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Video: Epstein Says Disney’s `Toy Story 3′ Gets Profit `Award’

by on February 25, 2011

Feb. 25 (Bloomberg) — Edward Jay Epstein, author of “The Big Picture: Money and Power in Hollywood,” talks about the profitability of the film industry and the outlook for the Academy Awards on Feb. 27. He speaks with Lisa Murphy on Bloomberg Television’s “Fast Forward.” (Source: Bloomberg)

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Video: Epstein Says Disney’s `Toy Story 3′ Gets Profit `Award’

Richard (RJ) Eskow: Hank Paulson: Ex-Goldman Sachs CEO, Ex-Bush Treasury Secretary, and Ex-actly Right

by on February 17, 2011

Somebody said that regulators need real power in order to be tough and effective. He said a strong, independent consumer protection agency is needed to help prevent the next financial crisis. And that we should help the millions of “responsible” homeowners hurt by the crash, instead of demonizing them. This guy described Fannie and Freddie’s assets as “bullsh*t capital” — $5.4 trillion of it, with taxpayers on the hook and potential debtors that included China and France. He also said this about the whole notion of privatizing a government activity: “To me, if there’s a guarantee, they should be a (government) utility (rather than a private company) — why should people get wealthy off of a government guarantee?” So who is this socialist — Noam Chomsky? He’s Hank Paulson, former Goldman Sachs CEO and Bush’s Treasury Secretary during the 2008 meltdown. Paulson’s interview with the Financial Crisis Inquiry Commission may leave you wishing he was still in Washington. The clarity of his comments highlight the absurdity of those politicians who claim that the FCIC reached a “partisan” conclusion. Here’s a Wall Street powerhouse and GOP stalwart who’s saying the same things — and more. Paulson didn’t just express opinions to the FCIC. He also provided anecdotes that illustrate the real problem with Fannie, Freddie, and the entire “privatize government” movement: When you give government backing to people with private-sector incentives, very bad things happen. So as the media distracts itself (and us) with the power struggle between Democrats and Republicans, a conflict it insists on describes as the “left” versus the “right,” Paulson described problems and their solutions in ways that neither party’s leaders are willing to discuss. Paulson spoke to FCIC staff last April, and an internal memo summarized that conversation: Not enough regulation + no consumer protection = catastrophe Here’s how the memo summarized Paulson’s thoughts, under the heading “Sec. Paulson’s Evaluation of Root Causes of Crisis” (all emphases in these excerpts are mine): Sec. Paulson stated that the root causes of the crisis were housing policy in addition to the lack of regulation . He explained that many mortgages had big regulatory gaps and many mortgages issued in many number of states did not have an adequate regulator. Sec. Paulson recommended including in a regulatory blue print a consumer agency that focuses on consumer protection and a mortgage origination commission that evaluates the training and regulation that goes on a state level and will be able to evaluate the different programs so investors would be informed . [ pdf ] Look at what Paulson’s saying: We need more regulation (“regulatory gaps”) and more regulators. We need a “consumer agency that focuses on consumer protection” (we now have the Consumer Financial Protection Bureau — it was downgraded from an agency to a bureau by the Senate). We need better training and regulation at the state level (banks are now trying to overrule state regulations to escape the consequences of foreclosure fraud). Investors need to be better informed about where there investments are going (Mr. Paulson’s former company is, of course, a major offender in this area). How many of these ideas are being promoted today by either party? And about that “housing policy”: This may sound like the old right-wing theme that it’s over-reaching when government tries to help poor people, but that’s not what he’s saying. As I hear it, he’s saying that many people were encouraged to buy homes who would’ve been better off renting. The problem wasn’t that government was too activist, but that the “ownership society” idea (and other government policies, including taxation) used government to encourage over-borrowing by some homeowners, enriching financial speculators while creating needless risk for borrowers. A lot of innocent homeowners got hurt — and they weren’t getting enough help. Paulson held town hall-style meetings in hard-hit real estate markets like Burbank, Stockton, Orlando, Chicago, and Kansas City. “I was literally sickened in terms of what I saw in terms of what had happened to some people, the terms of the mortgages,” he told the FCIC staff. He added that “lending essentially shut down on the private side, so now we were in a situation where very responsible people who wanted to buy or refinance to prevent losing their homes under very reasonable terms were having difficulty doing so.” Paulson described his own efforts to get loans out to these homeowners, which met with strong resistance from Fannie and Freddie’s badly-incentivized executives. Since Paulson left office, the current Administration’s HAMP program has only helped a few hundred thousand people although an estimated eleven million homes are considered at risk for foreclosure, and HAMP has harmed many others through the “extend and pretend” phenomenon. Meanwhile the House is planning to eviscerate funding for all housing programs in the next budget. Ideological battles diverted Congress from the task at hand. It’s ironic how many politicians who get campaign money from Wall Street banks — banks which continue to collect billions in indirect government assistance — resist anything that might help homeowners, because American families who obtained mortgages from those banks are supposedly “undeserving.” From the FCIC memo: According to Sec. Paulson, the “march to reform” in 2008 was diverted because of “really what were inconsequential battles” in the House over the Hope for Homeowners legislation, which he called a “a flash point” in the debate about on one hand, bailing out irresponsible individuals, and on the other hand inflating the number of individuals it would actually help … the battle over the program delayed GSE regulatory reform from being accomplished. In other words, Representatives were trying so hard to score points by knocking homeowners that they delayed action on the big-picture reforms that were so desperately needed. Significantly, ten Republican on the House Financial Services Committee crossed party lines to join with Democrats in forwarding Hope For Homeowners to the floor of the House, proving once again that common-sense reform needn’t be and shouldn’t be a partisan issue. By privatizing Fannie and Freddie, we created a monster. Intentionally or not, Paulson paints the picture of a monster: A company run by private-sector sharks, backed by government guarantees but unwilling to help the government carry out its policy — and aggressively lobbying to undermine the very principles that led to its creation. From the FCIC memo: “I had been trying to work regulatory reform through Congress, the House was not a problem, the Senate was a big problem” … Sec. Paulson said that he felt it was necessary to get the GSEs on board with reform … “I wanted them [the GSEs] to reiterate in front of the Senators the commitment to raise capital,” Sec. Paulson said. “And also, we had figured out that we were not going to get regulatory reform done if they opposed it. They had a lot of contacts on both sides of aisle, and were enormously effective , and they had different views …” Here’s what Paulson doesn’t say: Like Sallie Mae , the institution created to issue government-backed student loans, Fannie and Freddie were privatized and then went on a lobbying rampage designed to undermine their very own mission in order to further enrich the executives in charge. Paulson ran into roadblocks when he tried to get these “government sponsored enterprises” to collaborate with the government during an emergency. “Regulators were downplaying [the capital situation],” said Paulson. “There was a little bit of regulatory capture going on, I think.” That’s an understatement: He’s referring to $5.4 trillion in loose securities that had the implicit guarantee of the Federal government. $1.7 trillion was held by foreign countries, and Paulson explains how messy it became when he tried to explain this illogical and risky public/private marriage to leaders from countries like China and France. From the memo: Sec. Paulson said that the enterprises had “flimsy capital” and he said that some people referred to it as “bullshit capital,” (the deferred tax asset, for example), and that the regulator had no discretion to use its judgment with respect to the level of capital. Added to that, the country promoted a policy where the companies were chartered by Congress, “try to go around the world and explain to one leader after another what this implicit-not-explicit government guarantee was about. To me, if there’s a guarantee, they should be a utility — why should people get wealthy off of a government guarantee? Regarding those regulators, Paulson’s putting it mildly. Fannie and Freddie’s overseers ” didn’t have the power of a normal safety and soundness regulator,” as he put it, adding: “I don’t want to leave Washington without there being some major attempt to make it better and get a regulator who was more power.” Overall, Paulson paints the picture of runaway enterprises that were designed to fulfill a government mission but structured to do what private corporations do – with the corrupting influence of government guarantees creating a recipe for disaster. The end result was almost inevitable: Overly aggressive and reckless officers, backed by a Board of Directors Paulson described as “cheeky” and uncooperative. Despite this experiences, what’s the most popular recommendation in Washington these days for reforming Fannie and Freddie? Making them even more “privatized.” Somebody really ought to listen to Hank Paulson. In fact, why not put him in charge of the SEC? I know, I know: He’s ex-Goldman. But hey, Joe Kennedy did a damned good job at the SEC under Roosevelt. This guy’s learned a thing or two, and we could use him now. Besides, nobody ever called Hank Paulson a socialist. 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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Richard (RJ) Eskow: Hank Paulson: Ex-Goldman Sachs CEO, Ex-Bush Treasury Secretary, and Ex-actly Right

Jeffrey Korchek: Are Studios Dead?

February 17, 2011

While it may be true that in the movie business nobody knows anything, although I imagine James Cameron begs to differ, what about other businesses? Steve Jobs seems to know exactly what we want in elegantly styled electronics products, even before we do and even if they aren’t quite perfect. Jeff Bezos knows how to sell us almost everything we want online — and we thought he’d never make it past books. And how about that guy at Groupon who just turned down $6 billion for a company that didn’t exist 3 years ago and has zero barriers to entry in its business plan — he must know something. Of course, you can forget about Jesse Eisenberg/Mark Zuckerberg — he knows, what, about 600 million somethings. So, what does this have to do with movie studios? Well, it’s possible that the General Motors model of a studio — to paraphrase Alfred P. Sloan, “a movie for every person and purpose” — where one studio and its executives try to make a steady stream of comedies, dramas, genre pictures and those $200 million-plus things that hold up tents, is over. With studios’ high overhead and proven inability to control costs on one hand, and the daily onslaught of new technology that takes their product from them in ways they can’t understand and pays them less per viewing on the other, the very model of a modern major studio may just be dead. It’s a mixed up muddled up shook up world if you’re a major studio; everything that should go up is just going down — movie admissions, cable TV subscribers, and most dramatically DVD sales — while the wrong things — motion picture production and distribution costs, Redbox rentals, internet streaming and Netflix’s share price — all keep going up. Only the steady rise in the average price of movie tickets — up 5% in 2010 over the prior year, keeping box office results flat while attendance fell 5.3%, makes the business seem in okay shape. But, it’s not. Especially if you plot rising ticket prices and falling attendance on the same x:y graph and think about where that ends up. In the past, when studios green-lit their movies, theatrical performance was always the variable with video revenue and cable output deals a given, escalating based on box office gross. But now, with DVD sales down 33% over the past four years and cable networks like Showtime less interested in studio output deals, how can a studio even begin to green-light a movie based on historical revenue assumptions that are unlikely to be accurate 12-18 months later when the picture comes out? The existing major studios are all part of very large corporations, so their continued existence is not in jeopardy. Their corporate parents may get tired of owning them, like General Electric, but a bad movie or a few years of them isn’t likely to put them out of business. And while now nearly everybody can make a movie (but not necessarily get it released) the major studios still do something that other movie companies can’t: produce, distribute and market motion pictures on a worldwide basis, in all possible media and, of equal importance, collect the money. What the major studios don’t seem to be able to do, however, is adapt their current business model to the new world. They’re still making a yearly portfolio of unrelated movies with decision-making done on an incremental basis, paying big participations on expensive star-driven pictures in success (maybe less first dollar gross but then it’s just a participation pool with a minimal or no distribution fee and 100% of video income thrown in), while owning all the failure. While studios can say that financing partnerships lessen their risk, they also lessen the upside, which is what you’re in the movie business for in the first place. It’s possible, then, that the better model is the one practiced by Apple, Amazon and yes, Jim Cameron: do what you do, do it better than anybody else in a way or volume that allows you to exact a premium, build brand loyalty and keep your competitors out. Apple, Amazon, Groupon and the Facebook, despite their different businesses — one sells stuff they make, one predominantly sells other peoples’ stuff, one allows other people to sell their stuff to people who otherwise wouldn’t buy it, and one allows everyone to sell themselves — have something very important in common: a direct relationship with their customers and customers’ affinity for their brand. Studios long ago ceded that relationship. Back when, when people actually went to the movies every week, that relationship existed and studios had individual identities. And they controlled all aspects of the motion picture process — the talent, the production, distribution and exhibition of the pictures and the publicity surrounding them. Those days, of course, are long gone for a variety of reasons: crushing overhead, the Justice Department, technology the studios didn’t control and lack of foresight. The world is a different place, and movies may just have a different place in it. For the large corporations that control the 6 remaining major studios, what is the maximum point of leverage, and therefore revenue potential: producing content or controlling its distribution? With the high cost of producing content, a studio wants to maximize distribution of its product to consumers, but some of the alternatives, Redbox rentals for $1 or unlimited streaming on Netflix for $9.99 a month and whatever Amazon may do generate relatively minimal revenue and commoditize the product that the studios spend so much to make. And here the movie business is unique as the cost of making movies is totally separate from the price at which they’re sold, and increased costs cannot be passed on to consumers. So as a studio you’re torn between getting your content out there in the form that consumers demand while trying to retain some control so you’re not, say, merely providing a loss leader to companies who’s main business is something else, like electronic devices. In the future, fortune will favor the content producers with direct access to consumers, especially in the home and through the electronic devices that serve as extensions of the home — News Corp. which controls Fox and Direct-TV, Comcast with its purchase of NBC-Universal and Disney with its network and cable channels and its brand that guarantees access and Apple in its back pocket (actually it’s the other way around). Warner, which recently spun off Time-Warner cable, has the sheer power of its size. Paramount and Sony are riskier; the former with less connection to the home and the later with a foreign parent preventing ownership of a network (Is it odd that we allow foreign governments to own a good part of our country through Treasury bonds and other investments but we won’t let them tell us what to watch?). Now, don’t let me go all Peter Bart on you but here’s a memo: what the movie business needs is a unified plan and someone to lead it. Where is the movie business’ Steve Jobs, the person who knows what people want to see before they do, knows that giving content away for free on the internet isn’t such a good idea and who creates excitement, brand loyalty and an enduring corporate culture? Or is the development and production process for movies just too attenuated so that what once seemed like a good/clever idea isn’t when it finally gets made and released? And, is it unrealistic to expect that the same group of executives can effectively manage a diverse slate of 20 pictures, year in and year out, especially given the cost of all that? Before, even without enlightened leadership we could count on the intersection of self-interest and money to secure a future for the movie business. But now, with so much uncertainty in the economy, turbulence in the distribution of motion pictures, reduced shelf space for DVD’s at Walmart and maybe no shelf space at Blockbuster, and with the stakes so high because of the costs, there is no safe harbor. While change may be a natural cycle of any market economy, the motion picture business has to be careful to not bring it upon itself. Schumpeter would call this “creative self-destruction.” To avoid this, there must be a consensus among studios, talent and their representatives and unions. The unanimity with which the studios generally approach union negotiations should be brought to bear on distribution windows, technical standards and other forms of distribution, as well as talent relationships, just so long as cooperation stops short of collusion. If a secure future for studios is no longer merely controlling a vast library, it must be controlling the destiny, and exploitation, of their product. And in that, what is the defining relationship? It is the one with the consumer. It’s what Apple has mastered with their products, their stores; their community. It’s what Netflix has done by making its streaming service available on over 100 platforms — truly Movies Everywhere. That’s what studios or their corporate parents need to create and if it’s not through their content, it’s through how that content is delivered to the consumer. Consumer products companies create that relationship through brands, reaching through the retail outlets for their product to consumers. But movies aren’t really brands (and neither are stars; they, like Soylent Green, are just people) — brands offer security, status by association and trust, not to mention premium pricing. Movies are individual products that have one weekend to make a first, and lasting, impression on their audiences. Studios risk their future by ceding the relationship with the consumer to all those who sell their product.

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Amongst So Many Trade Opportunities, We Need to Keep a Big Picture Perspective

February 12, 2011

Amongst So Many Trade Opportunities, We Need to Keep a Big Picture Perspective

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Dean Baker: Arithmetic and the Fannie/Freddie Fix

February 10, 2011

Arithmetic is a skill that is in short supply among economists in policymaking positions. The Obama administration is about to come out with its plans for replacing Fannie and Freddie. The word in the media is that the administration will propose a range of options, with one option maintaining a Fannie/Freddie type structure and one option going to a completely private system for the main sector of the housing market. (Presumably the Federal Housing Authority would remain in place even in the private system to provide credit to moderate income households.) The third option, that apparently many Washington policy wonks are smiling upon, is a hybrid system with private institutions buying mortgages with a government guarantee standing behind them. (Depending on the construction, the government may either guarantee the institution or the mortgage backed security — more likely it will be the latter.) According to a new paper by Moody’s, this sort of hybrid system will reduce the cost of a 30-year mortgage by 90 basis points (9/10ths of a percentage point) compared to a purely privatized system. The Moody’s analysis also calculates that it will raise house prices by 8 percent compared to a privatized system. There are some reasons for skepticism about the Moody’s estimates of the cost advantages of the hybrid system, most notably that the spread between jumbo mortgages, which are not bought by Fannie and Freddie, and conformable mortgages that go into the Fannie and Freddie pools has generally been just 25 basis points. Even in the current environment, it is just 75 basis points, so a spread between mortgage rates in a purely private system and hybrid of 90 basis points seems somewhat high. But let’s just take the Moody’s estimates at face value and have some fun with numbers. The median house price is currently around $170,000. Prices are still falling, but let’s assume for the moment that we freeze them at their current level. Let’s see what the picture looks like. I got the mortgage rates by assuming that the typical 30-year mortgage rate under the current system has been around 6.0 percent. The Moody’s paper assumes that it will rise by about 20 basis points under their hybrid system. This gives us a 6.2 percent rate. If we add another 90 basis points for the purely private system, we get the 7.1 percent rate shown above. So taking the estimates from the Moody’s analysis exactly as written, we find that the hybrid system will save the buyer of the median home about $8 a month on their mortgage. The basic story is that the benefit of the lower interest rate is largely offset by the fact that buyers will have to pay more money for their house. So, is it important to set up a whole new system of finance, with all the regulatory problems with which we are now quite familiar, in order to save homebuyers $8 a month on their mortgage? But wait, there’s more. One big obstacle to homeownership is the downpayment. In both cases we have assumed a 20 percent downpayment, the standard for a conformable mortgage. In the case of the private system this requirement means that homebuyers would need $31,280 in cash. In the case of the hybrid model, following Moody’s estimates, they would need to come up with $34,000 in cash. That might not be easy for many first-time buyers. But wait, there is still more. In most parts of the country people pay property taxes on their homes. Let’s assume that the tax rate is 1.0 percent, which is somewhere near the average. Let’s see what happens to those monthly payments now. Hmmm, now it looks like our homeowner comes out somewhat worse under the hybrid system. It seems that their savings on mortgage payments is more than offset by higher property taxes. This one is not looking really good. But, in the spirit of old-fashioned late night TV commercials, there is still more. The current value of residential real estate is around $16 trillion. if we take the Moody’s numbers at face value then it will fall by roughly $1.3 trillion to $14.7 trillion under the private system. The housing wealth effect is around 6 percent, meaning that an additional dollar of housing wealth leads to 6 cents in additional consumption each year. This means that this should lead to a decrease in annual consumption and an increase in annual saving of around $78 billion, a bit more than 0.5 percent of GDP. This would be a large increase in saving. While higher savings (and less consumption) would not be helpful at the moment, with the unemployment rate near 9.0 percent, when the economy is near full employment, higher savings means more investment and more growth, at least in standard economic models. And increasing savings by a half percentage point of GDP is a big deal. So, what have we learned about the relative merits of the private system and the hybrid model? Well the hybrid model will mean slightly lower monthly mortgage payments, but this benefit is likely to be offset by higher property taxes. The higher house prices in the hybrid model will mean that it will be more difficult for first-time buyers to come up with a downpayment. And, the wealth effect associated with the higher house prices in the hybrid model will mean lower savings and less growth. We could also point out that financial intermediaries (e.g. Goldman Sachs and J.P. Morgan) would stand to make more money on housing in a hybrid model, but there is no reason to get into such details.

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After Deluge of European Data Picture Starts to Look Brighter; German Unemployment Headlines

February 1, 2011

After Deluge of European Data Picture Starts to Look Brighter; German Unemployment Headlines

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Richard (RJ) Eskow: If Obama Moves Right He Loses Everybody — and Everybody Loses

January 19, 2011

The latest Democracy Corps/Campaign For America’s Future poll on jobs and the economy has a clear message for the president and his party: Stand up for jobs, and protect Social Security and Medicare. The results couldn’t be clearer. Yet it’s still rumored that the president’s State of the Union will emphasize deficit reduction over job creation, and the White House has refused to assure worried Democrats that the president won’t also propose cuts to Social Security. How many polls will it take to convince the White House that this is political suicide? How many expert analyses will it take to persuade them that its premature to make deficits the priority when the country desperately needs jobs and economic growth? The latest poll is based on interviews with 1,480 people who voted in 2008, and was conducted January 9 – 12. It strongly reinforces the findings of earlier polls: Voters overwhelmingly want their government to emphasize job creation and economic growth over deficit reduction, and they are opposed to cutting Social Security or Medicare. The bottom line? The president’s in danger of moving in a direction that will lose everybody he needs. Literally every demographic group he and his party needs will be alienated by a right-leaning set of policies. Voters Today Here’s how the picture looks today, by demographic group: Young voters will be considerably less eager to support Barack Obama in 2012, except in the unlikely event that his opponent is Sarah Palin. While he wins 64 percent to 29 percent of the youth vote in a match-up against Palin (which tellingly isn’t even as great as his poll showing against McCain), he only wins 54 percent of the youth vote against Mitt Romney, who hasn’t even begun to campaign. Support for Congressional Democrats among young voters is plunging, as the 63-18 percent difference drops to 50-39 percent in a hypothetical 2012 match-up. And these numbers don’t capture the lost intensity of support, either. After the 2008 election, the Obama team boasted that it had built an independent, youth-based team around its Internet lists that it could mobilize to win future elections. But the number of young voters plunged by more than half in 2010. 51 percent of voters aged 18-29 showed up in 2008, and that number plummeted to 20.4 percent last November. That’s even fewer than voted in 2006. The party’s lead in union households, another Democratic stronghold, has dropped from 37 points to 18 points. The president and the party still have some very strong relationships: suburban voters, unmarried women, and African Americans are still very solid. And the president’s negatives have dropped sharply since the election. But two core constituencies, the young and union members, are crumbling. The picture’s even bleaker among key groups of swing voters. Congressional Democrats are trailing by 23 points among white non-college voters, and Obama’s losing them to Sarah Palin by 22 points (and to Romney by 21). Obama’s losing white seniors to Palin by 8 points, to Romney by 25 points, and other Democrats are losing them by 16 points. Congressional Democrats are losing rural non-South white voters by 31 points, and Obama trails both Palin and Romney (losing to Romney by 26 points). So the question becomes, what should the president and Congressional Democrats do — and what shouldn’t they do — to improve their electoral chances? The Way Out The answer, as it turns out, is: The right thing. The rumored priorities for the State of the Union are exactly the opposite of voters’ priorities. When asked to name the two biggest problems right now, the overwhelming answer was “jobs and the economy.” Unemployment and outsourcing ranked first and second, with a total of 74 percent of respondents placing them in the top two. “Deficits” were included by only 18 percent; 18 percent said “wages have not kept up with the cost of living,” and 17 percent said “the economy is not growing.” The total blend of answers paints the picture of a country devastated by job loss and economic setbacks. In a similarly-structured question, 46 percent said Congress’ top priority should be “economic recovery and jobs,” 34 percent said “protecting Social Security and Medicare,” and only 15 percent said “reducing the size of the budget deficit.” Another 14 percent included “investing in new infrastructure and new industries” as one of their two top priorities. Should Social Security benefits be cut? White seniors said no, by 48 percent to 36 percent, and the “don’t cut” voters felt much more strongly about their position. White non-college voters said “don’t cut” by 55 percent to 35 percent. Voters in districts that turned Republican in 2010 opposed cuts by 57 percent to 34 percent. Even suburban voters were opposed, 60 percent-34 percent. The voters were strongly in favor (57 percent) of “a plan to invest in new industries and rebuild the country over the next five years.” By contrast, only 52 percent approved of “a plan to invest in new industries and rebuild the country over the next five years,” with less intensity of support than expressed by those who wanted investment. Other ideas sound good to voters until they’re told what’s involved: They liked the idea of adopting the recommendations of a “bipartisan deficit commission,” supporting it 56 percent to 19 percent. But when they were told what the recommendations were, they opposed them by 54 percent to 34 percent. 55 percent were opposed to raising the retirement age and 57 percent were opposed to reducing benefits for people now entering the workforce. Would this be a “move to the middle”? 52 percent of independents and 55 percent of Republicans oppose raising the retirement age. People under 50 oppose it by a 22-point margin, women oppose it by a 19-point margin, suburbanites oppose it by a 14-point margin, and people in districts the GOP picked up last year opposed it by 14 points. For other benefit cuts the opposition was even greater. The margins were 25 for under-50′s, 27 points for women, 26 points for suburban voters, and 23 points in GOP pick-up districts. So why are we still talking about this? Warning Signs These poll results show that a rightward move at the State of the Union would be disastrous, yet the signs are ominous. Robert Gibbs has indicated several times that deficit reduction will be a major theme of the speech. Now Christina Romer, a former administration economics official, is pushing the deficit line. In a New York Times op-ed called ” What Obama Should Say About the Deficit, ” Dr. Romer writes today that “My hope is that the centerpiece of the speech will be a comprehensive plan for dealing with the long-run budget deficit.” Romer continues: “The recommendations of the bipartisan National Commission on Fiscal Responsibility and Reform that the president created are a very good place to start.” That’s wrong on two counts: The bipartisan Commission never issued recommendations — it couldn’t reach the required majority — and the recommendations of its’ two co-chairs are harmful, anti-growth, and (as the polling has showed) extremely unpopular. This is the same Christina Romer who wrote another op-ed only ten weeks ago, also in the Times , called ” Now Isn’t the Time to Cut the Deficit .” Is this reversal the sign of some internal administration shift? Now Dr. Romer says that “the need for such a bold plan is urgent — both politically and economically. Voters made it clear last November that they were fed up with red ink.” (No, they didn’t, as this and many other polls have shown. This was a protest vote, more than anything else.) Why are deficits “urgent” economically? Dr. Romer explains: “At some point — likely well before 2035 — investors would revolt and the United States would be unable to borrow.” Jobless Americans might be stunned to learned that a possible investor revolt sometime within the next quarter-century, based on hypothetical scenarios, is more “urgent” than they are. Many economists would be equally surprised to learn that Dr. Romer doesn’t consider economic growth an effective way to cut the deficit. Many of the president’s advisors will argue that there’s a new political calculus and that he no longer has the horsepower to get spending measures through Congress. They’ll also point out that voters say they want cooperation and civility. Okay. But why can’t you explain what you believe will work? And since when did articulating an economic policy or defending Social Security become “uncooperative”? The Moment Before If the president moves to the right in this way, it would be a deeply cynical strategy — one that sacrifices his party and everything it’s represented for 75 years in order to win on celebrity likability and post-partisan “branding.” Worse, from his point of view, we now know it probably wouldn’t work. The numbers aren’t there. He would be proposing the wrong policies, at the wrong time, for the wrong reasons. And if the president’s advisors think that a deal on Social Security or deficits would give him the same boost that the tax deal did, they’d be sadly mistaken. The tax deal, whatever its flaws, put money in everybody’s pockets. Social Security cuts and austerity economics would take money out of those pockets. Sure, Republicans would cut a deal. Then they’d use it against him in 2012. Large segments of his base would turn away from him, or just stay home. Swing voters would register their disapproval of the deal by turning on him, as the public face of the “grand compromise.” We’re in a strange historical moment. The president’s about to give a speech that will define the future of his presidency — and our own personal futures — yet nobody knows what he will say. That’s odd and disturbing. For those who want to see the administration defend Social Security and strive to rebuild the economy, Washington seems to be moving in slow-motion. It’s like the scene in a science-fiction movie right before a world-changing event. You know the scene I mean, the one where the sky grows dark and the wind rises and everything becomes silent. You don’t know exactly what’s coming. But you know that afterwards nothing will ever be the same. 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 Strengthen Social Security campaign. Richard also blogs at A Night Light . He can be reached at “rjeskow@ourfuture.org.” Website: Eskow and Associates

