along with weathered mats of oil — that were over an inch thick in places — covering the marshes,” he said. “Yet these areas were open for fishing, and shrimping boats were in the very same water.” Testing by other environmental groups has yielded worrisome results. Paul Orr, whose title is “River-keeper” at Lower Mississippi River-keeper in Baton Rouge, said his organization — along with its parent Louisiana Environmental Action Network — began collecting seafood samples from the coast in early August to analyze the spill’s impacts. Oysters, crabs and fin fish were gathered from twenty locations between the western edge of Terrebonne Parish and the Louisiana-Mississippi border. They were tested for total petroleum hydrocarbons or TPHs and polycyclic aromatic hydrocarbons or PAHs. Testing was done by two, commercial-lab companies, using EPA-recognized protocols, Orr said. “All of the seafood organisms that we collected came back with TPH levels that were of concern to us, and a number of them were very, very high,” Orr said. “As far as we can determine after talking with researchers and a toxicologist, there should be no detectable levels of TPH in seafood. We also found some high levels of total PAH’s.” Orr continued, saying “some of the organisms we tested came from waters that were open for fishing, and the samples all looked beautiful. They smelled good, and there was nothing that made me think that they might be contaminated with oil.” Orr doubted anything would be found in the first oyster samples that the group sent for testing. “But they came back from the lab containing 9,780 mg/kg of total petroleum hydrocarbons, which was a bit alarming. Since then, we’ve sampled from the western edge of Terrebonne Parish to the Louisiana-Mississippi line, and the results we got back suggest to me that the government’s ‘all clear’ was sounded far too soon.” Last October, Nancy “Mac” MacKenzie from NOLA Emergency Response bought two pounds of shrimp from a Venice, La. dock and sent the digestive tracts, along with some stock that she prepared from the heads and shells, to Analytical Chemical Testing Lab, Inc. in Alabama. She said “I’m a teacher, not a scientist, but I’m also a cook and wanted to know what was in the the shrimp after the spill.” She continued, saying “after making the stock, I threw away the turkey baster I used to transfer my stock from the pot to specimen jars, because it had orange, oily spots on it that I couldn’t get out–even by soaking it with boiling water.” Her lab-test results showed “oil and grease” in the shrimps’ digestive tracts in amounts of 193 parts per million. After a series of phone calls to the FDA, the Unified Command in response to the Deepwater spill, NOAA, EPA and poison experts, she learned that her test results were many times above safe consumption levels. But she also found out that “there’s no ‘acceptable level’ for oil in general.” She said that since various oils are composed of different concentrations of chemicals, metals and compounds, the government calculates safe consumption levels based on components, like benzene and toulene. Meanwhile, the report on MacKenzie’s shrimp stock showed “PAH’s that were below the lab’s minimum level of detection,” which, she said, didn’t ensure it was safe to eat. MacKenzie received a response from a U.S. Coast Guard public affairs officer late last year, saying that analytical methods for oil and grease can’t distinguish between petroleum oils and other fatty materials, including fats that occur in shrimp. She remains upset by the runaround that she got from federal agencies, and said that seafood information presented on their websites can be difficult to understand. She also said that paying for private testing is expensive. Robert Naman, president of Analytical Chemical Testing Lab, Inc. in Mobile, Alabama, said that without seeing the test results from the Louisiana Bucket Brigade samples, it’s possible that cadmium found in local oysters is from soil contaminated by manufacturing plants. Nonetheless, he said, “large and small labs in Louisiana and across the Gulf are finding elevated PAHs, associated with the spill, in seafood.” He also said “current FDA protocol allows much higher concentrations of Petroleum Hydrocarbons in seafood sold to consumers than the government allowed after the Exxon Valdez spill” in 1989. “Many individuals have come to us to have seafood, water and tarballs tested since the spill,” Naman said. His firm, for example, tested water in a fish pond on an Alabama property half a mile from the beach. The fresh water fish had died, and the pond water tested positive for dispersants. The owner drained, refilled and restocked the pond, and the second batch of fish died. “We also found dispersant in swimming pools near the coast,” Naman, a chemist, said. “We suspect dispersants were sprayed on the coastline though that’s illegal for the most part.” The U.S. Coast Guard and the EPA authorize dispersant use. Naman said “tarballs we tested recently were 7% oil, and the rest was COREXIT dispersant and watery goop. A thick sludge containing petroleum and dispersant covers part of the Gulf ocean floor that could be seen in government, satellite photos if they wanted to show them to us.” Meanwhile, Washington agencies say Gulf seafood is safe to eat. Christine Patrick, NOAA spokeswoman, said “under government protocol to reopen fishing areas, waters must be free from oil, and every seafood sample taken from an area must pass a sensory and a chemical test.” Since the spill, four phases of sampling and testing have occurred in fishing areas, and they are characterized as baseline, boundary-surveillance, reopening and post-opening stages by NOAA. Boundary surveillance was the sampling done to make sure that all tainted fish were included inside a specific area, Patrick said. During the four phases, NOAA vessels have collected samples at sea and delivered them to the agency’s Pascagoula, Miss. seafood lab for analysis. Samples continue to be taken from docks and processing plants. “NOAA is conducting post-opening sampling now to support consumer confidence that fish in open areas of the Gulf are testing clean,” Patrick said. Since late April of last year, about 10,000 seafood samples have been collected and tested by the government, she said. “Post-opening samples number about a thousand to date, and all have passed sensory and chemical analysis.” As sampling continues in the Gulf, the only remaining federal area that’s closed to fishing is near BP’s wellhead. “All Gulf samples, state or federal, go to the National Seafood Inspection Laboratory within NOAA’s Pascagoula facility, where they’re dissected, with tissues put into sterile jars for analysis,” Patrick said. Samples are examined by a Pascagoula sensory panel — made up of NOAA and FDA experts. “During the reopening phase, it’s a seven-person panel of more than seven, rotating experts, and during the post-opening phase, it’s a panel of three,” she said. The lab’s staff of over a hundred includes scientists and technicians. Sensory testing is a longstanding method used in the food industry, and it is a science, Patrick said. “Reopening protocol calls for 21 tests on raw and cooked seafood for taste and smell, and in order for a sample to pass, five of seven panelists must pass it.” Chemical testing, including dispersant testing, for samples taken from federal waters is done at NOAA’s lab in Seattle, while state samples are chemically tested by FDA labs elsewhere. NOAA and the FDA developed a chemical test, announced in late October, to detect dispersant in fish tissues. “However, none of the thousands of fish tested in Seattle and elsewhere showed dispersant residue at levels harmful to humans, and over 99% of the over 4,000 samples tested so far had no detectable residue at all,” Patrick said. NOAA on Feb. 2 reopened 4,200 square miles that were closed to fishing after a royal red shrimper’s net yielded tarballs last October. When asked about the reopening, Brabeck of the Louisiana Bucket Brigade said “NOAA and FDA continue to make decisions affecting consumers based on too few samples, not sampling for all the toxins, not testing for all the metals and not listening to what scientists, fishermen and nonprofit groups are saying. They have shown the same woefully inadequate protocol in every fishery reopening since the well was capped.” Brabeck shows community groups how to take seafood samples. “These groups are actively engaged in seafood issues, and they decide what they want to test for,” he said. The Louisiana Bucket Brigade does training and pays for tests–which can be expensive. “Once we have results, we bring an interpretation of the numbers to the community where the samples were taken, and report what the results can mean for environmental and public health,” he said. “This should be the job of the FDA and NOAA, and it sickens me that it’s not being done by our government.”

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BAD NEWS: What Role Did Reporters Play In The Financial Crisis?

February 5, 2011

Given that some economists still debate the root causes of the Great Depression, little wonder that a multitude of competing stories still vies for affirmation as explanation for the financial crisis of 2008. Recrimination sometimes seems like the real American pastime, and the near-slide into the financial abyss presents a teeming buffet of potential culprits. Depending upon your ideological predisposition, the crisis owes to the greedy bankers who turned home loans into casino chips, or to the federal regulators who abdicated authority, allowing Wall Street to turn itself into a gambling parlor. It was homeowners who treated their mortgages like winning lottery tickets, cashing in through repeated rounds of refinancing. It was politicians who championed expanded home ownership with reckless tax incentives and mandates forcing banks to lend even to borrowers with sketchy credit. It was the Federal Reserve which kept interest rates too low for too long. But one segment of American society has largely evaded scrutiny in the search for the source of the disaster: the financial press. This is a dangerous oversight, argues journalist Anya Schiffrin in an intriguing and thoughtful new book, “Bad News: How America’s Business Press Missed the Story of the Century.” As the crisis begins to fade from memory, and as acute fear is predictably replaced by complacency, a rigorous accounting of what actually transpired is imperative. Schiffrin aims to impose that accounting on those of us who make our living writing about finance. Her findings are not comforting, suggesting that coziness with sources and a lack of financial acumen made many reporters vulnerable to bogus assurances that nothing was wrong. Schiffrin is herself a member of the tribe, having worked as a correspondent for Dow Jones news service in Vietnam during the Asian financial crisis (an experience that gave her an taste of the risks inherent in an economy shy of reliable information). She brings her experience and contacts to bear on this project, probing how shrinking budgets in a time of traditional media decline deprived many newsrooms of the resources needed to unravel a complex story, just as financial journalism confronted its ultimate test: a historic real estate bubble enhanced by the steroids known as derivatives. A necessary disclosure: I wrote a chapter of this book, examining my experience covering the crisis as the national economic correspondent for the New York Times . And I don’t fully buy into its overarching thesis that the reporting in the run-up to the crisis amounts to a systemic failure. As several chapters in Bad News make clear, a good deal of excellent work in the years before the crisis could have limited the pain had warnings been heeded–not least, work by my former Times colleagues Gretchen Morgenson and David Leonhardt, who sounded the alarm early on that home prices were getting well of whack with American incomes, setting up a fall. The trouble was that a louder chorus repeatedly drowned out this probing reporting about the magnitude of the real estate bubble–a steady celebration of permanently rising home price, the fantasy that propelled a construction binge, a mortgage bonanza and no end of wealth that got created along the way. That chorus abetted and enabled the capture of the regulators who are supposed to be able to tune out such noise while dispassionately scrutinizing the numbers. This is not to exonerate the press or chastise the lazy reader, the reflexive posture for many a scribe whose words have failed to produce happy results. Though the press rarely has the power to dominate events and does not make policy, we are collectively responsible for the understanding that our audience takes away from our words. And it is a fair hit to assert that we are prone to being manipulated and getting swept up in the excitement of the times, rather then stopping to ask the critical, typically difficult-to-answer questions that public service journalism demands. This is not so much because we consciously decide to become cheerleaders, urging on bubbles that take shape on our watch, but rather because cheerleading is the product of the easiest options that present themselves on any given day. Rising prices, soaring stock markets and the wealth accruing to executives overseeing the festivities are verifiable facts, whereas warnings and worrying entail the indulgence of conjecture and speculation, and they might turn out to be wrong. It takes a special breed of reporter to do the digging and put faith in their convictions as they take on the dominant narrative of the moment–particularly when that narrative is championed by prize-winning economists celebrated as wise men, such as the former Federal Reserve Chairman Alan Greenspan and his successor, Ben Bernanke, who played leading roles in convincing the public that everything was fine. I first saw this dynamic up close during the technology bubble of the late-1990s. I never heard one of my colleagues profess a desire to help the Nasdaq continue to multiply. I never was privy to a directive to tout the impregnability of every new dot-com that came along. But many writers effectively opted to play these roles by default in selecting the stories that were most readily available–profiles of start-ups arranged by ubiquitous public relations consultants; astounding tales of technological discovery; stories of the wealth being harvested from the market like the proverbial gold at the end of the rainbow. You could sit at your desk in any newsroom in America in 1999 and simply wait for a press release to arrive in your inbox or a wire story to be flagged by your assignment editor and soon find yourself writing about something that no one had ever written before–the largest merger in history! The fastest this! The slickest that! The path of least resistance turned journalists into boosters, while critical stories entailed a path into the wilderness, with no eager sources and only piles of inscrutable documents. Fundamentally, there is much to Schiffrin’s point that most reporters took the easy route in the years leading up to the financial crisis, which meant buying into the fantasy that justified ridiculously inflated housing prices. The real estate bubble so dominated the era that it caused even serious reporters to miss the underlying story: Tens of millions of Americans needed to use their houses as ATMs because their pay checks no longer delivered enough money to finance even middle class aspirations–health care when someone got sick, college for children, a functioning car to get to work. That is the broadest context in which to critique the financial press. We mostly missed the breakdown in the American middle class bargain, and so we did not appreciate how predatory lending effectively went mainstream. The more immediate coverage of the crisis and its aftermath has occasioned conspiratorial talk that the press oversold the fears of a systemic meltdown to help enable the Bush and Obama administrations to deliver the taxpayer-financed bailouts for Wall Street. Some have suggested that the financial press played a role much like the Washington press corps in the lead-up to the Iraq War, frightening the public with apocalyptic visions that required intervention. (Schiffrin cites the pre-Iraq War coverage as a potent example of coziness with sources yielding tainted journalism, though her critique is more systemic than conspiratorial.) As someone who sat inside one of the biggest newsrooms during the crisis, however, I reject the notion that has taken root in some quarters that we were essentially active participant in a government-directed con. Yes, there were good reasons to doubt the veracity of Bush’s Treasury Secretary, Hank Paulson, who had previously headed Goldman, as he warned in the fall of 2008 that the public either had to hand over $700 billion to Wall Street or invite a meltdown. Those doubts (which were duly reported at the time) have only intensified as the terms of the bailout have emerged, with Goldman managing to secure a ” backdoor bailout ,” through funds dispensed to the insurance firm American International Group. Continued investigation into the terms of the bailouts and how they came about is required. But the idea that the press was effectively complicit in an Iraq-style ruse, trumping up the mushroom clouds to justify the intervention, is misleading and unfair. The Bush administration doctored the intelligence to create a false perception of threat in Iraq. But economists and business people were genuinely and legitimately terrified of a potential repeat of the 1930s banking runs as major financial institutions teetered toward collapse in the fall of 2008. Money was freezing up, laying waste to companies, sending the unemployment rate soaring. There turned out to be no weapons of mass destruction in Iraq, despite the bad journalism that insisted otherwise–journalism that contributed to the stampede into the war. But you simply cannot say the same about the financial consequences at risk as the Bush administration crafted the bailouts. Did the trillions of dollars of interrelated and suddenly un-payable credit obligations constitute weapons of mass destruction pointed at the global economy? Maybe, maybe not. There was simply no way to be sure, and whatever the government did–wade in with a rescue, or stand back and watch–was bound to affect the outcome. Once the markets became ruled by fear, an expensive bailout was the price of preventing the worst. That bad news simply had to be reported, whatever the consequences, even as we knew that the stories themselves were adding to the fear. Bad News provides little reason to imagine that the press will heroically prevent the next crisis, figuring out where danger lies before everyone else does. Financial crises build over many years through the fabric of the culture itself, warping expectations, altering the risks people and institutions are willing to bear in pursuit of return on their money, while tilting the balance away from the intrusions of government regulation. Journalists operate within our culture, and we absorb collective understandings. Still, the basic critique of the book is instructive and worth contemplating. It boils down to most of us not cultivating a wide enough circle of sources. For anyone who writes about finance, it is worth pausing to consider where we regularly draw our information and then actively expanding that zone. It is worth looking at how many of our sources are people whose job descriptions include having to talk to reporters for a living. Because in this crisis, as in all such events, the warnings were never going to be obtained from people paid to talk to the press, a group dominated by the special interests that benefit from the status quo. The real insights were waiting in harder to reach places, among people who typically have good reason to avoid journalists–the ranks of mid-level managers inside predatory lending operations; those doing due diligence inside banks that were buying a selling radioactive securities; the growing ranks of regular families that could no longer pay the bills. In my own view, and from my own experience, blaming the press for the financial crisis is like blaming January for giving you a cold: You may have a point, but you better be prepared to dress warm again next winter. In both the technology bubble and the run-up to the Iraq War, a much stronger case can be made that shoddy reporting helped nurture disaster. Even by the everyday standards of journalism, bad information was presented as fact. But in the case of the financial crisis, the system did not fail so much as function according to the ordinary rules of engagement. This is Schiffrin’s fundamental point, and it amounts to bad news indeed. It would be so much more convenient if we could blame it on a Judy Miller, pin it on one guy who got it wrong, then lance that boil and feel better. But the problem goes right to heart of a press that simply reflects too few voices, often missing out on the ones that have something important to tell us.

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For-Profit College Students Face Financial Woes

February 4, 2011

A quarter of all federal student loan borrowers at for-profit colleges defaulted on their loans within three years of beginning to repay them–more than twice the rate of their counterparts at non-profit institutions, according to new data released today by the Department of Education. In addition, students taking out loans at for-profit schools were responsible for nearly half of all federal student loan defaults within the three-year timeframe, even though students enrolled at such institutions made up less than 15 percent of college students nationwide. The findings released by the Department of Education come as the for-profit college sector faces heightened public scrutiny over questionable outcomes for students, many of whom leave the schools with debts they cannot repay. Average tuition at for-profit schools is nearly twice that of the in-state tuition at four-year public colleges, and more than five times the average tuition at community colleges, according to a Senate report released last year. The data released today is essentially a snapshot in time: The Department of Education analyzed students whose loans began coming due between October 2007 and September 2008, and tracked those students through last September. Overall, nearly 14 percent of students analyzed at all colleges nationwide went into default within the three years. But the numbers are particularly noteworthy for the for-profit sector, which at 25 percent had the highest default rate of any segment in higher education. Public non-profit schools had about 11 percent of borrowers defaulting in the three-year window, while students at private non-profit schools defaulted at a rate of less than eight percent. Though there is flexibility in repayment plans, federal student loans are among the most difficult debts to discharge. In most cases, the debt persists even after someone declares bankruptcy. Student loan default rates are a key factor in a college’s eligibility for federal student aid dollars. In the case of for-profit colleges, access to higher education grants and loans is essential to the industry’s survival. Many for-profit schools derive upwards of 80 percent of revenue from federal student aid. The three-year rates released by the Department of Education today won’t have a direct impact on student aid eligibility, but the same data in coming years will figure heavily into whether schools could face restricted access to higher education grants and loans. Currently, schools are graded on a two-year timescale for student loan defaults. Schools that have more than 25 percent of borrowers going into default within two years could face sanctions and limitations to federal student aid dollars. But Congress changed the rules in 2008, requiring an additional year of analysis to better gauge students’ ability to repay their loans. There have been concerns in Congress and among student advocates that some for-profit schools actively managed their default rates by placing students into loan deferment plans or other agreements that prevented defaults until the two-year window had passed. Comparing the two-year default data to the three-year default data sheds some light on how much one year can change the statistics. For the for-profit sector, the two-year student loan default rate was 11.6 percent, but by adding one more year of analysis, the default rate ballooned to 25 percent. The shift in defaults from the two-year to the three-year window was much less drastic at non-profit colleges. Public non-profit schools increased from a six percent two-year default rate to a 10.8 percent three-year default rate; private non-profit schools went from a two-year rate of four percent to a three-year rate of 7.6 percent. “You would expect the three-year default rates to be somewhat higher because students have a longer period of time in which to default,” said a Department of Education official who discussed the default data with reporters before it was officially released. “But if the three-year rate seems disproportionately high compared to other sectors, then that may be a sign that institutions in that sector or a particular institution is managing its default rate aggressively.” Schools are still officially transitioning from the two-year window to the three-year window in measuring loan defaults. The first year in which a college could be sanctioned based on the three-year loan data is 2014. Schools must have more than 30 percent of students default on loans within the three-year timeframe, in three consecutive years, to be restricted from federal student aid.