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Jacob S. Hacker and Paul Pierson: The Great Disconnect

December 15, 2010

If an economic catastrophe befalls Americans and no one in power hears it, did it happen? That was the question raised by a new Yale/Rockefeller Foundation report released yesterday that looks at the economic experiences of Americans during the Great Recession. Since one of us (Hacker) was a coauthor, we obviously gave it extra attention. Yet the picture it painted — based on a two-wave survey between March 2008 and September 2009 — was only confirmation of what most Americans know: there’s a lot of economic pain out there. According to the report, more than 90 percent of Americans experienced at least one major economic “shock” during these 18 months: a substantial drop in wealth or income, a large increase in nondiscretionary spending (such as medical costs), or similar dislocation. Even if you ignore big wealth losses — ubiquitous because of the fall in the housing and the stock markets — roughly 7 in 10 Americans saw their earnings substantially decline or their nondiscretionary expenses substantially rise. Nearly a quarter saw their income fall by 25 percent or more. Even more worrisome, those who experienced these shocks were much more likely to report serious economic deprivation (going without food, housing, or medical care because of the cost). And this was true for middle-income families as well as the least advantaged. Indeed, more than half of families with incomes between $60,000 and $100,000 that experienced employment or medical disruptions reported being unable to meet at least one basic economic need. Against this backdrop, the tax-cut deal brokered by President Obama looks like very weak tea. Extended unemployment benefits are a vital lifeline that will encourage spending to revive the economy, and the temporary cut in payroll taxes will provide an important, albeit modest and short-lived, boost. But a huge chunk of the bipartisan deal is tax cuts that the Congressional Budget Office has judged singularly ineffective as economic tonic, including massive cuts for the richest of Americans and their heirs that will pile on future debt, exacerbate inequality, and crowd out other, more effective measures — all for little or no short-term economic gain. What about a major effort to create jobs to rebuild our crumbling roads, bridges, and transportation system? Nope. What about giving more relief to struggling states that are laying off teachers and first responders? Nada. Perhaps we could step up the implementation of the health care law to provide expanded Medicaid benefits during this weak recovery, when millions of Americans are still losing their jobs and health insurance. Are you kidding? That the tax-cut deal may well be the best that Obama could have gotten only makes the joke crueler. What’s wrong with our politics that so much hardship evokes so little response? At the event launching the Yale/Rockefeller foundation report, the panelists — Ezra Klein of the Washington Post , Larry Mishel of the Economic Policy Institute, and Stuart Butler of the Heritage Foundation — seemed genuinely puzzled by this question. Even Butler, an astute conservative thinker who saw the report as a chance to have a real conversation about the level and distribution of economic risk in the United States, appeared not to have a precise response. Two answers floated around the room. The first is that our political system is so dysfunctional that even political leaders deeply worried about what’s happening just don’t see any prospect for serious action. Klein fingered the Senate filibuster, which has showed its ugly head again and again during the lame-duck session. With an intense conservative minority in the Senate, everyone from the president to those peddling deficit-reduction proposals to liberal democrats simply assumes that nothing that involves direct job creation or serious public spending or increased revenues — even revenues gained by letting tax cuts expire — is feasible. But there was second hypothesis: Maybe a good chunk of the political class is just so insulated from the realities in the report that they don’t feel the same sense of urgency that most Americans do. Things are terrible on Main Street, but on Wall Street, Pennsylvania Avenue, and K Street, they don’t look so gloomy. How else can we explain why everyone in Washington was talking about deficit reduction (at least until they decided to blow another hole in the budget), even while polls show that Americans ranked it way, way below fixing the economy? It’s not clear which is scarier — that our leaders don’t think they can lead, or that they don’t want to. Either way, the middle-class economy keeps falling, and no one is there to hear it. Jacob S. Hacker and Paul Pierson are the authors of Winner-Take-All Politics: How Washington Made the Rich Richer–And Turned Its Back on the Middle Class

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The Hedge Fund Legend Who Got His Start Counting Cards In Vegas

December 8, 2010

Over at the Big Picture, Barry Ritholtz interviews Scott Patterson, the author of The Quants, a book on the math-driven traders who took over Wall Street. There’s a great back and forth about Ed Thorp, a guy who got a Ph.D. in math, invented modern card counting in blackjack, and went on to launch the first quant fund.

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Nelson Davis: What Small Business Owners Really Want

November 20, 2010

We are in that hazy netherworld that seems to sneak up on us near the end of every year. We wonder where the time went, what the New Year will hold and how we can take our enterprise to what we euphemistically call the next level. This year there is an extra bit of haze in the picture because the mid-term elections have sent a lot of rookies to various legislatures and embracing small business may not be their #1 priority. This is a good time to share some thoughts on what the business sector and small business in particular really want and need. I think that the biggest thing small business owners want from all levels of government is simply respect. With over 60% of all jobs created in the country coming from the small business community, won’t politicians and others simply say “nice job” to the men and women who hustle and risk every day to build and grow various enterprises. It is my contention that small business gets only lip service in the corridors of congress because the heavy hitter lobbyists represent other interests. That respect has to begin at the local level. Last week I received a nice note from Bob Foster, the Mayor of Long Beach California regarding a pilot program they’ve been working on for greater small business development. He and his council want more city contracts to go to small and even very small businesses. He says this will help generate job growth and sales tax revenue, and ensure that their tax dollars are spent locally. Are your local politicians building real bridges to entrepreneurs? If so, please let me know about it and be sure to thank them for it. The next thing the owner of a growing business wants to have is a clear set of rules regarding taxes, and health care costs that will hold steady for at least a few years. The top layer of clouds blotting out the sun for business is that a massive expansion of government has created an equivalent amount of uncertainty for the private sector. Uncertainty means that money goes to the mattress and many expansive thoughts are put away for a while. Big business in America is sitting on about $1.8 trillion in cash, waiting for a sign that the federal government won’t do a snatch & grab on their resources. Carl Schramm, head of the Kauffman Foundation in Kansas City has a clear idea about how the country can build a path to greater economic growth. In a Forbes Magazine interview he said “The single most important contributor to a nation’s economic growth is the number of startups that grow to a billion dollars in revenue within twenty years.” He went on to say that in the U.S. we need to see 75 to 125 of those billion dollar babies every year to feed a post WWII rate of growth. The owners of growing businesses need care, feeding and specific education on how to get where they want to go. From our twenty years of producing television stories of small business owners for Making It! we’ve seen about five (out of 1000) rise to the billion bucks level. They were all headed by hungry and even driven people who probably consume big dreams for breakfast! One of the exciting aspects of this for me is that this superstar level of entrepreneur comes from all known ethnicities and genders! Most business owners simply want to make an independent living that can take care of their families and help the kids through college. Many don’t have the iron constitution, discipline and raw ambition that it takes to go from very small to large, but that isn’t what they want. I know that you can find your own comfort level of enterprise building and it may have three, six or nine zeroes after the first three digits. Business owners don’t want to feel that they are being treated as pawns in some sort of class warfare. President Obama and his administration have acquired a reputation as being anti-business. A lot of the energy of the Tea Party seems to have come from small business owners who feel that Washington simply doesn’t understand them or their place in reviving the American economy. Politicians sometimes inject haves versus have-nots notes that imply business owners have some sort of unfair advantage. Some Wall Street barons may indeed have that advantage, but Main Street America certainly does not. Notice that I didn’t put easier loans or money in general on the wish list. Money has never been cheaper and it seems that loans for going enterprises are available. I believe that what small business owners really want is very much what all humans crave. That would be understanding, appreciation, encouragement and respect. Those ingredients are the food of dreams and no country can be great without entrepreneurs who harbor big dreams.

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Michael W. Hudson: Alan Greenspan, Animal House and the Scandal That Never Ends

November 19, 2010

As I’ve tried to make sense of the Robo-Signing, Document-Backdating Foreclosure Scandal That Never Ends , a couple of things have popped in my head: Animal House and Alan Greenspan. Stay with me here. Imagine Greenspan as Flounder, the callow freshman trying to pledge Delta House. The Delts persuade Flounder to loan them his father’s car, then take it on a spree, smash it up and return it much worse for wear. The only explanation they have for Flounder: “Hey, you fucked up. You trusted us .” Greenspan was no neophyte back in the 1980s when, between government gigs, he signed on as a consultant to Charles Keating’s Lincoln Savings and Loan. But he did seem to have a sense of innocence about him, that same starry-eyed idealism he’d possessed a few years before when he’d penned an article in Ayn Rand’s journal declaring that no company could afford to risk its “reputation for honest dealings and a quality product” by “letting down its standards for one moment or for one inferior product; nor would it be tempted by any potential ‘quick killing.’ ” As Lincoln Savings came under fire, Greenspan wrote a letter to regulators pronouncing the management of Keating’s S&L as “seasoned and expert.” The S&L, he said, was “a financially strong institution that presents no foreseeable risk” to the Federal Deposit Insurance Fund. Lincoln eventually perished in a conflagration of recklessness and fraud, costing taxpayers $2.66 billion. Now imagine Keating, before heading off to jail, taking Greenspan aside and explaining: “Hey, you fucked up. You trusted me .” In the for-real world, Greenspan told the New York Times : “I don’t want to say I am distressed, but the truth is I really am. I am thoroughly surprised by what has happened to Lincoln.” Despite his distress, the episode didn’t seem to have much of an impact on Greenspan’s thinking. As Fed chairman — the Dean Wormer, if you will, of the financial system — he still maintained a certainty that markets and bankers could be trusted to protect consumers and investors from fraud and folly. His inaction during the housing boom, many critics say, allowed predatory lending and wild speculation to cripple the economy. Greenspan is no longer in the picture. He spends his days as a sort of professor emeritus, explaining there was nothing he could have done to prevent what he calls a “once-in-a-century credit tsunami.” It’s hard, though, not to detect a whiff of Greenspanian idealism in the forces that have helped bring about the current controversy over the tactics used to speed the banking industry’s foreclosure machine. Foreclosure has traditionally been a laissez-faire activity. The feds have mostly left it up to the states to oversee foreclosures. Many state courts and administrative agencies, though, aren’t equipped to handle the flood of filings or to assess the propriety of the paperwork submitted by banks and other “loan servicers.” But why worry? Why worry whether brand-name banks will do the right thing when it comes to taking away people’s homes? Don’t they want to maintain “a reputation for honest dealings”? Why would they be tempted by the potential for a “quick killing” via foreclosure — instead of, say, modifying homeowners’ loans and helping to keep the stream of income from the loans coming in? There’s the problem. The banks often no longer own the mortgages they’re servicing. The rights have been sold off, through securitization, to investors around the world. The banks still service the mortgages, but they earn little simply collecting payments from month to month. The real money is in defaults: late fees, legal fees, inspection fees, pricey insurance. These add-ons can total thousands of dollars per loan, consumer groups say, and sink homeowners who are barely getting by so deep in default they have little chance of recovering. Which is why, consumer advocates claim, the honor system hasn’t worked well in terms of the Obama administration’s effort to get banks to rewrite borrowers’ loans on more affordable terms. It may also be why some banks may have given in to the temptation to flood courts with inaccurate or perjured documentation. The evidence suggests that the foreclosure scandal is more than a few procedural snafus. It’s a serious problem, driven by the “anything-goes” culture of fraud that’s permeated much of the mortgage industry over the past decade. Solving the problem will take more than putting banks on Double Secret Probation. It will take a change in philosophy: Trust — whether among frat boys or bankers and regulators — should be earned, rather than assumed. Michael Hudson is a staff writer at the Center for Public Integrity and author of THE MONSTER: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America – And Spawned a Global Crisis .

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The 14th Banker: Unsafe at Any Speed

November 17, 2010

When I first became aware of Ralph Nader , he was already considered a flake by the New Economic consensus that would shortly sweep Ronald Reagan into office. I would have laughed out loud if you had told me that 30 years later I would quote him. In the preface to his book, Unsafe At Any Speed , he says the following: This country has not been entirely laggard in defining values relevant to new contexts of a technology laden with risks. The post-war years have witnessed a historic broadening, at least in the courts, of the procedural and substantive rights of the injured and the duties of manufacturers to produce a safe product. Judicial decisions throughout the fifty states have given living meaning to Walt Whitman’s dictum, “If anything is sacred, the human body is sacred.” Mr. Justice Jackson in 1953 defined the duty of the manufacturers by saying, “Where experiment or research is necessary to determine the presence or the degree of danger, the product must not be tried out on the public, nor must the public be expected to possess the facilities or the technical knowledge to learn for itself of inherent but latent dangers. The claim that a hazard was not foreseen is not available to one who did not use foresight appropriate to his enterprise.” These words speak of legal and social developments in materials manufacturing going on 50 years ago. Yet it is striking that we have not achieved these most foundational values when it comes to another kind of manufacturing, the manufacture of financial products. The clock has completed its cycle on the day in which the Congressional Oversight Panel released its report on Mortgage Irregularities and the consequences for financial stability. In addition to documentation concerns, another problem has arisen with securitized mortgage loans that could also threaten financial stability. Investors in mortgage-backed securities typically demanded certain assurances about the quality of the loans they purchased: for instance, that the borrowers had certain minimum credit ratings and income, or that their homes had appraised for at least a minimum value. Allegations have surfaced that banks may have misrepresented the quality of many loans sold for securitization. Banks found to have provided misrepresentations could be required to repurchase any affected mortgages. Because millions of these mortgages are in default or foreclosure, the result could be extensive capital losses if such repurchase risk is not adequately reserved. The dawn will soon break in Europe, where volcanoes erupt with regularity. Today’s volcano is the Irish Debt Crisis and an apparent impending bailout or series of bailouts, this time more painful. I give you this link , not to endorse it’s assessment because frankly I don’t know. But the very fact that such extremity can be considered plausible and be posted to a highly reputable blog (not mine, Calculated Risk’s) paints the picture rather well does it not? So back to the quote from Ralph Nader’s preface. ”Where experiment or research is necessary to determine the presence or the degree of danger, the product must not be tried out on the public, nor must the public be expected to possess the facilities or the technical knowledge to learn for itself of inherent but latent dangers. The claim that a hazard was not foreseen is not available to one who did not use foresight appropriate to his enterprise.” I heard a commenter recently say that in financial services, “complexity is fraud”.  I am becoming inclined to believe him. Products have been introduced into the system which simply cannot be modeled by experiment or research. Yet they continue to be introduced, promoted, and defended by their issuers as well as those in government who have sold out to the industry. It is time for that to end.

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Mortgage Crisis Is ‘Cancer,’ ‘Slow Wasting Process,’ Analyst Says

October 22, 2010

The foreclosure crisis is slowly killing the nation’s economy, and the government has no idea what to do, analyst Christopher Whalen said on Bloomberg television (hat tip to the Big Picture ). Whalen, managing director of Institutional Risk Analytics, who earlier this month speculated the nation is only one quarter of the way through the foreclosure crisis , said the current situation is reminiscent of the early years of the Great Depression — both in the severity of the crisis and the inefficacy of the government response. “This is cancer. This isn’t a sudden crisis that’s going to erupt out of the ground like some monster trying to eat us. It’s a slow, wasting process,” Whalen told Bloomberg ‘s Mark Crumpton. “Barack Obama is walking in Herbert Hoover’s shoes. They’re making the same mistakes, almost unconsciously.” An unforeseen consequence of the crisis, he said, is the blow to property taxes. When people lose their homes, they stop paying property taxes, and with states and municipalities in serious debt trouble , this will only make the situation worse. Whalen predicted disunity between Federal and local governments. “We’re going to have state moratoria, the way we did in the ’30s,” he said. “The governors of those states are going to say, ‘Folks, stay in your homes, keep paying your property taxes, default on your mortgage. That’s Washington’s problem.’” It’s not just homeowners who are in trouble. Investors, Whalen said, should call their lawyers. In many cases, mortgage securities lack the notes that give investors their collateral. As Whalen put it, “the Street was very sloppy.” He discussed his own mortgage as emblematic. It was originated, he said, by Bank of New York and then sold to Lehman Brothers, who eventually packaged it in a security. But there’s no court record of that. “There’s an awful lot of investors out there who don’t know what they own,” Whalen said. “This is a much broader issue than just contract law.” WATCH the interview: value=”http://www.youtube.com/v/9_i9DO0BRdk?version=3″>

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Richard (RJ) Eskow: Pictures of MERS, Part 1: Corporate Documents Illustrate the Mortgage Shell Game

October 20, 2010

At the center of the foreclosure fraud crisis lies something called “MERS,” which is usually described in news reports as a computer system and database. But a thorough review of the company’s publicly available documents show it’s much more than that. We reviewed hundreds of pages of bulletins, newsletters, and manuals, along with PowerPoint presentations, user forums and other website material and several hours of training videos and other recordings. This is the first of a series of reports on what we found. As the following images show, MERS is a nebulous, database-driven entity created by the mortgage industry . It’s designed to let lenders swap mortgages electronically without being slowed down by inconvenient courtroom rules. MERS is “Digital Life” for mortgages, an electronic shell game that makes it hard to track the real party behind a loan. The company’s own publicly available documents paint the picture of a legal shapeshifter that appears before the court as the lender and title holder, then morphs itself into a mere service organization when it’s time to take responsibility. Who is MERS? Here’s a list of the owners: “MERSCORP” is an entity created by the mortgage industry, including the Mortgage Bankers Association (yes, that would be the same Mortgage Bankers Association that appears to have walked away from its own commercial real estate loan – after its CEO lectured homeowners on honoring their debts). The other owners are a who’s who of TARP recipients, HAMP violators, and known lawbreakers. “MERS Inc.” is a subsidiary of MERSCORP which was created for the sole purpose of acting as if it held the note on a home loan. Why do institutions use MERS? Here’s their pitch: Judges across the country might not be amused to learn that MERS promises”no recording or re-recording of assignments,” since that’s exactly the problem at hand. As for “ease of delivery into secondary markets” – that is, the bundling and re-selling of mortgages – there’s no question that MERS has enabled that. MERS provides the chips for the housing market casino. And as for the claim that there will be “no chain of title issues,” that’s a hard claim to defend now that Attorneys General for all fifty states are investigating the matter. Artificial MOMs There are at least two ways “MERS Inc.” (that synthetic company that’s a MERSCORP “subsidiary” becomes the mock holder of a loan, but the preferred way is to have lenders employ a “MOM” arrangement. MOM stands for “MERS as Original Mortgagee.” Some nerdy types may remember the sinister corporation run by an overlord named “Mom” in Futurama . While this “MOM” is also technology-driven, it’s essentially a legal device: In order to obtain their home loan, the lender demands that the borrower – that’s you, Mr. and Mrs. Homeowning American – “mortgages, grants, and conveys” their property to the vague “MERS Inc.” The homeowners agree that MERS “holds legal title” and has the authority to exercise all mortgagee rights, “including foreclosure.” So MERS owns the note, right? Not so fast: Got that? “No interests are transferred,” they’re “just tracked.” MERS “holds legal title,” but “no interests are transferred.” In other words, this virtual entity has all of the rights to act against homeowners, with none of the responsibility. The party facing you in a courtroom is not your legal adversary. They’re only pretending to be. Having a “MOM” doesn’t make MERS Inc. the genuine note holder any more than wearing a dress makes Norman Bates his own mother. “But Mother, she’s just a stranger …” If your home loan was produced with a “MOM,” the court has no record of who issued your original loan. If you need to challenge the legality of that loan, you’re dependent on MERS to tell you who the other party really was. When it comes to the title, the courts know nothing – and mother knows best. That can lead to a Catch-22 situation: When homeowners want to bring the lender to court, MERS is the entity that shows up. But MERS bears no legal responsibility: It didn’t issue the loan and can’t defend the transaction. And when homeowners or their representatives contact MERS, they’re told its not MERS’ responsibility to update the court records to reflect the true identity of the title holder. But that’s what the court record is supposed to show. “MERS Inc.” Is Everyone … and No One MERS Inc. – the title holder of record – is a legal entity. As far as the courts are concerned – at least the ones that have accepted its use they hold your note. But that’s a legal fiction. The real holder of the note is usually a bank you’d recognize – like Bank of America, Wells Fargo, JPMorgan Chase, or Citigroup. Who are the officers of this fictitious entity? “Designated officers of the servicers” are “elected” as officers of MERS so that they can act on behalf of their own company while pretending to act for this artificial one. “Loan servicers” are the companies that collect and process loan payments, and the big banks themselves act as loan service companies. As the Associated Press reported last year, Billions of dollars the government is spending to help financially pressed homeowners avert foreclosure are passing through — and enriching — companies accused of preying on the people they’re supposed to help.” These companies actually target people who are struggling to pay their bills, because they make more money from late fees. Who are the largest loan servicers? Bank of America, Wells Fargo, JPMorgan Chase. and Citigroup Inc. That’s right: The artificial corporation called “MERS Inc.” holds your note as a facade, and it could very well name as its officers the very same bankers who issued your loan in the first place. (Or, as we’re about to find out, not.) But in this case they’re officers of “MERS,” not their own organization. There have already been lawsuits against loan servicers for wrongful foreclosure, misrepresentation, breach of contract, conspiracy, violation of state debt collection laws, and predatory lending, just to name a few. It’s not as if we need another layer of obfuscation, confusion, and secrecy to further cloud the legal process. The owners of MERS are turning the corridors of justice into a hall of mirrors. The Judge Calls It Fraud Would a prestigious bank like JPMorgan Chase really deceive a court of law about ownership of a title? From a recent court ruling : ” “The court finds WAMU (now owned by Chase), with the assistance of its previous counsel, Shapiro and Fishman … knew that … WAMU never owned or held the note and Mortgage … the Court finds by clear and convincing evidence that WAMU, Chase and Shapiro & Fishman committed fraud on this Court … a knowing deception intended to prevent the defendants from discovery essential to defending the claim.” Chase was only the servicer for this loan, but it wanted to score a foreclosure so it pretended that it actually held the title on the loan. That’s the kind of deception that becomes vastly easier to carry out using the legal and electronic instruments provided by MERS. Was that why MERS was designed? They say no. MERS documents claim that the system was designed to provide transparency, consistent data, and a more streamlined system. It hasn’t worked out that way. __________________________ IN OUR NEXT EPISODE: How MERS “navigates through foreclosures.” We’d feel a lot better about their attitude toward struggling borrowers if one of their training videos didn’t use “Harry Homeowner” on “Poverty Lane” in Jacksonville as a test case. It doesn’t make it look as if sympathy toward struggling homeowners is their Number One concern: As you’ve probably guessed, there is no “Poverty Lane” in Jacksonville, FL – yet. _______________________________________________________________ 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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Donna Flagg: Why Dressing for Business Should Not Resemble a Visit to a Sex Club

October 19, 2010

This story gets worse by the minute. One more word from Ines Sainz and I think my head might explode. Just last week, she was once again in the press and making no sense. Actually, she was defending her appearance and her right to dress like a bimbo by saying, “I like to look good, but that in no way makes me any less dedicated to the sports journalism world … I’m proud of being a woman and I’m not shy about hiding it. However, this in no way makes me any less of a professional.” Uh, yes, Ines. Yes, it absolutely does. That’s the whole point. The fact that she dresses like she works in a night club (when she doesn’t) and thinks it’s not only okay, but appropriate, is exactly what makes her “less of a professional.” No one in the business world says we need to hide that we are women, at least not that I know of. But, let’s face it. Boobs all up in everyone’s face and pants painted on in no way help the general public register the extent to which one belongs to the female gender, or not. The other thing that utterly escapes me is her proclamation that she will no longer enter the locker rooms due to this whole scandalous mess with the big bad Jets. Ahem. Isn’t that her job? Isn’t that the job of every sportscaster who interviews athletes? What makes her think that dressing like a floozy excuses her from the basic core function of her role? I mean, could this get anymore screwed up? Who decides for themselves, within an organization the size of the NFL, that they will be the exception to the rules by which everyone else plays? We call that a bonafide qualification (BFOQ) of the job and if you can’t do it, then you can’t do the job. Over and out. It’s like your average, everyday person saying to his or her boss, “I’m not doing my weekly reports anymore. Tough nuggies.” Is she joking? Granted, she is a smokin’ hot sportscaster … and by the looks of the way she walks around, she knows it and she needs the rest of the world to know it too. Still, it was the Jets who got dinged for making her feel uncomfortable? Gimme a break. An article in The Daily News shortly after the “incident” quoted Sainz as saying that the reason she was no longer going to go into the locker rooms was because she didn’t want to “be the focus.” Bulls**t. Has anyone actually seen what this woman wears to work? It’s laughable. I mean that, in a Jessica Rabbit caricature sort of way. Then we had the Jets whose coach offered a personal and genuine apology and I’m left asking, “What is wrong with this picture?” It is not she who owes the Jets an apology for walking into their locker room, of all places, so scantily clad? Here we have everyone tiptoeing around poor Ms. Sainz’s sensibilities and defending her right as a woman to sexualize herself and dress any way she damn well pleases, in the name of what? Feminism? Please. That’s the same argument they make in the sex and prostitution industries, which I suppose goes precisely to the heart of the matter. Dressing for sex in a sex club is totally appropriate. Not so in spectator sports, however. I’m sorry, in business life, being judged on what you wear and how you present yourself is a reality to which everyone is subjected, Ms. Sainz and her revealing, suggestive, man-teasing outfits not withstanding. Presumably, we all go to work to get paid for the job we’ve been hired to do, women and men alike. Imagine if a man came to work in a Speedo all greased up and muscular. People would wonder. And not only that, he would be told to put some clothes on. A wise woman once told me that it was best to be attractive, but not attracting, when dressing professionally for work. What a simple and profound concept it was. Perhaps a tidbit Ms. Sainz might like to take to heart. There is a subtle, but significant difference. Sexing it up versus being pleasant to look at tell two very different stories about a woman. Women do, and will continue, to get a bad rap when they appear as though they are trying to attract, and therefore manipulate, men by exploiting their “assets.” Whether they actually are or not is irrelevant. It’s the impression they make and an inescapable one at that. Sorry girls, slutty just does not fly if you want to be taken seriously. Image: iStockphoto

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Marshall Goldsmith: What Is the Truth About Leadership? (Part 2 of 2)

September 24, 2010

In my last blog, I posted excerpts of my interview with Jim Kouzes, co-author with Barry Posner of the award-winning, well-known, and classic book, The Leadership Challenge . Jim and Barry have written a new book called The Truth about Leadership , and recently I had the opportunity to ask Jim a few questions about his and Barry’s new book. Following are excerpts from our discussion. MG: Who are some modern-day leaders who inspire you personally? JK: The everyday leaders who step up to the leadership challenge inspire me daily. These aren’t the folks who are well known or who make the headlines or the covers of magazines. They’re the line managers, principals, coaches, community leaders, local officials, youth leaders, and others, who are taking the initiative to turn around a losing operation, or renew a decaying neighborhood, or create a winning team, or start a new business, or organize young people to plant trees. These are the leaders we mostly write about in our books, and they are the ones who give us hope and uplift our spirits. It’s these leaders who will restore our confidence and our economy. The truth is that you can make a difference. Over the last couple of years, we’ve analyzed data from over a million people around the globe to assess the practices of leaders. The numbers reveal that the behavior of leaders explains more about why they feel engaged and positive about their workplaces than any particular individual or organizational characteristic. Factors like age, gender, ethnicity, function, position, nationality, organizational size, and the like, together account for less than one percent of the reason that people feel productive, motivated, energized, and the like in their workplaces. The leaders’ behaviors, on the other hand, explain nearly twenty-five percent of the reason. Leadership is not about who you are or where you come from. It’s about what you do. Here’s something else to consider. For a long time now we’ve been asking people about the leader role models in their own lives. Regardless of age, when thinking back over their lives and selecting their most important leader role models, people are more likely to choose a family member than anyone else. Mom and Dad, it turns out, are the most influential leaders after all. In second place, for respondents thirty years of age and under, is a teacher or coach, and the third spot goes to the community or religious leader. For the over-thirty crowd, business leader is number two. But when we probe further, people tell us that business leader really means the person who was an immediate supervisor at work, not someone in the C-suite. In third position is teacher or coach. And in the fourth spot are community and religious leaders. What do you notice about the top groups on the list? You should notice that they’re the people you know well and who know you well. They’re the leaders you are closest to and who are closest to you. They’re the ones with whom you have the most intimate contact. And they’re the people you meet early in your lives. MG: Are you concerned about the decline of leadership as baby boomers prepare to retire in large numbers? JK: I am not the least concerned about the younger generation waiting in the wings. They are much better prepared to lead than their parents were when they joined organizations as new recruits. They’re more likely to have participated in leadership development programs and been active in leadership roles. In fact, most college campuses now have very active youth leadership development and service leadership programs. Because of this, young people today are better prepared than their parents were to assume leadership roles in organizations. They are also more skilled in the use of the new social media technologies that are changing the nature of organizations. These tools have the potential to make organizations more open, more collaborative, more innovative, and more adaptable than ever before. What does concern me is that the current economic crisis has postponed the inevitable transition from older to younger leaders. By necessity, older managers are staying in their jobs longer, and not necessarily investing in their own learning. It’s discouraging for the emerging leaders, who tend to be more impatient anyway, to see their progress slowed. I’m also concerned about those organizations that have significantly decreased investment in leadership development during this recession. The research indicates that not only are skills greater in organizations where people feel someone cares about their development, but their confidence in the economy is greater. That’s a very significant and profound discovery. Paying attention to the development of people inside the organization can actually influence their attitudes about the larger economy. Now that’s the kind of stimulus program we could all use. MG: A significant number of young people are starting and running successful businesses, Mark Zuckerman of Facebook for example, what advice do you have for young, influential, but inexperienced executives like Mark Zuckerman? JK: Mark Zuckerman and his entrepreneurial colleagues are extremely bright and capable people. They are changing organizations, and they are changing the world. I use Facebook, YouTube, Twitter, and other of these new technologies every day, and I am grateful that young people take the initiative to start these businesses. The world would be a whole lot smaller, and the economy would be a lot less global if they hadn’t. So, the first thing I’d say to them is “Thank you.” And, I also recall something Florida State University professor Anders Ericsson, the leading expert on expertise, said. He once commented that “Living in a cave does not make you a geologist.” It’s a wonderfully instructive observation. You can spend years inside a business, and not necessarily become an expert at running it. I’d advise them that there are seasoned leaders out there who can help them. Every world-class athlete, for example, has a coach. Every world-class business leader should also have a coach who can give them honest feedback, the unvarnished truth about their strengths and weaknesses, and wise advice and counsel on what it’ll take to become a truly exceptional leader. I would also tell them that the truth is you can’t do it alone . No leader ever got anything extraordinary done without the talent and support of others. You need others and they need you. You have to be sensitive to the needs of others. You have to listen, ask questions, develop others, provide support, and ask for help. Truly inspirational leadership is not about selling a vision; it’s about showing people how the vision can directly benefit them and how their specific needs can be satisfied. What people really want to hear is not the leader’s vision. They want to hear how their dreams will come true and their hopes will be realized. They want to see themselves in the picture of the future that the leader is painting. The vast majority of people want to walk with their leaders. They want to dream with them. They want to invent with them. They want to be involved in creating their own futures. This means that you have to stop taking the view that visions come from the top down. You have to stop seeing it as a monologue, and you have to start engaging others in a collective dialogue about the future.

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Ian Fletcher: Economics vs. Fakeonomics

September 16, 2010

We skeptics of free trade are used to being told, “You don’t understand economics.” In fact, one major reason I wrote the book Free Trade Doesn’t Work was simply to expose, once and for all, that there do exist extremely serious and intellectually reputable arguments, within the confines of accepted mainstream economics, which question free trade. And indeed they exist. But I’ve noticed something. We skeptics are often not really struggling against real economics at all. When I pick up a copy of the Wall Street Journal , or Forbes , or the New York Times , or turn on Fox TV or MSNBC, or read papers issued by the libertarian Cato Institute or the Peterson Institute for International Economics, I don’t even find economic arguments. I find a mischievous substitute for economics we can call “fakeonomics.” What is fakeonomics? It sounds like economics to the uninitiated. It uses the same language, addresses the same issues and fills the same logical hole in the national policy discourse. Most people can’t tell the difference. But fakeonomics is not the real thing. How is fakeonomics fake? It tells a story that goes something like this… • Free markets are always right, always and everywhere. • Anyone who doesn’t believe this is stupid. Smart people not only understand that free markets are best, they like free markets, because free markets mean opportunities to get rich. • Or maybe they’re corrupt. The opposite of free markets is government. Government is always incompetent. It never does anything right. Ever. • Or maybe they’re evil. Anyone who doesn’t believe in perfectly free markets is a Marxist wannabe or a loser jealous of more-successful people. • Free trade is just free markets applied internationally. • Therefore all smart, good, successful people must believe in free trade. Unfortunately, fakeonomics is at best a crude parody of economics. It is often larded with a thick layer of moral hectoring, courtesy of a certain variety of the American Right which seems to think that economics is its exclusive property, a stick given it by God to beat liberals with. There is even a whole class of people, known as “libertarians” who elevate fakeonomics to the level of an all-encompassing moral ideology. (Their fundamentalist sect is the old Ayn Rand cult, who call themselves “objectivists.”) So let’s be clear about one thing: real economics does not support the idea that 100 percent pure free markets are best. Not domestically, not internationally. That’s why the U.S. has, like every other developed nation, a mixed economy, with government amounting to about 35 percent (pre-2008; it’s spiked since then) of our GDP and various laws, from child labor laws to environmental laws and the SEC, regulating much of the rest. It’s easy to fulminate against this fact in beautiful after-dinner speeches about economic liberty, but the reality is that when in office, even conservative Republicans grasp the necessity of most of these policies — whatever adjustments on the margin they may make. Surveys indeed show that about 90 percent of economists support free trade. But, and this is crucial, only about 70 percent of them support it without reservation . Economists are, in fact, well aware of a number of problems with free trade, like: • Free trade for America is one-sided, with most major foreign economies practicing managed trade of one kind or another. • When free trade involves trade deficits, it may be optimal in the short run but is unsustainable over longer time horizons. • Even if it increases GDP, it has even stronger effects on income distribution and can thus harm many, or even most, of the people in the economy. • The adjustment costs of declining industries — from unemployment checks to the rubble of Detroit — are huge and ongoing. • It brings us cheap goods today at the price of building up economic rivals who will take markets away from us tomorrow. • It helps dirty industries move from environmentally-strict jurisdictions to environmentally-lax ones. • Even if it is efficient in the short run, efficiency per se has little to do with long-term economic growth. • The theory of comparative advantage — which supposedly proves that free trade guarantees win-win outcomes — doesn’t hold in the presence of capital mobility between nations. None of the above is especially new information, though these points are legitimately controversial like anything else. My point here is simply that economics does not grant free trade the blank check many people seem to think it does. Nonetheless, the juggernaut of fakeonomics, which doesn’t understand this, rolls on. The really scary thing about fakeonomics is that it is not just a vulgar version of economics, served up to amuse the audience of Bill O’Reilly’s TV show. It is also believed in by people who should know better. Like it or not, fakeonomics is mistaken for real thinking by a disturbingly large number of people with top MBAs, graduate degrees in serious fields, congressional staffers, et cetera. (I know; my job obliges me to talk to these people all the time, and they tell me so.) Perhaps it’s just laziness on their part, but people who should be taking their bearings from more serious sources — people whose careers depend upon the idea that they have genuine expertise — are drawing their ideas from fakeonomics. These are people who pride themselves on understanding the most sophisticated ideas when it comes to, say, corporate finance, but here they are, relying upon intellectual constructs of a chat-show level of sophistication. Make no mistake: Fakeonomics matters. For one thing, it is the implied theoretical model of current U.S. trade policy. That is to say, if one looks at American trade policy and asks what picture of the economy one would have to hold in order to believe that these policies make sense, fakeonomics is that picture. So whatever sophisticated version of real economics someone like ex-Harvard professor Larry Summers may have tucked away in his head somewhere, when he acts as economic adviser to President Obama, fakeonomics is what he dishes out. One can, of course, gin up rationalizations bridging the gap between real economics and fakeonomics on any given issue at will. So there’s no point confronting people like Larry Summers with the gap between, say, their own theoretical writings and the policies they support in office. If they weren’t bright enough to pull off a piece of minor casuistry like that, they wouldn’t be where they are in the first place. Why are the nominally sophisticated so misguided? Because fakeonomics tells them what they want to hear. At bottom, fakeonomics is the ultimate free lunch story. Its seductive message is that we can consume all we want, right now , and never worry about the consequences. “Free” trade translates as “don’t worry about” trade. The market forgives all sins. Unfortunately for this happy fantasy, fakeonomics can only maintain this fantasy vision by systematically ignoring half of economic reality. It is, for one thing, almost exclusively focused on consumption, ignoring the production side of the economy. So it has plenty to say about how cheap imports provide consumers lower prices, but blithely airbrushes out of the picture the way imports deplete our industrial base. Of course, in the long run, nobody can afford imports, however cheap, without the ability to produce something to exchange for them. But that, of course, is the long run, and fakeonomics is about instant gratification and letting the chickens come home to roost in the next administration. What does all this mean? It means that there are really two targets, for those of us who would criticize free trade. There is economics per se , which tends to be pro-free trade, but is actually surprisingly well aware of the counterarguments and becoming slowly but inexorably more skeptical. And there is fakeonomics, which is dogmatically pro-free trade, proactively ignorant of the counterarguments, and determined to stick its head in the sand. Shooting at the first target does almost nothing, unfortunately, to hit the latter, which is arguably more important, at least in the short run, for determining real-world policy outcomes. As a result, the first question one must ask when querying some piece of economic reasoning offered as justification for policy is this: is it real? Or is it fakeonomics? Ian Fletcher is the author of the Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, 2010, $24.95) An Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council , a Washington think tank founded in 1933, he was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net .

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Ian Fletcher: Economics vs. Fakeonomics

September 16, 2010

We skeptics of free trade are used to being told, “You don’t understand economics.” In fact, one major reason I wrote the book Free Trade Doesn’t Work was simply to expose, once and for all, that there do exist extremely serious and intellectually reputable arguments, within the confines of accepted mainstream economics, which question free trade. And indeed they exist. But I’ve noticed something. We skeptics are often not really struggling against real economics at all. When I pick up a copy of the Wall Street Journal , or Forbes , or the New York Times , or turn on Fox TV or MSNBC, or read papers issued by the libertarian Cato Institute or the Peterson Institute for International Economics, I don’t even find economic arguments. I find a mischievous substitute for economics we can call “fakeonomics.” What is fakeonomics? It sounds like economics to the uninitiated. It uses the same language, addresses the same issues and fills the same logical hole in the national policy discourse. Most people can’t tell the difference. But fakeonomics is not the real thing. How is fakeonomics fake? It tells a story that goes something like this… • Free markets are always right, always and everywhere. • Anyone who doesn’t believe this is stupid. Smart people not only understand that free markets are best, they like free markets, because free markets mean opportunities to get rich. • Or maybe they’re corrupt. The opposite of free markets is government. Government is always incompetent. It never does anything right. Ever. • Or maybe they’re evil. Anyone who doesn’t believe in perfectly free markets is a Marxist wannabe or a loser jealous of more-successful people. • Free trade is just free markets applied internationally. • Therefore all smart, good, successful people must believe in free trade. Unfortunately, fakeonomics is at best a crude parody of economics. It is often larded with a thick layer of moral hectoring, courtesy of a certain variety of the American Right which seems to think that economics is its exclusive property, a stick given it by God to beat liberals with. There is even a whole class of people, known as “libertarians” who elevate fakeonomics to the level of an all-encompassing moral ideology. (Their fundamentalist sect is the old Ayn Rand cult, who call themselves “objectivists.”) So let’s be clear about one thing: real economics does not support the idea that 100 percent pure free markets are best. Not domestically, not internationally. That’s why the U.S. has, like every other developed nation, a mixed economy, with government amounting to about 35 percent (pre-2008; it’s spiked since then) of our GDP and various laws, from child labor laws to environmental laws and the SEC, regulating much of the rest. It’s easy to fulminate against this fact in beautiful after-dinner speeches about economic liberty, but the reality is that when in office, even conservative Republicans grasp the necessity of most of these policies — whatever adjustments on the margin they may make. Surveys indeed show that about 90 percent of economists support free trade. But, and this is crucial, only about 70 percent of them support it without reservation . Economists are, in fact, well aware of a number of problems with free trade, like: • Free trade for America is one-sided, with most major foreign economies practicing managed trade of one kind or another. • When free trade involves trade deficits, it may be optimal in the short run but is unsustainable over longer time horizons. • Even if it increases GDP, it has even stronger effects on income distribution and can thus harm many, or even most, of the people in the economy. • The adjustment costs of declining industries — from unemployment checks to the rubble of Detroit — are huge and ongoing. • It brings us cheap goods today at the price of building up economic rivals who will take markets away from us tomorrow. • It helps dirty industries move from environmentally-strict jurisdictions to environmentally-lax ones. • Even if it is efficient in the short run, efficiency per se has little to do with long-term economic growth. • The theory of comparative advantage — which supposedly proves that free trade guarantees win-win outcomes — doesn’t hold in the presence of capital mobility between nations. None of the above is especially new information, though these points are legitimately controversial like anything else. My point here is simply that economics does not grant free trade the blank check many people seem to think it does. Nonetheless, the juggernaut of fakeonomics, which doesn’t understand this, rolls on. The really scary thing about fakeonomics is that it is not just a vulgar version of economics, served up to amuse the audience of Bill O’Reilly’s TV show. It is also believed in by people who should know better. Like it or not, fakeonomics is mistaken for real thinking by a disturbingly large number of people with top MBAs, graduate degrees in serious fields, congressional staffers, et cetera. (I know; my job obliges me to talk to these people all the time, and they tell me so.) Perhaps it’s just laziness on their part, but people who should be taking their bearings from more serious sources — people whose careers depend upon the idea that they have genuine expertise — are drawing their ideas from fakeonomics. These are people who pride themselves on understanding the most sophisticated ideas when it comes to, say, corporate finance, but here they are, relying upon intellectual constructs of a chat-show level of sophistication. Make no mistake: Fakeonomics matters. For one thing, it is the implied theoretical model of current U.S. trade policy. That is to say, if one looks at American trade policy and asks what picture of the economy one would have to hold in order to believe that these policies make sense, fakeonomics is that picture. So whatever sophisticated version of real economics someone like ex-Harvard professor Larry Summers may have tucked away in his head somewhere, when he acts as economic adviser to President Obama, fakeonomics is what he dishes out. One can, of course, gin up rationalizations bridging the gap between real economics and fakeonomics on any given issue at will. So there’s no point confronting people like Larry Summers with the gap between, say, their own theoretical writings and the policies they support in office. If they weren’t bright enough to pull off a piece of minor casuistry like that, they wouldn’t be where they are in the first place. Why are the nominally sophisticated so misguided? Because fakeonomics tells them what they want to hear. At bottom, fakeonomics is the ultimate free lunch story. Its seductive message is that we can consume all we want, right now , and never worry about the consequences. “Free” trade translates as “don’t worry about” trade. The market forgives all sins. Unfortunately for this happy fantasy, fakeonomics can only maintain this fantasy vision by systematically ignoring half of economic reality. It is, for one thing, almost exclusively focused on consumption, ignoring the production side of the economy. So it has plenty to say about how cheap imports provide consumers lower prices, but blithely airbrushes out of the picture the way imports deplete our industrial base. Of course, in the long run, nobody can afford imports, however cheap, without the ability to produce something to exchange for them. But that, of course, is the long run, and fakeonomics is about instant gratification and letting the chickens come home to roost in the next administration. What does all this mean? It means that there are really two targets, for those of us who would criticize free trade. There is economics per se , which tends to be pro-free trade, but is actually surprisingly well aware of the counterarguments and becoming slowly but inexorably more skeptical. And there is fakeonomics, which is dogmatically pro-free trade, proactively ignorant of the counterarguments, and determined to stick its head in the sand. Shooting at the first target does almost nothing, unfortunately, to hit the latter, which is arguably more important, at least in the short run, for determining real-world policy outcomes. As a result, the first question one must ask when querying some piece of economic reasoning offered as justification for policy is this: is it real? Or is it fakeonomics? Ian Fletcher is the author of the Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, 2010, $24.95) An Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council , a Washington think tank founded in 1933, he was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net .