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CFPB May Crowdsource Payday Lender Crackdown

February 3, 2011

WASHINGTON — The new Consumer Financial Protection Bureau rolled out a preliminary version of its website on Thursday, and with it a few indications about the agency’s plans to crowdsource prospective regulations that may soon target shady payday lenders. The CFPB hopes to use its website at consumerfinance.gov to collect data not just from banks, but from consumers, in order to monitor trends in various lending markets. While they’re still devising specific plans, the agency hopes to have an active public presence, with a simple, closely-watched platform for borrowers to submit complaints. Elizabeth Warren, an adviser to President Barack Obama who is charged with setting up the bureau, told HuffPost in October that she hopes to use crowdsourcing to enhance the regulator’s impact. One of the agency’s crowdsourcing initiatives may involve payday lenders and check-cashing shops. Because these businesses are often small operations, they can be difficult for federal officials to track, appearing in a neighborhood only to disappear a few weeks later. Citizens could organize to take photos of new payday lending or check cashing products, and upload those photos to the CFPB website. That could help notify other members of the neighborhood about potentially-troublesome local companies, as well as helping the regulator build a list of shops to investigate. As Warren said in a speech at the University of California at Berkeley in October, “Through crowd-sourcing technology, consumers can deal collectively with those who would take advantage of them–and can reward those who provide excellent products and services.” Payday lenders provide short-term, high-interest loans to consumers that critics say are designed to be difficult to repay, often encouraging consumers to repay one payday loan with another. This can lead to a vicious — and expensive — cycle of debt. Members of the U.S. military are a particular target for high-interest lenders. A 2006 Department of Defense report concluded that payday lending was having a negative effect on military readiness and troop morale. The CFPB is yet to formally detail any specific programs, but the bureau hopes to submit new consumer-protection ideas to the public on its website and allow borrowers to voice approval or disapproval through an online voting system. The bureau’s website stresses the struggles facing borrowers. A “Protecting You” page features three stories from borrowers who have had problems with their bank, emphasizing that the CFPB hopes to respond to similar cases. The new website’s design represents a considerable change of tone from the consumer-complaint resources available from the Office of the Comptroller of the Currency, previously the ostensible go-to for borrowers. The OCC’s consumer call center, based in Houston, has long been criticized by state banking regulators and public-interest groups for being inattentive to consumer complaints. In December 2007 testimony before the House Subcommittee on Financial Institutions and Consumer Credit, Ed Mierzwinski, Consumer Affairs Director for the U.S. Public Interest Research Group, noted that some state regulators referred to the call center as “OCC’s black hole in Houston.” The OCC, which declined to comment for this story, rolled out its helpwithmybank.gov website in 2007 in response to criticism that its call center is clunky, but many consumer advocates say the regulator remains clunky and unhelpful. The banking horror stories on the CFPB’s site are reproduced below: Karen, 32, is an airport security supervisor from Pennsylvania. When she refinanced her mortgage, her broker promised her a low fixed-rate loan but instead gave her two more expensive loans. Why? She didn’t know it at the time, but giving her both a large adjustable-rate first loan and a second smaller loan increased the fees she paid to the broker. Karen told the lender what she had in savings and her income, but the broker changed the numbers on her form. (Some brokers changed numbers in order to make borrowers eligible for higher loan amounts than they could otherwise qualify for–and to close a deal for a bigger mortgage that will give the broker bigger fees.) The broker scheduled Karen for a late-night closing and did not give her the closing documents at the time of closing, so she was not aware of these changes. The consumer bureau will work to prevent similar abuses, in part by enforcing the requirement in the Dodd-Frank Wall Street Reform and Consumer Protection Act that mortgage lenders document and verify a borrower’s income or assets before making a loan to ensure that the borrower can afford to repay it. Robin, 55, is a seventh-grade science teacher from Georgia. Her credit card company increased the rate on her existing credit card balance from 10.90% to 17.90%, even though she paid her account on time every month. The increase has been particularly difficult for her family because her husband’s landscaping business has been hard hit recently by the financial crisis. The consumer bureau will enforce the Credit CARD Act, which President Obama signed in 2009 to ban credit card issuers from arbitrarily raising rates on existing balances and other unfair practices. The CFPB will also be responsible for updating the credit card rules moving forward. Andrew, 62, is a retired Baltimore police officer and Vietnam veteran who manages a fitness center for seniors. Andrew had both a primary checking account and a separate “veteran’s account” in which he received $123 in benefits each month. In 2009, his bank made a mistake that caused confusion about a replacement debit card for one of his accounts. The bank had also automatically enrolled Andrew’s veteran’s account, including transactions using the debit card, in “overdraft” protection that he never asked for–a practice that has since been prohibited. When Andrew used the replacement card–expecting it to withdraw from his primary checking account–he was hit with hundreds of dollars in overdraft fees on his veteran’s account. Andrew discovered the bank’s error and explained the situation, but the bank was willing to refund only part of the fees. The consumer bureau will examine big banks to ensure that they are following the rules that now require banks to give consumers a real choice of whether to join overdraft protection programs for ATM and debit card transactions. The CFPB will update those rules to respond to changes in the marketplace over time.

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Barbie, American Girl Drive Mattel’s Holiday Win

February 2, 2011

DETROIT (By Ben Klayman) – Mattel Inc, the No. 1 toy company, staked its claim as the winner of the holiday shopping season as strong demand for its core Barbie and American Girl brands helped quarterly earnings beat expectations. The company also said rising costs of oil and Chinese labor would entail price increases in 2011, but analysts questioned whether consumers will accept them in a sluggish economy. “They did better than their competitors, and the signals coming out of the retailers weren’t entirely positive about the holiday season,” said Ted Moore, portfolio manager with Fifth Third Asset Management, which owns Mattel shares. “They picked up market share, not dramatically, but a solid quarter all the way around.” Mattel’s better-than-expected results and rising inventories come just weeks after smaller rivals Hasbro Inc and LeapFrog Enterprises Inc said sales had slowed late in the biggest selling season of the year. BMO Capital Markets analyst Gerrick Johnson said Mattel had gained share and was looking strong to continue its momentum. “Yeah, fourth quarter’s good; they bucked the trend of weakness,” said Johnson, who has an “outperform” rating on the shares. “These guys made their numbers and are set up really nicely for 2011.” Johnson cited strong new product launches like Monster High and Sing-A-Ma-Jig and a good performance by Barbie. The new products all sold out in the fourth quarter, and were measured in tens of millions of dollars in 2010, but will grow to hundreds of millions of dollars this year. “We gained market share in virtually every one of the (industry) segments — dolls, vehicles, action figures, games, infant and preschool,” Chief Executive Officer Robert Eckert told analysts on a conference call. Mattel’s fourth-quarter net profit was $325.2 million, or 89 cents a share, compared with $328.4 million, or 89 cents a share, a year earlier. That was 3 cents more than analysts polled by Thomson Reuters I/B/E/S had expected. A lower-than-expected tax rate added 3 cents to 5 cents a share to earnings, analysts said. The company, which announced the departure of the president of Mattel Brands, Neil Friedman, last month, said Barbie and American Girl sales rose 8 percent. Fisher-Price sales remained flat, while Hot Wheels was up 1 percent. Overall net sales at Mattel, which counts billionaire investor Carl Icahn among its investors, rose 9 percent to $2.12 billion, above the $2.09 billion analysts had expected. Sales included a reduction of 2 percentage points due to currency exchange rates. Gross sales were up 11 percent in the United States and 6 percent internationally. The company said inventory levels rose to meet growing demand and to improve customer service levels, compared with significant liquidation of inventories in 2009 due to economic uncertainty. Eckert said inventory levels at the company and within the industry are back to where they were two years ago. UBS analyst Robert Carroll said the inventories were up 30 percent, but Mattel’s comments on demand would alleviate some investor concerns exiting the holidays. Gross margin fell 1.82 percentage points to 51.6 percent due to higher input costs and royalty payments, but that was still above the 50.3 percent Carroll had expected. Eckert pointed to a 28 percent increase in the cost of oil and a 20 percent rise in Chinese labor costs, and said prices will be raised to offset that. Officials also cited rising resin and freight costs, and the stronger Chinese currency as pressures. “My sense, it’s most likely high single digits in terms of price increases, essentially across the whole line this year,” Eckert said, adding that the increases would occur in the second quarter. However, Fifth Third’s Moore said Mattel’s aggressive plan to raise prices bears watching as rivals’ high inventories may force them to cut prices, pressuring the company. Shares of El Segundo, California-based Mattel rose 1.7 percent to $24.56 on Nasdaq. (Reporting by Ben Klayman in Detroit, additional reporting by Dhanya Skariachan in New York and NR Sethuraman in Bangalore; Editing by Unnikrishnan Nair, Dave Zimmerman, Lisa Von Ahn) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Beth A. Brooke: What’s the Difference?

January 28, 2011

Kudos to the World Economic Forum (WEF). Big changes usually begin with small steps and the WEF continues to step forward. A new WEF policy this year required the Forum’s 100 Strategic Partners to select at least one female executive among the five delegates they sent to Davos. This simple action more than doubled the participation of women executives among the Strategic Partners. Women were still few and far between in Davos, but it was both symbolic and an important step forward. I have been a WEF delegate for my organization, Ernst & Young, for five years. It was gratifying to participate with friendly faces that brought different perspectives to this important annual gathering. My initial impression when I saw the participant list — wow, I knew nearly all of the women! These are highly regarded, high-level women leaders. Why hadn’t they been at Davos before? I guess it shouldn’t be too surprising. There is a paucity of women CEOs, board members and policymakers. Progress around women’s advancement has been moving at a glacial pace in all countries. The White House Project Report: Benchmarking Women’s Leadership shows that women hold a static 18% in the leadership ranks across ten sectors of the US economy, despite their record participation in the US workforce. Another example: The latest statistics from Catalyst on the percentage of women on boards and in leadership concur that the numbers have been virtually stagnant over the last five years. Women are still less than 3% of Fortune 500 CEOs, 15% of boards, and only 20% of WEF attendees. WEF has been trying. They formed a gender parity group with 50 men and 50 women. They issue the annual Global Gender Gap Report. They are shooting for 40% women in their Young Global Leaders program. After all these steps failed to produce the desired results, WEF took this next step with the policy this year. Without a little nudge, it’s easy to gravitate towards colleagues and leaders who think, look, and act like we do. Unconscious bias on the part of those in power is undoubtedly behind the glacial pace of change. (In fact, I’ve found this same dynamic to be true in discussions of women’s advancement initiatives — it’s too often women only talking to other women about what needs to change.) With WEF’s new policy, suddenly, women who arguably should have already been a part of the Davos scene were actually there this year. And there was no doubt in my mind that having access to the incredible network of corporate, political and civil society global leaders — these women would make the most of it. They contributed positively and differently to the dialogue, to the benefit of the companies they represent and to the broader public interest. Having said that, there were still far too few women on the dais and on the panels debating the serious issues facing our global economy. The fundamental question for each of us when it comes to women’s advancement — and more inclusive leadership in general — is whether we believe there is still a reason to “push.” Is there really a benefit? Is there something to be gained by aggressively engaging diverse perspectives? I believe the answer is yes — we still need to push — for two reasons. First, there is undeniable proof that performance and outcomes will be better. Second, I have personally experienced the benefits of diversity in action. There is a tremendous volume of research, conducted by both the private and public sector that having more diversity on corporate boards, for example, results in better financial performance and corporate governance. Research has also proven that well-led diverse groups are better at problem solving and homogenous teams run the risk of “groupthink.” Today, there is an even more compelling reason to involve more women leaders. Women, according to a study by Booz & Company, are an “emerging market” as they become economically empowered around the world. They are “the third billion”, consumers, employees, leaders, or entrepreneurs, only behind China and India. Who would ignore that size of emerging market? Who would exclude India or China from Davos or fail to evaluate investments in women as they consider investments in other emerging markets? Having access to and leveraging the potential of half of the global talent pool is vital to economic progress around the world – individuals, families, corporations, and whole societies benefit. The potential ROI is undeniable. Putting the research aside, I have countless examples throughout my more than 30 year career of meetings in which I’ve been the lone female voice. Often, my voice was dismissed, and I know I speak for all women leaders when I say that. On the flip side, I’ve been in meetings where there was a critical mass of diverse perspectives, and the conversations changed: tough decisions were made, but only after incorporating multiple and varying viewpoints and perspectives. After many years of experience, I can vouch for the fact that a healthy dose of difference, even dissent, produces better conversations and results. At a time when the global problems we face are more complex than ever, we can no longer stay in the comfort zone of the status quo — we must proactively seek to include diverse perspectives by setting goals and taking action. We need to go beyond mentoring to sponsor and appoint leaders who don’t think, look, or act like we do. In short, we need to push. This year, having more women in Davos was important but not a tipping point; the numbers are still too few. But things changed. I spoke with many leaders who found the different conversations and the new networking refreshing. They found, like I have often found, that when there is a lot of “different” going on — good things happen. So thanks to the WEF for using your platform to make a difference. Keep pushing.

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New York Is Officially The Best And Worst Place To Rent

January 25, 2011

Rent, or buy? Buy or rent?? We know you think this when you shave, when you jog, when you commute, when you everything. Luckily, Trulia.com just posted this handy Rent vs. Buy Index rating the nation’s median rent vs. the median housing costs, and it sure puts into perspective just how unique New York is (it’s the biggest and reddest!). From Trulia : Trulia’s Rent vs. Buy Index tracks whether buying a home or renting is less expensive.com in America’s 50 largest U.S. cities by population. The price-to-rent ratio is calculated using the average list price compared with average rent on two bedroom apartments, condos and townhomes listed on Trulia.com. Where, say, Chicago’s average sale listing price was $200K-$300K, New York’s was $1.3-$1.4 million . The second most expensive city was San Francisco at $700K-$800K. After crunching the numbers, Trulia found that it was more affordable to buy than rent in %72 of the country, and in that small sliver that is more affordable to RENT than to buy, New York didn’t just quietly assimilate but completely dominate (see humungous red dot). So, if you are renting and want to feel vindicated for your choice to rent (not that it’s a choice in this city) that’s not really the point. Sadly, the high costs to purchase a place in New York create this silver lining, if you want to can call it that. If we weren’t so tired of him, we would mention something about Jimmy McMillan here.

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Critics Call New Job Network An ‘Economic Recovery Killer’

January 22, 2011

A new online job network is on the scene, with the kind of webwide reach that has older job recruiting sites in a tizzy. The huge new job network –consisting of over 40,000 sites, and continually growing–is actually its own domain that will use the suffix “.jobs” to designate sites that display job opportunities by profession and location. For example, sanfrancisco.jobs or engineer.jobs would take you to a page listing job openings in San Francisco, or for engineers. Or you might go to sanfrancisco.engineers.jobs for engineering jobs in San Francisco. Though there’s something absurdly intuitive about labeling a job-seeking domain with .jobs, the move has career-building sites like Monster.com wrathfully worried over what they perceive as a massive threat to their own profitability. Actually, the .jobs domain has existed since 2005, when it was licensed by a company called Employ Media. But until recently, it functioned primarily for established companies to list the job opportunities in their own organizations–a prospective photocopying maven might go to xerox.jobs to find a position with Xerox. Last year, Employ Media decided they wanted to expand the domain’s use to job-seeking organized more generally by region and occupation. To do so, they turned to the Internet Corporation for Assigned Names and Numbers, or ICANN . ICANN is the group responsible for maintaining the virtual infrastructure of the web by coordinating the use and registration of web domains like .com and .edu so that the global network can function smoothly. ICANN approved their request, but a number of job-seeking websites and related organizations calling themselves the .JOBS Charter Compliance Coalition viewed the proposed expansion as unjustly dangerous to their own interests. They in turn filed with ICANN to reverse the decision, arguing that the expansion violated the charter Employ Media had agreed to back in 2005. In December, ICANN ruled that they would allow the expansion , but would also keep a close eye on Employ Media. The site universe.jobs, a central point for the .jobs network, is live. In a strange twist, the company partnering with Employ Media to execute the universe.jobs initiatives, the DirectEmployers Association, is led by a former Monster.com president, Bill Warren. The coalition warned ICANN that the .jobs domain was “causing substantial and continuing harm to numerous members of the Internet community, including many smaller, regional and niche job boards that are suffering immediate and irreparable harm from the operation of the Charter-violating Dot Jobs Universe.” But there’s a divide between those who see .jobs as a jobsite-killing beast circumventing the code of business competition, and those who see it as simply another step forward in the continually morphing landscape of our World Wide Web. Peter Weddle, the executive director of the International Association of Employment Web Sites, was unreserved in his fear. “This is an economic recovery killer,” he told the Washington Post . “It’s going to infringe on the trademarks and undermine thousands of small businesses who have spent the last 15 years serving job seekers very well.” But others note that .jobs is merely doing exactly what job recruiting websites did back when newspapers were the go-to source for job information: taking the industry into a yet-unrealized future. “It strikes me as rather disingenuous of the online job recruitment sites to cry foul over the creative destruction caused by broader applications of the .jobs domain. These very same online job recruitment sites were the former disruptors themselves, and the great beneficiaries of the Internet domain name land grab. They were all for disrupting the traditional models of job recruitment companies ten years ago. Now that they are the entrenched players in job recruitment, they are crying for support to curb the new disruptors,” said Jonathan Askin, a professor at the Brooklyn Law School, who compared the job seeking sites’ push to block .jobs to a counterfactual scenario where the “government outlaw[ed] the automobile because it would destroy the horse and buggy industry.” Ultimately, .jobs will test the way that domain use and registration functions, especially if the imbroglio draws scrutiny to ICANN’s activity. Though ICANN does not control content, or access to the Internet, its role as a coordinator of the naming system puts it in a unique position to aid or forestall the growth and transformation of the web. The .jobs squabble is not the first, nor will it be the last of the battles to come as new Internet practices inevitably supplant or transform old ones. “Every technological leap leaves a few dead companies in its wake,” Askin said.

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Last Minute Luck: Lottery Win Saves Man’s Home From Foreclosure

January 14, 2011

PAWLEYS ISLAND, S.C. (AP) — A Pawleys Island man says winning $200,000 in the South Carolina Education Lottery has saved his home. John Davis says he went to a hearing on Monday about the possibility of losing his home to foreclosure. Tuesday he let the computer pick his numbers for the Palmetto Cash 5 drawing at a gasoline station in Surfside Beach, adding a dollar to increase his winnings in case he got a winning ticket. Wednesday, Davis discovered he had won. The single father of two girls says he’s had a tough year, financially. Davis says he had just $6 in his bank account when he won. He works at a car dealership and says he plays the lottery almost every day. Davis says he plans to pay off most of his debt and will take a cruise with his daughters when the weather warms up.

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Foreclosure Records Shattered In 2010

January 13, 2011

WASHINGTON (Reuters) – Banks seized more than a million U.S. homes in one year for the first time last year, despite a slowdown in the last few months as questions around foreclosure processing arose, a leading firm said on Thursday. Banks foreclosed on 69,847 properties in December, bringing the year’s total to 1.05 million, topping the prior record of 918,000 homes seized in 2009, real estate data firm RealtyTrac said. The number of foreclosure filings, which includes default notices, auctions and repossessions, was a record 2.9 million last year, including 257,747 filings in December. “Total properties receiving foreclosure filings would have easily exceeded 3 million in 2010 had it not been for the fourth-quarter drop in foreclosure activity — triggered primarily by the continuing controversy surrounding foreclosure documentation and procedures that prompted many major lenders to temporarily halt some foreclosure proceedings,” said James J. Saccacio, chief executive officer of RealtyTrac. “Even so, 2010 foreclosure activity still hit a record high for our report, and many of the foreclosure proceedings that were stopped in late 2010,-which we estimate may be as high as a quarter million, will likely be re-started and add to the numbers in early 2011,” Saccacio said. December filings were 2 percent lower than November and 26 percent lower than December 2009. The firm said Nevada, Arizona and Florida continued to post the highest foreclosure rates in the country. And just five states — California, Florida, Arizona, Illinois and Michigan — accounted for more than half of all foreclosure activity. One in every 11 housing units in Nevada received at least one foreclosure filing in 2010, more than four times the national average. In 2005, before the housing bust, banks took over just about 100,000 houses, according to the Irvine, California-based company. (Reporting by Corbett B. Daly; Editing by Jan Paschal) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Mark Engler: The Rich Can Already Call It a Year

January 7, 2011

Well, 2011, it’s been nice. But I think we’ve worked enough already. In any case, we’ve already made enough money. Time to call it a year. This is a ridiculous idea, right? Yet, as the Canadian Financial Post reported at the beginning of the week, “Top CEOs will have earned average workers’ full annual pay by 2:30 p.m. today.” The “today” in question was Monday, January 3, the first business day of the year. Here’s their explanation: Canada’s best-paid chief executives earned 155 times the average income earner during the darkest days of the recession, the Canadian Centre for Policy Alternatives said in a report Monday. Declaring that those 100 chief executives were “recession proof,” the think tank said they earned an average of $6.6 million in 2009 compared with $42,988 for the average Canadian. That means by 2:30 p.m. Monday, the first working day of the year, those CEOs will have earned the full year’s wage of the average Canadian, said Hugh Mackenzie, the author’s study and research associate for the centre. I’m not sure how the Canadian Centre for Policy Alternatives , when producing this brilliant bit of PR, crunched the numbers to come up with the exact time of 2:30 p.m. on January 3. However, their general point stands. And, in fact, the situation is even worse in the United States. Here, as the AFL-CIO has tracked , the average compensation for a Fortune 500 CEO is $9.25 million per year. Even if we grant that these businesspeople are workaholics putting in seventy-hour workweeks and taking no vacation, that comes to $2,541 for every hour they labor. Calling it quits after the first week of January, these American CEOs would each be able to take home an annual income of over $177,000. Whether the world would be worse off if they did check out for the rest of the year is a debatable point. As CNN Money has noted , not all of the companies run by the top-twenty-earning CEOs were even profitable. For example, in 2009 Johnson & Johnson experienced its first annual sales decline in seventy-six years, yet its CEO, William Weldon, was nevertheless paid $22.8 million , in large part for making “difficult personnel decisions.” (Translation: firing as many as 8,000 workers.) Of course, even these Fortune 500 CEOs are not making money very quickly by the standards of the financial sector. The New York Times reported that the top twenty-five hedge fund managers made $25.3 billion between them in 2009, with George Soros personally raking in $3.3 billion. That’s $8.2 million per day. It goes without saying that, while the incomes of the rich may be “recession proof,” that is not the case for the wages of the rest of us. But a lot of people don’t realize that this is not just a result of the recession of the past couple years. Over the last several decades, as earnings at the very top have skyrocketed, incomes for those outside of the top 20 percent have been basically stagnant, with productivity gains not translating into wage increases . And we are working ever more hours just to stay afloat. I have written a couple times before about Take Back Your Time Day , which takes place on October 24 each year. The notion behind this holiday is that if working hours in the United States were on par with those in Germany, the Netherlands, or Norway, then, come October 24, we’d be able to take the rest of the year off. If you don’t want to use those other countries as points of comparison, that date could be adjusted. Economist Juliet Schor explains that “the average worker [in the U.S. was] putting in 204 more hours in 2006 than in 1973.” That’s a full five weeks of extra work per year. If Americans just worked the same amount they did in the early 1970s, we’d be able to finish up our working year on about November 25. This would mean turning the entire month of December into a glorious annual sabbatical. Or we could spread the free time out over the entire year. (Three Fridays off per month, anyone?) The result: a far more reasonable balance between work, family, and leisure — a standard of life that used to be widely enjoyed in this country. Certainly, that’s not as sweet as being able to take your hard-earned week’s pay of $177,000 and clocking out from now until 2012. But it’s something the rest of us can dream of — and demand. Cross-posted from the “Arguing the World” blog at Dissent magazine.

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Divided States of America: Black America Suffers Depression-Like Joblessness

January 7, 2011

The latest snapshot of the American job market, released by the Labor Department on Friday, confirms what most ordinary people already knew without need of a government report: Little is improving quickly or broadly enough to dislodge the anxiety that has taken up long-term residence in many communities. The unemployment rate fell to 9.4 percent in December, from 9.8 percent the month prior. But that had little to do with people actually finding work, and much to do with the jobless simply giving up and halting their searches, dropping out of the statistical pool known as the labor force. A deeper dive past the headline numbers reveals a reality that ought to trigger national alarm but hasn’t for the simple reason that it is already embedded in the country we have unfortunately become: the Divided States of America. Among white people, the unemployment rate dropped in December to 8.5 percent — hardly acceptable, but manageable were the government spending more to expand a fraying social safety net and generate jobs. For black Americans, the unemployment rate was 15.8 percent. Professional economists will not pause for an instant at those figures. It is a truism that the black unemployment rate generally runs double the white one, and yet when did that become acceptable? How can there be so little discussion about a full-blown epidemic of joblessness in the African-American community, as if the commonplace incidence of despair — and, more recently, reversed progress — somehow amounts to old news? “Can you imagine any other group at that level of unemployment and the media dismissing it as not important?” the Rev. Jesse Jackson asked during an interview this week. He described deteriorating inner-city, predominantly-black communities in Chicago and Detroit. In New York, a recent study found that more than one-third of African-American men aged 16 to 24 were unemployed between early 2009 and the middle of last year. “These are the same areas that were targeted for foreclosure by the banks, through reverse redlining,” Jackson said, referring to the way subprime lending operations preyed with particular dispatch on minority communities. “These are the same areas that have less access to transportation, which makes it nearly impossible to get to where the jobs are. You are structurally locked out of economic participation and growth.” The picture becomes more vivid still using a broader Labor Department measure known as underemployment, which counts jobless people along with those who are working part-time for lack of full-time work, or who have given up looking for work but are eager for jobs. Among African-Americans, the underemployment rate was running just under 25 percent late last year, according to an analysis of government data by the Economic Policy Institute in Washington. That compared to a rate of about 15 percent for white Americans. Nearly 15 years have passed since the publication of “When Work Disappears,” a masterful book by sociologist William Julius Wilson describing in compelling detail the impact on working class African-American neighborhoods suffering large job losses: in a word, disintegration. Little has changed since then except for an acceleration of the slide. There is no magic bullet for urban strife in poor communities, but if you had to pick one thing that can fix a great deal in one shot, a paycheck is as good as it gets, as Wilson’s book makes clear. A job is a source of pride, a reason to get out of bed, an imperative to take care of one’s health, and — if the economy is functioning properly — a justification to keep going and strive for better. A job is reason to steer clear of drugs and alcohol, and an alternative to the risk of earning money through crime. A job allows households to function, keeping families together, and proving children with the support they need. When jobs disappear so, too, do these sources of social cohesion, these motives to avoid trouble, these reasons for navigating the commonplace difficulties of any human day. Anger builds, which can lead to violence. Economic necessity motivates people to look for creative ways to earn money, sometimes taking them outside the law. Wilson convincingly argues that morally loaded, often-racist depictions of inner-city black poverty have tended to distract many Americans from the single greatest factor behind the troubles that have claimed once-vigorous communities — the steady bleeding of decent paychecks. When Wilson’s book was published back in 1996, the black unemployment rate sat at just above 10 percent. By 2000, with the American economy in the midst of a historic boom, it had dropped to 7 percent. But by early last year — following eight years of lean job creation and then two years of the worst recession in a half-century — the black unemployment rate exceeded 16 percent, or 1 in 6. Drill deeper into the Labor Department data, and the numbers get more disturbing still. Among black men between the ages of 25 and 29, the unemployment rate was just under 21 percent in December. And that actually constituted an improvement from the 25.7 percent it reached in the spring of 2009, during the worst of the Great Recession. In short, over the last decade, most of black America has been effectively ensnared in an endless recession that became flat-out catastrophic when the rest of the county officially sunk into the downturn in the fall of 2007. Even among black college graduates, the unemployment rate sat at just under 8 percent in December — four times the rate in late 2006, back when the economy was still producing jobs. By contrast, the unemployment rate for white college graduates sat at 4.3 percent in December, roughly double the rate at the beginning of the recession. It is difficult to absorb these numbers without coming to a simple conclusion: In black America, a veritable depression is still unfolding, tearing at communities that had previously seen substantial progress, turning first-time homeowners into foreclosure victims and transforming proud college graduates into bewildered jobless people, unclear why their hard work and education have failed to translate into the step up they were supposed to in the movie trailer version of the American dream. And yet, the political system is busy with other things, such as how to blame union labor for local budget disasters — caused by financial services companies that pay their executives seven- and eight-figure sums — or how to cut the federal budget deficit by depriving people of health care. In Washington, the leadership of both parties seems stuck in the mode of trying to manufacture the illusion of a recovery — via photo ops at factories and pontificating about spending cuts — while doing little or nothing to bring a real recovery about. Meanwhile, whole swaths of the economy are falling away, going uncounted in the monthly Labor Department surveys and little-regarded by politicians. In the calculus of American power, just as in the reports used by our economic experts to set policy, it’s as if much of black America has simply ceased to exist.

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Anna Cuevas: Hope For Homeowners: HAMP Trials and HAMP Tribulations

December 23, 2010

Meet Carla Carla is a social worker for Children’s Services. She was making a decent income while she did her part to help the children of her county. She did not buy a home above her means. The downturn in the economy caused furloughs in California and a loss of income for Carla who now also had to care for an additional family member in her household who came with unexpected health expenses. Not many people are immune to the financial hardships that the state of the current economy has brought on. Carla tried desperately to hang on as her savings dwindled to nothing, she had to dip into it just to stay afloat and try to maintain her, then perfect, credit rating. Now this too is gone. It’s July 2009, Carla was excited after several months of trying to get a HAMP loan modification and she was approved for a trial payment with Wells Fargo. One trial payment later and she gets a telephone call that says they made a mistake in calculating her income and now the payment was approximately $1000 higher than the trial agreement specified, “sorry,” was all they could offer up in the empathy department. Carla was devastated, there was no way she could afford this on her reduced income and it was definitely not 31% of what her gross income was, as the HAMP program guidelines specify. You see, they were using her previous income in the new calculations vs the new reduced income that caused the hardship. It would take over a full year to get someone to listen to the errors that were made and get the problem resolved. In September of 2009, after one trial payment was made and the next one was due with the new higher incorrect amount, Carla was able to finally get someone to listen to her story. This feat took dozens of phone calls, several emails and overnight letters but she finally got someone to listen rationally to the facts and once again she was ecstatic to receive a revised and corrected trial payment which came in December of 2009. Fast forward to June, 2010, after the HAMP trial went on for 6 months, the permanent loan modification arrived and low and behold it was back up to the incorrect amount, approximately $1000 over what the HAMP trial payment was, the same inaccurate calculation, the one that set this whole HAMP tribulation off in the first place. Could you imagine her dismay, her disappointment and massive frustration. It took some coaxing to get Carla off of the proverbial HAMP ledge she had been perched on, for a full year, at this point. She had to learn how to take deep breaths. The key here was in knowing what the correct payment was supposed to be, knowing that it still should qualify. Then she had to push and escalate this until someone would finally listen to her and fix the inaccuracies. Don’t get me wrong, this could take some time, the road is long, and it will most definitely cause, not a little, but large amounts of frustration. Still it is not impossible. I am not saying this is for the faint of heart, but I do believe in fighting for what is right, as long as you know what is right, and are ready to back up your fight with accurate facts and go the distance. I encouraged Carla that she could do this, to keep her faith and belief that she was fighting for her home and it was a worthy cause. There was no way she could keep her home if the error was not fixed. The values had dropped over 40% in her city, many of the neighborhoods had begun to look like ghost towns reminiscent of the gold rush days in California. However, this was Carla’s home and she was determined to save her home. Carla pressed on, this time taking this on as a challenge, the fight of her life to save her home from a needless foreclosure to do the errors caused by the massive workload experienced during this foreclosure crisis, and it is evident that there is a clear breakdown within the HAMP processing factory at many of our nations mortgage servicers. Carla, is not the only person going through this sort of issue and so many other inaccuracies. Carla is one of thousands upon thousands of homeowners suffering through this painstaking process. Some people are lucky and have smooth sailing, many others, are not quite so lucky. The next battle for justice began immediately after reviewing the permanent HAMP modification and finding that the payment given was completely inaccurate and it was not acceptable. Carla informed the processors of her HAMP permanent modification only to be told that if she did not accept this that she would not be able to reapply for HAMP. I think most people would have either accepted this inaccurate HAMP modification at this point, even if they could not afford it, or they would raise their white flag and give up. In fact, I am positive that this is something that happens on a daily basis because people are scared of losing their homes and they also believe that their servicer, their bank of many years would never intentionally steer them wrong or hurt them, so this must be their only option, take it or leave it. Carla chose to question authority, fight on, and fight hard. Carla fought with every ounce of strength with a sense of determination and belief that she would make it happen. Let me tell you, it was not an easy fight. This was a battle that was escalated at every level upon receiving the inaccurate HAMP loan modification in June of 2010 and this fight continued, upper level upon upper level, each department declining her request for the loan modification, saying that Carlas did not make enough to cover her debts. This even when the inaccurate HAMP approval was inaccurate because they had used an inflated income figure. This is why it is of utmost importance to know your numbers inside and out. When you are empowered with the right information you are able to push back at all levels with the confidence of knowing your stuff, in many cases, more than anyone else does. You see, what happened is that after Carla pushed back on the inaccurate HAMP modification, her loan was flagged as if she did not accept the HAMP modification vs that she just wanted an accurate approval. Now every escalation attempt, regardless of her explanation, her file was never re-ran for the HAMP program. They kept running Carlas loan for other programs and turning her down based off of other calculations, when all along Carla qualified for the HAMP loan modification, and that is what she was trying to get them to see. She knew something was wrong because she had the figures in front of her and could see that there was no way she did not make enough to qualify for HAMP. After several executive level escalations, and hitting several walls, contact was made with Freddie Mac her loan’s investor and she was able to get someone to hear all the facts, they understood her initial request to fix the inaccuracies, and her file was re-run for HAMP. I am proud to say that on December 20, 2010 and over one year and a half of going through the HAMP trials and HAMP tribulations, Carla got her Christmas miracle and was approved for an accurate HAMP permanent modification, and she is going to get to keep her home. Get empowered, get knowledgeable about your situation and all of your options. Question authority and expect only miracles! **** Anna Cuevas is an invited blogger on The Huffington Post, author of several soon to be published books and the Founder of www.askaloanmodguru.com a blog dedicated to empowering homeowners with free information they need to confidently apply for a loan modification and also providing the latest Do It Yourself tools to Save Your Home. Request your free copy of Dirty Little Loan Modification Secrets You Must Know along with free bonus materials that take the guess work out of the loan modification process to stop your foreclosure dead in it’s tracks. 


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TAX CUT MYTHS: Fact Checking The Showdown In Congress

December 4, 2010

NEW YORK — As debate rages on extending tax cuts set to expire at the end of the year, politicians are making misleading statements about who might be hurt or helped. Before the midterm elections, President Barack Obama insisted that lower income-tax rates should be permanently extended only to those he called the “middle class.” People in the top two tax brackets would face higher rates. Now, with Republicans triumphant, the White House is trying to hash out a compromise so rates don’t automatically revert to their higher, pre-2001 levels for everyone in the new year. One possible deal: extending all the lower rates for a yet-undetermined period of time, perhaps two or three years. Time is running out, as is patience. In a purely symbolic vote, House Democrats on Thursday passed a bill extending lower rates for everyone but those in the top brackets. House Republican leader John Boehner said the vote ran counter to efforts to forge a deal, dubbing it “chicken crap” political maneuvering. Here are a few myths, half-truths and short-hand distortions that have marred the debate: _ Under the Obama plan, taxes will increase for families making more than $250,000. Wrong. Actually, a family could make a lot more and still not face higher taxes. Obama wants to raise the top two brackets from 33 percent to 36 percent and from 35 percent to 39.6 percent. The first of the two – 36 percent – is widely assumed to kick in at $250,000. Obama says that himself. But that’s not right. The higher rate would apply to families with $232,000 or more of taxable income, or what’s left after personal exemptions and deductions have been subtracted from income. Deductions can be sizable, especially for wealthy people. Think state and local taxes, mortgage interest and charitable contributions. The result is that a family making $300,000 or even more could have taxable income of less than $232,000. “A lot of people making more than $250,000 won’t be paying higher taxes,” says Clint Stretch, a managing principal of Deloitte Tax. So where does the $250,000 come from? That’s a number for “adjusted gross income,” which is total income minus a few things like 401(k) contributions and alimony payments. A family that had adjusted gross income of $250,000 and took two personal exemptions, plus a standard deduction instead of itemizing, would have taxable income of $232,000. So $250,000 is distorting. It refers to adjusted gross income, not total income. And most people in that income range itemize their deductions. The key number for families is taxable income of $232,000; for individuals, it’s taxable income of $191,000. Only 2 percent of U.S. households would face the 36 percent tax rate, according to the nonpartisan Tax Policy Center, a Washington think tank. _ Tax hikes would prevent small businesses from hiring. Well, maybe. But the numbers cited as proof are flimsy at best. Critics say Obama’s plan to raise taxes on the highest earners would hobble the businesses that generate most of the nation’s new jobs. Yet fewer than 3 percent of small businesses produce enough income to face the higher rates, according to the Tax Policy Center. Some Republicans note that this tiny slice accounts for half of total small-business income. So the damage to the economy would be more than you’d think, they say. But many of these businesses aren’t what most people would consider small anyway. The IRS doesn’t have a category of tax filers called “small business.” Analysts who study taxes use the next best thing, which isn’t very good at all: business owners who use their personal 1040 to file taxes instead of a corporate return. For example, some hedge funds and law firms pay their taxes through the personal returns of their individual partners. While these are lumped in as “small businesses” and would pay higher taxes, they are far different from the retail stores and small manufacturers that most people associate with the term and which would not pay higher taxes. _ Keeping Bush’s tax cuts for the top earners would swell U.S. debt by $700 billion, unconscionable in an age of budget-busting outlays. Somewhat misleading. The lower tax receipts would accumulate over 10 years – not one year. On average, that means $70 billion less for the government each year, or about 1/30th of all federal receipts. _ Bush tax cuts for millionaires average more than $100,000 a year and should be eliminated. Misleading, again. The term millionaire can include people making tens of millions or even billions. Their tax breaks are much larger. An average doesn’t capture the benefit for most millionaires. According to Deloitte Tax, a typical family making exactly $1 million pays about $50,000 less each year in federal income taxes than it would if the Obama plan were rejected and the tax cuts expired. _ The rich would pay 36 percent or more of their income in taxes under Obama’s plan. Wrong. A rich family would pay 36 percent – and 39.6 percent – only on taxable income above $232,000. The family would continue to benefit from the other four brackets established earlier this decade – 10 percent, 15 percent, 25 percent and 28 percent – on taxable income below $232,000. A family with taxable income of $350,000 would pay a higher rate on $118,000. The family would pay $42,480 in taxes on that amount, or $3,540 more than it pays now. Of course, for the really rich, the two higher brackets would take a bigger bite. A family making $2 million would pay about $100,000 more in taxes under Obama’s plan, according to the Tax Policy Center. _ The tax debate is all about income tax rates. Wrong. For all the attention given to higher taxes on earned income if current rates expire, the big hit to some families will come from taxes on capital gains and dividends. The government now takes 15 percent of both. If the Bush cuts aren’t renewed, the tax on long-term gains would rise to 20 percent. And the rate on dividends would shift to your income tax rate, or a maximum 39.6 percent. Under Obama’s plan, the tax on dividends would rise to 20 percent for everyone. If Congress doesn’t act to stop taxes from reverting to their pre-2001 levels, new limits would be placed on deductions and exemptions, too. And a $1,000 child credit would be halved.

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Bryce Covert: The Beginnings of a Credit Card-Free Revolution? Maybe Not.

December 1, 2010

Cross-posted from New Deal 2.0 . Welcome to the club , eight million new people without a credit card! CNNMoney reported yesterday that credit card use is in decline, with the number of cardless people jumping up to 78 million this year from 70 million last year. In a recession where every penny counts, many consumers shredded their cards in a move to reduce their debt (and probably avoid fee hikes ). The article reports, “TransUnion said the average U.S. credit card debt fell more than 11% over the past year to $4,964 in the third quarter.” Gerri Detweiler of Credit.com called the phenomenon “unprecedented.” Consumers never abandon their plastic, she says; the numbers have “always gone up.” Perhaps a silver lining of our economic misery could be consumers moving from debt and risk to saving and building real wealth. But the drop in users isn’t all due to penny pinching and/or outrage. Part of this trend is from “charge-offs in the higher risk segments,” says TransUnion. Because the new credit card act puts a kink in card companies’ ability to jack up interest rates and impose fees, they dumped consumers who they “saw as dead weight,” the article reports. With a recession causing more defaults on debt, the companies are getting out of riskier accounts. So both consumers and companies are parting ways with risk. And with easy access to credit cards dried up, some see the opportunity to cash in by creating new products. Enter the Kardashians — because we should always take financial advice from celebrities famous only for being famous. The reality TV celebs planned to market a pre-paid debit card to young teenage girls with their faces painted across the front. While they decided to shut down the venture (after Connecticut Attorney General Richard Blumenthal questioned the legality of the card’s “pernicious and predatory fees”), they aren’t alone in trying to get in on a growing trend. Annie Lowrey reports that “the total market will double in size in the next three years, with customers loading a whopping $672 billion onto prepaid cards by 2013.” The cards are sometimes used to get money to underserved communities such as immigrants and the poor. But they are also seen as a way for banks to cash in on a new distaste for credit cards among young people and to avoid rules that could limit profits on credit and debit cards. Lowrey points out that the Kardashian Kard (yes, with a ‘K’) would have had “more fees than the Kardashians have reality shows.” On top of that, these cards don’t have “the protections or the financial-education benefits of plain-vanilla banking products,” she adds. So good news: more people converting to the non-credit card cause. Bad news: not all of those people chose to leave credit card ownership of their own accord, and financial wizardry is already on the case, filling our need for predatory products. Innovation at its best! Sign up for weekly ND20 highlights, mind-blowing stats, event alerts, and reading/film/music recs.