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Richard (RJ) Eskow: Coup d’Etat: Standard & Poor’s Is Now Giving Orders to Congress … and the American People

August 30, 2010

There’s been a lot of talk recently about the enormous power that’s been given to the Deficit Commission, which is co-chaired by Alan ” Social Security recipients are milking it ” Simpson and dominated by people who have advocated cuts to Social Security and Medicare. But here’s an aspect of the story that’s gone unremarked: Standard & Poor’s, the credit agency whose reputation should rightfully have been shattered by the economic crisis, is now dictating policy to the United States government. S&P just put our elected officials on notice: Submit to the proclamations of the Deficit Commission or we’ll downgrade our rating of government debt. That’s blackmail, plain and simple. This threat comes from a privately-owned company whose rating process is riddled with conflicts, and which has gotten virtually every critical assessment of recent years spectacularly wrong. Enron? Lehman? Subprime mortgages? They were zero for three. Yet rather than reining back their penchant for reckless proclamations, the chairman of S&P’s “sovereign rating committee” said that our elected officials’ response to the Deficit Commission would be crucial to its analysis of US debt. John Chambers said last week: “It is very important for the credit standing of the United States that the Congress considers very carefully what the fiscal commission proposes.” Just in case his intent wasn’t clear enough, he added: “It is very important for Congress to take the required steps.” “Sovereign” is right. That’s a kingly proclamation. Bear in mind, we supposedly don’t know yet what the Deficit Commission will propose. (We have a good idea, of course, since both the Democratic and Republican co-chairs are long-time advocates for cutting Social Security.) The total extent of the Commission’s recommendations, and the extent to which they’ll actually provide financial stability, are supposed to be completely unknown at this point. S&P’s statement isn’t an analysis, since there’s nothing to analyze. It’s a threat: Turn your authority as elected representatives over to this unelected body or we’ll cause financial damage to the United States Government. It’s not a hollow threat, either. This statement was made one day after S&P downgraded Ireland’s debt . A downgrade could cause massive harm to the United States government at a time of extreme difficulty. Debt could be harder to obtain, and it would become more expensive. That, in turn, would plunge the US deeper into debt. So who, exactly, is issuing this warning? What kind of credibility do they have? Standard & Poor’s is a division of McGraw-Hill, a publicly traded publishing company. They are a for-profit company, as is their fellow rating agency Moody’s (which issued a similar threat last March). Both of these for-profit companies have eagerly pursued the very institutions they were rating, to disastrous effect. Internal documents obtained by the Levin Subcommittee showed that both Moody’s and S&P let the profit motive compromise their judgments in the run-up to the economic meltdown. As we noted in a previous analysis , one internal S&P email said this about a rating they did for a customer: “”I don’t think this is enough to satisfy them. What’s the next step?” Here’s another example of S&P’s integrity . When an analyst asked to review loan files for a security he was asked to rate, his supervisor told him the request was “TOTALLY UNREASONABLE!” And consider this reported comment , which occurred during exploratory acquisition talks with investment research company Morningstar: “The S&P people insisted to Joe Mansueto (Founder/Chairman) that he was leaving big mounds of money on the table by not charging mutual funds for their ‘star’ ratings. Joe replied to the S&P bidders that it was an obvious conflict of interest to charge the funds for their own ratings — how would Morningstar maintain its independence? They called him naive — and stopped the merger talks.” The comments, though unconfirmed, have not been denied. Expert money manager Barry Ritholtz, who reported the story, indicated his confidence in his source and added, “This anecdote rings rather true to me.” Moody’s fared even worse in our review of Levin Subcommittee documents. Of four key objectives for its Structured Finance Group, responsible for ratings, “high quality ratings and research came in dead last – behind “generating increased revenue,” “increasing market share …,” and “fostering good relationships with issuers and investors.” Get the picture? Why would companies like Standard & Poor’s and Moody’s issue threats of this kind? There could be many reasons. One might be to please its corporate clients, who would like to see government spending cut for both ideological and business reasons. Another might be to encourage cuts in Social Security because, under current proposals from both parties, that would place more retirement savings in funds and accounts managed by S&P’s key clients. Moody’s may also legitimately believe that the deficit needs to be reduced immediately, which is debatable on economic grounds. But if the Moody’s action was arguable, S&P’s statement is indefensible. The ratings agency system is broken. These private companies have accrued enormous power without earning it. A lot of that power has been handed to them by government actions that rely on their ratings. That’s why the Senate voted for the Franken Amendment, which — while leaving these companies private — would have removed the inevitable conflict of interest that’s created when they compete for business. (The House/Senate Conference eliminated the Franken Amendment, calling instead for a two-year study. While the final bill is weighted toward an action of the kind called for by Franken’s amendment, two years gives lobbyists a long time to influence the outcome.) Standard & Poor’s are called “agencies,” but they should be called by their proper name: For-profit companies. These “ratings companies” have undermined the free market by allowing powerful issuers and investors to influence their own ratings. Markets with bad information – information that’s bought and paid for – aren’t really “free.” Now the “rating companies” are targeting the democratic process, too. We need a national discussion about the proper role of these companies, before they cause even more damage. Standard & Poor’s should be reprimanded for its inappropriate and unprofessional intrusion into the working of government. And everyone needs to be reminded: Neither Congress nor the Executive Branch can ‘outsource’ the democratic process. They are our elected representatives. They must not be forced to submit to conflict-ridden private companies with a track record of failure. _______________________________________________________________ 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 and Strengthen Social Security projects. Richard also blogs at A Night Light . He can be reached at “rjeskow@ourfuture.org.” Website: Eskow and Associates

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Dan Solin: The Myth of the Stock Market Guru

August 24, 2010

The securities industry has many ways to separate you from your money. My personal favorite is hedge funds. These funds push all the right buttons: Greed, the promise of outsized returns, elitism, and the thrill of playing with the big boys. I’m sure you get the picture. Back in October, 2009, Bloomberg did a fawning article on Paolo Pellegrini. It had a lot of ammunition. Pellegrini has an engineering degree and a Harvard MBA. According to his field study advisor at Harvard, he was “into data and systems” and “…was intrigued by the potential of math-based systems to trade stocks.” Sounds impressive, but not as much as his subsequent track record. He helped Paulson & Co earn profits of more than $3.5 billion betting against subprime mortgages. Flush with victory, he formed his own private fund. He bet against U.S. Treasury futures, among other trades, and earned 52% from April 15, 2008-December, 2008. It was now clear to everyone in the investment community that Pellegrini had the magic sauce insuring huge profits. It was clear to Pellegrini as well. In December, 2008, He started his own investment firm, PSQR Management LLC, and staked $100 million of his own money in it. Investment “pros” extolled his virtues, noting his “rare ability to apply rigorous analysis to specific financial markets, as he did with the subprime trade.” Bloomberg opined that his past performance was “no fluke” and noted that “Pellegrini’s meteoric rise is proof that bad news can produce a lucrative bounty for those with the foresight to predict it.” So, are you in? Fast forward to August 20, 2010. Pellegrini announced he is returning the money invested in his fund. The fund is down 11% this year. Last year it gained 62%. In July, it lost 7.9%. The losses were caused by bad bets against U.S. Treasury bonds, which have rallied since April. To put these numbers in perspective, a globally diversified portfolio of index funds broke just about even year-to-date. Pellegrini has a lot of company. According to a web site that tracks hedge funds, at least 117 funds have imploded since 2006. “Quant” funds have been hit particularly hard. These funds are run by “super brains” with Ph.Ds and quantitative skills enhanced by hyper fast computers. According to an article in the New York Times , assets in these funds are down 61% from 2007. Quant funds had a dismal performance record in 2008, which continued in 2009. Maggie Ralbovsky, an officer of a firm that gives investment advice to big funds, is quoted as stating that “not all quants are created equal.” She is right, but for the wrong reasons. Her observation implies there are superior quant managers out there, if only you could find them. The reality is that luck and not skill explains outperformance by fund managers. Many studies conclusively demonstrate this fact. Neither Ms. Ralbovsky nor anyone else can help you find the next lucky quant fund manager. When fund managers get lucky, the rewards are big. Pellegrini purchased what he called “”entry- level supercars”: a silver Ferrari F430 with a base price of $168,000 and a black $109,000 Audi R8. Investors who chase returns are driving Yugos. When will the madness stop? 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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Dan Solin: The Myth of the Stock Market Guru

August 24, 2010

The securities industry has many ways to separate you from your money. My personal favorite is hedge funds. These funds push all the right buttons: Greed, the promise of outsized returns, elitism, and the thrill of playing with the big boys. I’m sure you get the picture. Back in October, 2009, Bloomberg did a fawning article on Paolo Pellegrini. It had a lot of ammunition. Pellegrini has an engineering degree and a Harvard MBA. According to his field study advisor at Harvard, he was “into data and systems” and “…was intrigued by the potential of math-based systems to trade stocks.” Sounds impressive, but not as much as his subsequent track record. He helped Paulson & Co earn profits of more than $3.5 billion betting against subprime mortgages. Flush with victory, he formed his own private fund. He bet against U.S. Treasury futures, among other trades, and earned 52% from April 15, 2008-December, 2008. It was now clear to everyone in the investment community that Pellegrini had the magic sauce insuring huge profits. It was clear to Pellegrini as well. In December, 2008, He started his own investment firm, PSQR Management LLC, and staked $100 million of his own money in it. Investment “pros” extolled his virtues, noting his “rare ability to apply rigorous analysis to specific financial markets, as he did with the subprime trade.” Bloomberg opined that his past performance was “no fluke” and noted that “Pellegrini’s meteoric rise is proof that bad news can produce a lucrative bounty for those with the foresight to predict it.” So, are you in? Fast forward to August 20, 2010. Pellegrini announced he is returning the money invested in his fund. The fund is down 11% this year. Last year it gained 62%. In July, it lost 7.9%. The losses were caused by bad bets against U.S. Treasury bonds, which have rallied since April. To put these numbers in perspective, a globally diversified portfolio of index funds broke just about even year-to-date. Pellegrini has a lot of company. According to a web site that tracks hedge funds, at least 117 funds have imploded since 2006. “Quant” funds have been hit particularly hard. These funds are run by “super brains” with Ph.Ds and quantitative skills enhanced by hyper fast computers. According to an article in the New York Times , assets in these funds are down 61% from 2007. Quant funds had a dismal performance record in 2008, which continued in 2009. Maggie Ralbovsky, an officer of a firm that gives investment advice to big funds, is quoted as stating that “not all quants are created equal.” She is right, but for the wrong reasons. Her observation implies there are superior quant managers out there, if only you could find them. The reality is that luck and not skill explains outperformance by fund managers. Many studies conclusively demonstrate this fact. Neither Ms. Ralbovsky nor anyone else can help you find the next lucky quant fund manager. When fund managers get lucky, the rewards are big. Pellegrini purchased what he called “”entry- level supercars”: a silver Ferrari F430 with a base price of $168,000 and a black $109,000 Audi R8. Investors who chase returns are driving Yugos. When will the madness stop? 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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Danny Schechter: Countdown to Collapse? The Recovery Is Not

August 18, 2010

Financial journalist Charles Gasparino, whose career trajectory took him from Newsweek to CNBC to Fox News, was on with Bill O’ Reilly doing what the host of the factless Factor likes to do the most: promote Fox News. In the course of their self-promotional banter, Gasparino let slip an unverifiable story about a meeting of top CEOs speculating about whether President Obama really is a secret Socialist. Stories like this, invented or not, freak a White House ever eager to reassure the business world of their loyalties. That is no doubt why Robert Gibbs, the President’s Press Secretary took a whack at the “professional left,” a statement he later said had been “inartful” but did not withdraw. Writing on OpEd News, Kevin Gosztola was not surprised: While circumstantial, the best evidence for why Gibbs would feel like uttering the aforementioned remarks is the shift of money from Wall Street to Republicans ahead of the election… The Democrats earned 57 percent of campaign contributions from securities and investment industries. The situation compels the Obama Administration, especially White House press secretary Gibbs, to whip the left and the sections that are most listened to by voters into line not only because money from business interests needs to swing back the other way but because disappointed and disillusioned voters will likely stay home, not donate to Democratic Party campaigns, not make phone calls, and refuse to go door-to-door canvassing prior to Election Day if they do not fall in line. According to a preliminary analysis, the Center for Responsive Politics reports that “individuals and political action committees linked to the financial and real estate sectors swung hard to the Republicans with their giving since last year…. In March 2009, 70 percent of money from the sector went to the governing party, but by this summer, 68 percent was going to the opposition, as Democrats fought to pass some version of a financial overhaul.” The motivation for Gibbs’ remarks may or may not be tied to signaling Wall Street but the deeper truth is that everyone, right and left alike, seem frustrated and at the same time powerless to check the continuing economic decline. The private sector is not creating jobs. The GOP is blocking the government from doing more stimulus programs while the system seems to be unraveling. All the talk of cutting deficits by conservatives or ending tax cuts by liberals will not give the economy the boost it needs. There is a paralysis of analysis and a stalemate. The markets were more freaked by the recent pessimism oozing from the Fed than any partisan punditry. The slowdown they are worried about has already doomed any heavily-hyped “recovery.” And the public knows it, according to the recent polls. What’s worse is the tea leaves offer few signs of a turnaround any time soon even if General Motors is selling more cars — many, may we be reminded, in China. (The GM CEO who last week took a nasty ingrate smack at GM being perceived as “Government Motors,” demanding the government sell all of its shares, has just announced he is leaving! I wonder why?) The Carlyle Group is taking over while the automaker launches a new program of subprime lending, the very predatory dealmaking that got them in trouble in the first place. Does anyone ever learn from history, or care about how communities are being destroyed as a financial crisis becomes a social crisis at the grass roots level? Check out what happened at that mall in Atlanta where thousands of people nearly rioted to get on a public housing waiting list. The Congress returned from its recess to pass new monies to keep teachers teaching and cops patrolling. They did so by slashing food stamps so the unemployed and poor — some 41 people who rely on them — will have to cut back further. What a trade-off. As for insuring the stability of an increasingly volatile system, will the new financial reforms make any difference? It doesn’t look like it. The New York Times reported, “As Wall Street scrambles to find the best and most profitable way to operate under the new financial reform law, Goldman Sachs Group Inc. — the firm that was expected to suffer the most under the legislation — could emerge practically unscathed… “…we think we are well positioned to be a market leader under the new rules,” said Jack McCabe, co-head of Goldman’s derivatives clearing service business. Richard Bove, a bank analyst at Rochdale Securities, said he had changed his view of the law’s effect on Goldman. “I thought this company was going to be really harmed by this bill; now I’ve figured out that it’s not going to happen,” he said. “They should win big here.” That’s Goldman’s reason to celebrate its “big win” What about the others? The truth is we will not know for a awhile, for a long while, for many, many years. So much for any sense of urgency even after former Fed Head Paul Volcker said we are running out of time. Bloomberg News explained why: “Many of the measures ordered by Congress and global regulators, aimed at cushioning the financial system in future crises, are years away from being implemented. The Basel Committee on Banking Supervision plans to give the world’s banks until 2018 to comply with limits on how much they can borrow. Parts of the Volcker rule, a provision of the new Dodd-Frank Act that would force firms to cut stakes in in-house hedge funds and private-equity units, may not go into effect for a dozen years…” “Based on our experience of government’s ability to execute these things effectively and in a timely way, we are almost uncovered now from any future financial risk for at least another 8 or 10 years, and that’s a little scary,” said Roy Smith, finance professor at New York University’s Stern School of Business and a former banker at Goldman Sachs Group Inc. Economist Nouriel Roubini, one of the first to forecast our crisis, worries that major economies in Europe are at risk and could fall. At the same time I am reading articles that contend, “The US is more bankrupt than Greece.” Another reports the IMF saying the US is bankrupt but most Americans don’t know it. What else don’t we know? At the same time, the folks who brought us this crisis are still riding high, making multi-million dollar “settlements’ to cover up fraudulent practices. In recent weeks, Goldman Sachs, Countrywide and, now, Wells Fargo have just done that in part to avoid prosecutions. Their CEOS are going on vacation to spend their ill-gotten gains, not to jail to pay for their crimes. And the “professional left” — whatever that is supposed to be — is more pissed at Robert Gibbs blathering at that podium than the banksters maneuvering behind the scenes. Can anyone tell me what’s wrong with this picture? Just one footnote: In this week of growing economic despair, an 81 year old senior citizen named Bernard Stone stood outside the unemployment office in Harlem with a flyer of his own making calling on President Obama to issue an executive order closing all American-owned factories outsourcing jobs. If they don’t do it, their executives should, he suggests, lose their citizenship and be deported to the countries to which they exported American jobs. “The hundred or so people who read my leaflet liked that part,” he told me. News Dissector Danny Schechter directed the film Plunder The Crime of Out Time to investigate the financial crisis as a crime story. (Plunderthecrimeofourtime.com) Comments to dissector@mediachannel.org

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Famed Investor Bill Gross Calls For Massive Taxpayer-Backed Mortgage Refinance Initiative

August 17, 2010

The head of the world’s biggest bond fund, bemoaning the slow economic recovery, reignited debate Tuesday by publicly supporting a massive new refinance program currently roiling the mortgage bond market by describing it as a form of fiscal stimulus that wouldn’t add to the deficit. Bill Gross, who runs Pacific Investment Management Co.’s $239 billion Total Return Fund, said that policymakers “should quickly re-engineer” a plan that would refinance all non-delinquent mortgages backed by the federal government. The rate on a 30-year fixed-rate mortgage averaged a record-low 4.44 percent in the week ending Aug. 12, according to taxpayer-owned mortgage giant Freddie Mac. Taxpayers guarantee the mortgages of 37 million households, or two-thirds of all homeowners with a mortgage, according to a July 29 note by David Greenlaw, Morgan Stanley’s chief U.S. fixed-income economist. That includes government agencies like the Federal Housing Administration as well as twin behemoths Fannie Mae and Freddie Mac. Greenlaw estimates about 18.5 million taxpayer-backed mortgages are at rates higher than 5.75 percent interest. By refinancing those mortgages at current, lower rates, Greenlaw believes those homeowners would save $46 billion a year. Gross said the refi scheme would spur some $50-60 billion a year in new consumer spending and raise home prices between 5-10 percent. Forecasters, including Fannie Mae, say home prices are set to decline the rest of the year and into 2011. Former Federal Reserve Chairman Alan Greenspan said this month that a so-called double-dip recession is possible “if home prices go down.” In theory, the proposal would immediately help those homeowners, as they’d save on their monthly mortgage payment, and it could help the broader economy because homeowners could take the savings and spend it, spurring growth. And because homeowners — particularly those who owe more on their mortgage than their house is worth — would have more affordable payments, less of them would fall behind and face foreclosure, stabilizing the housing market and leading to an uptick in prices. “It’s the last real big thing that an administration can do that’s caught between a Republican and Democratic orthodoxy and the inability to legislate — certainly in front of the election, and maybe even afterwards as we have more evenly balanced constituents in Congress,” Gross told the Huffington Post during a brief interview in between sessions at the administration’s Conference on the Future of Housing Finance, held at the Treasury Department in Washington. “It’s the one thing they can do that doesn’t increase the deficit and that doesn’t require legislation.” “[W]e are not recommending any change to the qualification for new mortgages — only refis,” Greenlaw wrote in his note. “Thus, there is no subsidy involved, and credit quality actually improves somewhat due to the lower payment burden. This implies fewer foreclosures going forward and less credit risk for the guarantor of the mortgage (i.e., the U.S. government).” Government officials have dismissed the idea. Gross said that putting the idea into practice — Morgan Stanley’s Greenlaw called it “Slam Dunk Stimulus” in his note — would “balance the scales” between “Main Street” and “Wall Street.” “I just don’t think the administration recognizes the problem this economy is in and what’s required,” Gross said. “Certainly the Fed recognizes the problem. I mean, [the administration] knows they can’t put forth another stimulus package, so what can they do? This, to me, is something they can do. “It’s a question of Wall Street and Main Street — which side do you favor? I’d say that Wall Street has been favored enough over the past year and a half, so let’s give Main Street a chance,” Gross continued. “The administration needs to get back on Main Street and off of Wall Street, and I think this is one big step that they can do.” But it’s more than just a Wall Street versus Main Street issue. Investors in mortgage-backed securities — like pension funds, unions and retail investors — would be hurt by the program. And longer-term, so could homeowners. Mortgage refinancings involve paying off an old mortgage and taking on a new one with better terms, like a lower rate. Investors who own bonds backed by home loans with 7 percent interest, for example, would essentially lose out on that extra income. Also, wiping out those higher-rate mortgages that back bonds that are trading above par — meaning their current price is above face value — would rob investors of that additional gain. Banks that own those securities would also lose out on that income, as would asset managers and other large investors in mortgage-backed bonds, like the Chinese government, Gross said. Fannie and Freddie, which have tens of billions of dollars in mortgage holdings in their portfolio, would also suffer from that loss of income. PIMCO, too, Gross said. “At PIMCO, we’d be affected by $3 or $4 billion in terms of a refunding loss,” Gross said. “But I’m here as a public advocate, not as a private [investor]. When I go back to Newport I’ll be back to managing that portfolio.” PIMCO is based in Newport Beach, Calif. Homeowners could end up losing too, said Joshua Rosner, managing director at independent research consultancy Graham Fisher & Co. “As a result of another prepayment-shock and the inability to model future prepayment shocks, investors would become even more unwilling to invest in [mortgage-backed securities] going forward, or would begin to demand higher yields going forward,” Rosner wrote on the popular finance and economics-focused blog, The Big Picture . The prepayments — refinancings lead to old mortgages being paid off — would cost investors “more than half a trillion [dollars] in lost interest income,” he wrote. A loss of investors in mortgage-backed securities would lead to higher rates of return, or yield, in order to lure them back. Higher yields on mortgage bonds would lead to higher interest rates for borrowers. In other words, the gain from the Fannie and Freddie-backed refi scheme could be wiped out by the higher yields investors could demand. Rosner also said that the move “could precipitate a systemic risk issue.” Since banks and Fannie and Freddie would have to hedge their positions to these new record-low rates, they’d likely do it simultaneously. (Rates will undoubtedly rise from their record lows, leading banks to pay more to get money to fund loans while fixed-rate mortgages pay them a steady rate.) That push could cause enormous damage to the financial system, Rosner wrote. Thomas A. Lawler, a former top official at Fannie Mae now a consultant on housing and mortgage matters, said that homeowners’ potential savings were overestimated. There are substantial upfront costs associated with refinancing a mortgage, Lawler wrote on another popular finance and economics-focused blog, Calculated Risk . While Gross said the costs could be rolled into the mortgage, Lawler wrote that the costs were so high that they could negate the savings many homeowners had hoped for. For example, Freddie Mac already discloses that fees add an additional 0.7 percent interest to the mortgage. Lawler estimated that the costs associated with refinancing — underwriting fees, taxes, insurance and others — could add an additional 1 percent to the rate. So if the average mortgage fetches about a 4.5 percent interest rate, that additional percentage point brings it pretty close to the median on outstanding 30-year fixed-rate mortgages, which Morgan Stanley estimates to be 5.75 percent. Lawler also raises concerns over implementation — particularly considering the many difficulties the Obama administration has run into with its other foreclosure-prevention initiatives — and the fact that the administration already has a refinance program for essentially the same borrowers that Gross wants to help. The Home Affordable Refinance Program, otherwise known as HARP, aims to do the same thing — take homeowners with taxpayer-backed mortgages and refinance them into lower rates. Through May, about 350,700 homeowners have benefitted from the program, according to the latest data from Fannie and Freddie’s regulator, the Federal Housing Finance Agency. Morgan Stanley said as many as 18.5 million homeowners could benefit from a new program. HARP was launched in April 2009. But to Gross, the benefits of the program outweigh the potential costs, which he termed “marginal arguments.” “The American economy is approaching a cul-de-sac of stimulus — both monetarily and fiscally,” Gross told the crowd at the Treasury Department, “which will slow to a snail’s pace, incapable of providing sufficient job growth going forward. “Unemployment rates will approach and remain at double digits unless positive fiscal stimulus is provided in the next six months.” ************************* Shahien Nasiripour is the business reporter for the Huffington Post. You can send him an e-mail ; bookmark his page ; subscribe to his RSS feed ; follow him on Twitter ; friend him on Facebook ; become a fan ; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.

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Richard (RJ) Eskow: Techno-Thriller: Why Was Goldman Sachs So Worried About One Nerdy Sentence?