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Jacob S. Hacker and Paul Pierson: The High Costs of Cheap Talk

November 30, 2010

Perhaps the best that can be said about President Obama’s preemptive sacrifice to the deficit-reduction gods — a two-year freeze on pay for non-military federal workers — is that it represents small change. Amid widespread calls for big immediate cutbacks that could endanger a painfully weak recovery, the president’s proposal might seem a modest offering to calm the screeching deficit hawks. But the price isn’t as small as the numbers suggest. In one fell swoop, the president has validated three dangerous myths that, if accepted, are likely to consign the United States to years of economic struggle and a continued widening of the huge gap in our society between the richest and the rest. Myth #1: Public-sector workers are the root of our economic problems Anyone who watches Fox on a regular basis might be forgiven for thinking that the biggest problem facing our nation is overpaid public workers. So it’s worth pointing out that study after study has shown that public workers are generally underpaid. Yes, federal employees don’t receive the bottom-floor wages seen in private service jobs — a border patrol agent may well make more than a private security employee — but neither do we see the exorbitant pay at the top. As the economist Nancy Folbre puts it, “Some oinking can definitely be heard out there in the labor market, but anyone willing to follow the numbers can tell that the biggest piggies are not those employed by the federal government.” But these statistics are somewhat beside the point. The deeper problem is that there’s no credible case that the pay of public-sector workers has anything to do with our current crisis. After all, if public-sector workers are overpaid today, they were also overpaid a year before the economy tanked. By contrast, we know that many of the private-sector “piggies” on Wall Street had a lot to do with our current crisis. Their pay, however, is not freezing, but getting hotter and hotter. Myth #2: The number one priority is to cut spending now to reduce the deficit Most Americans think that getting the economy back on track is far more important than the tackling the deficit. In Washington, however, fiscal austerity–or at least lip service to it–has become the defining test of seriousness. Perhaps it’s easier to feel this way when your family, friends, and neighbors are not among the millions of Americans who are out of work or working part time despite wanting a full-time job. How else can we explain why Congress cannot muster sufficient support to extend unemployment benefits to the two million Americans whose benefits are set to expire at the end of this month even as its leaders are poised, with the president’s tacit support, to extend the Bush tax cuts for the wealthiest Americans — at a cost that vastly, vastly exceeds the savings produced by a federal spending freeze? Getting the deficit under control requires an economic recovery. After all, this was the story of the 1990s. The real work of tackling the national debt is figuring out a long-term plan that will bring spending and revenues in line over the coming decades, and this work will only succeed against the backdrop of a reasonably strong economy. In the current context, deficit fixation is actually a dangerous distraction from the real and present danger that our economy will slip into stagnation. Myth #3: There’s no will or ability to challenge the runaway gains at the top of the economic ladder even as middle-class Americans lose ground Many who accept arguments #1 and #2 nonetheless call for “political realism.” They say we have to take into account that there’s not sufficient political support for any proposal that involves tackling inequality or raising taxes, even taxes on those who have done the best over the last generation. The blueprint released by the bipartisan cochairs of the president’s deficit commission–which will slash spending on Medicare, Social Security, and vital public services while tilting the tax code in favor of the top — appears to buy into just this sort of depressing realism. Perhaps this is also the president’s rationale for reinforcing the two bad arguments just discussed; he has to bow to the new priorities. But it is simply not the case that Americans’ priorities are Washington’s. Even among the more conservative electorate that went to the polls in November, the majority was against extending the Bush tax cuts for the richest, and the number one concern by far was the economy. Making the case for a strong response to our present crisis and criticizing those who talk about the need for immediate restraint yet continue to shower tax cuts and other goodies on the most fortunate wouldn’t just be good economics. It would also be good politics. Too bad it’s a course the president seems reluctant to take.

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David Fiderer: The Fannie Mae Accounting Scam Promoted by the Chairman of the S.E.C.: A Case Study

November 19, 2010

There are myriad accounting tricks to deceive the public, but Christopher Cox chose one of the simplest. The Chairman of the S.E.C. moved billions of dollars from one side of the ledger to the other side, but didn’t mention how he had shifted the numbers. He then filed a lawsuit charging Fannie Mae with concealing $11 billion in losses, despite the fact that those losses had actually been disclosed in Fannie’s public financial statements, in a category called “Accumulated Other Comprehensive Income (Loss).” He bamboozled Congress, the press, the public and the U.S. District Court into thinking that Fannie was not transparent about what it was doing. Nothing better exemplifies the extent to which he politicized the regulatory function of his agency. Cox didn’t act alone. The S.E.C. collaborated with Office of Federal Housing Enterprise Oversight on a two-year investigation into Fannie Mae’s books. Disregard for Generally Accepted Accounting Principles “resulted in Fannie Mae overstating reported income and capital by a currently estimated $10.6 billion,” said the OFHEO . The 340-page OFHEO report and the 23-page S.E.C. complaint allege all sorts of accounting infractions, but neither specified where the multibillion-dollar losses actually came from. This was back in the halcyon days of May 2006, when Fannie’s regulators insisted that it was excessively conservative in its lending policies. The S.E.C. complaint alleges a panoply of accounting violations, but almost all of them are rounding errors, nickel and dime stuff in the context of a trillion dollar balance sheet and billions of dollars in reported earnings. For instance, the S.E.C. said Fannie misrepresented its financial position because it accrued 30.4 days of interest each month, instead of using the actual number of days. It also said Fannie had defrauded investors by making $100 million in excessive provisions for loan losses. Virtually all of the $11 billion shortfall was attributed to improper designation of financial hedges. Here’s the critical paragraph in the S.E.C. complaint: The Company disregarded the requirements of [Financial Accounting Standard] 133 and qualified transactions for the “short-cut” method based on erroneous interpretations and an unjustified reliance on materiality. By failing to comply with the requirements of SFAS 133, the Company failed to qualify for hedge accounting. This failure led to the Company publicly issuing materially false and misleading financial statements for the periods covering the first quarter 2001 to the second quarter 2004. The vast majority of the anticipated restatement of at least an $11 billion reduction of previously reported net income is a result of Fannie Mae’s improper hedge accounting. The S.E.C. makes two critical points: 1. Fannie improperly failed to mark-to-market certain financial positions, and 2. The S.E.C. reviewed those financial positions and found that the net positions created billions of dollars in losses. Testifying before Congress, Cox characterized the $11 billion number as, “the lower bound of the estimate.” The whole case revolves around the application of FAS 133 . When it was first implemented, FAS 133 gave companies a lot of latitude as to how they could recognize noncash mark-to-market gains or losses. One company might choose to recognize the change in value on its income statement. Another company might characterize the same item as an adjustment to shareholders equity, rather than on the income statement. The adjustment would be disclosed as, “Accumulated Other Comprehensive Income (Loss).” Either way could be acceptable under FAS 133 — it is literally six of one, half dozen of another — and any junior analyst would adjust for those differences when evaluating financial performance. The essence of the S.E.C.’s case is its contention that Fannie committed fraud by recognizing the gains and losses as direct adjustments to equity instead of putting them on the income statement. That’s a common form of window dressing, but the only people who would be misled would be those who don’t know how to read financial statements. And even if you think the distinction is valid, it was dishonest of the S.E.C. and the OFHEO to withhold the fact that the changes in net income were derived by reversing out items elsewhere in the financial statements, and the fact that Fannie had publicly disclosed its FAS 133 losses. For 2001 and 2002, Fannie recognized $11.8 billion in losses in the category of Accumulated Other Comprehensive Income (Loss). They included, for 2001, a $4 billion loss for “Transition adjustment from the adoption of FAS 133,” plus another $3.4 billion loss for “Net cash flow hedging losses on derivatives hedging debt.” In 2002, Fannie recognized another $8.9 billion loss in “Net cash flow hedging losses on derivatives hedging debt.” All of this is set forth, clear as day, on page 124 of its 2003 10-K . Nobody, or at least nobody who is minimally competent, could miss it. Also, when Fannie was forced to unravel all the financial positions it had deemed as hedges, the net result showed billions in dollars of gains , not losses. By reversing the previously recognized AOCI losses, plus by recognizing the market-to-market gains in AOCI, shareholder equity for year-end 2002 had almost doubled, from $16.3 billion to $31.9 billion. When Fannie Mae released its restated financials in December 2006, six months after the overblown media narrative about Fannie Mae’s accounting problems had calcified into the zeitgeist, almost no one looked at the numbers and asked where they came from. By every standard metric — cumulative net income, shareholder equity, corporate cash flows — Fannie’s financial position turned out to be far stronger than originally reported. But that’s not how the media perceived it. The company, which already settled with the S.E.C., was loathe to challenge or embarrass its regulators and gave only selective data in its press release : “The cumulative impact of the restatement was a total reduction in retained earnings of $6.3 billion.” The dominant narrative, that Fannie was a corrupt, out-of-control enterprise, seemed to be set in stone. When Cox and Lockart announced their phantom $11 billion losses, politicians were quick to make comparisons to Enron and Worldcom. “It’s fair to argue that this is perhaps more significant or more grave than Enron,” said Senator Richard Shelby. “Though, perhaps the biggest difference at the moment is that the guys at Enron have been convicted.” As it turns out, no one misrepresented Fannie’s financial position more egregiously than Cox and OFHEO Director James Lockhart. None of the foregoing suggests that Fannie is anything but a financial basket case today. But its losses are not from trading, but from credit losses on bad loans. Why is any of this important today? Because pundits and politicians like to conflate issues. When the OFHEO first argued that timing differences fee amortization represented “systemic risk” in October 2004, Barney Frank and other Democrats argued several things: That any earnings manipulation should be punished, that the OFHEO had not quantified any FAS 133 gains or losses, and that the shifting of income from one period to the next is not the same thing as a direct threat to safety and soundness. Bush administration regulators pushed Fannie and Freddie into high-risk loans, which is why Republicans are eager to claim that Fannie’s chief enabler was a congressman in the minority party helped draft GOP-sponsored legislation for increased government oversight. Also, Lockhart’s deputy, a holdover from the Bush administration, is Fannie’s chief regulator and has an incentive to sanitize his predecessor’s feeble record.

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Brigid O’Farrell: Women Want to Work Construction. Let’s Help Them Get Jobs.

November 4, 2010

After the crash, the downturn was dubbed a “mancession.” As the meme continues to circulate, the Roosevelt Institute’s New Deal 2.0 blog asked leading thinkers to help sort fact from fiction. Are men suffering more than women in a weak economy? Is Washington doing enough to address female unemployment? How do we ensure a jobs agenda that’s fair and equitable? In the final part of the series, ” The Myth of the Mancession? Women & the Jobs Crisis “, Brigid O’Farrell calls for a full employment policy that benefits women ready to work in non-traditional trades. In this Great Recession, there is no question that the construction industry has been hard hit. Unemployment for construction occupations was almost 20% last year and reached a record 26% in February 2010, according to the U. S. Department of Labor . But is the laid-off electrician who was earning $856 a week, and is likely a union member with health benefits, suffering more than the home health aid still earning $430 a week, with no benefits and no union? Are men in the higher-paying construction industry suffering more than women in the lower-paying health care sector or women who are more likely to be single parents and living in poverty ? Who is suffering more, however, is the wrong question. Everyone but the very rich are suffering in this recession. In the 21st century, the federal government needs to have both a short-term stimulus program and a long-term economic plan that supports creating good jobs and decent wages for all workers without discrimination based on gender or race. It needs to have a jobs agenda that is fair and equitable. Government policies should not support one group of workers at the expense of others. Stimulus money going to the depressed infrastructure industry needs to create jobs that are equally accessible to men and women, minorities and non-minorities. Stimulus money in the new green energy industry should create jobs and actively recruit workers regardless of gender and race and not reinforce discrimination prohibited by law. Let’s focus more closely on women in the predominantly male, blue collar world of construction trades. Yes, there are women in these jobs. It is important to note that according to the Department of Labor in 2005 , before the recession began, only slightly fewer women had joined the construction trades, about 274,000, than had become lawyers, 290,000. There were slightly more tradeswomen than women physicians, 268,000. Women, however, had become 30% of lawyers and 32% of doctors, but fewer than 5% of the electricians, plumbers or bricklayers. Despite three decades of equal employment policies, job training programs, and thousands of women showing that they are interested in and capable of performing this work, the jobs remain segregated and the women who are there are joining the unemployment lines. Tradeswomen and researchers have identified many of the barriers to women’s employment in skilled trades, including the socialization of young girls, employer discrimination in hiring and promotion, male coworker and union hostility, and lack of enforcement by government regulators. There is also evidence to support the kinds of outreach and training programs, as well as organizational changes, that are needed to recruit more women, end hostile workplace environments and sexual harassment (which can be life threatening in these jobs), reform employer personnel systems, and engage unions and employers in positive changes for hiring, training, promoting, and retaining women. These programs begin with vigorous enforcement of the laws, especially Executive Order 11246 , which is under the jurisdiction of the Department of Labor and prohibits gender discrimination by government contractors. The Office of Federal Contract Compliance Programs (OFCCP) established the first goals for women in apprenticeship and skilled trades in 1978. The Obama administration and Congress have undertaken several initiatives to address gender segregation in construction trades while increasing employment. Earlier this year, Secretary of Labor Hilda Solis met with tradeswomen, advocates, and researchers to discuss the barriers and successes for women in the trades. Patricia Shiu, director of the OFCCP, and Sara Manzano-Diaz, director of the Women’s Bureau, have held hearings around the country. The Engineering News-Record reports that Shiu’s office, which enforces the executive order, is reevaluating what “good-fair effort” means, and she declared that, “In order for the numbers to change, we have to be willing and able to enforce the laws that we implement, and we are.” There are no goals set for women and minorities to receive infrastructure jobs under the American Recovery and Reinvestment Act. But the stimulus program does include $20 million for grants in transportation and technology training and includes supportive services for women, minorities, and other disadvantaged groups. The Women’s Bureau has again awarded over one million dollars in grants for outreach and training for women in apprenticeship and nontraditional occupations, the WANTO program . Congressman Jared Polis, from Colorado, has introduced H.R. 4830 , the Women & Workforce Investment for Nontraditional Jobs Act. This Women WIN Act would authorize up to $100 million for recruiting, training, and retraining women in nontraditional jobs and establish a national commission to hold hearings and make policy recommendations. Are these actions enough? Not yet. Policies and programs need to be supported with budgets and staff who implement rewards and penalties. It is too early to measure the effects of new initiatives or to predict the outcome of proposed legislation, but the movement is in the right direction. Hard economic times are not a reason to deny women the right to jobs they have shown they are interested in, that they are fully capable of performing, that they need to support their families, and that they have been denied access to in the past because of their gender. Government money must be spent without discrimination against women or people of color. While it is well known that the Roosevelt Administration didn’t solve the problems of employment discrimination, in 1948 Eleanor Roosevelt was instrumental in providing a human rights framework for achieving equality in the workplace. Written while she was chair of the United Nations Human Rights Commission, the Universal Declaration of Human Rights specifies in article 23 that everyone has a right to a decent job, fair working conditions, a living wage, no discrimination, protection from unemployment, and a voice at work. Perhaps we should put more effort into achieving a full employment policy under a human rights framework, instead of arguing about who is suffering more in a recession and how to divide limited resources in ways that reinforce gender stereotypes. Cross-posted from New Deal 2.0 .

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Robert Lenzner: Nitty Gritty Numbers Suggest Downwqard Spiral

October 31, 2010

Nitty Gritty Numbers Suggest Downward Spiral Robert Lenzner, 10.29.10, 06:20 PM EDT Invest by the numbers, not the political rhetoric. Right now the numbers are lousy and downright frightening. In housing, the Case-Shiller home price index fell almost 3% on an annualized basis in August and September, the weakest performance since May of 2009 when the recession still going on. In 19 of the top 20 cities, prices were down on a seasonally adjusted basis. During the July, August, September period sales of new homes fell at a sickening 41% annual rate to 293,000 units the lowest level ever recorded going back to 1963, when the figures were first kept. In unemployment, emergency benefits to extend 99 weeks (almost two years) of unemployment benefits are running out or for some 4 million to 5 million people from December through April. This is proof positive that we are on the cusp of a deepening poverty at the very moment of political stalemate. Rosenberg says government handouts are responsible for 20% of disposable income in the country, so pray for the stability of the Social Security system. In personal Income, this loss of unemployment benefits means a loss of income equal to about $300 a week, or about $80 billion totted up, unavailable for consumption. I have seen no other market strategist get down to the prospects for the people at the bottom of the income ladder. Did you know that 38% of middle income families plan to spend less than $500 on holiday gifts, double the number last year? Look at global air cargo shipments, an indicator of health for global economy. They slid ominously by 2.1% last month. The Air Transport Association found this “worrying,” according to Rosenberg’s daily letter “Breakfast with Dave.” Durable goods orders are down 0.8% if you exclude orders for aircraft components, which suggests air travel and tourism might be good place to invest dollars. Good news? Some 83% of companies have beaten their profit estimates, putting their margins at a high point despite the slowness in revenues. Large public companies have risen in share price because they cut out overhead. They laid off a lot of people and were able to report significant profit gains from the bottom of the recession cycle. . Jobless claims showed a lower number this week, which was widely interpreted as promising for a turn in the economy. Rosenberg suggests that job losses will be revised upward We are in danger of drifting into mediocrity because we are only focused on elections not governance, points out Columbia University economist Jeffrey Sachs He has said it better and more cogently There is a lot of uncertainty ahead. Most gurus don’t think Bernanke’s QE2 will do anything meaningfully positive, only weaken the dollar more to juice U.S. exports and profits at giant multinationals. It will also lead to more speculation in gold and commodities, though of a more

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ProPublica: Treasury’s Incredible Shrinking Mortgage Mod Program

October 27, 2010

By Karen Weise , ProPublica . The U.S. government’s effort to help struggling homeowners is approaching a standstill, and the number of homeowners in ongoing mortgage modifications could start shrinking in several months if current trends continue, according to a ProPublica analysis of Treasury Department data. A year and a half into the program, the number of homeowners defaulting on their modified loans has been fast approaching the number of new modifications. In September, for example, banks modified almost 28,000 loans, but nearly 10,000 homeowners fell out of the program because they defaulted on their modified payments. Taken together, the programs’ growth has slowed by almost a quarter each month since May. The administration launched its foreclosure-relief effort last spring, looking to help 3 to 4 million homeowners by modifying their mortgages to have affordable monthly payments. Only 467,000 homeowners are in modifications that are still ongoing. Alan White, a law professor at Valparaiso University, said the problem isn’t the rate at which homeowners are redefaulting, which is low compared to other modifications, but rather the shrinking number of new modifications given out by banks. “We need to be modifying 10 times as many a month,” he told us. Across the country, over 5 million mortgages are more than 60 days overdue or in foreclosure, according to Lender Processing Services. Banks have had a poor record of modifying mortgages under the government program. (Check out our graphical breakdown of each bank’s performance.) Homeowners report Kafka-esque experiences of lost paperwork , miscommunication and dashed hopes in trying to get help preventing foreclosures. We’ve recently chronicled homeowner experiences in a series of profiles and a questionnaire . Investors who own mortgages are dismayed as well. The Treasury Department has yet to penalize a single mortgage servicer since the program launched last spring. “You start with a program that’s not well designed and a lack of will to enforce the program, and this is what you’re getting,” says White. The pipeline for permanent modifications also continues to dwindle. There are now fewer than 175,000 active trial modifications, down from almost 260,000 in July. Nearly half of the active trials are at least six months old. We contacted Treasury to ask about the slowing of the program, and they haven’t responded yet. We’ll update this post when we hear back. Two mortgage servicers, Bank of America and Aurora, have seen their numbers of active permanent modifications decrease in the past month. Bank of America’s dropped by about a thousand modifications, and Aurora’s fell by over 2,500 modifications. In a press release , Bank of America said that the drop came from a combination of defaulted modifications, servicing transfers and repaid mortgages. Only 428 mortgages have been repaid to the more than 100 mortgage servicers participating in the federal program. Aurora did not respond to ProPublica’s request to comment. Update: Treasury said it is working to reach as many eligible homeowners as it can and has expanded alternative options for borrowers that do not qualify for the modification program. ProPublica is America’s largest investigative newsroom. Sign up for our daily email here .