August 13, 2010

It sounds like the plot to a dozen movies: Picture a corporation so powerful that its tentacles circle the globe and reach into the highest corridors of power. Yet a single sentence on an ex-employee’s obscure website forces it to move into action. That sentence is so important that it leaves the corporation with no choice but to make that employee … No, not disappear. They just made him delete it. (This is where the movie comparisons end.) But the question is, why? The sentence described the Goldman Sachs risk system, SecDB (which stands for securities database). It read: “Unbeknownst to most of the non-strategists, you could see basically every position and holding across the company, whether you were supposed to or not.” Without some digging we can’t know that the sentence is true – but why did it cause such a reaction? It was pretty well buried in a blog post by Antonio Garcia-Martinez, a former Goldman “quant” (financial analyst). The post is a long, kiss-and-tell piece about his reasons for joining Goldman, his experiences there, why he left, and why he’s happier at his new start-up company. He says a number of unflattering things about Goldman Sachs in his post. So do a great many people, for that matter – every day. So why did Goldman Sachs bother making Garcia-Martinez delete this particular sentence, out of the reams of scandalous things said about them, and then contact Business Insider’s Clusterstock blog (which had reprinted it) to deny that it was true ? Because it could have a serious impact on Goldman’s future. First, consider the effect a revelation like this would have on Goldman’s already-battered client relationships. The firm is struggling to overcome the now-public knowledge that it bet against some of those clients, causing them financial harm while claiming at the same time to “serve their needs.” Personal relationships can influence a business deal even more than the corporation’s reputation, which is probably one reason Goldman’s still around. A corporate exec may continue to place his business with them even after he’s heard the bad stuff, as long as he likes and trusts hiscontact there. But what if our exec knew that his trusted “friend” at Goldman was aware of every position Goldman or its clients were taking against him (or had taken in the past), and that the guys betting against him knew instantly what he was doing? He might not want too much to do with his “friend” after that. Then there’s the question of market manipulation. Goldman has approximately 15% of the entire derivatives market. If its traders can immediately cross-check any deal they negotiate against what’s happening across 15% of the market, in real-time, that could raise serious legal issues. And it could seriously undercut statements like these, in which Goldman’s senior management tried to defend itself from accusations of fraud: “We certainly did not know the future of the residential housing market in the first half of 2007 any more than we can predict the future of markets today. We also did not know whether the value of the instruments we sold would increase or decrease. ” (emphasis mine) If they and their employees were tracking every deal in real-time they had a better picture of the those instruments’ value than they let on. A database like the one Garcia-Martinez described, if it exists, would be an invaluable tool in getting a jump on the market – or manipulating it. But wait: it gets worse. David Viniar, Goldman’s CFO, testified under oath to the Federal Crisis Inquiry Commission and claimed that Goldman didn’t track its derivatives deals separately from its other transactions. FCIC panel chair Angelides pressed him: “Are you telling me you have no system at your company that tracks revenues or assets of contracts, and liabilities and payments under contracts? You have no management reports, no financial reports that track these contracts?” “I’ve never seen one,” Viniar answered. The Commissioners seemed to verge on accusing him of lying. “Nobody here really believes (that),” said one. Flash back to February of this year, when David Viniar said this in a presentation to investors : “Technology is fundamental to everything we do, from revenue-producing activities to enabling much of the control infrastructure of the firm.” And here’s another quote, from Goldman’s Business Principles: “We take great pride in the professional quality of our work.” As the Wall Street Journal reported, Goldman has said that “credit trading desks … are separated by industry group … (and) traders are indifferent to whether they are selling clients a bond or a credit derivative.” The Journal added: “The firm also said its technology systems firm-wide don’t single out derivatives transactions.” Now comes the part of the movie where we place our sentence, that jigsaw puzzle piece, into context so that we get its full meaning: ” The Goldman Sachs risk system is called SecDB (securities database), and everything at Goldman that matters is run out of it. … Database replication was near-instant , and pushing to production was two keystrokes. You pushed, and London and Tokyo saw the change as fast as your neighbor on the desk did (and yes, if you fucked things up, you got 4AM phone calls from some British dude telling you to fix it). Regtests ran nightly, and no one could trade a model without thorough testing … Unbeknownst to most of the non-strategists, you could see basically every position and holding across the company, whether you were supposed to or not. The whole thing was so good …” He’s saying that Goldman Sachs has a first-rate, centralized data system that captures each deal in detail, and that everyone can see it as soon as it’s posted. What’s more, if I understand him correctly, he’s saying that employees are required to run a detailed model of their deals before they can post them on the system. And all this information is stored on a database. How can a system can do all this and yet be unable to distinguish between a bond and a derivative? Nevertheless, David Viniar testified under oath that Goldman’s systems were so unsophisticated that he couldn’t even tell the FCIC how much profit the company made from derivatives. Eventually, under continued pressure, Goldman provided the FCIC with an estimate which amounted to 25%-35% of its 2009 revenue. Yet Goldman is telling investors it won’t lose any revenue as a result of the financial reform bill , and analysts believe them. “They’ve clearly seen the writing on the wall and are planning their moves ahead of time,” said one. That brings us to Goldman’s plans to shut down its proprietary trading unit and spin it off into an independent hedge fund — or move it into Goldman’s asset management arm. Here’s a question that probably hasn’t been asked yet: Do they plan to use Goldman’s SecDB, or any other Goldman systems, in that asset management firm? If this trading unit is moved into a hedge fund, will that fund ‘rent’ its computer systems from Goldman? Will all the traders and ‘quants’ at these various organizations be able to ‘see’ deals happening in real time? That could trigger calls for an SEC investigation or other actions to prevent Goldman from improperly using computer data. And it could raise questions about the other big banks’ systems, too. It’s understandable why, given the implications of this nerdy sentence, Goldman would dispatch its publicists to tell Clusterstock it isn’t true. As for Garcia-Martinez, he was asked why he deleted the sentence. ” Prudence is the better part of valor ,” he answered — followed, no doubt, by a click as a gloved hand placed the telephone back in its cradle. Or course, this is no thriller. But the story raises serious questions, ones we should be asking anyway. If a bank is “too big to fail,” its data is “big enough to misuse.” It also shows why we need strong regulations behind the financial reform bill, to make sure that information doesn’t become another “financial weapon of mass destruction.” And it shows why we need to end “too big to fail.” The story also illustrates how much we don’t know about what the big financial players are doing. It reminds us that we wont be able to protect the economy from future Wall Street crimes unless we keep investigating the ones that have already taken place. _______________________________________________________________ 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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Richard (RJ) Eskow: Social Security: The "IOU … Nothin’" Argument Strikes Again

August 10, 2010

Allan Sloan, Senior Editor at Fortune and a frequent Washington Post contributor, is usually a smart and fair guy with a knack for seeing through the usual DC economic spin. That’s why it’s particularly disappointing to see him get it wrong on Social Security trust funds, and in a way that provides ammunition to those who would do the wrong thing morally. Today’s piece by Sloan is an excellent example of the arguments being used to justify breaking commitments to working Americans. So, even if that’s not his intent, it’s important to respond. Sloan says that the $2.54 trillion Social Security trust fund — money that the government borrowed to offset tax cuts, a couple of wars, and a whole host of other expenditures — is “funny money” that looks real but isn’t. He mocks this longstanding financial (and moral) obligation as a “Geithner bond,” complete with the picture of a Monopoly-money bond with Geithner’s face on it. (It’s a handy rhetorical move to pin this on ol’ Tim, since he seems pretty unpopular these days, but most of this debt was incurred in previous Administrations.) Here’s the example that’s used as the crux of Sloan’s “funny money” argument: If he and Mrs. Sloan begin collecting their Social Security when they become eligible this year, “Social Security would have to cash in about $3,400 of its trust-fund Treasurys each month to get the money to pay my wife and me.” So, argues Sloan, the trust fund’s accounts aren’t “real money” at all. This is important. Social Security trust funds will have an annual surplus of $77 billion in 2010 (because of interest earnings on bonds and certificates of obligation issued by the US Treasury), but payroll taxes alone won’t cover the full cost of benefits. Sloan writes that Social Security will “tap” the Treasury Department to cover the $41 billion difference between tax income and benefits paid this year, but that’s loaded language. Collecting interest on borrowed funds, or for that matter the principal, is not what we usually consider “tapping” (a slang word for borrowing or asking for money). Sloan’s argument, as nearly as I can tell, is that the $41 billion isn’t “real” because the Treasury Department might need to borrow to pay for it. That doesn’t make sense. It’s an IOU. An IOU is both a financial instrument and a moral obligation. It’s wrong to say that a government IOU has no value unless you expect the government to default. Why should a financial obligation to the future recipients of Social Security be treated with any less gravity than one to a bank or other lender? Banks consider the obligations the government has toward them very real indeed. Is Mr. Sloan, suggesting a bank-held Treasury bill or debt obligation isn’t “real”? Employees and employers paid into the Social Security fund for the sole purpose of providing these benefits. Politicians raided the kitty to borrow the funds for other purposes. We as a nation have an ethical responsibility to pay it back. Here’s another problem with Mr. Sloan’s argument: That $41 billion is only 6% of the total benefits of $686 billion that will be paid this year. So Social Security would only have to cash in about $200, not $3,400, to provide the Sloans with the retirement security to which they’re entitled each month. And, as the Social Security Trustees reported this year, this year’s shortfall is “attributable to the recession and to an expected $25 billion downward adjustment to 2010 income.” We’ll probably have another year like this one, followed by a couple of years of surplus. After that the plan will need to draw down on the IOUs for a portion of its payments under current projections. The real shocker in Mr. Sloan’s piece is this line: “The trust fund is of no economic value.” Let’s hope that nobody takes him seriously when he says that, because it could set off a panic. Bonds from the United States Treasury are of no economic value? They are, in fact, one of the safest forms of investment. What could he mean? Apparently he means that they’re of no value in reducing the deficit, since he bases that statement on this quote from the 2009 Trustees report (presented as if it were a smoking gun): “Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new income to the Treasury, which must finance (them) through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.” It’s true that redeeming these bonds doesn’t reduce the deficit — but that’s the point. It shouldn’t. And given that Tim Geithner is one of the Trustees, along with the Secretaries of Labor and HHS and the Social Security Administrator (two public trusteeships are awaiting confirmation), it’s hardly surprising that this reminder was included last year. (It’s not in this year’s report.) Mr. Sloan says that both political parties are “wrong” — “the Democrats financially, the Republicans morally.” But the financial argument for repaying the money is perfectly sound: Government bonds — all IOUs, for that matter — have real financial weight. They can’t just be declared invalid, or “funny money,” because the borrower now has other priorities and doesn’t want to borrow to redeem it, even when the borrower is the nation itself. In the end, the argument that this money isn’t “real” is morally mistaken, too. It’s based on the premise that government debts to the Social Security fund have no ethical, legal, or economic weight. “Let’s not kid ourselves that a fat trust fund is the solution,” writes Sloan — but a solution to what, exactly? It’s certainly not a solution to the Federal deficit, any more than the government’s other debt obligations are. That’s why it’s wrong for Alan Simpson’s Deficit Commission to be going after these benefits. I hope Mr. Sloan comes to see the flaws in his argument. Social Security is a separate trust, a pact to provide benefits to the American people. Debts to Social Security are real and valid, and if they’re not honored millions of Americans will suffer. That’s why we hope Mr. Sloan will come to see that the “funny money” line, and the “gag” bond illustration that went with it, really aren’t funny at all. _______________________________________________________________ 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 Strengthen Social Security campaign. Richard also blogs at A Night Light . He can be reached at “rjeskow@ourfuture.org.” Website: Eskow and Associates

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Danny Schechter: The Eleven Pens of Barack Obama

July 27, 2010

With eleven pens for souvenirs, President Obama signed the financial reform bill in a rare celebratory moment. Significantly, the ceremony did not take place in the Oval Office but up the block at the Ronald Reagan building perhaps to signal recalcitrant Republicans that this is a cause they should sign on to. It wasn’t clear if he was aware that he was signing up for the a new volatile phase of struggle to rein in out of control financial power. The three GOP lawmakers who voted for the bill receiving a standing O, from the largely democratic crowd that watched Obama embrace Paul Volcker while Elizabeth Warren stood by applauding (before taking her picture with the former Fed head.) Warren’s presence didn’t make many news stories or the Times photo caption perhaps because many — mostly bankers and some Obama advisors — want her out of the picture permanently. They say Banks need protection too. Quips David Sirota, “Not to put too fine a point on it, but the new agency is called the Consumer Financial Protection Bureau, it is not called the Bank Financial Protection Bureau (as, frankly, you might call the rest of the government).” She could be appointed right now to head the new consumer protection bureau without approval by the Senate. But will she? No sooner was the bill signed than there were emails from Obama operatives flying around the country claiming credit for an achievement that looked unlikely for months, sustained the heaviest Lobbyist attack in history, and won praise from all the advocacy groups who realized that while the bill was flawed, rationalized it as the best they could squeeze out of Congress in this climate. Republicans are predicting it will lead to job losses. Minority leader Mitch McConnell regurgitated a familiar mantra saying: The White House will declare this bill a victory. But for millions of Americans struggling to find work, for millions of small-business owners bracing themselves for all the new regulations they’ll have to deal with, for ordinary Americans who just wanted to see an end to the bailouts, this bill is no victory. (Of course, there was no reference to the Republicans who initiated the bailouts, or, of course, the “ordinary Americans want jobs!) Now, the businesses that could be regulated under the bill are launching an effort to reform the Reform bill — their way — to make sure the rules that are still to be written will not be too hard on them. The Chamber of Commerce and the Business Roundtable have their hatchets out by continuing the full court press lobbying effort that did force compromises in the bill. Of course, they position what they are doing only in the most positive light. “We will work with President Obama and policy makers to ensure that this legislation is implemented in a manner that continues to promote sustainable economic growth and job creation,” says Roundtable honcho Larry Burton. Not only is this bla bla contrived, but it is also flawed in a more fundamental way because there is no job creation to continue, in large part, because the private sector is not creating jobs. In fact corporations are stashing trillions that they are not using for job growth. You expect business to oppose regulations on business but the Daily Beast carried an article suggesting that some savvy Wall Streeters actually want stricter regulations. Author Randall Lane writes: Upon passage, the standard response was to publicly grumble but privately rejoice about a bill that could have been far more punitive. But as I asked around over the past few days, there’s been a shift: many on Wall Street now view financial reform as a wasted opportunity — to make the rules that govern them even tighter. They won’t say this officially. They might not even say it to their peers, in the same way they won’t tell others on the desk they really dig Glee . But privately, one-on-one, the most deliberative Wall Street hitters I know recognize that they need a system that saves them both from themselves, as well as potentially capricious regulators. This new law, while well-intentioned and likely better than nothing, effectively accomplishes neither. Lane argues that, “Wall Street craves — and needs — rules, and the discipline to enforce them consistently. If left to its own self-interest, Wall Street couldn’t function.” In this view, the bill was not tough enough even with the many compromises the biggest firms won to allow them to circumvent the law. Wall Street’s new battleground is over the shape of the rules to come. The Washington Post reports: The SEC is required to issue 95 new regulations governing a wide swath of the financial sector, dozens more than the Federal Reserve, the new Consumer Financial Protection Bureau or other federal agencies. The SEC is also slated to complete 17 one-time studies and five new ongoing reports, according to a tally by the law firm Davis Polk & Wardwell. The SEC does not exactly have a reputation for moving quickly. They missed Bernie Madoff’s ponzi scheme for a decade, but now say they are going after more cases of corporate fraud in the aftermath of the $550 million dollar settlement they won from Goldman Sachs. The problem is that they are only settling cases, not prosecuting fraudsters. Progressives have an agenda too, to strengthen reform. They will be fighting to, in Zack Carter’s buzz words, “Break Up The Banks … Tax Wall Street Gambling … End The Foreclosure Nightmare…” There are also concerns with the future of the taxpayer billions invested in mortgage lenders “Freddie” and “Fannie.” While all this goes on in the foreground, in the background there’s panic about the economy’s stubborn refusal to rebound. Ben Bernanke at the Fed expects unemployment to linger for years. His arsenal of economic weaponry seems out of ammunition. He is now “unusually uncertain.” Huh? Stress tests of banks are expected to show a capital hole. When the six-month extension of unemployment benefits squeaked through the Senate, there was a sigh of relief among those in need, and cheers from Democrats who have not been able to move the unemployment needle or restore confidence in the economy. What happens after six months? Putting money in the pockets of consumers will create some bounce, but it doesn’t deal with the deep structural and systemic problems that worry economists and governments worldwide. What they see are 800 insolvent banks, industries shrinking, state and local governments on the verge of bankruptcy and escalating debt. They see China rising and the West sinking. A million foreclosures are expected this year while in the know advocates like Paul Krugman warn of stagnation and a creeping depression. Others say a double dip recession is already here. Shrill partisan voices make it hard for the public to focus on any solutions. So there is no jobs bill despite a bill seeking Local Jobs For America. So far, only a few brave voices are calling for major cutbacks in defense or inflated intelligence spending as the wars we cannot win continue to drain us like those knives that leave a thousand cuts. Many banks are falsifying their earnings but still considered too big to fail. My view they are not too big to jail, yet there is no public pressure from progressives for the prosecution of Wall Street criminals as I call for in my film PLUNDER. So, by all means, let’s be grateful for small victories, but we can’t substitute symbolic steps with a real recovery that, every day, looks further and further away, News Dissector Danny Schechter directed Plunder the Crime Of Our Time a DVD arguing that sees the financial crisis as a crime story. It is screening at the NetRoots Conference in Vegas. Comments to dissector@mediachannel.org

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Midterm Elections 2010: Politicking Hovers Over Economic Decisions

July 22, 2010

WASHINGTON — Midterm politics are distorting economic decision-making as leaders of both parties spin rival views of the road ahead, offering visions based on questionable economics. The resulting political angst is leaving a mark on major legislation. A far-reaching financial overhaul bill signed by President Barack Obama on Wednesday reflects voter anger over bankers, bailouts and bonuses. A measure extending unemployment insurance, soon to be on Obama’s desk, was scaled back from an earlier, far more ambitious Democratic stimulus plan. Angling for advantage, Democrats look to troubles before Obama took office. “It’s a choice between the policies that got us in this mess in the first place and the policies that are getting us out of this mess,” asserts Obama. Republicans seek an edge by looking ahead. “More government, fewer jobs: This isn’t the picture of recovery; it’s the epitome of failure,” says House Republican Leader John Boehner of Ohio. Both sides are exaggerating, say economists and political analysts. And things will only get messier as November’s congressional elections draw closer. Politicians of all stripes are under heavy pressure from polls that show increasing voter worry about alarmingly high unemployment, growing government debt and rising skepticism over Obama’s ability to help the economy. By contrast, 64 percent of economists surveyed in a Wall Street Journal-NBC News poll said the economy would get better over the next 12 months – compared with just 33 percent among the general public who said they believed that. “The election is certainly coloring the decision-making process in Washington, as one would expect,” said Mark Zandi, chief economist at Moody’s Analytics. Zandi, who has advised both Republican and Democratic lawmakers, said the political gamesmanship comes as the economy remains “in a precarious situation” despite earlier signs of a rebound. Fed Chairman Ben Bernanke reinforced this view, telling Congress on Wednesday the economy is “unusually uncertain.” But he did not forecast that it would fall back into recession. In office 18 months, Obama is still running against the policies of George W. Bush and cites “nearly a decade of not paying for key policies and programs” such as the wars in Iraq and Afghanistan, big tax cuts and a costly Medicare prescription drug program. Bush came to office with a $236 billion budget surplus in 2001, says Obama. “The day I took office, eight years later, America faced a record $1.3 trillion deficit.” But blaming the country’s economic woes on Bush tax cuts and spending is a stretch. It ignores the fact that as recently as 2007, the budget deficit was just $162 billion – long after Bush’s tax cuts of 2001 and 2003 kicked in and spending on the two wars and on the Medicare program was in place. Furthermore, the projected surplus reflected a continuation of the bubble economy of the late 1990s, when the stock market was soaring, high-tech businesses were on a roll and corporate profits were surging. Those surpluses would have evaporated no matter who became president in 2001. The rise in the annual deficit from $162 billion in 2007 to over $1 trillion now is largely due to collapsing tax revenues from the recession that began in December 2007, and stimulus and bailout spending by both Bush and Obama, said Brian Riedl, a budget analyst at the Heritage Foundation. The Bush tax cuts and other policies are “a convenient scapegoat for past and future budget woes,” he said, but can’t be blamed for today’s trillion-dollar deficits – or future ones. “Over the next 10 years, virtually 100 percent of the rising deficits” will be driven by “entitlement” programs such as Social Security, Medicare and Medicaid and interest payments on the $13.2 trillion national debt, Riedl said. Most economists – as well as Obama – seem to agree. For their part, Republicans paint a grim picture of Obama’s stewardship, claiming his $862 billion 2009 stimulus package failed to produce many new jobs – with over 14.7 million Americans out of work and the jobless rate stuck for months near 10 percent. But economists generally agree that the Obama stimulus measures, plus bank and auto company bailouts begun under Bush, did keep the economy from plunging into another Great Depression and have recently contributed, at the least, to modest job growth. “Even GOP economists acknowledge that without the big fiscal stimulus and two years of near-zero interest rates, we wouldn’t have moved from losing half a million jobs a month to a small gain,” said Rob Shapiro, a former economic adviser to President Bill Clinton and now chairman of Sonecon, a consulting firm. “The Republicans are simply making a political case. The economy is slow, which is true. They’re blaming the stimulus, which is false. But their success in doing that has constrained Democrats as well,” Shapiro said. As a result, talking about budget restraint is clearly the order of the day – even though Obama himself and many economists warn some additional government spending is needed to keep the economy from slipping back into recession. This stimulus downshift can clearly be seen in the legislation to renew the extension of unemployment compensation for up to 99 weeks for more than 2.5 million out-of-work Americans whose benefits have expired. The roughly $34 billion cost of the plan will be paid for by new borrowing. Until this week, Republicans had blocked the bill for months, arguing that the expense shouldn’t be used to increase the $13.2 trillion national debt. And even though Senate Democratic leaders were finally able to eke out a victory this week, they had to scale back their proposal from an original plan for a $120 billion package that included various other new stimulus items, including aid to cash-strapped states. The House was expected to give final approval to the measure on Thursday. Obama is set to sign it as soon as it reaches him.

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Joan Williams: Looking Beyond the BP Oil Spill

July 16, 2010

Picture the Gulf spill. Now, zoom in closer. Who’s in your picture? Is it women — or mostly men? Women may push the vacuums at home, but we’re scarce as whale’s teeth on the huge ship now cleaning up the nation’s biggest mess. I guess we should be glad we can’t be blamed for killing whole species or ruining beaches for generations. But why aren’t more women in the picture? Is it because oil’s still a man’s world? Women don’t run oil rigs — or oil companies. In fact, women hold fewer than x jobs on oil rigs. We are strong enough to fight wars and clean floors, so why aren’t we in the Gulf in bigger numbers? The conventional wisdom is that the American family’s a gender factory, fueling traditional gender roles. So’s the workplace. Back when Uncle Sam (or Aunt Pelosi) sent TARP funds for “shovel ready” (read: men’s) jobs, like building roads or schools, women spoke up. What, we asked, about equal funds for more day care jobs — equal vital for getting people back to work? To a remarkable extent, men still work with men, and women with women. It’s not due to the objective requirements of the job. Women are considered strong enough to do a lot of heavy lifting — if they are nurses. When it comes to construction, factory work, and oil rigs — not so much. With all the automated equipment in use, how come we aren’t “man enough” to rescue Mother Nature? Jobs create jujubies, jukeboxes — and gender. One company decided that macho behavior in a blue-collar environment peopled solely by men was leading to a high rate of industrial accidents: the gendering of the job was, quite simply, a safety hazard. So the company began training workers to leave the macho at home. Actually, that blue-collar environment was an oil platform. No evidence I am aware of suggests that any such problem led to the tragic accident that produced the Gulf oil spill. But the point remains. Wouldn’t it be better for everyone if we left our personal anxieties about whether we are “real men” or “real women” at home? As we focus on cleaning up the Gulf, and digging our way out of the recession, let’s turn lemons into lemonade by leaving gender out of the picture. Let’s clean the Gulf and build the future by just doing our jobs.

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Riki Ott: BP, Governments Downplay Public Health Risk From Oil and Dispersants (PHOTOS)

July 7, 2010

Pensacola Beach, FL — When Ryan Heffernan, a volunteer with Emerald Coastkeeper, noticed a bag of oily debris floating off in Santa Rosa Sound, she ran up to BP’s HazMat-trained workers to ask if they would retrieve it. “No, ma’am,” one replied politely. “We can’t go in the ocean. It’s contaminated.” Ryan waded in and retrieved the bag. That was Wednesday, June 23, the first day visible oil hit Pensacola Beach. Ryan had been swimming off the beach the day before, as she said, “to get in my last swim before the oil hit.” The trouble is that not all of the oil coming ashore is visible. Dispersed oil – tiny bubbles of oil encased in chemical dispersants – are in the water column. On Thursday Ryan was treated at a local doctor’s office for skin rash on her legs. Three days later on Pensacola Beach, I watched BP’s HazMat-trained workers shovel surface oiled sand and oily debris into bags early in the morning. The workers followed the waterline like shorebirds, scurrying up the beach in front of breaking waves and moving back down with receding waters. The late morning sun retired the workers to the shade of their tents and the job of “observing,” while it brought out throngs of beach-goers — children, parents, grandparents — who happily plunged into the “contaminated” ocean without a second thought. I was astounded. Why did people think the ocean was safe for swimming? There were five HazMat tents, four front-loaders, and at least two dozen HazMat workers on the beach. HazMat workers wore yellow over-boots duct-taped to their long pants’ legs to minimize risk of contact with the water. The white surf popped with visible black tar balls as it rolled towards the beach. Waves left an oily signature of tar balls on the beach, melting in the sun. The treads of my Chacos weighed down with oily sand despite trying to avoid the mess. Most people were barefoot. Hotels set up oil cleaning stations on their premises – and signs saying the water advisory (put in place after Ryan’s incident) had been lifted. What’s wrong with this picture? Lots. For starters, Ryan’s story from Pensacola Beach is not an isolated incident. I have received emails and heard personal stories from Louisiana to Florida of people who have developed skin rashes and blisters from going in the ocean. People describe stings by “invisible jellyfish.” Turtle patrol volunteers who walk beaches daily write of blisters and bronchitis. And then there are individuals like Sheri Allen who took her dog for a walk on a beach in Mobile Bay in May. Sheri wrote me that her “arms and legs were burning, even after the shower. The following morning … (there were) … small blood blisters. By evening the blisters had begun to welt. By the fourth day, the areas had got larger and swollen.” She went to see a doctor but the sores remain and they have begun to scar her arms and legs. For several days after Sherri’s incident, her husband found fish kills on the beach. William Rea, MD, who founded the Environmental Health Center-Dallas , treated a number of sick Exxon Valdez cleanup workers. He once told me, “When you have sick people and sick animals, and they are sick because of the same chemical, that’s the strongest evidence possible that that chemical is a problem.” It’s not just skin rashes and blisters. At community forums, I commonly hear from adults and children with persistent coughs, stuffy sinuses, headaches, burning eyes, sore throats, ear bleeds, and fatigue. These symptoms are consistent across the four Gulf states that I have visited. Further, the symptoms of respiratory problems, central nervous system distress, and skin irritation are consistent with overexposure to crude oil through the two primary routes of exposure: inhalation and skin contact. Most distressing to me are stories about sick children. “Dose plus host makes the poison,” I learned in toxicology. A small child is at risk of breathing a higher dose of contaminants per body weight than an adult. Children, pregnant women, people with compromised or stressed immune systems like cancer survivors and asthma sufferers, and African Americans are more at risk from oil and chemical exposure – the latter because they are prone to sickle cell anemia and 2-butoxyethanol can cause, or worsen, blood disorders. Public officials have failed to sound an alarm about the public health threat because three federal agencies – DHHS, EPA, and OSHA – cannot find any unsafe levels of oil in air or water. Perhaps the federal air and water standards are not stringent enough to protect the public from oil pollution. Our federal laws are outdated and do not protect us from the toxic threat from oil – now widely recognized in the scientific and medical community. BP is still in the dark ages on oil toxicity. BP officials stress that, by the time oil gets to shore, it is “weathered” and missing the highly volatile compounds like the carcinogenic benzene, among others. BP fails to mention the threat from dispersed oil, ultrafine particles (PAHs), and chemical dispersants, which include industrial solvents and proprietary compounds, many hazardous to humans. If oil was so nontoxic, then why are the spill response workers giving hazardous waste training? Our federal government should stop pretending that everything is okay. What isn’t safe for workers isn’t safe for the general public either. Ryan’s rash was getting better until she sat on Pensacola Beach to watch fireworks on July 4. The next day her skin erupted in fiery red burns. She is worried about her health. So are many other people along the Gulf. Perhaps it is time for the government to protect public health first and BP’s profit second. Riki Ott, PhD, is a marine toxicologist from Alaska, volunteering in the Gulf. She has written two books on surviving the Exxon Valdez oil spill – Sound Truth and Corporate Myths on biological impact of oil to people and wildlife, and Not One Drop on emotional impact of disaster trauma and litigation to people and community. www.rikiott.com . Ott is working with Emerald Coastkeeper and others to petition the EPA to delist toxic chemical products in oil spill response.

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Jan Phillips: Sparking the Collective Imagination

June 30, 2010

I read about an executive who had a real flat response from his employees when he put out the question “How can we best the best company in the world?” There was a long pause and a deep silence in the room until a worker said, “How about this: how can we be the best company FOR the world?” And that was the question that charged everyone’s imaginations and started everyone thinking creatively. It’s not about what we can get. It’s more about what we can give. And it’s our giving that opens the door to all the abundance we are going to receive in the world, as a person or a corporation. Just as a battery is charged by the union of positive and negative forces, just as a child is conceived by the union of a male sperm and female ovum, just as a thought issues forth from the union of right and left brain, so does original thinking emerge from the practice of joining “us” and “them” into a “we.” Our imaginations are the most potent engines of change in the universe. There is no doubt that we can evolve ourselves forward once we replace our dualistic thinking with thought processes that re-pair the opposites and cause convergence. In this matter, emotions are essential. They are our guide, our body’s means of instant messaging to the brain. Yes, this decision is wise. No, that choice is unwise. Our bodies are hardwired for survival of the species, and if we listen deeply to them, if we are wise enough to trust the feelings they emanate on our behalf, then we will find the clarity necessary to make inspired choices that are as good for the whole as they are for the one, which is an absolute prerequisite for thought leadership today. And because the work of transforming our own thought processes is so evolutionary an act, it requires the total engagement of body, mind, and spirit. This is not business as usual. This is reorienting to a new star. We are organisms in a constant state of flux, exposed to an ever-changing environment, and the more we inquire into our own state of consciousness and notice the evolution of our own ideas, the more aware we become of our place in the family of things. As a civilization, we are shifting out of an industrial, assembly-line mindset of isolated units into an organic, knowledge-based network of communities. There is a tectonic shift of consciousness occurring and an evolutionary tendency away from the mechanical and back toward the natural. This may be seen as Mother Nature’s mid-course correction. As the thinking neurons of the planet, biologically oriented toward survival, we are finding ways of connecting and communicating with unimaginable speed and precision. Someone has calculated that we can globally transmit the contents of the Library of Congress across a single fiber optic line in 1.6 seconds. Science and nature have announced their engagement. It is not the task of creators to know the answers, but to articulate the questions we face as a people and to call us together to create our solutions. This is the potential of corporate America–to re-think their structures and processes in such a way that they become furnaces of inspiration, centers of creative ingenuity, arbiters of a culture conscious enough to bring the whole human family into the picture. The profits from such an endeavor–materially, culturally, spiritually–could overwhelm the most skeptic imagination. Thought leaders do not think in terms of “me” and “mine.” They think in terms of “we” and “ours.” They do not think outside the box, they live outside the box. No matter what their address, they think of themselves as global citizens, responsible to the earth, responsible to the human family, and aware that their well-being is tied to the well-being of others. They are balanced and in tune with their own inner life, and they are awake to the immense possibilities that erupt when the inner lives and imaginations of their colleagues are fully engaged. These are the kinds of alliances that can emerge when we change our questions from “What can we gain?” to “What can we give?” Businesses have always been on the cutting edge of creative innovation, and finding ways of bridging their bottom line concerns with the basic needs of the poor opens up whole new avenues for win-win solutions. There is a tremendous opportunity here for commercial enterprises that balance commerce with compassion, that reframe “the poor” from a category of charity to a category of collaborator, and that imagine new ways of working with and in these communities so that everyone benefits. -from The Art of Original Thinking

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Asia Stocks, European Futures, Currencies Rise on Growth Gold Near Record

June 18, 2010

By Yumi Teso and Anna Kitanaka June 18 (Bloomberg) — Asian stocks gained, driving the MSCI Asia Pacific Index to its longest winning streak in 11 months, and the won climbed on signs investors are buying assets in the region as an economic recovery gathers pace. The MSCI Asia Pacific Index rose 0.2 percent to 116.02 as of 2:03 p.m. in Tokyo, advancing for a seventh day. South Korea’s won was poised for its biggest weekly jump in 13 months after Finance Minister Yoon Jeung Hyun said growth will likely exceed 5 percent this year. The euro strengthened to a three- week high against the dollar as concerns eased that Europe’s debt crisis will worsen. Gold traded near a record. Emerging-market equity and bond funds received net inflows in the week to June 16 as appetite for higher-yielding assets revived after concerns over European deficits eased, EPFR Global said. A government report showed Thai exports jumped 42.1 percent in May from a year earlier, the most in almost two years, and Japan’s government pledged to cut company tax to spur growth. “There has been optimism that the impact of Europe’s problem on the Asian economy may be limited, supporting the purchase of regional currencies,” said Minori Uchida , a senior analyst in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd. The MSCI Emerging Markets Index rose 0.4 percent, extending an eight-day, 6.5 percent rally. The FTSE Bursa Malaysia KLCI Index added 0.4 percent. The Hang Seng China Enterprises Index , a measure of Chinese shares traded in Hong Kong, rallied 0.9 percent, set for a seventh day of gains that will be its longest winning streak since April, 2007. Currencies Gain South Korea’s won advanced 0.8 percent to 1,203.9 per dollar as foreigners pumped money into the stock market for a sixth day, the longest run of net purchases in two months. The Taiwan dollar gained 0.5 percent to NT$32.15 before a report next week that a Bloomberg survey of economists indicates will show exports increased 34 percent in May from a year earlier. Emerging equities funds took in $2.5 billion in the past week, the second-largest inflow this year, while emerging bond funds received $659 million, EPFR said in a statement. The MSCI Asia Pacific Index has slumped 10 percent from its high this year on April 15 as swelling budget deficits prompted Standard & Poor’s to cut ratings of Greece, Spain and Portugal. The retreat has driven down the average price of shares in the gauge to 14.7 times estimated earnings . The ratio sank to 13.8 times on May 18, the lowest level since December 2008. “There was a lot of pessimism about what’s happening in Europe that took the market down,” said Tim Leung , who helps manage about $1.5 billion at IG Investment Ltd. in Hong Kong. “Stabilization in the European funding probably made a lot of investors less worried about the situation.” Default Risk HSBC Holdings Plc, Europe’s biggest bank, gained 0.7 percent in Hong Kong after Spain yesterday sold 3.5 billion euros ($4.3 billion) of bonds at yields lower than the prevailing market rates. London-based Standard Chartered Plc jumped 3.3 percent. The cost of protecting Asia-Pacific bonds from non-payment fell, according to traders of credit default swaps. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan declined 3 basis points to 126 basis points, on track for its lowest close in a month, according to Royal Bank of Scotland Group Plc and CMA DataVision in New York. The euro advanced to $1.2403, after earlier touching $1.2414, the highest level since May 28. The yen climbed 0.3 percent to 90.76 after the government pledged in its medium-term economic plan today to bring the corporate tax rate down to a level “commensurate” with other leading nations. Asian technology shares gained after Apple Inc. rallied 1.7 percent to a record yesterday. Morgan Stanley said the customer base for the iPhone may top 100 million users next year on demand for its latest version. Apple Link Softbank Corp., the exclusive supplier of the iPhone in Japan, climbed 0.8 percent to 2,443 yen. Nintendo Co., the world’s largest maker of video-game players, advanced 2.1 percent, its seventh consecutive gain. Wintek Corp. , a component maker for Apple Inc.’s iPad and iPhones, gained 2 percent. Japan’s Nikkei 225 Stock Average fell 0.2 percent and futures on the Standard & Poor’s 500 Index fell 0.1 percent today. Toyota Motor Corp. , which gets 28 percent of its sales in North America, lost 1.8 percent in Tokyo after U.S. jobless claims increased. “The economic climate has to further improve in countries like the U.S. for the stock market to enter a full-fledged recovery phase, though investors are less anxious about Europe,” said Kazuhiro Takahashi , a general manager at Tokyo- based Daiwa Securities Capital Markets Co. Bullish on Gold Gold may advance to a record as investors take refuge in the precious metal to protect their wealth from Europe’s financial turbulence. Bullion for immediate delivery traded at $1,244.9, after jumping as much as 1.8 percent yesterday. The metal touched a record $1,252.11 on June 8. Newcrest Mining Ltd., Australia’s largest gold producer, gained 2.1 percent in Sydney. “We are still very bullish on gold,” said Hwang Il Doo , a senior trader with KEB Futures Co. in Seoul. “Gold will remain the main beneficiary of what’s happening in Europe unless the picture takes a turn for the better.” Crude oil fell for a second day in New York, dropping 0.3 percent to $76.56 a barrel, amid doubts about the pace of the economic recovery in the U.S., the world’s largest energy consumer. U.S. fuel consumption fell 0.9 percent to the lowest level in five weeks in the seven days ended June 11, the Energy Department reported June 16. “The U.S. economy is facing a major structural adjustment in the wake of the financial crisis and subsequent economic slump,” said Toby Hassall , a research analyst at CWA Global Markets Ltd. — Kim Kyoungwha and Christian Schmollinger in Singapore, Yusuke Miyazawa in Tokyo, Weiyi Lim in Taipei, Ronnie Koo in Hong Kong and Toshiro Hasegawa in Tokyo. Editors: Sandy Hendry , Patrick Chu To contact the reporters on this story: Yumi Teso in Bangkok at yteso1@bloomberg.net .

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Hungary `Isn’t Greece,’ Moody’s Says After Bonds Plunge on Default Concern

June 4, 2010

By Tal Barak Harif and Piotr Skolimowski June 5 (Bloomberg) — Hungary has “a good track record” managing fiscal crises and will take the steps needed even after a government official said the country may be at risk of defaulting, according to Moody’s Investors Service. “Hungary isn’t the next Greece,” Kristin Lindow , a senior vice president with the ratings company, said in a telephone interview yesterday from London. “Hungary has a good track record of doing what it needs to do when in trouble.” Hungarian bonds tumbled yesterday, pushing up borrowing costs by the most since October 2008, and the forint and stocks plunged after Peter Szijjarto , spokesman for Prime Minister Viktor Orban , said it’s not “an exaggeration at all” to speculate that the nation may be unable to pay its debt. The comments sparked concern that Europe’s debt crisis is spreading after credit downgrades of Greece, Portugal and Spain. The European Union pledged almost $1 trillion to the bloc’s weakest economies last month after Greece’s widening budget deficit threatened to undermine confidence in the euro. “It’s clear that the economy is in a very grave situation,” Szijjarto said at a press conference in Budapest yesterday. “I don’t think it’s an exaggeration at all” to talk about a default, he said. Orban took office May 29 after winning elections by pledging to cut taxes and stimulate the economy. He failed last week to get EU approval for looser fiscal policy. ‘Ill Considered’ Comments The extra yield investors demand to own Hungary’s debt over U.S. Treasuries rose 157 basis points, or 1.57 percentage point, to 476, according to JPMorgan Chase & Co.’s EMBI Global Index . The BUX Index of equities tumbled 3.3 percent, while the forint fell 2.3 percent to 288.73 per euro, the weakest level since June 2009. “The politician was over-speaking, which is typical for a new government, but it was ill considered,” Lindow said. Moody’s lowered Hungary’s debt rating to Baa1, the third lowest investment grade, from A3 in March 2009 and has a negative outlook. Hungary, the first EU nation to receive an international bailout during the credit crisis, has the equivalent of $26.9 billion of debt coming due this year, according to data compiled by Bloomberg. The government’s budget deficit could grow to as high as 7.5 percent of gross domestic product this year, compared with a 3.8 percent target set with the International Monetary Fund by the previous government, Mihaly Varga , Orban’s chief of staff, told M1 television on May 30. Tax Reductions Orban is vowing to end austerity and cut taxes to help accelerate economic growth after the worst recession in 18 years. Former Hungarian Finance Minister Peter Oszko said yesterday the country is “in no way near default.” “While the outlook for that country remains poor, it does not quite have the potential to roil markets as much as Greece or the other peripheral euro zone members,” Win Thin , a senior currency strategist at Brown Brothers Harriman & Co., said yesterday in a report. “The Hungary story is bad, but the overall impact is likely to be limited.” Hungary, which received a 20 billion-euro ($24 billion) loan from the IMF, the EU and the World Bank in October 2008 to help avert a default, hasn’t drawn any funds from its standby program under the fourth and fifth previews, and the new government has raised the possibility of renegotiating this year’s deficit target to 5 to 6 percent of GDP, according to Thin. Manageable Situation “The new government is trying to say the picture is much uglier and we’re going to work to clean the house,” Luis Costa , an emerging market strategist at Citigroup Inc. in London, said yesterday in a phone interview. The comments “are probably more populist than anything else,” he said. “When it comes to the funding requirements, the situation in 2010 is still very manageable.” Credit-default swaps on Hungarian government bonds rose to 410 basis points from yesterday’s close of 308, according to CMA DataVision prices. An increase signals deterioration in investor perceptions of credit quality. “We still have a negative outlook because we don’t know when implementation will happen of the structural changes,” Moody’s Lindow said. The BUX index briefly extended its drop from this year’s high to more than 20 percent yesterday before paring it loss. The MSCI Emerging Markets Index of shares lost 1.2 percent yesterday, while currencies from Poland to Romania and Russia weakened against the dollar. The Standard & Poor’s 500 Index tumbled 3.4 percent as a report showing slower-than-estimated American job growth worsened losses sparked by concern over Hungary’s debt. Reducing Expenses Hungary is in its fifth year of cost cutting and the government reduced the deficit to 4 percent of GDP last year from 9.3 percent in 2006, the EU’s widest at the time. The country’s debt level may reach 79 percent of GDP this year, on par with Germany and making it the most indebted eastern EU member, according to the European Commission. The debt level is less than the 125 percent of GDP for Greece, 118 percent for Italy, and 86 percent for Portugal. A fact-finding panel will probably present preliminary figures on the state of the economy this weekend, Szijjarto said. The government will publish an action plan within 72 hours after the committee reports its findings, he said. “The moment of truth has already arrived in Greece and it has yet to come to Hungary,” Szijjarto said. “The government is prepared to avoid the road that Greece has been down; in other words, we won’t hesitate to act after the truth becomes known.” Szijjarto’s comments “are extremely confusing and more market panic should be expected,” Elisabeth Andreew , chief foreign-currency strategist at Nordea Markets in Copenhagen, wrote in an e-mailed comment. “Beware of more spill-over effects on other currencies and asset classes.” To contact the reporters on this story: Tal Barak Harif in New York at tbarak@bloomberg.net ; Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.net

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Brett King: Bad Service is Killing Bank Share Valuations

May 31, 2010

No one can deny that banks have had a tough time of it when it comes to stock market valuations over the last couple of years. The global financial crisis, massive debt and NPL issues along with punishing public opinion led to a massive collapse in banking stocks and company valuations in recent times. It would be simple to blame the sub-prime and global financial crisis as the sole cause of all the ills of the banking sector, but I have a different theory which explains a large part of the picture. In the last 5 years the S&P 500 has experienced incredible volatility. On October 9, 2007 the S&P 500 hit its all time record of 1,565.15, but it was followed by the biggest annual loss in the S&P’s history, losing 37% in 2008 (the previous record being -22% in 2002 at the end of the dot com boom). As a result you’d expect any participants in the US market to have suffered similarly, and they have. Volatility, or the range/spread of buy and sell trades in the US markets is at an all time high and according to many analysts this volatility is here to stay . The certainty in the market has largely disappeared, and with it, the status quo in respect to valuations. In the last 5 or 6 years, however, a new component has come into valuation metrics for listed companies. We still have revenue, we still have market share, branding and so forth, but innovation is clearly an increasingly significant part of the story. Let me illustrate: Comparative Performance – S&P 500, Tech and Banking Stocks Below is a graph (source: Yahoo Finance , Bloomberg ) showing the comparative performance of a selection of key stocks from the US market, the S&P500 Index being the dotted yellow line. Innovation is being rewarded like never before in market valuations Clearly Apple and Google have differentiated themselves. What has made the difference? Why have Google and Apple performed so much better over the last 5 years in market terms? Let’s examine the facts and see what conclusions we can draw. Microsoft’s Revenue in 2005 exceeded Apple’s by more than 300%, and Google’s by almost 600%. In the last 5 years Microsoft’s Revenue has increased from $39B in 2005 to close to $60B in 2009 , certainly not a bad performance. Google’s revenue certainly has increased, but in the years 2007-2009 it has only jumped from $16.5B to $23.7B. Since 2005 Apple has increased their revenue from $13.9B (2005) to $36.5(2009). Apple has certainly benefited from the popularity of the iPhone (Released June 29th, 2007) and more recently the iPad (Released April, 2010). But if we compare the top 4 US banks we see that their revenue makes the tech companies look fairly ordinary. If revenue was the key driver, then we’d expect to see that the banks would have better comparative valuations. Given that Microsoft’s revenue is still close to double that of Apple’s revenue, and more than double that of Google – if the answer was that ‘tech’ revenue was valued at a premium then we’d expect Microsoft to be fairing better. 2009 data Assets ($B) Revenue ($B) Bank of America (BAC) $2,300 $113 J P Morgan Chase (JPM) $2,000 $101 Citigroup (C) $1,800 $106 Wells Fargo (WFC) $1,200 $51.7 On this basis, revenue, while a critical component of a company’s valuation, would seem to not correlate cleanly with the exceptional performance of Apple and Google recently. Well before the GFC started to impact company valuations, they were already being hurt by something… So is it future revenue potential? P/E Ratios show somewhat the expectation of the market in respect to future revenue potential. For the ‘blue chip’ performers like Microsoft, JP Morgan Chase, Wells Fargo – P/E Ratio (Price/Earnings Ratio) are all performing in the range of 15-17, whereas Apple and Google are at 21.8 and 22.1 respectively. Certainly expectations are that Google and Apple have not yet hit their peak in earnings capability because their valuations show a higher multiple. Indeed, the S&P 500 typically tracks at around 15 – so Google’s and Apple’s performances are something special. Future earnings might account for a higher valuation today, but this is not necessarily the sole factor in their comparative performance which, over the last 5 years, has been much better than Microsoft, the top banks and industrials. In fact, you have to look very hard globally to find better performing stocks in respect to either new or established companies in terms of growth in both revenue and share price over the last 5 years. So future revenue is a factor, but not the sole factor. If it was, then you’d expect Microsoft would get some of the joy too as part of the ‘tech’ clique, but they’ve not received as much optimism as their tech buddies have. What differentiates Apple and Google’s revenue from the rest of the pack? You might attribute Apple’s success in respect to valuations from their great products. But if you compare market share both Google and Apple really still are minority players when compared with Microsoft, purely from a product perspective. While Google’s Android and Apple’s OS-X are taking some share of the mobile market, Windows is still a force to be reckoned with. So where is the differentiation? Google’s strength to date, and Apple’s more recent success with great new device technologies has centered around one key area. Their ability to create great, but simple and intuitive, propositions. Google.com as a search engine is the perfect representation of search (at least for now). When Google launched their search engine in 1997, there was really no one that could touch them in terms of simplicity of experience and validity of results, and today, although many have attempted to copy Google’s formula, (read Bing.com) we still see Google maintaining a 65.6% market share of the SE space. What Google bought to the table, their foundation or core, was innovating the customer experience and making technology really simple to use. The simplicity and user experience differentiate Apple devices Apple has done the same. User Experience is at the heart of why the iPod, iPhone and iPad have captured not only the imagination of the consumer market, but why Apple and its products are increasingly part of the common vernacular. Sure Apple’s stuff looks great, cool and is about as aspirational as branded products get in the Y-Gen/Digital Natives space today. But this stuff just works. Innovating the customer experience is the ‘secret sauce’ Innovating the customer experience is at the heart of why Apple and Google are outperforming the market today. It’s also at the heart of why traditional banks are suffering. As market analysts, consumers and as media commentators we just see more of the same. While there has been pressure on the banking market, bankers seem content to ‘wait it out’ until more sane, normal times return. Banking is an old and traditional industry and it doesn’t take kindly to change. But that is problematic – because right now their lack of adaptability is hurting bank valuations significantly. There’s nowhere for banks to go from here if they can’t innovate around the customer. The lack of innovation means less future revenue and reduced earnings potential. In fact, as of today it’s more likely that a Google, Apple, PayPal or new start up like Square will innovate the customer experience in banking, rather than banks themselves. This is where banks need to take a good hard look at themselves. The lack of capability to innovate the customer experience is costing them, and it’s only going to get worse.

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Brett King: Bad Service is Killing Bank Share Valuations

May 31, 2010

No one can deny that banks have had a tough time of it when it comes to stock market valuations over the last couple of years. The global financial crisis, massive debt and NPL issues along with punishing public opinion led to a massive collapse in banking stocks and company valuations in recent times. It would be simple to blame the sub-prime and global financial crisis as the sole cause of all the ills of the banking sector, but I have a different theory which explains a large part of the picture. In the last 5 years the S&P 500 has experienced incredible volatility. On October 9, 2007 the S&P 500 hit its all time record of 1,565.15, but it was followed by the biggest annual loss in the S&P’s history, losing 37% in 2008 (the previous record being -22% in 2002 at the end of the dot com boom). As a result you’d expect any participants in the US market to have suffered similarly, and they have. Volatility, or the range/spread of buy and sell trades in the US markets is at an all time high and according to many analysts this volatility is here to stay . The certainty in the market has largely disappeared, and with it, the status quo in respect to valuations. In the last 5 or 6 years, however, a new component has come into valuation metrics for listed companies. We still have revenue, we still have market share, branding and so forth, but innovation is clearly an increasingly significant part of the story. Let me illustrate: Comparative Performance – S&P 500, Tech and Banking Stocks Below is a graph (source: Yahoo Finance , Bloomberg ) showing the comparative performance of a selection of key stocks from the US market, the S&P500 Index being the dotted yellow line. Innovation is being rewarded like never before in market valuations Clearly Apple and Google have differentiated themselves. What has made the difference? Why have Google and Apple performed so much better over the last 5 years in market terms? Let’s examine the facts and see what conclusions we can draw. Microsoft’s Revenue in 2005 exceeded Apple’s by more than 300%, and Google’s by almost 600%. In the last 5 years Microsoft’s Revenue has increased from $39B in 2005 to close to $60B in 2009 , certainly not a bad performance. Google’s revenue certainly has increased, but in the years 2007-2009 it has only jumped from $16.5B to $23.7B. Since 2005 Apple has increased their revenue from $13.9B (2005) to $36.5(2009). Apple has certainly benefited from the popularity of the iPhone (Released June 29th, 2007) and more recently the iPad (Released April, 2010). But if we compare the top 4 US banks we see that their revenue makes the tech companies look fairly ordinary. If revenue was the key driver, then we’d expect to see that the banks would have better comparative valuations. Given that Microsoft’s revenue is still close to double that of Apple’s revenue, and more than double that of Google – if the answer was that ‘tech’ revenue was valued at a premium then we’d expect Microsoft to be fairing better. 2009 data Assets ($B) Revenue ($B) Bank of America (BAC) $2,300 $113 J P Morgan Chase (JPM) $2,000 $101 Citigroup (C) $1,800 $106 Wells Fargo (WFC) $1,200 $51.7 On this basis, revenue, while a critical component of a company’s valuation, would seem to not correlate cleanly with the exceptional performance of Apple and Google recently. Well before the GFC started to impact company valuations, they were already being hurt by something… So is it future revenue potential? P/E Ratios show somewhat the expectation of the market in respect to future revenue potential. For the ‘blue chip’ performers like Microsoft, JP Morgan Chase, Wells Fargo – P/E Ratio (Price/Earnings Ratio) are all performing in the range of 15-17, whereas Apple and Google are at 21.8 and 22.1 respectively. Certainly expectations are that Google and Apple have not yet hit their peak in earnings capability because their valuations show a higher multiple. Indeed, the S&P 500 typically tracks at around 15 – so Google’s and Apple’s performances are something special. Future earnings might account for a higher valuation today, but this is not necessarily the sole factor in their comparative performance which, over the last 5 years, has been much better than Microsoft, the top banks and industrials. In fact, you have to look very hard globally to find better performing stocks in respect to either new or established companies in terms of growth in both revenue and share price over the last 5 years. So future revenue is a factor, but not the sole factor. If it was, then you’d expect Microsoft would get some of the joy too as part of the ‘tech’ clique, but they’ve not received as much optimism as their tech buddies have. What differentiates Apple and Google’s revenue from the rest of the pack? You might attribute Apple’s success in respect to valuations from their great products. But if you compare market share both Google and Apple really still are minority players when compared with Microsoft, purely from a product perspective. While Google’s Android and Apple’s OS-X are taking some share of the mobile market, Windows is still a force to be reckoned with. So where is the differentiation? Google’s strength to date, and Apple’s more recent success with great new device technologies has centered around one key area. Their ability to create great, but simple and intuitive, propositions. Google.com as a search engine is the perfect representation of search (at least for now). When Google launched their search engine in 1997, there was really no one that could touch them in terms of simplicity of experience and validity of results, and today, although many have attempted to copy Google’s formula, (read Bing.com) we still see Google maintaining a 65.6% market share of the SE space. What Google bought to the table, their foundation or core, was innovating the customer experience and making technology really simple to use. The simplicity and user experience differentiate Apple devices Apple has done the same. User Experience is at the heart of why the iPod, iPhone and iPad have captured not only the imagination of the consumer market, but why Apple and its products are increasingly part of the common vernacular. Sure Apple’s stuff looks great, cool and is about as aspirational as branded products get in the Y-Gen/Digital Natives space today. But this stuff just works. Innovating the customer experience is the ‘secret sauce’ Innovating the customer experience is at the heart of why Apple and Google are outperforming the market today. It’s also at the heart of why traditional banks are suffering. As market analysts, consumers and as media commentators we just see more of the same. While there has been pressure on the banking market, bankers seem content to ‘wait it out’ until more sane, normal times return. Banking is an old and traditional industry and it doesn’t take kindly to change. But that is problematic – because right now their lack of adaptability is hurting bank valuations significantly. There’s nowhere for banks to go from here if they can’t innovate around the customer. The lack of innovation means less future revenue and reduced earnings potential. In fact, as of today it’s more likely that a Google, Apple, PayPal or new start up like Square will innovate the customer experience in banking, rather than banks themselves. This is where banks need to take a good hard look at themselves. The lack of capability to innovate the customer experience is costing them, and it’s only going to get worse.