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Meredith Bagby: Harvard Political Review Publishes Annual Report on America

October 22, 2010

Amidst the witches and the former madams, the too-damn high guy and the Nazi reenactor, the demon sheep and the Aqua creep, there is finally some rational conversation this election season about the issues that really matter. But this illuminating analysis is not coming from the politicians running for office. No, it’s from a group of college undergraduates. The Harvard Political Review , a nonpartisan undergraduate magazine at Harvard College, has just published The Annual Report of the USA (“ARUSA”). Yes, you heard it right. Just as a corporation reports to its shareholders, ARUSA informs citizens how our country stacks up financially. The students break down how our tax dollars are being spent — how much money comes in, and how very much goes out. They write about complex issues such as the national debt, the new health care legislation, the American Recovery and Reinvestment Act — and much more — all in a way that is engaging and understandable to everyone. So how does America fare in 2010? You can probably guess, but here are just some of their findings: In 2010 the U.S. government will spend $1.6 trillion more than it receives in tax revenue . That’s more than a 40% shortfall and the largest nominal deficit in history. Total federal debt stands at more than $13 trillion or 84% of GDP (everything we make, sell, or do all year). Forty-eight percent of that is owned by foreign investors, a number more than double what it was 10 years ago. The wars in Iraq and Afghanistan and other post-9/11 operations have cost roughly $1.15 trillion over the past decade . That’s more than twice what we spend on the entire public education system in a year. Thirty-one percent of the federal budget is spent on just two programs — Social Security and Medicare . These “mandatory spending” programs can be changed only legislatively and are not part of the budget process. The Congressional Budget Office estimates that in 10 years entitlement spending will cost as much as we spend on the entire budget today. The $787-billion-dollar American Reinvestment Act represents the single largest counter-recessionary effort in American history. The biggest chunks are $288 billion in tax relief and $144 billion to state and local governments . These monies have helped shore up public sector jobs, but there is mixed evidence on the impact to the private sector: the unemployment rate hovers at 9%. As an alum of the HPR and creator of ARUSA in 1995, I may be a little biased. But what I find most impressive about this report is that it comes from a group of students that spans the political spectrum. Joint editors, Peyton Miller, the editor of The Salient , the conservative rag on campus, and Eva Lam, president of the College Dems, may disagree on some policy issues, but they do agree on the numbers and the implications of what’s coming: “Strained by static revenue and exploding costs across the board, ballooning deficits risk dangerous consequences. Excessive borrowing raises interest rates, reduces private investment, gives foreign lenders diplomatic leverage, and places a huge burden on future generations. Overcoming these problems will require decisive and painful political choices. Providing a clear view of how and why our government spends our tax dollars is the first step to shaping the debate.” For two years now, we’ve watched our economy flail and thrash in the worst financial crisis since the Great Depression — because of private market largess, yes, but also because of deep and persistent government mismanagement. Quite frankly, some days, it seems we may be looking over the precipice with no idea of how far we may fall. Perhaps, the pale light in these times of darkness is that we have a younger generation that seems to care. If these students can work together to pinpoint and discuss our problems in a respectful and thoughtful way, why can’t our politicians and leaders? Join the discussion: www.annualreportusa.org

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Unemployed Entrepreneurs: In The Absence of Jobs, Some People Create Their Own

October 21, 2010

When Harold Brown, 49, was laid off from his job as an interior design drafter in December 2008, he knew that the prospects for reemployment were grim. The economy in his hometown of Las Vegas, Nevada, was one of the worst in the country and he worked in an industry that was entirely dependent on new building projects staying afloat. Instead of sitting around waiting to hear back from employers who would probably never call, Brown decided in early 2009 that he was going to have to think outside the box. “I was sitting in my kitchen one day thinking, there’s gotta be a better way in life than to work for somebody else,” Brown told HuffPost. “And then I just started looking at my clock, thinking, what if I changed the numbers and did it this way or that way? I got my sketchpad out and started drawing stuff and writing notes down, and my business idea developed from there.” A few months later, with a couple thousand dollars Brown had saved up over his years of working, he launched Rev’lution, a line of innovative clocks that he hopes will show people an alternative way to look at time. So far, Brown says he’s only sold about five clocks for up to $59.98 apiece, but he’s confident that his business will eventually take off. “The name, Rev’lution, it signifies the change in the clock and the time, of course, but also also a change that’s hopefully gonna come in my life,” said Brown. “My unemployment benefits run out next month, so I’m hoping I can make a living off of this. You know, I’m hoping I’ve created a new job for myself.” In this dismal U.S. job market, many of the longterm unemployed who have lost hope in the possibility of finding a new job are learning to be creative and proactive with their free time in order to eke out a living and keep their resumés fresh for potential employers. When Nicole Porter, 30, lost her job and her relationship in the same week, she decided it was time to channel her frustrations into something productive. “I was unemployed for about ten days, and I thought, there must be some reason why I keep getting hired for projects that are essentially free,” said Porter, who previously worked as a production manager in Los Angeles. “Why not work for me instead?” Porter said she moved to New York, took a part-time job folding clothes at a retail store, and began to compile some of her favorite comfort food recipes into a book she called ” The Breakup Cookbook .” Now, every Saturday and Sunday, she sits out in Union Square selling copies of her book and handing out promotional recipes at the local Whole Foods. She has already sold about 500 books this month. “I asked myself a question: are you more prepared to be embarrassed or hungry?” she said. “Embarrassed was it. The break-up cookbook now makes up about 50% of my income, and I’m getting closer to what I was making before the recession.” Even young, fresh-out-of college people are having to tap into their entrepreneurial skills to make themselves competitive in today’s job market. Jason Boeckman, 25, had zero job prospects after graduating from college in December 2008 with a degree in public relations and he has struggled for the past two years to find an entry-level opportunity related in any way to his degree. Fearing a gaping hole in his resumé, he decided to put himself to work. “Since I couldn’t find a job, I decided that I was going to have to invent one,” he told HuffPost. “To keep my resumé fresh and make new contacts, I have spent the last year and a half volunteering my communications services to a couple non-profit organizations in my hometown of Cincinnati. I wanted to build a portfolio of writing samples so I could continue applying for jobs with fresh material — it was the most advantageous approach I could take to a bad situation.” The portfolio Boeckman created during his self-made internship recently helped him to land a temporary paid copywriting position in Naples, Florida. “The position didn’t come with a retirement plan or health insurance, and it’s very temporary, but I guess nobody has a hold on any job right now,” he said. “I live as frugally as possible and save the majority of my earnings should I find myself in a pinch without a job again.” Boeckman may be young, but he feels the stress of the recession as acutely as anyone, despite having done everything right. “It’s extremely distressing to think that the ability to enjoy gainful employment may be a luxury for only the most lucky or well-connected among us,” he said. “Too many people will be hanging around wondering what they did wrong. But the majority of them, like me, probably did everything they were advised to do to become successful and functional members of adult society. Could it be that it just doesn’t work out for everyone?” Has your life been significantly affected by the recession? Please send stories and comments to LBassett@huffingtonpost.com .

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Scott Paul: Obama Acts to Investigate U.S. – China Trade Absurdity

October 16, 2010

All praise from here for President Obama’s courageous decision Friday to proceed with an investigation of China’s opportunistic and illegal trade practices in the clean energy sector. Those of us dedicated to supporting U.S. workers, U.S. jobs and U.S. manufacturing owe him an enormous debt of gratitude. The Administration deserves a tremendous amount of credit for considering this case on its merits, rather than letting some overarching philosophy dictate the outcome. Demonstrating a willingness to challenge China’s cheating could make a huge difference for American workers and businesses in the clean energy manufacturing sector. And if the Administration’s efforts with China are successful, the ultimate result will be more American jobs. Friday’s decision , announced by United States Trade Representative Ron Kirk, was in response to a United Steelworkers (USW) Section 301 unfair trade complaint against China. In his announcement, Kirk said, “We take the USW’s claims very seriously, and we are vigorously investigating them.” He said his office would use the next 90 days – the time period called for under World Trade Organization (WTO) laws – to investigate the practices detailed in the USW petition. The Steelworkers – one of our stakeholders – stepped up to the plate while many others have been reluctant to do so in the face of Chinese pressure. Here was the union’s reaction Friday. This week’s trade numbers sure helped drive home the fact of the absurdity of our trading relationship with China: a record-breaking $28 billion trade deficit with China driving a total August deficit of $46.3 billion. China did not get to this superior position by playing on a level playing field, and the USW’s petition, a 5,800 page report, details the more than 80 Chinese laws, regulations and practices that are designed to crush clean energy manufacturing and other green technology in the U.S. As the August numbers help show, China’s plan is working. China has set prices to undercut the U.S. and other competitors, set discriminatory technology laws and regulations, demanded that foreign companies transfer valuable technology, and has provided massive subsidies to Chinese companies, causing serious damage to U.S. interests. The numbers also help put in perspective how futile U.S. clean energy plans and proposals will be unless China adheres to international trade laws. The Brookings Institution, American Enterprise Institute and the Breakthrough Institute issued a joint report this week calling on the government to invest $25 billion a year in “military procurement, R&D, and a new network of university-private sector innovation hubs to create an energy revolution.” That’s all fine, but just comparing the numbers – a trade deficit of $28 billion a month versus a proposed U.S. investment of $25 billion a year – shows the futility of the effort until the U.S. regains balance in its trading relationship with China. As I wrote in November 2009, “American voters have a visceral response to jobs shipped overseas, a trend that Obama said he would address as a candidate. Less than a year out from the mid-term elections, this looms as a major political problem, as well as an economic one.” That mid-term election is a lot closer now and until today the fundamentals had not changed. The president’s decision to stand up against China’s highly aggressive and illegal trade practices is a huge win for American workers, and he deserves our hearty thanks. # # #

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Migration Bust: Fast-Growing U.S. Areas Show Big Income Drop, Census Reports

October 13, 2010

WASHINGTON — Call it the migration bust: Many of the fast-growing U.S. areas during the housing boom are now yielding some of the biggest income drops in the economic downturn. That could have broad impact on the political map in the coming weeks. Voters discontent over the economy and related issues such as immigration head to the polls on Nov. 2 to decide whether to keep Democrats in Congress. Whites and blacks have taken big hits since 2007 in once-torrid Sunbelt regions offering warm climates and open spaces, including Florida, Colorado, Arizona and Nevada, according to 2009 census data. Hispanics suffered paycheck losses in many “new immigrant” destinations in the interior U.S., which previously offered construction jobs and affordable housing, such as Tennessee, Georgia and North Carolina. The few bright spots: Washington, D.C., San Jose, Calif., San Francisco and Boston. Their household incomes remained among the highest in the nation last year partly due to steady demand for government and high-tech work. “As a whole, the income changes represent a sharp U-turn from the mid-decade gains,” said William H. Frey, a demographer at the Brookings Institution who reviewed the household income data. “The last two years have left those who couldn’t move stuck in place with lower incomes.” In December, the Census Bureau will release 2010 population counts, which trigger a politically contentious process of divvying up House seats. In all, Southern and Western states are expected to take seats away the Midwest and Northeast. But last-minute shifts could affect a handful of states hanging in the balance, including California, which is hoping to avoid losing its first seat ever, and Arizona, which may now gain just one seat rather than two based partly on slowing Hispanic population growth. The census data show that Hispanics, the nation’s largest and fastest-growing minority group, are helping drive growth in several Southern states. Five states have seen their numbers double over the last decade – South Carolina, Tennessee, Alabama and Arkansas in the South and South Dakota in the Upper Midwest. Other big gainers include Georgia and North Carolina. Several of those states, South Carolina, Georgia and possibly North Carolina, stand to gain House seats based partly on that fast growth. At the same time, the Latino population remains a relatively smaller share of the population in those states, numbering about 8 percent or less. There, they also tend to be disproportionately low-income workers who lack a high-school education, speak mostly Spanish and don’t vote in elections, which analysts say may be driving some of the tensions over immigration and jobs. In recent months, the rhetoric has ranged from a call for English-only policies in states and localities that wish to minimize the use of Spanish and other languages, to a call to strip birthright citizenship for illegal immigrants. “Hispanics’ recent growth and sharp disparity with existing white populations may have something to do with the anti-immigrant backlash now being observed in large parts of the country,” Frey said. Hispanics had the highest income in metro areas such as Washington, D.C., Baltimore, Dayton, Ohio, and Virginia Beach, where they also were more likely to have a college degree. Lower-educated Hispanics also had strong earnings in San Francisco and San Jose, Calif., two areas with high costs of living where more-affordable immigrant labor tends to be in greater demand. Nationally, the government reported last month that median household incomes dipped to $49,777, the lowest since 1997, with the sharpest drop-offs in the Midwest and Northeast. Broken down by race, blacks had the biggest income losses, dropping to $32,584. They were followed by non-Hispanic whites, whose income fell to $54,461. Asian incomes remained flat at $65,469. Income among Hispanics edged higher but lagged whites significantly at $38,039. The findings are part of a broad array of 2009 data released over the past month that have highlighted the impact of the recession – from soaring poverty and a widening gap between rich and poor to record levels of food stamp use. On Tuesday, the Census Bureau posted additional 2009 findings. Among them: _Declining home values. Median values for owner-occupied homes dropped 5.8 percent last year to $185,200. They ranged from a high of $638,300 in San Jose, Calif., to a low of $76,100 in McAllen, Texas. In all, five of the 10 highest property values were located in California, with the rest in New York, Washington, D.C., Boston, Seattle and Baltimore. _Increased welfare payments. About 2.6 percent of U.S. households, or 3 million, received government cash payments for the poor, up from 2.3 percent in 2008. States whose residents received the most aid were Alaska, Maine, Washington and Michigan. _Growth of college sciences. About 36.4 percent, or 20.5 million, of college graduates in the U.S. had a degree in the science and engineering fields. Five states – California, Maryland, Massachusetts, Virginia, Washington – as well as the District of Columbia had science and engineering degrees above 40 percent. The 2009 figures come from the Census Bureau’s Current Population Survey and the American Community Survey, which gathers information from 3 million households. The surveys are separate from the 2010 census. ___ Online: http://www.census.gov

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Dan Solin: Jim Cramer’s Shame Meter Is Broken

October 13, 2010

I don’t watch Jim Cramer’s aptly titled Mad Money . A reader sent me CNBC’s summary of his October 6, 2010, show, which he thought would be of interest. He was right! Cramer outlined a recommended trading strategy. It was quite simple. You should sell stocks that had “flown too high,” “let them cool off” and then buy them back at lower prices. According to Cramer, this is a “tested strategy” that had served him well for 30 years. Here’s the part that really got my attention: “And if there were proof that buy-and-hold — or simply buying an index fund, for that matter — generated the kinds of returns earned from actively managing your money,” Cramer would “offer a mea culpa immediately.” Hold on to your hats. Cramer offers no data indicating his trading strategy is “tested.” All of the available data indicates it is nonsense. Cramer doesn’t tell investors how to implement this strategy. How is an investor to know when a stock is “too high” or when to buy back in? The movement of stock prices is random, often driven by tomorrow’s news, which no one knows. Cramer’s dismal stock-picking record illustrates this problem. An article in Barron’s found that Cramer’s stock picks underperformed the DJIA, the S&P 500 and the Nasdaq over the two year period studied. A website that tracks the performance of investment gurus found that Cramer’s stock picks were right 47% of the time, which is slightly less than you would expect from the toss of a coin. Cramer conveniently ignores this data, and offers “proof that he is correct.” He brags that he called the market lows, when the Dow was “flirting with 6,000,” and advised his viewers to buy stocks. Cramer fails to note that, on March 21, 2008, he wrote an article for New York Magazine stating that the market had reached a bottom: “[N]ot just for the stock itself, which happens to the venerable Bear Stearns, but for the whole stock market, and for the long-suffering housing market too.” Viewers who followed this advice, saw their portfolios plunge by 39.7% over the ensuing 254 days. His observation about the “long-suffering housing market” hitting bottom was simply dead wrong. Sometimes stock pickers are right and sometimes they are wrong. When they are right, it is due to luck and not skill. This was precisely the finding of an independent study , which concluded that 99.4% of the 2,076 active fund managers studied over a 32-year period demonstrated no genuine stock picking ability. Another study , published in the prestigious Journal of Finance , looked at the performance of 819 actively managed funds over a 45-year period. The study found that actively managed funds underperformed their passive benchmarks by approximately 1% a year, due to their trading costs and high management fees. The import of this study is stark. Investors pay more than $10 billion in fees to actively managed funds. Yet the fund managers do not have the skill to equal their benchmarks. Investors would be better off buying funds that simply tracked the index. Still not convinced? Another study discussed here looked at hiring and firing decisions of active managers made by more than 3,700 retirement plan sponsors over a nine-year period. These managers were responsible for managing $737 billion of assets. Generally, the managers were hired based on their past performance, much the way investors are told to pick mutual funds. So how was the performance of these “skilled” active managers after they were hired? On average they were close to or below their benchmarks. “Hot hands” are a function of luck. Luck does not persist. There is a wealth of additional data indicating that index-based investing consistently beats active management over the long term. It is summarized here. There is a method to Cramer’s “madness.” He wants you to trade. Trading increases the revenues of his corporate sponsors. It also decreases your returns. Here’s my challenge to Cramer: Show me any peer review study demonstrating your trading strategy has merit. Since you represented your strategy has “served you well for 30 years,” provide me with a list of your trades over that time period. I will crunch the numbers and publish the results. Otherwise, I look forward to your promised mea culpa. It’s not spelled “boo-ya.” The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog. Here is the trailer for my new book, Timeless Investment Advice .

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Arianna Huffington: Can-Do Entrepreneurs Move Beyond Our Can’t-Do Government

October 12, 2010

The latest jobs report came out on Friday. Overall, another 95,000 jobs were lost in September. Maybe they should start calling it the no-jobs report. Ezra Klein crunches the numbers to explain why the addition of 64,000 private sector jobs is pitifully inadequate: That’s about 35,000 less than the 100,000 or so jobs needed to keep up with population growth. It’s about 180,000 less than the number of jobs needed to get back to 5 percent unemployment in the next 10 years. It’s about 257,000 less than the 320,000 jobs needed to get back to 5 percent unemployment in five years. In other words, the economy is not bouncing back any time soon. Even worse, it’s clear that Washington is not up to the task of creating the conditions for the job growth the country so desperately needs. And as we find ourselves in the silliest stretch of the electoral silly season, it doesn’t inspire confidence that the government that emerges on November 2nd will do any better. A deep-seated cynicism is not an unreasonable response. But I’m pleased to report that hundreds of thousands of Americans across the country are choosing to react by taking action. As a result, a parallel economy is being created by people who, finding there are no jobs, have decided to create their own. Of course, this burgeoning parallel economy doesn’t mean the government is off the hook. But while millions of Americans are waiting for the government to do the right thing in terms of bold infrastructure spending, a payroll tax holiday, etc, etc, many have decided to stop waiting. Through the creative use of technology, social media, and a focus on community, this new wave of small businesses is making its mark in a true convergence of left and right. At the moment, our government may be can’t-do, but more and more of our citizens are solidly can-do — and irrepressibly American. To turn a spotlight on this nascent movement and encourage its continued growth, HuffPost is launching Small Business America , a new blog sponsored by FedEx where entrepreneurs can exchange ideas, get advice, and keep up with the latest small business news. Small Business America’s contributors will run the gamut from CEOs to mom-and-pop business owners to policy-makers, business writers, professors, and social media experts. Some of those we’ll be featuring in our first week include: Aaron Patzer, founder of the online personal finance site Mint . William Aulet, Managing Director of the MIT Entrepreneurship Center. Karen Mills, Administrator of the Small Business Administration. Tim Westergren, Founder of the online radio site Pandora . Christopher Hytry Derrington, whose company helps firms outsource their work to rural America instead of overseas. Small Business America will also feature the first-person accounts of people who have already jumped in and started their own business — as well as those thinking of taking the leap. One of those forced by circumstances into creating her own business is Brenda Carter, whose story is featured in Third World America. A grandmother living in Marietta, Georgia, Carter had worked as a manager of information systems at the same company for thirteen years. Then, in 2007, she was suddenly laid off. “Imagine getting up every day for 13 years and suddenly that part of your life just ceased,” she wrote. “I cried and cried and cried. I just could not believe it.” She didn’t know what she was going to do, but then had an idea. Her mother, to help pay the bills as a single mother in New Orleans, had sold pralines door-to-door. “People would knock on our doors at all times of night asking to purchase these pralines,” she said . “So as I was sitting at home I thought ‘Hey I can do this too! This is something I can do and am comfortable doing.’” And now she’s the proud operator of a growing praline operation — except instead of selling door-to-door, she’s doing it computer-to-computer. Her online store can be found here . “Times are changing and so must we,” Carter says. “We need to be supporters of ourselves, otherwise we will not survive.” Americans have a lot of passion and ingenuity, and there is a clear market in helping bring them to market. Enter Etsy.com and Cafe Press , which have now grown large enough to have a multiplier effect rippling across the country. Etsy was founded in 2005 by Robert Kalin. Then 25, he was an aspiring furniture designer feeling frustrated by his attempts to sell his work online. So he created a streamlined platform for handmade goods of all kinds, and launched it from his apartment. The site’s mission? “To enable people to make a living making things, and to reconnect makers with buyers. Our vision is to build a new economy and present a better choice.” Which is exactly what Etsy.com is doing. And along with creating jobs, this new economy is creating connections, and caring, and community. As Kalin said in a 2009 interview : One of the most important things anyone can do right now is create jobs. What’s important is to empower people to make a living, and I support renting and running a 9,000-square-foot workspace in Red Hook, Brooklyn, that provides other small businesses with affordable studio space. And we have big community dinners there once a week for networking and sharing our ideas. Etsy’s effect is being felt far beyond Brooklyn. Colleen Fields, 54, lives in a remote town in the mountains of North Carolina. Two years ago, she was laid off from her job as a newspaper subscriptions manager. “I must have sent out a thousand or more resumés and applications,” she told The Huffington Post . “I applied for a job at a convenience store, and they said they had over 200 applicants. It’s just crazy. There are no jobs around this area.” A friend suggested she look into Etsy. Not exactly computer literate, she nevertheless gave it a try. In December 2009 she opened her online store, Gemstones and Wire , selling necklaces, earrings and handmade clay vases. She wrote about how some women pay all their family bills with small businesses started through Etsy. “I’m just not one of them yet. I would love to be one of them,” she added. Several other successful sites have followed in Etsy’s footsteps. Among them is Bonanza , which, with its “friendliest social community online,” aims to put the human element back into e-commerce, “making people relevant again.” Then there is ArtFire , which started two years ago in Tucson, Arizona. It provides a platform for “handmade goods, fine art, vintage, designed items, supplies and media,” and aims to “celebrate the unique individuality of artists and crafters around the globe.” Cafe Press was started in 1999. Based in San Mateo, California, the company provides on-demand printing for mugs, t-shirts and products designed by users, “uniting and rewarding self-expression.” It now gets 11 million unique visits a month and, with its 6.5 million users, adds around 2,000 new, independent shops and 45,000 new products every day. Another great example of making a business out of helping people make a business is Recession Wire . Begun in February 2009 by Sara Clemence and Lynn Parramore, who were laid off when Portfolio magazine folded, and partner Laura Rich, the site aims to “chronicle the ‘upside of the downturn’ through personal stories, helpful advice and reportage on the changes underway in these hard times.” In its small business section , the site features articles like: “How to Bootstrap Your New Business Wisely,” “Don’t Close Your Business, Change It,” and “A Cool, Free Way to Figure Out a Business Idea’s Potential.” At Inc.com , the website of Inc. Magazine , the editors aim to provide “advice, tools, and services, to help business owners and CEOs start, run, and grow their businesses more successfully.” Its start-up section includes advice on writing a business plan, running a home-based business, naming a business, how to incorporate, and financing. StartupNation bills itself as a “free service founded by entrepreneurs for entrepreneurs.” Headed by Jeff and Rich Sloan, two experienced entrepreneurs, who started the site to share their “years of in-the-trenches experience,” the site features blogs, forums, advice, and networking tools. Micro-financing, another entrepreneurship model greatly enhanced by the web, has been around for awhile. But the founders of InVenture Fund wanted to take the model to the next step. It was launched in October 2009 because, as the site says, “traditional microfinance models weren’t doing enough to lift communities out of poverty.” The problem was that the 75 million or so borrowers around the world were locked into loans they had to repay, sometimes at interest rates of 30 percent. InVenture finds microloan recipients who have good track records and gives them the financing to expand, with no fixed repayment schedule. “Give entrepreneurs an opportunity for real financial and social growth,” the site says , “and they’ll lift not just themselves but their communities out of poverty.” A portion of the site’s profits is then invested in responsible community programs, like clean water and education. Indeed, one of the hallmarks of this entrepreneurial movement is community — including an emphasis on local food, local agriculture, and sustainable business practices. One of the ironies of this new wave of small businesses is how the global reach of the web has been so pivotal in connecting people to their own communities. Judy Wicks, the owner of the famed White Dog Cafe in Philadelphia, founded the Business Alliance for Local Living Economies (BALLE), which now has 80 local chapters in the U.S. and Canada. To spread the local food gospel of the White Dog, Wicks also founded Fair Food , which connects local family farms with city dwellers. In Lexington, Kentucky, Fresh Stop is an attempt to bring the benefits of community-supported agriculture to those who couldn’t normally afford it. Forming partnerships with churches, Fresh Stop asks those who can afford it to pay a bit more for what they buy, which subsidizes those for whom the fresh — and healthy — food would otherwise be out of reach. Whether you’re directly involved in a small business or not, I hope you’ll check out Small Business America . After all, we’re all affected by the well-being of the communities we live in. At least for the time being, real solutions are less likely to come from politicians than from the thousands of people in thousands of communities taking the initiative to connect, share, and create. I love how human this movement is. It’s fueled by technology, but at its core is a real person connecting to another real person. As Twitter founder Biz Stone said of his company: “Twitter is not a triumph of tech. It’s a triumph of humanity.” Technology is what will allow this very American movement to scale up and begin to have a real impact. But it’s in our backyards and basements that it begins. “To be attached to the subdivision, to love the little platoon we belong to in society, is the first principle (the germ as it were) of public affections,” wrote Edmund Burke. “It is the first link in the series by which we proceed towards a love to our country, and to mankind.” Click here to check out Small Business America… and let us know what you think.

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The 14th Banker: Auto Repairs and the Financial Crisis

October 10, 2010

The other day my vehicle was making a rubbing/grinding noise that was noticeable on low-speed turns. From prior experience, I knew it was probably wheel bearings, power steering, cv boots, axles or some such. As you can tell, I did not know much, just what I had paid for in previous experiences with similar symptoms. I received a recommendation for a local auto service place and decided to try them out. After leaving the car with them a few hours, the actual mechanic called me back. Note, it was not a “service advisor” or the intake person. The mechanic told me that the power steering fluid was a little low but he could not detect a leak. He said he topped off the fluid and suggested we just drive the car awhile and see if there is some very slow leak that is undetectable. He also told me that the last person to change the power steering fluid might have just left it a little low. When he paused, my response was “that’s it?”  Yes. I asked if he inspected the front end and he said that he had and there was a cracked CV boot but no wear as yet. He did not recommend changing it because I could drive it awhile and repair the whole thing later, including the axle, for about the same money. Then he put the business owner on and I asked him how much it would be. “Nothing”, he said. No service fee, no charge for time, no charge for fluid. I told him he had a customer for life. The business itself appeared to be quite successful. While not on a main street, there were two nice new buildings and plenty of apparent work, which could only come from word of mouth. This place had zero street visibility. As I was pondering this later, it occurred to me that the staff must not be under “metrics” and “goals”. Rather, they had an innate desire to provide a quality customer experience and to do the right thing for the client. They had a faith that if they did so, they would have a loyal customer that would come back to them when a real repair needed to be done. Do you know what? They are right. I will only go to a new car dealership in the future for a complex problem that only they have the diagnostics to fix, after these guys tell me then cannot handle it. And I trust that they will tell me that if it is the case. I did a quick internet search and quickly found a site that discussed metrics for Service Advisors. The terminology that began to jump out at me reminds me of that we find at large banks and corporations of every stripe. There are lots of metrics and the article discusses how if you compare individuals on the metrics the measures go up. Apparently in the auto repair business, metrics are such things as: Average up-sell per advisor Additional recommendations per Repair Order Additional average Customer Pay per Repair Order Warranty to Customer Pay conversion Customer declining of these additional up-sells are seen as a problem, so the industry has developed tools and techniques to overcome objections. They have found that if the advisor walks the customer through each recommended repair and “prioritizes” its importance, the customer pays for more repairs. They can use printed reports to help with this. The Recommended Action Plan can itemize all the suggested work and highlights in color (presumably red), those that are most urgent. Now I have had some experience with this process. I use a variety of places to service my auto based on convenience. If I am out at one office and there is a quick lube next door and I need an oil change, I will just get it done. I may even flush the radiator, rotate the tires, or do something else. Once at a new car dealership, a service advisor gave me this long list of work that he recommended and I asked where did he get this from? He told me that it was basically the list of everything that had to be done at certain intervals. If for example, my car had 80,000 miles on it, he might recommend a timing belt, even though I had someone else change the timing belt six months before. If I was not paying attention or did not remember what I had done, which is more likely the older one gets, I might just authorize the work. It had nothing to do with the condition of the vehicle. I am not against using metrics. They are important tools for accountability and to compare performance. But they go horribly awry when the metrics are wrong, there is little subjectivity, the compensation is tied to the metrics, the interests of the employee and the firm are elevated above the customer’s interest, the numbers are easily gamed by ethical lapse or cheating, etc. There are also many important work products that cannot be captured by metrics. I would love to see a metric in an auto shop that measures what my mechanic did. We could call it, “Sending The Customer Home Without Charging Them Anything. It might actually be the most important metric of all. What does this have to do with the financial crisis? There are two competing models here. One model is about extraction and consumption. Extract as much as you can so you can consume as much as you can. The other model is about preservation and investment. My new mechanic believes in preserving my money and investing in the relationship. In so doing, he also preserves his time, does not wear out his equipment, and perhaps provides faster service to other customers. With the time he is not spending doing unnecessary repairs on my vehicle, perhaps he is working on another vehicle, helping his spouse, or playing with his kids. There is a benefit to both of us that cannot be measured in currency. The current mortgage foreclosure crisis is a result of “extract and consume” thinking. How many tales are there of borrowers that bought more house than they could afford on false “stated income”. The mortgage originators must have been hitting some great metrics and getting big payouts. What about the lenders that made so many loans they did not have time to process the paperwork afterwards. Great metrics. Big payouts. What about the investment bankers that packaged these deals up and sold them to unwitting investors? Great metrics. Huge millions in payouts. What about the banks that loaded up on this stuff, many of them knowing the shortcomings but also knowing that they could get short-term results and that hopefully home prices would rise forever and everything would be fine? Great metrics and fantastic bonuses. What about the Federal Reserve that now owns much of this crap? Oh, never mind.

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Tim Chen: Credit Card Benefits You’ve Probably Never Used

October 6, 2010

Credit card selection tends to be all about the numbers. We all know how to calculate and compare rewards, interest rates, and fees, so these tend to be the main deciding factors when deciding what to carry in our wallets. However, credit card companies offer all kinds of other benefits that most of us know very little about and can’t really quantify for our decision-making. Two such benefits include purchase protection and return protection, both of which give consumers some degree of protection from their purchases, above and beyond what merchants offer. Like insurance, you never know how important this can be until you need it. Return Protection This protection kicks in when a merchant otherwise won’t let you return something that you bought. For example, if Macy’s has a 30-day return policy and you realize on day 31 that your new cashmere sweater doesn’t quite fit you right, your credit card company may be able to help you out. Purchase Protection Purchase protection can be even more valuable, since this is what covers your new toy in the event that it breaks or is stolen. Depending on what sort of retailers you’re buying from, damage may or may not be covered by their return policy, and theft is certainly not covered. But if you made the purchase with your credit card, your issuer could be more helpful. What does your credit card cover? Be sure to check your card’s terms to see what exactly is covered, but as a general rule this is what we’ve found: American Express cards offer both types of protection. 90 days return protection of up to $300 per incident, and limited to $1,000 annually. There are plenty of restrictions listed, but it definitely covers clothes. 90 days purchase protection against accidental damage or theft, up to $1,000 per incident and $50,000 annually. It covers purchases worldwide and will either replace, repair, or reimburse them as long as you provide proof of theft, accidental damage, or vandalism. Visa offers purchase protection on all Signature cards, but return protection depends on the issuer. 90 days return protection is offered on some cards, depending on whether you are enrolled in the program. Items can be returned for any reason and you’ll be covered for $250 per item and up to $1,000 annually, as long as the Benefit Administrator receives it in “like-new/good working condition.” 90 days purchase protection is offered to Visa Signature customers and covers $500 per claim and up to $50,000 per cardholder. Items will be replaced, repaired, or reimbursed “at the Benefit Administrator’s Discretion… in the event of theft, damage due to fire, vandalism, accidentally discharged water, or certain weather conditions.” MasterCard appears to offer both types of coverage on most cards, but when we searched the agreements of specific cards, we rarely found any mention of return protection. So make sure you verify with your cardholder’s agreement. 60 days of return protection of up to $250 per item. No annual limit is disclosed, but then again MasterCard also had the least clear disclosures. 90 days of purchase protection are offered, and the rules aren’t as detailed as with Amex or Visa, but you can assume the rules are similar. Who’s missing from this list? In our research, Discover was noticeably absent. They do not seem to offer either type of protection on any of their cards, which seems like a drastic oversight. While this won’t be a deal breaker for most card users, it’s definitely worth bearing in mind if you’re comparing cash back credit cards , and trying to decide between the Amex or the Discover (hint: go with the Amex. We like the Blue Cash ). Readers: Have any of you used these types of programs in the past? Do they work as advertised? Or have you had any exceptionally positive or negative experiences with certain credit card types?

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Eric J. Weiner: The Most Dangerous Myths About The Global Economy

October 5, 2010

Having worked in financial news for more than 15 years I understand well why reporters and columnists regularly develop narrative arcs to explain complicated economic issues. After all, these storylines often are the easiest way to get people to comprehend esoteric topics like gyrations in the global stock markets. The trouble is sometimes the premises behind these stories are dangerously wrong. And the mistakes can have catastrophic consequences. For instance, in July 2007 I wrote an op-ed for the Los Angeles Times that said the U.S. economy was in a bubble. Since this was before 2008, the concept of a bubble was not part of the financial media’s narrative. So I was pilloried, particularly in this appearance on CNBC (and here , and here .) Today these clips are like horrific time capsules. Watch as the so-called experts explain why the U.S. economy was poised for growth as it was teetering on the brink of disaster. Of course they look ridiculous now. But that’s what the financial world believed back then. The reason I bring this up today is during my conversations promoting my recent book The Shadow Market I’ve come across some dangerously pervasive narrative myths about the global economy. And if these stories take hold the results could be disastrous. The first myth goes something like this: China really can’t hurt America because it owns so much of our currency and debt that it will only be hurting itself. The term most commonly used to describe this phenomenon is “codependency.” The theory seems logical. The trouble is it’s not based on reality. The fact is China can do all sorts of damage to us without it having any impact back home. This was proven during an economic war games exercise the Pentagon held in March 2009. The U.S. repeatedly lost the games to China for a number of reasons, but chief among them was that China could get the U.S. to what it wanted just by tightening the financial screws a bit. If China shifted the maturities of some of its Treasury holdings to more short-term debt it would set off chaos in our stock markets. If China sold a small portion of its U.S. holdings and signaled to the markets that it questioned America’s stability all hell would break loose. The point is the relationship between the U.S. and China is deeply intertwined and complex. But it’s hardly codependent when one side has most of the authority. Yet that’s the state of play today. The other myth relies on the power of a historical analogy. The basic line of logic is: Remember when Japan supposedly was taking over the U.S. back in the late 1980s and early 1990s? Well that didn’t pan out, and China is just another overhyped threat from the East. This myth is so pervasive that a reviewer for the New York Times actually led her review of The Shadow Market with it this past Sunday. (I’ve received better reviews in my time, but if you’re curious you can find it here .) The problem is the two situations couldn’t be more different. First, even at the height of its influence Japan never was considered a threat to become a bigger economy than the U.S and its gross domestic product remained a fraction of ours. This gave the U.S. enormous advantages. The dollar faced no pressure as the world’s currency. Companies and countries still HAD to have access to the U.S. market since it was by far the largest in the world. Today, however, we know that China eventually will pass us and become the largest economy on earth. It’s only a matter of time. And to presume that we know what this will mean is ludicrous considering America’s never faced this challenge since it became the world’s dominant economic power. Second, and more importantly, China is playing by a completely different set of rules than Japan or anyone else ever has. This is crucial to understand because it seems so few people do. You see, Japan didn’t buy Rockefeller Center. Mitsubishi Real Estate did. And Japan didn’t buy Columbia Pictures. Sony did. These were publicly traded conglomerates buying assets they considered to be undervalued. Were the companies close to the Japanese government? Sure, about as close as major U.S. companies are to the U.S. government. But were they PART of the Japanese government? Absolutely not. This is not the case with China, which practices a form of state capitalism, where most of the country’s businesses are somehow tied to the government. So when the Chinese oil company Sinopec invested $7 billion in Brazilian oil last week it WAS the Chinese government doing the buying because Sinopec is state-owned. Or when the Chinese mineral company Sinochem enters into a bidding war for a Canadian potash producer it IS the Chinese government doing the bidding. This is a fundamental change in the way the global economy has traditionally operated. All of a sudden geopolitics and finance are intersecting in ways that we never considered possible. And to not understand this will lead to some wildly ill-informed conclusions. The fact is China’s government IS trying to buy up the world, or at least the parts it deems necessary to fuel the country’s growth. That makes this a whole new ballgame. So where does this leave the average American or the typical investor? Unfortunately, it leaves you not knowing whom to trust when it comes to interpreting what’s going on in the global economy. My best advice is to trust your eyes and the numbers from sources you believe in. But please, leave the narrative stuff to the fiction writers.

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David Isenberg: The Uncounted Contractors

October 5, 2010

Okay, just how long is it going to take for the U.S. government to get an accurate count of the private military and security contractors it employs in Iraq and Afghanistan? Apparently, not any time soon, according to the Government Accounting Office report released last Friday. The report ” DOD, State, and USAID Face Continued Challenges in Tracking Contracts, Assistance Instruments, and Associated Personnel ,” was GAO’s third assessment of the implementation of the Synchronized Predeployment and Operational Tracker (SPOT) and data reported by the three agencies for Afghanistan and Iraq for FY 2009 and the first half of FY 2010 on the (1) number of contractor and assistance personnel, including those providing security; (2) number of personnel killed or wounded; and (3) number and value of contracts and assistance instruments and extent of competition for new awards. What GAO found was that: While the three agencies designated SPOT as their system for tracking statutorily required information in July 2008, SPOT still cannot reliably track information on contracts, assistance instruments, and associated personnel in Iraq or Afghanistan. As a result, the agencies relied on sources of data other than SPOT to respond to our requests for information. The agencies’ implementation of SPOT has been affected by some practical and technical issues, but their efforts also were undermined by a lack of agreement on how to proceed, particularly on how to track local nationals working under contracts or assistance instruments. The lack of agreement was due in part to agencies not having assessed their respective information needs and how SPOT can be designed to address those needs and statutory requirements. In 2009, GAO reported on many of these issues and recommended that the agencies jointly develop a plan to improve SPOT’s implementation. The three agencies reported to GAO that as of March 2010 there were 262,681 contractor and assistance personnel working in Iraq and Afghanistan, 18 percent of whom performed security functions. Due to limitations with agency-reported data, caution should be used in identifying trends or drawing conclusions about the number of personnel in either country. Data limitations are attributable to agency difficulty in determining the number of local nationals, low response rates to agency requests for data, and limited ability to verify the accuracy of reported data. For example, a State office noted that none of its Afghan grant recipients provided requested personnel data. While agency officials acknowledged not all personnel were being counted, they still considered the reported data to be more accurate than SPOT data. Only State and USAID tracked information on the number of contractor and assistance personnel killed or wounded in Iraq and Afghanistan during the review period. State reported 9 contractor and assistance personnel were killed and 68 wounded, while USAID reported 116 killed and 121 wounded. Both agencies noted that some casualties resulted from nonhostile actions. DOD still lacked a system to track similar information and referred GAO to Department of Labor data on cases filed under the Defense Base Act for killed or injured contractors. As GAO previously reported, Labor’s data provide insights but are not a good proxy for the number of contractor casualties. DOD, State, and USAID obligated $37.5 billion on 133,951 contracts and assistance instruments with performance in Iraq and Afghanistan during FY2009 and the first half of FY2010. DOD had the vast majority of contract obligations. Most of the contracts were awarded during the review period and used competitive procedures. State and USAID relied heavily on grants and cooperative agreements and reported that most were competitively awarded. While, doubtlessly, DOD, State, AND USAID are doing the best they can to make SPOT work some issues are likely to prove difficult to solve. Determining the number of local nationals is one example. PMC supporters often note the advantage of using host country nationals is that it funnels money to the people who most need it, the country’s citizens. Yet according to the GAO many local nationals working under contracts and assistance instruments are at remote locations and their numbers can fluctuate daily. DOD officials in Iraq and Afghanistan explain that this is especially true for construction projects, where the stage of construction and season can affect the total number of personnel working on a project. For example, DOD officials in Afghanistan told GAO that at one project site the number of local national personnel working fluctuated anywhere from 600 to 2,100. Further, DOD contracting officials told us in some instances it could be weeks before they are notified that local national personnel are no longer working on a particular project. This has limited the ability to track, in real time, the status of these personnel in SPOT. Also, for personnel working at remote locations, the ability of U.S. government officials to verify the completeness of information in SPOT is hindered by security conditions that make it difficult for them to visit regularly, and they cannot use their limited time on site to verify personnel information. Furthermore, USAID and State policies limit the extent that local national personnel are entered into SPOT. Following their initial use of SPOT, USAID and State developed agency-specific policies regarding SPOT’s implementation. However, in some instances these policies limited the extent to which local nationals were required to be entered into the system. USAID’s April 2009 contract and assistance policy specified only that contractor and assistance personnel deployed to Iraq must be registered in SPOT. The policy explicitly excluded Iraqi entities and nationals from being entered into SPOT, until a classified system is established. It was not until July 2010 that USAID directed that its contractor and assistance personnel working in Afghanistan be accounted for in SPOT. The policy notes that procedures will be provided separately for entering information on Afghan nationals into SPOT, but as of September 2010, such procedures have not been developed. As a result of these policies, information on local nationals working under USAID contracts and assistance instruments in Iraq and Afghanistan is still not being tracked in SPOT. Another problem is that contractors and assistance recipients have not kept SPOT updated. Although the agencies have increasingly required their contractors and assistance recipients to enter personnel information into the system, there has been little emphasis placed on ensuring that the information entered into SPOT is up to date. Specifically, contractors and assistance recipients have not consistently closed the accounts of their personnel once they have left Iraq or Afghanistan. As a result, SPOT does not accurately reflect the number of contract and assistance personnel in either country, and in some cases the numbers may be overstated. SPOT program officials told us that in March 2010 they began periodically reviewing SPOT to close out the accounts of any personnel who either did not actually travel to Iraq or Afghanistan or whose estimated deployment ending date was 14 days overdue. Based on this review, in April 2010 alone, they identified and closed the accounts of over 56,000 such personnel who had been listed in SPOT as still being deployed. Perhaps most disturbing however is that although SPOT was designated as a system for tracking the number of personnel performing security functions, it cannot be used to reliably distinguish personnel performing security functions from other contractors. Consider the difficulty in tracking people authorized to carry weapons: The weapon authorization data field in SPOT identifies personnel who have been authorized to carry a firearm. Employers of armed security contractors are required to enter this information into SPOT as part of DOD’s process to register and account for such personnel in each country. However, USAID officials in Iraq explained that security personnel working under the agency’s contracts and assistance instruments receive authorization to carry firearms from the Iraqi government, not DOD, and are not identified in SPOT as having a weapons authorization. Further, some contractors performing security functions are not authorized to carry weapons and would, therefore, not be included in a count using this method. Conversely, some personnel who are not performing security functions have been authorized to carry weapons for personal protection and would be included in the count. Regardless of the method employed to identify personnel in SPOT, it appears that not all personnel performing security functions are being captured in the system. For example, based on an analysis of SPOT data, no more than 4,309 contractor personnel were performing security functions for DOD in Afghanistan during the second quarter of fiscal year 2010. In contrast, DOD officials overseeing armed contractors in Afghanistan estimated the total number of DOD security contractors in Afghanistan for the same time period was closer to 17,500.