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Marshall Goldsmith: Does What They Think About You Hold You Back?

May 15, 2010

How do you define who you are? If you think about the various components of how you define yourself, where did they originate? If you’re like most people, your identity is formed to a large extent by what you remember from your past and by what other people think about you and tell you about yourself. Where the past and other people’s opinions meet what I call your “reflected” identity. Other people remember events in your past and may remind of you of them, sometimes too often. It’s one thing for the executive above to admit to poor follow up. But if his boss or wife or customers tell him the same thing, it reinforces the picture he already has of himself. You might know this as feedback. Feedback from others is how we shape our reflected identity. As a professional who relies on feedback as a tool for helping people change for the better, I would never disparage the value of it; however, I feel obligated to note that not all feedback is offered in good faith or in the most forgiving spirit! For example, perhaps your spouse constantly reminds you of your one or two failures as a mate. Or perhaps it’s a colleague who never misses an opportunity to remind you of one of your more serious workplace mishaps. It could be the boss whose only impression of you is some less-than-brilliant statement you made in a meeting, which he repeats to anyone who will listen whenever your name comes up. (Year ago, I gave feedback to one manager who repeatedly derided one of his top lieutenant’s work habits, all because the subordinate refused to schedule an early morning phone call with the boss over a holiday weekend. I regarded this as an admirable display of work-life balance, but the manager saw it as evidence of the man’s 9-to-5 mentality and, therefore, a lack of commitment.) The fact is that while some feedback is quite fair, some of it is part of the ribbing and back-slapping that is supposed to be taken as part of a lively corporate environment where quick speech, one-liners, and “humor” are meant to be fun. Sometimes these little jokes and stabs at one another are not fun and in an environment where we tend to become what other people say we are, the wrong kind of feedback can be self-limiting and destructive. People who keep reflecting your worst moments back to you–with the implication that these moments are the real you–are no different than the friend who sees that you’re on a diet trying to lose weight and yet insists, “C’mon, you can loosen up for one day. Have a second helping of this cake.” They’re trying to suck you back to a past self, someone you used to be, not who you are or want to become. It’s likely that we’ve all found some value in paying attention to our reflected identity, but it’s important to keep a healthy skepticism about as well. At its worst, your reflected identity can be based on little more than hearsay and gossip and may tarnish your reputation. At its best it may enhance your reputation–and help you succeed. But either way, it’s not necessarily a true reflection of who you are. So, even if your reflected identity is accurate, remember it doesn’t have to be predictive. We can all change!

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Don McNay: Goldman Sachs: Too Big For Jail?

April 18, 2010

When happily ever after fails And we’ve been poisoned by these fairy tails Lawyers clean up small details Since daddy had to fly -Don Henley and Bruce Hornsby The Securities and Exchange Commission is receiving media kudos after filing a lawsuit that accuses Goldman Sachs of fraud. A Los Angeles Times headline trumpeted, “Goldman Sachs case could help Obama shift voter anger.” A McClatchy news service headline blares, “Message to Wall Street: SEC is back on the job.” Before I join the chorus of media cheerleaders, I ask the Peggy Lee question, “Is that all there is?” I’m not a lawyer but my understanding is this, the SEC filed a civil lawsuit. It’s a lawsuit, not a criminal action. No one is going to jail. No one is going to be dragged off in handcuffs. Just because the SEC filed a lawsuit, it doesn’t mean they will win. Goldman Sachs could easily prevail. The Wall Street Journal noted how the government might have a difficult time at trial. Before we start breaking out the champagne, let’s look at what is actually going on. The SEC went from doing absolutely nothing to doing something. A good first step. The agency had gotten so bad under Bush appointee Christopher Cox that they look like a public relations ambassador for Wall Street. After missing the financial meltdown and screwing up big time on the Bernie Madoff scandal, we knew the SEC was going to make an example out of someone To their credit, they didn’t hit a bunch of “easy to catch” small timers. They went after the biggest and baddest firm on Wall Street. No one has more clout in Washington and on Wall Street than Goldman Sachs. Suing Goldman Sachs will definitely attract mainstream media cheerleaders. As Wilt Chamberlain aptly noted, “no one ever rooted for Goliath.” Especially if Goliath is a Wall Street firm that took taxpayer bailout money and paid themselves million dollar bonuses. I don’t have any problems with the SEC going after Goldman Sachs. I just wonder if they are going after the right people and the right situation. The SEC lawsuit is based on the actions of Fabrice Tourre, a 31 year old Goldman Vice President. As Peter Huang, a securities law professor at Temple University told the Wall Street Journal, “The SEC has the tricky job of showing that Goldman was reckless in deceiving investors.” In short, the lawsuit is not a slam dunk. When you start looking at Goldman Sachs, there are a lot of high level decisions that need to be completely investigated. Many related to the bailout money they took. I’ve been opposed to the Wall Street bailouts from day one. I looked at the cast of characters and decided that the American people were going to get taken, while Wall Street and Washington insiders would make out like bandits. I called that one correctly. As Ronald Ricker pointed out in a Huffington Post piece, Goldman was given $12 billion in taxpayer bailout money in 2008. A year later, they paid out $19 billion in bonuses to their employees. Sounds like a great place to be on the payroll. The Goldman story gets worse. One of the most unusual moves during the whole bailout fiasco was the bailout of AIG. AIG is an insurance company. Insurances companies are regulated by states, not the federal government and certainly not by the Federal Reserve Board. On September 16, 2008 The Federal Reserve, an organization designed to provide liquidity for banks, announced that the Federal Reserve Bank of New York was giving AIG an $85 billion line of credit. AIG has gotten billions more since then. The Secretary of the Treasury at that time was Henry “Hank” Paulson. His previous job had been head of Goldman Sachs. The Federal Reserve Bank of New York was headed by Timothy Geithner. He took Paulson’s place as Secretary of the Treasury. Shortly before the AIG bailout, Paulson let Lehman Brothers, one of Goldman’s biggest rivals, go into bankruptcy. There was no bailout money for Lehman. There was not even a shot gun marriage/merger like Paulson arranged with Morgan Stanley and JP Morgan Chase. When all the dust settled, Paulson’s former rivals at Lehman, and a chief competitor of Goldman, was out of the game. While AIG stayed in. It gets even worse than that. A very complicated part of the bailout was related to companies that were “counterparties” to AIG. Counterparties were financial institutions that AIG owed money to. Goldman Sachs and other companies that had gotten money from bailouts got even more government money as it was funneled back to pay AIG’s claims 100 cents on the dollar. Taxpayers put up all the money and got none of the rewards. It was multi billion dollar windfall for Goldman and the other AIG counterparties. In his days on Wall Street, I can’t imagine that Paulson ever cut a deal as one sided. If he had, he would never have lasted as head of Goldman Sachs. Even Federal Reserve Chairman Ben Bernanke said the move hurt the taxpayers. “If a federal agency had on September 16, 2008 , they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate. That outcome would have been far preferable to the situation we find ourselves in now.” It was the biggest scandal related to the bailout. And swept under a rug. I don’t see them dragging anyone off in handcuffs over the AIG saga. I have not even seen a civil charge. Geithner is now President Obama’s top dog at Treasury. His former boss Bernanke was re-appointed by President Obama for another term. Paulson is out promoting his new book. The civil suit by the SEC allows the government to pretend they are more like Elliott Ness than Barney Fife. They can put all their firepower into getting a positive result out of the lawsuit. It’s easier to go after a 31 year old Vice President than the current and former Secretary of the Treasury. The current suit will have little impact on Goldman in the long run. Goldman will still keep racking up hefty profits, still keep paying the employees multi million dollar bonuses and still finding a way for its friends and alumni to work for the government agencies regulating it. It could be that Henry Paulson, and Geithner are truly innocent guys just doing their jobs. It could be that Ben Bernanke is really a genius and deserved to have his picture slapped on the cover of Time Magazine as “Man of The Year.” It could be that everything wrong at Goldman was contained to a 31 year old Vice President. The could be that moon is made out of green cheese. Just don’t ask me to believe it. I’m a skeptical of what Washington and Wall Street are doing. After a lifetime of hearing government statements like “Watergate was a third rate burglary,” “Oswald acted alone,” “Iraq has weapons of mass destruction” and “I did not have sex with that woman,” I have a right to be. We’ve been told that Goldman Sachs is too big to fail. Now I wonder if they are too big for jail.

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Simon Johnson: Hard Pressed, Senator Dodd Gives Ground

March 27, 2010

Senator Chris Dodd has good political antennae. He knows that his financial reform bill will come under severe pressure because it has a weak heart — the provisions that deal with “too big to fail” are simply “too weak to make any sense.” Stung by the hard-hitting critique of Senator Ted Kaufman earlier on Friday and unsure exactly where an increasingly combative White House is heading on the broader strategy vis-à-vis banks, Mr. Dodd took to the Senate floor yesterday afternoon – actually immediately after Senator Kaufman – in an attempt to sustain the momentum behind his approach to “reform”. Note the prominent and rather defensive mention of Delaware, Senator Kaufman’s state, in what Senator Dodd said (the wording here is from the verbatim recording, not the official transcript): “A business, as I say respectfully, in Connecticut or Delaware or Colorado, a homeowner in those states shouldn’t have to pay the price because a handful of financial institutions got too greedy, too risky, they were unwilling to examine what they were doing or did, recognizing that the federal government would bail them out if they made a bad choice, which they did.” Perhaps it was this picture that did it: Senator Dodd asserts that “never again should a financial problem of a major financial institution put the rest of the country at risk”. But there is no mention of the specific reforms that would prevent this. Mr. Dodd does express exactly the right general idea, “First and foremost, never, ever again should a financial institution get so large, so interconnected, produce products that put the rest of us at risk.” But the cognitive dissonance here is extreme. The only purported mechanism to rein in megabanks in the Dodd bill is the resolution authority, but this by definition cannot work for large complex cross-border financial institution – this is the point insisted upon by Senator Kaufman today. Dodd recognizes the validity of Kaufman’s argument at some level, but just cannot bring himself to say that he agrees – or to acknowledge that his legislation does nothing to deal with financial institutions that have already proved themselves to be so large they can damage society. So we reach an impasse – at least for now. Dodd concedes that too big to fail is the central issue and he implicitly acknowledges that his bill has no way to address the concerns raised by Senator Kaufman (and Paul Volcker and others). The White House has cleared the way for major progress vs. the financial sector lobby (nice speech by Neal Wolin to the Chamber of Commerce), but does not yet press home its advantage. Barney Frank knows there is a deep flaw in the current legislation and waits in the wings with a sharp pencil. He previously thought “too big to fail” firms could be taxed down to size; increasingly this seems unrealistic and at odds with the shifting consensus on systemic risk. Chris Dodd wants to go out in blaze of glory, not with a bill that makes no sense at all on its most critical points. Ted Kaufman is turning into a relentless critic, Elizabeth Warren is fast becoming a folk hero, and Paul Volcker is poised to make a major speech in Washington on Tuesday. Is Volcker likely to toe the party line and defer to Senator Dodd – or will he lay out in forceful terms what reforms would really mean, i.e., what are the true Volcker principles, who has them, and how would you know? Financial reform might make for good television after all.

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Bill Swadley: Back to the Futures

March 25, 2010

An article in the New York Time s yesterday revealed that the MPAA (Motion Picture Association of America) is up in arms at the prospect that the Commodity Futures Trading Commission might approve the creation of a futures market that would deal in movie box office receipts. I say, let ‘em try! Futures markets have traditionally been reserved for raw goods. In futures trading sugar is a commodity that is traded through futures contracts, but not salt water taffy. Sugar is the raw ingredient, candy is the resultant product after manufacture. Same with oil. Crude oil futures are traded, not gasoline. Why is that? Mainly because there is an inherent standardization to a raw commodity, but also a question mark as to how much that commodity will bring once it’s brought to market. It’s that question mark that becomes the gain or loss for the futures trader. Once the raw commodity becomes its final product, price fluctuation is severely limited so there’s not much to bet on. Perhaps this is what fooled the Einsteins at Cantor Fitzgerald and Veriana Networks (the two groups proposing the exchanges) to think that trading box office futures could work. The complete unpredictability of a film’s performance. But it’s an entirely different manner of unpredictability, and I wonder if they understand that. To further disconnect this idea from true futures trading: while it’s true that the value of futures contracts fluctuates according to many factors depending on the commodity, there’s a best/worse case scenario that can be estimated as a basis, barring unforeseen events like a natural disaster, unexpected blight, economic crisis, etc. In any given contract period the trader calculates the risk involved going in and may gamble that a certain crop’s yield will do well or poorly based on what’s known about that commodity, interest rates, weather patterns, even political climate for less stable countries. The “gamble” is a calculated one. Being a gambler and investor and having worked in entertainment finance for over 15 years, the last thing I would ever advise anyone to bet on or invest in is film box office grosses. Why? Oh, I don’t know, let’s ask renowned screenwriter/playwright/author William Goldman: “Nobody knows anything.” You said it, Bill. Mr. Goldman’s statement, which has been quoted ad nauseum (including by me with great frequency) and attributed to all manner of people about pretty much anything that’s unpredictable in life, was in fact a statement about show business, Hollywood in particular, and the unlimited surprises (both good and bad) awaiting any individual or company venturing into the entertainment industry. Yes the rewards can be great, but they’re so sporadic and impossible to predict that even big movie studios often lose their nerve in the face of an expensive, potential flop. Entertainment finance people spend untold hours and sleepless nights trying to figure out the monetary potential of any given film and the closest anyone in this business ever comes is to approximate a best-guess based on a virtual house-of-cards of assumptions. When something hits a mark we set or, thank the heavens, exceeds it, you never hear the words, “I told you so.” No, the wise man or woman who made that prediction is too busy worrying that the other 10-15 films in that year’s slate will miss the target. Like good ol’ Charlie Brown, one minute you’re the hero, the next you’re the goat. Here’s the thing, people with a lot of money and/or people with access to a lot of money almost never have the slightest understanding of how the movie business works, especially from a finance point of view. But they almost always find out. The hard way. But go for it, boys, and don’t worry. As long as you hit that wire with the connecting hook at precisely 88mph the instant the lightning strikes the tower… everything will be fine.

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IMF’s Lipsky Says Advanced Economies Are Facing `Acute’ Debt Challenges

March 21, 2010

By Joyce Koh March 21 (Bloomberg) — Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures will not come close to bringing deficits back to prudent levels, said John Lipsky , first deputy managing director of the International Monetary Fund. All G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100 percent by 2014, Lipsky said in a speech today at the China Development Forum in Beijing. Already this year, the average ratio in advanced economies is expected to reach the levels seen in 1950, after World War II, he said. The government debt ratio in some emerging market nations had also reached a “worrisome level.” “This surge in government debt is occurring at a time when pressure from rising health and pension spending is building up,” Lipsky said. Stimulus measures account for about one-tenth of the projected debt increase, and rolling them back won’t be enough to bring deficits and debt ratios back to prudent levels. Rising public debt could lead governments to seek to eliminate it through inflation or even default if they fail to carry out fiscal measures in time, Mohamed A. El-Erian , co-chief investment officer at Pacific Investment Management Co. warned earlier this month. Nassim Nicholas Taleb , author of “The Black Swan,” a book arguing that unforeseen events can roil markets, said March 12 he is concerned about hyperinflation as governments around the world take on more debt and print money. Budget Deficit The U.S. budget deficit widened to a record in February as the government spent more to help revive the economy. The gap grew to $221 billion after a shortfall of $194 billion in February 2009, the Treasury Department said on March 10. The figures indicate the deficit this year will probably surpass the record $1.4 trillion in the fiscal year that ended in September. Maintaining public debt at its post-crisis levels could cut potential growth in advanced economies by as much as half a percentage point annually, compared with pre-crisis performance, Lipsky said. The Washington-based IMF, which rescued countries including Pakistan and Iceland during the recession, expects global growth of about 4 percent this year, and a somewhat faster pace in 2011, reflecting expansionary fiscal and monetary policies, he said. ‘Bulging Fiscal Deficits’ “When we look at the picture right now, recovery has been encouraging in both developed and emerging economies, and inflation has remained fairly contained,” said David Cohen , a Singapore-based economist at Action Economics. “The biggest cloud over the outlook would be bulging fiscal deficits. The concern is that the situation in Greece is a dress-rehearsal for problems in bigger economies.” Greece is racing to cut its borrowing costs as 20 billion euros ($27 billion) of debt comes due in the next two months. In the U.S., President Barack Obama on Feb. 12 signed a bill into law that raised the federal debt limit by $1.9 trillion to $14.3 trillion and placed new curbs on spending in an attempt to prevent this year’s record deficit from becoming worse. Inflation is “clearly not the answer” as a moderate increase in inflation would have a limited effect, while accelerating inflation would impose major economic costs and create significant risks to a sustained expansion, Lipsky said. Instead, growth-enhancing reforms such as liberalization of goods and labor markets, as well as the removal of tax distortions should be pursued vigorously. Pension, Tax Reforms The bulk of the needed debt reduction should be focused on reforms of pension and health entitlements, containment of other primary spending and increased tax revenues and improving both tax policy and tax administration measures, Lipsky said. For most advanced economies, maintaining fiscal stimulus in 2010 remains appropriate, the IMF official said. Still, fiscal consolidation should begin in 2011 if the recovery occurs at the projected pace. Some actions should be undertaken now by all countries that will need fiscal adjustment, he said. Lipsky said it was “fully appropriate” for China to maintain its fiscal stimulus through this year, while seeking to rein in its rapid loan growth. He said fiscal consolidation would be appropriate in the U.S., where a higher public savings rate will be required to ensure long-term fiscal sustainability. For Related News and Information: Most-read stories on the IMF: TNI MOSTREAD IMF Top economy stories: TOP ECO Emerging market debt: NI EMD Top finance stories: TOP FIN Stories on emerging markets: NI EM For emerging-market stocks news: TNI EM STK Developing economy market moves: EMMV Emerging-market economic statistics: STAT4 Stories on the Greek deficit: EXT3

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House Republicans Eschew Election-Year Earmarks in Bid to Outdo Democrats

March 11, 2010

By Brian Faler March 11 (Bloomberg) — House Republicans announced they will not request any so-called earmarks in an election-year attempt to outdo Democrats in clamping down on the practice of adding money for pet projects to legislation. Republicans agreed to a moratorium in a closed-door meeting today, said Representative Jerry Lewis of California, the top Republican on the Appropriations Committee. Yesterday, House Democrats said they wouldn’t fund earmarks for defense contractors, energy firms and other companies. Critics say earmarks for companies amount to no-bid contracts for groups that contribute to lawmakers’ re-election campaigns. Both parties are attempting to turn what has been bipartisan support for the earmarking process into a partisan issue they can take to voters, who polls show are concerned about rising federal spending and deficits. Republican leaders issued a joint statement yesterday urging their colleagues to give up projects they called “a symbol of broken Washington.” Lewis, a prominent defender of the earmarking practice, told reporters earlier today he was supporting the moratorium because “you guys paint the picture one way — we’ve got to be responsive.” To contact the reporter on this story: Brian Faler  in Washington at   or bfaler@bloomberg.net .

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Stocks in U.S. Fluctuate as Drop in Financial Shares Offsets Telecom Gains

March 9, 2010

By Michael P. Regan March 9 (Bloomberg) — U.S. stocks fluctuated on the anniversary of the 2009 bear-market low for the Standard & Poor’s 500 Index as financial companies and materials producers retreated, while phone companies and industrial shares rose. The S&P 500 advanced less than 0.1 percent to 1,138.58 at 10:09 a.m. in New York. The benchmark gauge for U.S. equities ended a six-day rally and closed little changed yesterday. The Dow increased 0.1 percent to 10,560.15 after falling as much as 0.2 percent. “The stock market has moved up substantially from last year,” said Stanley Nabi, New York-based vice chairman of Silvercrest Asset Management Group, which oversees $8.5 billion. “There’s nothing new in the picture. Things are improving and earnings will be very respectable.” The S&P 500 is up 68 percent since hitting a 12-year low of 676.53 one year ago today, the biggest rally for the index since the Great Depression. The main benchmark for American equities is still down about 1 percent from this year’s high amid concern about some European countries’ ability to pay back debt and as investors speculated the Federal Reserve will need to rein in emergency stimulus measures as the economy improves.