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Mike Green: Innovation Crisis in Black America Pt. 4: 20th vs 21st century ideology

October 5, 2010

When unemployment in Black America topped 16 percent and Black teen unemployment skyrocketed to an outrageous 45 percent this summer, the voices of outrage were muffled in the pockets of a few media that cared to cover the crisis. The majority of media wrung their collective hands over 9 and 10 percent unemployment challenges in White America, with overall teen unemployment hovering at 23 percent. Dirty Secret “A dirty little secret is that many jobs are not going to come back,” says Johnathan Holifield, founder of Trim Tab System, LLC, a personal development and organizational leadership methodology, which applies innovation concepts and tools to generate exponential impact. “Under the old model, recovery meant increased productivity, which meant increased hiring, Holifield said. “That is no longer the case. Because of the ingenious uses and applications and adoptions of new technology throughout our economy, we will continue to experience productivity growth but we will not have the level of job replacement and hiring that our recoveries in the past have been accustomed to.” Dear President Obama … Dr. Boyce Watkins, founder of Your Black World , underscores Holifield’s point. He wrote a public letter to President Barack Obama that stated in part: “In addition to massive unemployment, wealth inequality in America remains a persistent problem, causing African Americans to bear the brunt of this economic crisis in ways that are unimaginable to other Americans. Our homes are facing foreclosure more often and we are less able to rely on a source of background wealth to help us get through the toughest times. “Yet, while we are the least prepared for the recession, we are being hit with a downturn that is twice as forceful as that being experienced by the rest of America. In fact, even after the recession is over, our unemployment rate will probably be as high or higher than the rate that white Americans are agonizing over right now. The United Nations has investigated this issue as a human rights violation, because it appears that we live in a nation that accepts a black underclass as a default way of life. “To this point, your administration has remained disturbingly silent on the issue of black unemployment. The silence is deafening, but the economic hardship is loud and clear. I am concerned that many of your key economic advisers are unable or unwilling to process and empathize with the depths of black economic misery in America.” Never-Ending Recession Dr. Watkins called on President Obama to institute political efforts and policy measures that would help create urban jobs through congressional legislation and generate more government contracts with African American companies. At theLoop21.org , Dr. Watkins made a compelling case that suggests even when the economy recovers, the burden of unemployment for Black America will still be in double digits while the nation celebrates a long-awaited return to prosperity. He states: “Our country spent 400 years firmly placing black folks at the bottom of the social totem poll, only allowing us to recently participate as laborers in the American economic system. “The conclusion is that even during good economic times, it is acceptable in the eyes of the Obama Administration for black unemployment to be worse than it is for whites during a recession. The recession will never end for us.” I Have A Nightmare! In an effort to address the dire situation facing Black America, The Nation magazine took a look back at Dr. Martin Luther King’s words when he spoke on the issue of joblessness five years after his famous rallying cry, “I have a Dream.” The Nation writes: “In King’s vision of the campaign, thousands of Americans who had been abandoned by the economy would create a tent city on the National Mall, demand action from Congress, and engage in nonviolent civil disobedience until their voices were heard. King argued in one of his last sermons, ‘If a man doesn’t have a job or an income, he has neither life nor liberty nor the possibility for the pursuit of happiness. He merely exists.’ “Four decades later, as our country struggles with disappearing jobs and growing desperation, much of the critique of the U.S. economy offered in the Poor People’s Campaign is newly resonant. “In a November 1956 sermon, King presented an imaginary letter from the apostle Paul to American Christians, which stated, ‘Oh America, how often have you taken necessities from the masses to give luxuries to the classes… God never intended for one group of people to live in superfluous inordinate wealth, while others live in abject deadening poverty.’ “Unfortunately, since then, inequality has only grown.” 42 Years of Economic Stagnation Both Dr. King and Dr. Watkins note the same problem of unemployment and economic disparity persists for Black America. It is a stark reality that one leader spoke obvious truth in the mid-20th century while another continues the same truthful refrain today in the 21st. There is one other similarity. Dr. King called for a government solution. Dr. Watkins is calling for the same. Yet, the 535 members of Congress are no more moved to resolving the crisis today than the congressional members were in 1968 … and every year in between. MLK and Jeremiah Wright: On The Same Page Dr. Michael Eric Dyson, the author of a new book , ” April 4, 1968: Dr. Martin Luther King’s Death and How It Changed America ,” provided a unique look at how Dr. King’s message evolved beyond 1963 until his assassination in 1968, when he was preparing to give an upcoming sermon entitled, ” Why America May Go To Hell .” Voices like Dr. Watkins, Dr. Dyson and others today are necessary. And the pressure upon congress must continue to be applied from quarters outside of the infamous K Street, where a lobbyist cabal routinely spends hundreds of millions of dollars each year on behalf of their clients to ensure congressional members hear and prioritize their problems. Economic Katrina History strongly advises that government will drag its feet until another Black generation has passed on lint-filled pockets to destitute grandchildren. Even a Black president cannot move 535 leaders sitting on their hands and ignoring the plight of Americans hit hardest by the economic crisis. For example, the National Association of Small Business Investment Companies sent its representative, Carolyn Galiette, to testify before Congress on Oct. 14, 2009. She spoke of the work the SBIC was doing to bridge the funding gap for women and minority businesses, but also warned of the seriousness of the problem that threatened to push investment companies, such as hers, out of the effort: “Our partnership with the SBA has enabled our portfolio companies to create approximately 4,500 jobs and to increase revenues in these companies by over 50% on average. Moreover, we have accomplished all of this while making 50% of our investments in companies owned and managed by women and minorities and businesses located in or employing residents of low and moderate income communities. “We have provided capital where larger, more established financing sources would not, some of which are the very lenders and investors who recently received TARP financing. Despite the success of the SBIC program and of Ironwood Capital, if the program is not reformed we and many other funds that are bona fide experts in growing domestic small businesses will be forced to leave the program. “… despite the efficiency of the SBIC credit facility, the program is dramatically underused. Fiscal year 2009 used only about 20% of the SBA’s $3 billion in capacity, denying domestic small businesses over $2 billion in SBA leverage and $1 billion in private growth capital. “Today more than ever, the patient capital, market experience, and governance guidance that SBICs provide fill a capital chasm that threatens the ability of small businesses to emerge from the current recession. Congressional action is needed from you to realize improvements that are critical to providing capital to small business.” Galiette’s plea highlighted the slothful, lazy and ambivalent processes employed by Congress. Government may support an outside solution, but government will not initiate nor embody a solution to the unemployment crisis in America; that’s the job of innovative entrepreneurs and investors. DIYS: Do It Yourself Innovative Solutions Innocentive is one such effort by innovative leaders who decided to take on the challenge of job creation by investing in deserving entrepreneurs. Innocentive claims it “harnesses collective brain power around the world to solve problems that really matter.” Innocentive brings together “seekers” (those with problems) with “solvers” (those with the means to address problems). So, how’s it going for this 9-year-old organization? Here are some quick facts from the Innocentive website : Total Solvers: 200,000+ from 200 countries Total Challenges Posted: 1044 Project Rooms Opened to Date: 294,865 Total Solution Submissions: 19,346 Total Awards Given: 685 Total Award Dollars Posted:24.2 million Range of awards:5,000 to1 million based on the complexity of the problem Total Dollars Awarded:5.3 million Average Success Rate: 50% Developing Innovative Infrastructure in Black America Where is the Innocentive of Black America? If a single organization can bring together more than 200,000 collaborators to invest in economic solutions through the efforts of innovative entrepreneurs, what could be Black America achieve by bringing together business, education and policy leaders, teachers and community organizations, entrepreneurs and investors? What amount of productivity could Black America contribute to the Age of Innovation if a concerted effort was made to focus on creating an innovation infrastructure through which students were taught and motivated, entrepreneurs were mentored and supported, and investors were attracted by the development of high-growth companies? Organizations like the Global Entrepreneurship Monitor ( GEM ) produce data that show conclusively innovative high-growth entrepreneurial ventures are the driving forces behind significant job creation. Call for Innovative Entrepreneurs The well-respected Conference Board offers data in its report, ” Entrepreneurs, Inventors and the Growth of the Economy ,” which underscores the need for innovative entrepreneurship. The Conference Board report, written by William J. Baumol of New York University and Princeton University in January 2008, points out there is a difference between an entrepreneur who opens a local store, barber shop or community restaurant, and a visionary risk-taker who develops a high-growth innovation that improves upon an existing idea or introduces new technology and captures a share of the market: “Generally, entrepreneurs have been defined as individuals who create a new firm or some other economic organization or who launch some economic activity that they will carry out at least initially. A replicative entrepreneur is someone who organizes an enterprise of a variety that has been launched many times before, and of which many other examples are currently extant–e.g., a new retail shoe shop or another limousine service. Replicative entrepreneurship has proven its effectiveness as a way out of poverty, as dramatically illustrated by the immigrant peddlers who often ended up sending their children to college. “The innovative entrepreneur, as the name implies, does something that has not been done before. She may market a new product, or may sell licenses to other firms to make use of intellectual property in her possession, the specifications of new products, or new production processes. But she may innovate in other ways as well, for example, recognizing new uses for an old product or a new market for that item, or a novel and more efficient way to organize the firm. “Indeed, I will note presently that the options available to the innovative entrepreneur are much broader than that. This is important because it is the innovative entrepreneurs who are the key to economic growth, since it is they, rather than the replicative entrepreneurs, who ensure that invention is put to effective use. Without innovative entrepreneurs, the innovations that promise rapid economic growth have been left to languish. But such an outcome can be prevented only if the prevailing economic forces provide the incentives for the innovative entrepreneurs to carry out the necessary activities.” These innovative entrepreneurs are largely missing in Black America. With failing educational systems, under-represented numbers in the science, technology, engineering and math ( STEM ) fields, severely under-represented numbers in high-growth entrepreneurship and SEC-qualified investors, the crisis of innovation in Black America threatens to undermine progress and productivity well into the 21st century. Steps Toward Producing Black Innovators But there are efforts being made to address the problem: Today, the Network for Teaching Entrepreneurship ( NTFE ) is concluding its $10,000 high school entrepreneurship contest , which included an elevator pitch contest and business plan contest. The contest, sponsored by Oppenheimer Funds and Southwest Airlines, will hold a celebration for its finalists tonight (October 5, 2010) and they will ring the opening bell at the stock market tomorrow. On the professional level, Unity, Journalists of Color association is a strategic alliance of four journalists associations representing the spectrum of Black, Hispanic, Asian and Native American journalists. Unity coordinated a new program funded by the Ford Foundation for journalists of color who want to become entrepreneurs called New U. Sixteen participants attended two-day “boot camps” to learn entrepreneurial skills and pitch their ideas to a group of mentors and industry experts. Unity is currently hosting a 30-second pitch contest online for its journalists-turned-entrepreneurs who participated in the New U entrepreneurship mentoring program. As one of the New U mentors, I was thrilled to participate in a developing infrastructure for journalists to help transition their professional talents and networking skills and into the world of entrepreneurship. “This is a ‘solutions-based’ project,” said Doug Mitchell, program co-director. “There is much to know and there are many people we’ve discovered who are eager to help from all corners to close the gap between who gets funded and who does not.” Change the Equation is an education effort focused on channeling students into the STEM fields of learning: science, technology, engineering and math. Johnathan Holifield, Founder Trim Tab System, Inc. I interviewed Johnathan Holifield to get his perspective on the pathway from 20th century processes to 21st century innovation. Holifield offers a visionary pathway that leads Black America from the dark portrait of the 20th century painted by Dr. Martin Luther King Jr. and highlighted by Dr. Boyce Watkins into a new frontier of 21st century opportunity. Prior to establishing the Trim Tab System, Holifield served as: President/CEO of the Urban League of Greater Cleveland President of the Buffalo Olmsted Parks Conservancy Executive Vice President of Council for World-Class Communities in Benton Harbor, Michigan Vice President of New Economy Enterprise for the Cincinnati USA Chamber of Commerce Founding Executive Director of CincyTech Additionally, Holifield practiced civil litigation with the Manley, Burke & Lipton firm and the Hamilton County, Ohio Prosecuting Attorney’s Office and was a member of the National Football League’s Cincinnati Bengals. Q: What is the key to helping Black Americans become more productive in the arenas of innovative entrepreneurship? A: Imagination is the mother of innovation. I remember I was over someone’s house and the mother told the kids, “Go outside and play.” And the kids said, “Play what?” Have we become so reliant on being entertained, structured play, that we no longer have the kind of imagination that ultimately feeds innovation? The imagination equation is: education, which includes but is not exclusive to academic training, plus unstructured play. Q: What is the core challenge for Black America to achieve progress and attract investments? A: We don’t talk about innovation as a life skill. We’re not nearly well-represented in the science, technology, engineering and math (STEM) disciplines that feed a lot of the explosive growth companies either through the production or application of new technology. Increase the demand for angel investment groups. That’s the core challenge. Q: CB Insights issued a report this summer that revealed Black American entrepreneurs received just 1% of angel and VC funding through the first half of 2010, while Asian American entrepreneurs received 12% and Whites 87%. A: It’s interesting to me that the report identified Asian entrepreneurs at a 12 percent level of receiving VC funding during that period, which I have no doubt is disproportionately high compared to their numbers in the population. What’s also disproportionately high among Asian students is high achievement in math, science, engineering; the STEM programs. And if you extrapolate that out to what gets funded, its high and explosive growth companies in the innovation economy. Most of those companies are using, or producing, technology that’s grounded in science, mathematics and engineering. That’s what it looks like. And I think our challenge, in order to increase the numbers of African American, Black entrepreneurs, high-growth or explosive growth entrepreneurs, we have to increase the numbers of African Americans who are immersed in the STEM disciplines. Q: What’s the answer to the lack of funding information and access? A: For the funding model, these entrepreneurs will need access to leadership and management talent, ultimately to attract the kind of growth capital they need, plus clusters of what I call “peer networks” and a robust infrastructure around them of service providers and institutional support. That’s how states like Ohio, for example, are growing the innovation economy. We (African Americans) have very little interaction with those networks from my experience. And in our community of support services to help African Americans achieve a level of equitable contribution to the national economy, none of these things are present. Q: Business plans are a big part of attracting funding, either from institutional investors like angels and venture capitalists or nonprofit resources and potential clients. What’s your recommendation on writing a business plan? A: Business plans should be focused on cash flow and growth. Not growth for the sake of growth and not mindless growth but growth consistent with the business plan along with outstanding management talent focused on explosive growth. Q: Education leaders in Black America are concerned about the low levels of Blacks in the STEM fields, which produce the highest number of explosive growth companies. To add to the challenge, there are growing numbers of universities that have separate entrepreneurship centers, like Harvard, Stanford, UC Berkeley and others that recognize the need to nurture the entrepreneurial energy that propels innovation. Where is Black America in this fast-paced push for productivity? A: In the education field, particularly higher education, it has been a continuing struggle to evolve the American higher education model. It is exceedingly difficult for universities that are largely not-entrepreneurial to build, not just an entrepreneurial center, but exude a culture of entrepreneurship throughout the university, throughout the faculty, staff and student body. It’s one thing to have an isolated entrepreneurship center within a university and another thing to have an entrepreneurial university that in many cases manifests breakthrough ideas through the entrepreneurship center ultimately for commercialization in the marketplace. I think there’s still a disconnect between the old model institution and the 21st century needs of all of our national assets. * * * Johnathan Holifield is inviting a collaboration of leaders to join him and Dr. Chad Womack of tbed21.org in developing an innovation infrastructure for Black America. To join the growing number of collaborators, contact Johnathan Holifield via email: johnathan@trimtabsystem.com. (Ask about the Trim Tab) Read the entire four-part series: Pt 1: Innovation Crisis in Black America Pt 2: Where are Black Entrepreneurs and Angels? Pt 3: The Challenges of Tech Entrepreneurship

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Phil Trupp: Did SEC Hide Botched Stanford Probe? I.G. Says Timing Is "Suspicious"

September 28, 2010

In the style of “Mad” magazine, it’s the season of con vs. con at the Securities and Exchange Commission — only no one’s laughing. Word on the inside is that the Commission covered up — or at least ignored — an investigation of billionaire R. Allen Stanford, who is awaiting trial in a Texas jail on 21 criminal charges that his Antiguan bank allegedly sold questionable certificates of deposit with “improbably high” interest rates and was running a Ponzi scheme at the same time. “They didn’t call him ‘Agile Allen’ for nothing,” according to a source familiar with the case. The SEC apparently wasn’t nearly so agile. A report by SEC Inspector General H. David Kotz claims the SEC was aware Stanford was running a $7 billion Ponzi scheme as far back as 1997, but waited until late 2005 to step in. The Commission filed civil charges in the case in February 2009. Kotz noted that the Commission filed civil fraud charges against Goldman Sachs last April, on the same day it released his report critical of the Stanford investigation. The timing of the Goldman filing is “suspicious,” said Kotz, who went on to suggest that the Goldman charges diverted attention from the report of the botched Stanford probe. The inspector general said the timing of the two actions in April “strains credulity.” Kotz made his suspicions public at a September 22 congressional hearing on the Stanford investigation before Senate Banking Committee. Republican sources in Washington claimed the SEC made Goldman the poster boy for greed as a cover for the Stanford investigative foul up. These sources also suspect Goldman was sued to help boost support for the new regulatory reforms governing Wall Street’s occasionally bad behavior. Though SEC denies the Goldman announcement was a cover-up of the Stanford probe, Kotz wondered out loud if in fact the timing might have been politically motivated. Republican speculation aside, Mr. Kotz told the committee that top officials at the SEC’s Fort Worth office were “being judged on the numbers of cases they brought, so-called ‘stats’,” the obvious and easy cases. “Complex cases were disfavored,” Mr. Kotz explained, because they were not “slam dunks.” Mr. Allen’s case is a rat’s nest of allegations including, but hardly limited to, the purchase of a Caribbean island. In other words, it didn’t add up as a “stat” or “quick hit” case. Robert Khuzami, director of SEC’s Enforcement Division, and Carlo di Florio, director of the Office of Compliance Inspections and Examinations, said they are moving to implement the reforms demanded by Mr. Kotz. Mr. Khuzami said he was alerting what he called “rank and file” SEC inspectors that quick hits do not drive enforcement. He said the divisions are now coordinating their efforts and stepping up the pace. So what does it take to make the SEC do the right thing? Among the suggestions by Mr. Khuzami and Mr. di Florio is to expand training programs and modernize the management structure. In addition, they added, it’s time to place “seasoned investigative attorneys back on the front lines and improve examiners’ risk management techniques.” No one on the Senate panel bothered to ask where these “seasoned attorneys” have been hiding. The Kotz report landed on SEC Commissioner Mary Schapiro’s desk in March. The Senate hearing gave the lawmakers a chance to vent their dissatisfaction with the Commission, but it’s anyone’s guess if substance will come out of the Senate probe. Last year, for example, the House Financial Services Committee held hearings on the $336 billion auction rate securities scandal, but no legislation or regulations followed. When Rep. Barney Frank (D-MA) was asked about this failure, he replied, “The (’08) meltdown got in the way.” It now remains to be seen if the Senate Committee can find a clear path to financial reform of the SEC’s enforcement process. The hearing produced notable contradictions. Sen. Richard Shelby (R-Ala), the committee’s ranking republican, said the Bernard Madoff $65 billion Ponzi scheme had caught the SEC flatfooted though at least one part of the Commission had been aware of the Stanford case for years. Sen. Shelby was obviously unaware that there had been warnings about Madoff as far back as the late 1990s. “I believe this should mark the beginning of our review of this troublesome episode,” Sen. Shelby said, referring to Mr. Stanford. “We need to know exactly why evidence of this fraud was not more thoroughly pursued.” He added that Mr. Khuzami had brought to light “a colossal failure of the SEC.” Observers wondered why Sen. Shelby was so outraged. “Is he living on another planet?” asked one source. “Is this the first time it crossed his mind that the SEC is maybe a little slow off the mark?” Another open question: Why was no one fired because of the incompetent handling of the Stanford affair? It seemed a rhetorical question, given that no one was fired in the wake of the Madoff scandal, which was a much larger fraud. Lawmakers also expressed concern that the head of the Fort Worth division later offered to defend Mr. Stanford before the Senate committee. “It takes time for a culture to change,” Mr. Kotz said. “It takes time to trickle down the line.” In the meantime, the investing public will just have to wait on trickle-down ethics to kick in before trust is restored. ###

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Richard (RJ) Eskow: Wall Street Noir: Moody’s "Double Agent" Ratings

September 28, 2010

What happened to Moody’s is what happens to every “agent” who thinks he can serve two masters. The sad thing is that it keeps happening, even though we’ve seen this movie before. Credit rating agencies are supposed to monitor debt that’s issued by financial institutions and governments. It’s their job to protect investors from purchasing financial instruments that are misleadingly packaged or are riskier than the buyer can afford. These “agencies” hold extraordinary power — to destroy companies, to make people fabulously rich, even to influence governments. The problem is they’re not “agencies” at all. They’re for-profit companies who have their palms outstretched to the big banks for revenue even as they’re “policing” the soundness of their portfolios. Consider the recent checkered past of Moody’s, which holds a 40% market share in the worldwide credit rating business. Allegations have been raised about its CEO’s stock trading, harassment of a whistle blower, and intentional deception of the public for its own financial gain. It got everything wrong when it came to rating debt, despite reports it should have known all along. How is Moody’s handling the public shame caused by its ignominious failures? By lecturing the government on how to handle the disaster its own ratings helped to create. The Moody’s File The SEC declined to file fraud charges against Moody’s last month, not because they thought the “agency” was innocent — the evidence showed otherwise — but because it said there was a jurisdictional problem. As the SEC’s report made clear, Moody’s knew a number of credit ratings had been incorrectly rated too favorably. But rather than face the public embarrassment of admitting its mistake, Moody’s let the public believe the ratings were accurate. Moody’s looked the other way as investors were placed at risk, twiddling its thumbs and whistling to itself like a crooked cop ignoring a robbery. To conceal its mistake, Moody’s s-l-o-w-l-y let the numbers climb back to where they should have been all along. As the SEC makes clear in its report, there is substantial evidence that fraudulent behavior occurred and that investors were misled as a result. The report also presents evidence which shows that Moody’s misled the SEC itself, which is a violation of law. In the latest scandal, a firm that analyzes home mortgages just testified that it told banks that the mortgages they were bundling were a mess , with more than one in four failing to meet even basic underwriting standards — and they kept on doing it anyway. They told the rating franchises, too . But, as the head of the analysis firm observed, “if any one of them would have adopted it, they would have lost market share.” He can’t help it if he’s lucky As if Moody’s reputation wasn’t battered enough, there’s the matter of Kevin Hall of McClatchy Newspapers as follows: “If you look at his major sales in 2007, 2009, 2010, they are all around price peaks and followed by large declines. The likelihood that this is just ‘lucky’ is very low — it appears he is using inside information to time his trades.” Hall and McClatchy had been on the Moody’s story like white on rice, as the saying goes. The headline McClatchy gave to Hall’s October 2009 story, ” How Moody’s Sold Its Ratings — And Sold Out Investors ,” shows how strongly his editors backed his work. Senate panels and the Financial Crisis Inquiry Commission both began investigating Moody’s shortly thereafter, and the FCIC found it tough sledding. Both the FCIC and California Attorney General Jerry Brown found that Moody’s was dragging its feet on providing requested documents. The FCIC was forced to issue a subpoena, and Brown had to go to court to force compliance with a subpoena he had already issued. Revenue over research Moody’s drive to “always be selling” severely compromised its judgment, according to reports. As Hall reported last June , Moody’s executives described its former CEO as “getting in their face whenever they raised obstacles to rating a complex deal, often boasting that they weren’t the ones responsible for Moody’s surge in revenues.” “Agencies” like Moody’s don’t make money by generating accurate ratings. They make it by generating ratings that make the customer — the banks, funds, and insurance companies issuing these debts — look good. No wonder analysts were discouraged from raising red flags about risky deals. A review of emails and other documents generated by the Senate Permanent Subcommittee on Investigations provided more evidence of this pattern. As an internal PowerPoint showed, consultants who spoke with members of the group that rated the riskiest financial instruments found that they saw their roles as follows: Generating increased revenue. Increasing Market Share and/or Coverage Fostering good relationships with issuers and investors Delivering high quality ratings and research Just in case that didn’t make priorities clear enough, the consultants added: “When asked about how business objectives were translated into day-to-day work, most agreed that writing deals was paramount, while writing research and developing new products and services received less emphasis.” A “franchise,” not an agency That’s why the word “agency” is such a misnomer. It’s a word with multiple meanings, but in this case it suggests a quasi-government function. The FBI is an “agency.” The Environmental Protection Agency is an “agency.” Moody’s isn’t that kind of agency. You’d have to look to another definition , like “the capacity, condition or state of exerting power” or “an establishment engaged in doing business for another.” The analysts who placed “writing deals” above research aren’t “agents,” except for the high-stakes gamblers who pay their fees. Follow the money. McDaniel held a “town hall meeting” with employees as the economy was crashing around them, thanks in large part to the great ratings they and their colleagues had given to fraudulent products. He said “… my thinking is there’s a much greater concern about the franchise. Everyone in this room is a long-term investor (ed: presumably in Moody’s stock), for sure.” The raters all own stock in Moody’s and want “the franchise” to succeed. That’s not an agency. It’s a “franchise.” That’s why the company reportedly ” purg(ed) analysts and executives ” who warned that there was trouble coming. It’s why Moody’s and its competitors don’t want to be held liable for “recklessly” issuing bad information. It’s why they withheld their services at a crucial time because they didn’t want to responsible. Now an ex-employee is alleging they defamed him after he raised issues of fraud and inflated ratings internally, and then to investigators. Agencies don’t do that. Franchises do. Ending the rigged game Despite all the evidence, Moody’s is still treated as a credible player … and one that’s powerful enough to send a warning shot across the bow of the United States government . It threatened to downgrade the US government’s debt last March if more wasn’t done to reduce the government’s debt. That’s the kind of rigged game we’re facing: One of the biggest sources of the government’s debt is the economic collapse. That collapse was enabled in large measure by the bad ratings issuing by rating franchises like Moody’s. Now Moody’s wants to hamstring the government’s ability to repair the damage it helped create. And it might. They’re that powerful, and the system is that rigged. Imagine: Moody’s still holds enormous power because it can deny the government a AAA rating — the same rating it once freely gave to mortgage securities underwritten so badly that 28% of them were virtually worthless. It’s a classic film noir ending: The double agents, the cops on the take, they’re the ones who wind up having connections, the ones who seem to come out on top in the end. The Franken Amendment would slow down the profit-driven salesmanship of the ratings franchises. Good idea, but why stop there? Where are the prosecutions? And it’s time to consider shutting these groups down. You’ve seen this movie, too: everybody knows you can’t trust a double agent. _______________________________________________________________ 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.” Website: Eskow and Associates

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David Isenberg: Translating For Dollars

September 22, 2010

In my Sep. 14 post I wrote about what I considered to be false accusations against Mission Essential Personnel, which provides translators and interpreters to the U.S. military in Iraq and Afghanistan, as well as other government agencies. However, that is not to say that everything in that industry is fine. In fact, one would have to assume simply on the basis of the money that has been shoveled into the language translation and interpretation sector since the 9/11 attacks that there has been some waste and fraud. Like so many other aspects of private military and security contracting when you scale up your operations several fold and do not have proper oversight and accountability procedures problems are inevitable. Now as I am not particularly familiar with this sector I would normally not try to provide further detail. But fortunately for us there is Common Sense Advisory an independent Massachusetts-based market research company. Among its goals it helps innovate industry best practices in translation and interpreting. Last December it produced a report ” Language Services and the U.S. Federal Government: A Detailed Look at Uncle Sam’s Translation Spending Habits .” The report analyzed 20 years of federal government data, from January 1, 1990 through December 11, 2009. One of its very first points makes it easy to understand why doing proper oversight is easier said than done. Many large contracts fall under the “wrong” codes. The embedded linguists contract (W911W4-07-D-0001) to provide interpreting services in military settings, capped at US$4.6 billion for a five-year period to end in 2013, does not appear under typical translation and interpreting codes. The US$703 million contract (W911W4-07-D-0004) and the US$66 million contract (W911W4-07-D-0002) awarded for interpreting services in Afghanistan do not appear either. Instead, these contracts are listed under codes for “program management services” and “other management support services.” Federal government agencies spent a total of US$4.5 billion on translation and interpreting services from 1990 through 2009. However the bulk of that is clearly attributable to what happened after 9/11. The massive amount of spending on language services by the U.S. government is a relatively recent phenomenon – 92 percent of this expenditure (US$4.2 billion) took place in the past decade alone, from 2000 to 2009. In fact, 47 percent of this money (US$2.1 billion) was paid out to language service providers in the past two years. In 2001, the amount spent on language services more than doubled from the previous year, from US$67.6 million to US$160.51 million. Language services contracts continued to grow – in size and number – in the years that followed. Another dramatic increase took place in 2008, when total federal spending on language services doubled yet again, from US$453.69 million in 2007 to US$1.96 billion in 2008. Who were some of the top spenders? The top twenty included: Agency Amount spent on language services Department of the Army 2,587,428,206 Virginia Contracting Agency 385,380,319 * Drug Enforcement Agency 259,079,703 Department of the Air Force 146,783,605 U.S. Special Operations Command 140,192,216 Department of State 108,142,963 Department of the Navy 38,989,968 Agency for International Development 19,381,630 Federal Prison System 17,919,454 Defense Logistics Agency 14,367,629 * The Virginia Contracting Agency buys language services for the Defense Intelligence Agency. On average, these 20 organizations spent a cumulative amount of US$217.71 million per year on outsourced language services. However, if we remove the Department of the Army from the equation, the average amount drops to less than half that amount – US$92.99 million annually. In other words, the Department of the Army accounts for more than half (57%) of the federal government’s translation and interpreting spending. Historically, the Department of the Army has held the number one spot in terms of language services expenditures more years than any other organization – a total of 13 out of the 20 years reviewed. Thirty companies earned US$17 million or more by providing language services to the U.S. federal government over the past two decades. Very few of these companies operate in the commercial market. Some firms, such as Berlitz and Bowne Global, were absorbed into other Language Service Providers (LSP) through mergers and acquisitions. Others had multiple points of participation through other entities such as McNeil’s partner share in Global Linguist Solutions. Companies Contracts Obtained Amount Awarded 1 Global Linguist Solutions, LLC 55 1,051,646,448 2 Aegis Mission Essential Personnel, LLC 167 520,678,259 3 BTG, Inc. 164 303,879,709 4 TRW, Inc. 24 219,839,926 5 SM Consulting, Inc. 78 148,348,254 6 Shee Atika Languages, LLC 90 131,662,819 7 Berlitz International, Inc. 66 125,626,424 8 Allworld Language Consultants, Inc. 1,479 121,676,792 9 Northrop Grumman Corp. 203 114,704,525 10 Chenega Federal Systems, LLC 72 110,093,518 11 Techtrans International, Inc. 95 97,055,726 12 McNeil Technologies, Inc. 1,049 90,949,937 13 Bowne Global Solutions, Inc. 45 89,559,211 14 Metropolitan Interpreters & Translators, Inc. 3,319 82,710,784 15 Calnet, Inc. 177 73,549,486 16 BDM International, Inc. 30 67,181,105 17 Comprehensive Technologies, Inc. 1,793 53,544,848 18 Torres Advanced Enterprise Solutions, LLC 1,435 44,114,173 19 Worldwide Language Resources, Inc. 78 41,162,120 20 SOS International, Ltd. 1,927 38,742,384 21 Schreiber Translations, Inc. 507 27,799,608 22 ZKD, Inc. 23 27,727,100 23 Nangwik Services, LLC 13 26,800,435 24 Miscellaneous Foreign Contractors 2,583 26,013,382 25 Diplomatic Language Services, LLC 1,048 20,854,433 26 Thomas Computer Solutions, LLC 103 19,843,274 27 Stuart B. Consultants, Inc. 512 19,233,858 28 AM General Corp. 59 19,140,476 29 Lionbridge Global Solutions 31 18,096,563 30 MPRI, Inc. 18 17,742,553 Just to pick a few years at random, after a slight dip in 2002 compared to 2001, the government experienced an enormous increase in language services spending in 2003 to US$394.4 million, well more than triple the amount spent in 2002 (US$106.3 million). Nearly US$270 million of the 2003 total was generated by the Department of the Army, and another US$37.4 million came from the Virginia Contracting Agency By 2005, the word was out – more companies than ever were hovering like bees around the hive of federal government language services opportunities. Thirty-three companies earned more than one million dollars in language services. The final year of the two-term Bush administration ended with a bang – the federal government spent more than one billion dollars on language services in 2008. The Department of the Army spent the most (US$833.6 million), followed by U.S. Special Operations Command (US$51.6 million). These two agencies issued 827 contracts – on average, worth more than one million dollars each. The analysis by Common Sense Advisory shows that after the attacks of September 11, 2001, there was a sharp increase in spending on language services, followed by a decrease in 2005, after which the numbers rose again from 2006 through 2008. One of the most dramatic rises in the overall federal budget took place between 2007 and 2008. Interestingly, this was also by far the largest increase in the language services budget. Meanwhile, the defense budget grew at a more predictable and steady pace… Language services expenditures appear to be linked to both overall federal and defense spending. Those who believe in spending U.S. tax dollars in America can take heart that there is a strong tendency to “buy American.” Just over US$17 million in federal contracts were awarded to non-U.S. vendors from 1990 through 2009. Although buying American is a bit geographically restricted. Federal agencies tended to buy from U.S. suppliers, and the majority of these have offices right in the Washington, DC area or in neighboring Maryland and Virginia. In total, 52 percent of all contracts (24,727) over the 20-year period we analyzed went to DC-area providers. How does the future look for the industry? Quite good. The report says, “The lessons of the past 20 years are clear. For the most part, spending goes up every 12 months. Under Republicans, more of that outlay traditionally underwrites defense- and intelligence-related activities, but President Obama’s embrace of the “just war” theory anticipates at least equal spending in these areas for years to come.” There are lots of business opportunities for the canny company. The report concludes, “In summary, the past 20 years of federal government spending have been very kind to the world of language service providers. Globalization guarantees that the next two decades will be equally beneficial.”

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Expiring Tax Cuts Hit Taxpayers At All Levels

September 18, 2010

WASHINGTON — Here’s some pressure for lawmakers: If they don’t reach agreement on extending soon-to-expire Bush-era tax cuts, nearly all their constituents back home will get big tax increases. A typical family of four with a household income of $50,000 a year would have to pay $2,900 more in taxes in 2011, according to a new analysis by Deloitte Tax LLP, a tax consulting firm. The same family making $100,000 a year would see its taxes rise by $4,500. Wealthier families face even bigger tax hikes. A family of four making $500,000 a year would pay $10,800 more in taxes. The same family making $1 million a year would get a tax increase of $53,200. The estimates are based on total household income, including wages, capital gains and qualified dividends. The estimated tax bills take into account typical deductions at each income level. Democrats have been arguing for much of the past decade that tax cuts enacted in 2001 and 2003 under former President George W. Bush provided a windfall for the wealthy. That’s true, but they also reduced taxes for the working poor, the middle class, and just about everyone in between. Those tax cuts expire at the end of the year, setting the stage for a high-stakes debate just before congressional elections in November. If Congress fails to act, families at every income level will see more taxes being withheld from their paychecks come January. The tax cuts enacted in 2001 and 2003 reduced marginal income tax rates at every level. They also provided a wide range of income tax breaks for education, families with children and married couples. Taxes on capital gains and dividends were reduced, while the federal estate tax was gradually repealed, though only for this year. President Barack Obama wants to extend the tax cuts for individuals making less than $200,000 and joint filers making less than $250,000 in adjusted gross income. That’s income from wages, capital gains and dividends, before standard deductions and exemptions are subtracted. Republicans and a growing number of Democrats in Congress want to extend all the tax cuts, at least temporarily. On Thursday, House Republican Leader John Boehner of Ohio said he wants an up-or-down vote on extending all the tax cuts before congressional elections in November. “Raising taxes on anyone, especially small businesses, is the wrong thing to do in a struggling economy,” Boehner said. “On the issue of job killing tax hikes the American people are not going to accept anything less than the vote that they deserve.” House Speaker Nancy Pelosi, D-Calif., wouldn’t commit to vote on any tax proposals before the election. She did, however, pledge to address them by the end of the year. “The only thing I can tell you is that the tax cuts for the middle class will be extended this Congress,” Pelosi told reporters Thursday. More than half the country backs raising taxes on the richest Americans, according to a new Associated Press-GfK Poll. The survey showed that by 54 percent to 44 percent, most people support raising taxes on the highest earners. In a breakdown of the numbers, 39 percent agree with Obama, while 15 percent favor raising taxes on everyone by allowing the cuts to expire at year’s end. Still, 44 percent say the existing tax cuts should remain in place for everyone, including the wealthy. While Obama’s plan would spare about 97 percent of tax filers, it would mean big tax increases for the wealthy. Under Obama’s plan, a family of four making $325,000 a year would get a tax increase of $5,400, while the same family making $1 million a year would get a tax increase of $56,300, according to the analysis by Deloitte Tax. A family of four making $5 million a year would get a tax increase of $325,600. Pelosi said the nation cannot afford to extend tax cuts for top earners. “I see no justification for going into debt to foreign countries to underwrite and subsidize tax cuts for the wealthiest people in America,” Pelosi said. Making all the tax cuts permanent would add about $3.9 trillion to the national debt over the next decade, according to congressional estimates. Obama’s plan would cost a little more than $3 trillion over the same period. ___ Associated Press writer Laurie Kellman contributed to this report. (This version CORRECTS that family of four making $1 million would get a tax increase of $53,200, not $52,300.)

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Foreclosures Hit Record High in August

September 16, 2010

August saw more Americans lose their homes to foreclosure than any other month on record, RealtyTrac reported today. Banks repossessed a total of 95,364 properties in August, a 25 percent increase from the same period in 2009 and a 2 percent increase over this May’s previous record. Foreclosure filings of all types, including default notices, scheduled auctions and bank repossessions (the three major stages of the foreclosure process), increased to 338,836 in the month, a 4 percent jump from July. At the same time, though, the number of default notices that lenders issued to homeowners to initiate the foreclosure process actually went down. The August total of 96,469 was a 1 percent decline from July and a 30 percent drop from August of last year. It’s significantly lower than the April 2009 peak of 142,064 default notices issued. That the numbers of repossessed homes and default notices (respectively the last and first stages of the process) are converging demonstrates that banks are trying to mitigate the flow of new homes to the market. As Bloomberg reported Wednesday, the glut of housing inventory means home prices could decline for at least three years. Indeed, the number of properties with delinquent loans (30 or more days past due) that aren’t yet in foreclosure is currently 4,947,000, or 9.22 percent of all mortgage-financed homes, according to data from Lender Processing Services . The total number of foreclosed properties on the market, LPS says, is 2,038,000. It’s a bleak picture, but glimmers of hope emerge. The majority of Americans (at least, the majority of a 3,399-person sample) think the market has bottomed out, according to a survey released today by Fannie Mae . 47 percent of those surveyed said prices will remain flat for the next year and 31 percent predicted prices will rise. Even in such trying times, the majority of a 2,967-person sample of Americans say it’s “unacceptable” for homeowners to willingly walk away from a mortgage, according to a new survey from Pew Research Center . A whopping 59 percent of respondents condemn homeowners who choose to stop payments on “underwater” mortgages. According to the RealtyTrac data, Nevada and Florida led the nation in rates of foreclosure filings (including default notices, scheduled auctions, and repossessions) in August, despite year-over-year decreases in activity in both those states. One in every 84 Nevada homes received some form of foreclosure filing, compared to one in every 155 homes in Florida. Arizona, California and Idaho were right behind Nevada and Florida in the foreclosure rankings.

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