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Buffett Sees U.S. Housing Recovery by 2011, Prices Below `Bubble’ Levels

February 27, 2010

By Andrew Frye Feb. 27 (Bloomberg) — Billionaire Warren Buffett said the U.S. will recover from the residential real estate slump by 2011 as demand for houses catches up with the supply that accumulated during the bubble. “Within a year or so, residential housing problems should largely be behind us,” Buffett wrote in his annual letter to the shareholders of his Berkshire Hathaway Inc. “Prices will remain far below ‘bubble’ levels, of course, but for every seller or lender hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means.” The worst housing decline since the Great Depression has drained profits from the nation’s largest banks and forced the bailout of companies including Citigroup Inc. and American International Group Inc. Record foreclosures flooded a U.S. real estate market already glutted with unsold property, causing housing starts to fall to their lowest in at least five decades, the U.S. Census Bureau said in a December statement . “People thought it was good news a few years back when housing starts — the supply side of the picture — were running about two million annually,” said Buffett, 79, the chairman and chief executive officer of Omaha, Nebraska-based Berkshire, in today’s letter. “But household formations — the demand side — only amounted to about 1.2 million.” Buffett built Berkshire into a $198 billion company through takeovers and investments in companies he believes have lasting competitive advantages and superior management. His deals transformed the company from a failing maker of men’s suit linings into an enterprise with businesses ranging from ice cream and underwear to power plants and corporate jet leasing. ‘Ridiculously Cheap’ Berkshire, which has a real-estate brokerage, a business that constructs pre-fabricated houses and units making products used in homebuilding, has suffered amid the downturn. Profit at carpet manufacturer Shaw Industries fell 30 percent last year to $144 million. “He’s very deeply invested in this,” said Tom Russo , partner at Gardner Russo & Gardner, which holds Berkshire stock. “Across his industrial companies, he’s massively poised to gain” from a housing recovery, Russo said. Buffett wrote today that his company should have made more purchases of corporate and municipal bonds last year because they were priced ”ridiculously cheap” compared with U.S. Treasuries. “When it’s raining gold, reach for a bucket, not a thimble,” he said. Pied Pipers Buffett has used past letters to discuss plans for his successor, praise Berkshire managers and confess his failings. He’s written passages that compare investing to baseball , derivatives to venereal disease , and Wall Street bankers to Pied Pipers . Last year, he said the U.S. economy was “in shambles” after reckless lending caused the worst financial “freefall” he ever saw. Buffett said this year that the CEOs and boards of directors of companies that failed during the credit crisis shouldn’t be able to pass blame to those below them. Boards should insist on CEOs taking full responsibility for risk, he said. “If he’s incapable of handling that job, he should look for other employment,” Buffett wrote. Shareholders weren’t the ones who botched the operations of some of the country’s largest financial institutions, Buffett said, “yet they have borne the burden with 90 percent or more” of their holdings wiped out in cases of failure. “If their institutions and the country are harmed by their recklessness, they should pay a heavy price,” he wrote. The Oracle The annual communications with shareholders have won Buffett a following of professional money-managers and amateur investors who have given him the moniker “the Oracle of Omaha.” Past letters have been compiled into a book for those who want to study Buffett’s pronouncements. “It’s Moses coming off the mountain with the Ten Commandments,” said Gerald Martin , a finance professor at American University’s Kogod School of Business in Washington who has made Buffett’s letter assigned reading for his students. “It’s something we all look forward to.” Buffett agreed to his largest deal last year when he arranged the $27 billion takeover of railroad Burlington Northern Santa Fe. Berkshire completed the acquisition, which Buffett described as an “all-in wager” on the U.S. economy, on Feb. 12. Shares of Berkshire traded at about $15 when Buffett took control in 1965. The Class A stock closed yesterday at $119,800, its highest since October 2008. Buffett added Class B shares in 1996, and agreed to split them this year to help pay Burlington Northern shareholders. Record Trading When Berkshire replaced the railroad in the Standard & Poor’s 500 Index , it prompted record trading. The value of Berkshire shares changing hands that day amounted to the most for a single company in one day of trading on the New York Stock Exchange. The annual letters typically give a preview of the company’s upcoming shareholder meeting, scheduled this year for May 1. Buffett announced a change in the format of the meeting in the last letter after shareholders at prior gatherings sought his opinion on sports, abortion and religion while asking few questions about Berkshire. Berkshire had announced that this year’s meeting won’t include a separate event for non-U.S. investors. He used the session in prior years to scout for acquisitions outside the country. To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net .

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Best Of The Financial Blogosphere: Feb. 19

February 19, 2010

Each weekday, we’ll be scouring the financial blogosphere for the best bits of wisdom from financial insiders, analysts and economists. Check back every weekday for the latest take on the economy from the web’s most astute observers. Fear-Mongering On The Cost Of Financial Reform . A recent JPMorgan report put the cost of financial reform for the world’s top banks at $220 billion annually, a figure that’s pure “self-interest fear-mongering,’ writes James Kwak . The report, for one, estimates that if every proposed financial reform is enacted, banks’ prices on all products would have to rise 33 percent. Kwak points to a recent HuffPost blog post by Jason Paez , and writes that this estimate assumes a lot . Here’s Kwak: “[As] Paez points out… the 33 percent threat assumes an oligopoly that is able to pass on all costs to customers. There is no magic law of economics that says that industries naturally return to some exogenously determined level of profits…And there is no law that says that banks’ 2007 profit levels are the ones that they are magically entitled to.” Paulson’s Revisionism . As Henry Paulson continues to make the media rounds for his book “On The Brink,” at Seeking Alpha, Christopher Pavese says he’s not surprised that Paulson opposes Obama’s key regulatory reforms. This is the man, Pavese says, who spearheaded “appalling” attempts to shrink capital requirements at investment banks in 2004. But what’s worse, he says, is that “our current Treasury Secretary has not exactly been an obvious improvement thus far”: “We’ll acknowledge that the joint blunders of Bernanke and Geithner have managed to avoid Financial Armageddon. But our praise stops there. We’ve done nothing to correct the previous structural imbalances. Consumer deleveraging has just begun. Unemployment will remain high and sticky for years. Small business continues to struggle. And the only thing we can see that is experiencing a v-shaped recovery is bank profits and the bonuses of Paulson’s old cronies.” The Recession’s Over, Long Live The Recession : On his blog, The Big Picture, Barry Ritholtz throws some much-needed water on the Fed’s declaration that the recession may be over. Using data from Tableau Software he has some elegant graphs on industrial production by sector, which highlight some lagging industries. The takeaway: the adage “a rising tide lifts all boats” doesn’t apply to this recovery. Hedge Funds Have Record Short Bets Against The Euro . A truly scary bit of news from Market Folly . One Start-Up Could Make A Killing In Mortgage Insurance. At The Atlantic Business blog, Daniel Indiviglio considers whether the market is ripe for a new mortgage insurer. The Essent Group has reportedly raised $500 million and, at this point, has few competitors. The mortgage crash, Indiviglio writes, not only resulted in tighter lending standards — which are likely to limit losses — but also made it reasonable for insurers to demand higher premiums. Whether Essent could survive another housing crisis is less clear, Indiviglio says, but in any case the next housing crisis is “at least several decades off.”

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Kodak Joins Home Depot Deserting Cash-Strapped Olympics for Alternate Ads

February 12, 2010

By John Helyar and Christopher Donville Feb. 12 (Bloomberg) — Eastman Kodak Co., an Olympics sponsor since the modern Games began in 1896, is no longer in the picture. The Rochester, New York-based company ended its International Olympic Committee sponsorship with the 2008 Beijing Games, as did fellow global partners Johnson & Johnson , Manulife Financial Corp . and Lenovo Group Ltd . With the Winter Games about to start in Vancouver, corporations that long clamored to link their brands with the Olympic rings are looking elsewhere amid a battered economy and emerging marketing alternatives. The IOC, which tripled revenue from global sponsorships to $866 million from 1993 to 2008, hasn’t been able to replace three of the four lost sponsors. As of October, when the IOC last disclosed financials on its TOP (The Olympic Partnership) sponsorship program, it had $883 million in revenue for the 2009-12 cycle, short of the committee’s $1 billion target. “I don’t think the Olympics have lost their appeal at all, but the digital revolution, the economic recession and the saturation of major sports events around the world have made Olympic sponsorships a tougher sell,” said Rick Burton , former U.S. Olympic Committee marketing chief and now the David Falk professor of sports management at Syracuse University in Syracuse, New York. Not Re-Signed The USOC failed last year to re-sign Bank of America Corp. , General Motors Co. and Home Depot Inc., which collectively were sponsors for 56 years and paid the USOC an estimated total of $45 million from 2005 to 2008. Their spots haven’t been filled. “A sponsoring company can reach its target audience and business objectives in many different ways, so a sponsor’s chief marketing officer or even its CEO is sometimes risking his or her career in making a $70 million, or more, commitment to a global event that only runs 17 days every two years,” Burton, 52, said in an interview. “It’s a huge decision and one that isn’t made lightly.” The IOC’s sponsorship problems have contributed to the financial challenges faced by the Vancouver Winter Games, which start today. Host cities get half the revenue from the program known as TOP, for The Olympic Partnership. Individual sports have suffered, as symbolized by comedian Stephen Colbert’s rescue of the U.S. speedskating team. The television host raised $300,000 to become lead sponsor. Sponsorships Slide Sports sponsorships in North America declined to $11.28 billion in 2009 from $11.4 billion in 2008, according to IEG Sponsorship, the first drop in 25 years of tracking data. The Chicago newsletter cited cautious spending since the 2008 financial crisis. “Within the context of overall spending, we’re quite pleased with where we are,” said Lisa Baird , the USOC’s chief marketing officer, who added that she is “hopeful” sponsorship revenue during the 2009-2012 cycle will match the $320 million level of 2005-2008. The USOC has succeeded in attracting sponsors to newly created categories, such as Big Four accounting firm Deloitte LLP (professional services) and consumer-products giant Procter & Gamble Co. (personal-care products). Marc Pritchard , chief marketing officer of P&G, said he sees the Olympics as a perfect fit with emphasis on families. The Cincinnati-based company announced a joint venture with Wal- Mart Stores Inc. this week to create “family-friendly” TV programming. “The Olympics brings families together in front of the TV,” Pritchard said in an interview on the day P&G introduced its “Thanks, Mom” ad campaign, showing mothers and their Olympic-hopeful children. TOP Sponsors The IOC still has a core of TOP sponsors willing to pay top dollar, particularly consumer-product giants such as Atlanta- based Coca-Cola Co., the world’s largest soft-drink maker, and Oak Brook, Illinois-based McDonald’s Corp., the world’s largest restaurant company, for whom the kind of image advertising tied to the Olympics is an important marketing component, according to Syracuse professor Burton. As McDonald’s president and chief operating officer Donald Thompson put it in a Bloomberg TV interview, “The goals, visions and values of the Olympic games are aligned with McDonalds.” The weak economy affected ex-sponsors such as General Motors, now 61 percent owned by the U.S. government, and Bank of America, the largest U.S bank by assets, which reported $2.2 billion of losses in 2009. Return to Profit Yet financial struggles don’t altogether explain the exit of even a company like Kodak, which reported its first quarterly profit in more than a year for the fourth quarter of 2009, when it had operating earnings of $430 million, or $1.36 a share, on sales of $2.58 billion. Jeffrey Hayzlett , Kodak’s chief marketing officer, saw better uses for his resources. “The first day I moved into this job (in 2007), I moved out of the Olympics,” he told a marketing conference in San Francisco in April 2008, according to Promo magazine. “I spend hundreds of millions of dollars and then have to wait two years to participate.” Hayzlett, who declined to be interviewed for this story, prefers online social networks to Olympic rings. Kodak employs three bloggers; has a YouTube channel; and has developed applications for Facebook photo-sharing. Hayzlett himself has 14,850 followers on twitter.com, who read his “tweets” about Kodak and other subjects. New Game Kodak hasn’t shunned sports; it’s changed games. The Kodak Challenge picks the toughest hole in 30 U.S. PGA Tour events and awards $1 million to the golfer with the best cumulative score on them for the season. Hayzlett decided the PGA Tour fit better with a transformed Kodak, whose photofinishing lines have been diminished by digital cameras (revenue from Kodak’s traditional businesses declined 10 percent in the fourth quarter of 2009) and which is now emphasizing growth areas such as digital imaging, whose revenues rose 12 percent in the fourth quarter. The golf sponsorship enables the new business-to-business Kodak to pitch hospitality tents at tournaments and entertain customers and prospects. The tour also provides Kodak more continuous exposure from a sport than the Olympics. The infrequency of the Games and the inability of corporate marketers to do much with Olympic sponsorships between them reflects not just on the property’s nature but the attitude of many Olympics officials, said Jim Andrews , senior vice president at IEG Sponsorship Report. “The IOC has had the mindset, ‘You want to buy the rings? Write us a check and check in with us when you run a TV ad,’” he said. “That’s all the IOC needed to do for a long time, but now the world has changed.” TOP Payments IEG calculates that TOP sponsors paid an average of $72 million for worldwide marketing rights to the 2008 Beijing Games and the 2006 Turin Winter Games. Timo Lumme , director of IOC Television & Marketing Services, disagrees. “We continually work with our TOP partners to make the program more relevant and to help them in the delivery,” said Lumme. Despite the current sponsorship vacancies, the TOP program isn’t in decline but in transition, according to Lumme. “We’ve had a very, very low turnover rate over the years, which is testament to the strength of the Olympic properties,” he said in an interview prior to the Vancouver Games. “However, at a certain stage, industries change, companies change, companies’ objectives change and of course there’s the world economic situation,” he said. Bank of America was one company hit hard by the recession, but officials there say its withdrawal from the USOC wasn’t due to distress but to the strict demands it now places on sports sponsorships to show a return on investment (ROI). Sponsorships’ Return Bank of America, which IEG ranks as the 12th-largest sports sponsor in the U.S., wants these deals to directly generate business. Its National Football League sponsorship allows it to extend lines of credit and investment services to teams; provide wealth-management services to owners and players; and offer NFL checking accounts at branches. “The U.S. Olympic rings delivered strong brand and community alignment,” said Joseph L. Goode , a Bank of America spokesman. “But beyond the brand fit and altruism, the sponsorship didn’t produce sufficient ROI, based on our current business model.” John Ross, who was chief marketing officer of Home Depot when it ended its USOC sponsorship and is now president of the IPG Retail Practice and Emerging Media Lab, a unit of Interpublic Group of Cos., called the Olympics a great but traditional sponsorship in a radically changed world. “The games are a large, mass-audience TV buy, which is not designed to be sustained over a year,” he said More Than Games Ross won’t discuss the decision by Atlanta-based Home Depot, the world’s largest home improvement retailer. He did say that Olympics official could better retain sponsor by turning more of their focus away from the games proper. “Why have they failed to see what could be done with a reality TV series that followed Olympic hopefuls?” he said. “It’s their inability to see the Games as anything more than 17-day events that makes it hard to justify the sponsorship cost.” Lumme said the IOC is assisting its partners in exploring new-media opportunities for leveraging their sponsorships. The USOC’s Baird said she has formed staff teams to work with companies on leveraging their Olympic sponsorships between the Games. “We’re constantly thinking about opportunities to activate sponsorships,” she said. To contact the reporter on this story: John Helyar in Atlanta at jhelyar@bloomberg.net ; Christopher Donville in Vancouver cjdonville@bloomberg.net .

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Gruebel Second Turnaround Means Battered UBS Stock May Trump Credit Suisse

February 8, 2010

By Elena Logutenkova Feb. 8 (Bloomberg) — UBS AG , the European bank with the biggest losses from the credit crisis, is poised for an earnings rebound that may help it catch up to Credit Suisse Group AG . Zurich-based UBS may report its first annual profit since 2006 this year after spinning off $38.7 billion in toxic assets into a central bank fund, cutting 18,500 jobs and appointing 11 new managers to the executive board, including a chief executive officer. The bank reports fourth-quarter 2009 earnings tomorrow. “UBS was a catastrophe,” said Eric Bendahan , who manages Banque Syz & Co.’s 1.8 billion-euro ($2.5 billion) Oyster European Opportunities Fund and counts UBS as one of his three largest holdings. “But if things get back to normal, the potential is colossal, while Credit Suisse did its job so well that its potential in the future is much smaller.” The man UBS is counting on to bring it back to health is CEO Oswald Gruebel , 66, who led a turnaround at Credit Suisse before retiring in 2007. Hired to run UBS almost a year ago, he’s relying on a recovery at its investment bank to help increase pretax earnings to 15 billion Swiss francs ($14 billion) in three to five years. Credit Suisse, which will probably report record earnings at its securities unit for 2009 on Feb. 11, may find it harder to increase profits as competitors sidelined by the financial crisis, such as UBS, return to the market. ‘Positively Surprise’ A recovery in profit may help UBS shares play catch-up, analysts said. The stock has fallen 6.5 percent in Swiss trading since the end of 2008 and trades at 1.24 times book value, about half the average of 2.56 times since 1997. Credit Suisse stock rose 55 percent in the same period and trades at 1.35 times book value, compared with an average of 1.74 times since 1990, Bloomberg data show. This year both UBS and Credit Suisse are down 14 percent. “There is a much greater scope for UBS to positively surprise than for Credit Suisse,” said Matthew Clark , a London- based analyst at Keefe Bruyette & Woods Ltd., who rates UBS “outperform” and Credit Suisse “market perform.” UBS, Switzerland’s largest bank by assets, may earn net income of 5.51 billion francs this year, according to the median estimate of 20 analysts surveyed by Bloomberg. The bank reported a 21.3 billion-franc loss in 2008, the biggest in Swiss corporate history. Credit Suisse, its largest Swiss rival, may eke out a 2.8 percent increase in profit to 7.6 billion francs in 2010, according to analysts. Sabine Jaenecke , a spokeswoman at UBS, and Credit Suisse spokesman Marc Dosch declined to comment. Madoff Avoidance Gruebel, a war orphan raised by his grandparents in East Germany, worked at Credit Suisse for 37 years. He moved to West Germany when he was ten to live with relatives and got into banking after school as a trainee at Deutsche Bank AG . At Credit Suisse, Gruebel, who has no university education, rose through the ranks from the bank’s Eurobond trading desk. In the three years after he took over as sole CEO in 2004, Gruebel doubled Credit Suisse’s profit and share price. It was under his watch in 2006 that the bank started cutting its holdings of U.S. subprime mortgage bonds, while UBS was still buying them. In private banking, he revamped product offerings in the late 1990s to include more hedge funds and alternative investments, and he advised clients to pull funds from Bernard Madoff ’s firm after a meeting with him in 2000. Client Redemptions At UBS, Gruebel, known as “Ossie,” has taken a similar hands-on approach by picking new management for the unprofitable investment bank and starting weekly calls with top risk officers. He aims to reduce annual costs by at least 3.5 billion francs this year from 2008 levels after cutting jobs, ending employee perks such as gym subsidies and getting rid of duplication in support functions. He also sold UBS’s Brazil unit and raised 3.8 billion francs from investors to boost capital. UBS may report fourth-quarter net income of 416 million francs, according to the median estimate of 14 analysts surveyed by Bloomberg. That would be its first quarterly profit in more than a year. Gruebel has said he expects a return to profitability will help UBS solve its biggest problem: withdrawals by wealthy clients who have removed a net 182.9 billion francs over the past six quarters. In a memo to staff last month, he described halting outflows as “imperative.” Redemptions may have slowed to 17.5 billion francs in the fourth quarter from 26.6 billion francs in the previous three months and 58.2 billion francs in the year-ago period, analysts estimated. ‘Biggest Risk’ The question of outflows at UBS’s private bank, once the world’s biggest manager of money for the wealthy, must be resolved, KBW’s Clark said. The Swiss administrative court muddied the picture last month by blocking the government from passing data to U.S. authorities on certain accounts, endangering an accord reached last year to settle a lawsuit against UBS related to alleged tax evasion by American clients. Swiss Justice Minister Eveline Widmer-Schlumpf said on Jan. 27 that the government will work with the U.S. to save the deal. Also at risk is the deferred prosecution agreement that UBS signed in February 2009 to avoid criminal charges, she said. A criminal prosecution in the U.S. could lead to the bank’s insolvency and endanger the Swiss economy, the government said. “UBS for sure has the biggest potential, but it also implies the biggest risk,” said Raoul Paglia , who helps manage about $80 billion at BSI SA in Lugano, Switzerland, and added more UBS shares than those of Credit Suisse to his Swiss equities fund at the end of last year. “The U.S. issue needs to be solved if we want to see UBS recover,” he said. “But once that’s out of the way, the stock has upside potential of almost 50 percent. So it’s worth it.” ‘Show Me First’ Of the 30 analysts who issued a recommendation on UBS over the past three months, only 30 percent advised buying the shares, compared with 70 percent for Credit Suisse, data compiled by Bloomberg show. “This distrust by analysts and the markets is explained by the fact that they took a lot of hits,” Banque Syz’s Bendahan said. “ Historically everyone loved UBS. Now people like Gruebel’s team but have a tendency to say, ‘Show me first. Show me that the restructuring is working.’” JPMorgan Chase & Co. analysts, led by Kian Abouhossein , last week raised their recommendation on UBS shares to “overweight” from “neutral,” saying the current valuation is attractive compared with their target price of 20 francs. At its current stock price of 13.88 francs investors are valuing UBS’s investment bank at almost nothing, they said. UBS last month appointed Rajeev Misra and Dimitri Psyllidis , who previously worked for Deutsche Bank and Merrill Lynch & Co., respectively, to co-run the debt-trading unit. That division was responsible for the majority of the $57.3 billion in losses UBS amassed in the credit crisis. Debt Trading Credit Suisse, which got 88 percent of its pretax profit in the first nine months of 2009 from its investment bank, may be harder hit if global securities revenue falls this year. Sanford C. Bernstein analysts, including Dirk Hoffmann-Becking , forecast that fixed-income revenue globally may drop about 30 percent this year from 2009 as increased competition shrinks the gap between bid and offer prices. Credit Suisse got about 36 percent of its total revenue from the debt-trading unit in the first nine months of 2009. UBS’s fixed-income unit had its first positive revenue in the third quarter of 2009 after eight quarters of losses, as the bank brought in 200 new hires. It missed out on a credit market rally in the first half of the year. “Overall it’s going to be hard for Credit Suisse to boost profits,” KBW’s Clark said. “UBS is clearly in the middle of a challenging turnaround, but then it’s got a capable management, which has delivered a challenging turnaround before. Back in 2004 Credit Suisse’s investment bank was a bit of an also-ran, and yet in a couple of years it was turned around to a credible leading player.” To contact the reporter on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

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Euro, Asian Stocks Fall as G-7 Fails to End Concern Over Greece, Budgets

February 7, 2010

By Darren Boey and Anna Kitanaka Feb. 8 (Bloomberg) — The euro fell for a fourth day and Japanese stocks dropped as investors sought less risky investments after European finance ministers failed to announce detailed plans to tackle budget deficits in the region. The euro weakened as much as 0.4 percent against the dollar, approaching an eight-month low, and traded at $1.3640 as of 12:14 p.m. in Tokyo. Japan’s Topix index lost 0.2 percent to 889.78, with nine stocks declining for every six that rose. Copper jumped 2.4 percent on the London Metal Exchange. U.S. stocks rebounded on Feb. 5 on speculation the European Union may propose a solution for Greece’s budget deficit, the largest in the region. French Finance Minister Christine Lagarde said at the conclusion of a Group of Seven finance ministers meeting in Canada that European nations “have confirmed the substance and significance” of Greece’s plan to reduce its shortfall without outside assistance. “The market is still pretty nervous,” said Chris Hall , who helps manage $3.3 billion at Argo Investments Ltd. in Adelaide, Australia. “Greece is still just one part of a bigger concern about the growing size of budget deficits.” Futures on the Standard & Poor’s 500 Index were little changed. The gauge rose 0.3 percent on Feb. 5, rallying from a 1.8 percent slump on optimism that support measures for Greece would be announced. European Central Bank President Jean-Claude Trichet said the ECB is “confident” Greece will cut its deficit below the limit of 3 percent of gross domestic product in 2012 from 12.7 percent. Panasonic, Yamaha The MSCI Asia Pacific Index lost 0.2 percent to 114.50. Japan’s Nikkei 225 Stock Average fell 0.5 percent. Australia’s S&P/ASX 200 Index rose 0.4 percent after the government said it’s withdrawing guarantees on large deposits and wholesale funding as credit markets recover from the financial crisis. Panasonic Corp., the world’s largest maker of plasma televisions, dropped 4.6 percent to 1,328 yen in Tokyo after the company reported a net loss for the nine months ended Dec. 31. Yamaha Motor Co. retreated 4.9 percent to 1,192 yen after the motorcycle maker widened its 2009 loss forecast. Chunghwa Picture Tubes Ltd. slid by the 7 percent daily limit for a second day in Taipei after reporting its sixth quarterly loss. The stock fell to NT$3.34. Korea Gas Corp. , the world’s biggest buyer of liquefied natural gas, sank 2.4 percent to 52,000 won on lower-than-estimated earnings. “Investors are concerned about who will rescue Greece and how it’ll be rescued,” said Hiroshi Morikawa , a senior strategist at MU Investments Co., which manages $13 billion in Tokyo. “The reaction in the stock market seems excessive, but the euro’s fall against the yen inevitably has an effect.” Euro, Dollar The euro fell to as low as $1.3622, from $1.3678 in New York on Feb. 5, on speculation mounting budget deficits in some European nations will keep policy makers from raising interest rates. It reached $1.3586 on Feb. 5, the lowest since May 20. The dollar strengthened versus 13 of the 16 major currencies as losses in most Asian stocks boosted demand for safer investments. The dollar gained 0.2 percent to 86.64 cents per Australian dollar, 0.3 percent to 68.78 cents to the New Zealand currency and 0.3 percent to 1,172.6 per Korean won. “The market is still not believing the story,” said Oh Suktae , an economist at SC First Bank Korea Ltd. in Seoul. “What they want is some big bailout program from the European countries.” The cost of protecting Asia-Pacific corporate and sovereign bonds from default declined, after a surge on Feb. 5, according to traders of credit-default swaps. Risk Aversion The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan dropped 2.5 basis points to 126.5 basis points, according to Citigroup Inc. The Markit iTraxx Australia index fell 3.5 basis points to 105.5 basis points, Citigroup Inc. prices show. The Markit iTraxx Japan index declined 3 basis points to 154.5 basis points, according to ICAP Plc. “As sovereign risks spread in the euro-zone, risk aversion will continue,” said Susumu Kato , chief economist for Japan in Tokyo at Calyon Securities, a unit of France’s Credit Agricole SA. “Investors are wondering how financial issues in those small nations may affect bigger ones.” Treasuries declined for the first time in three days as the U.S. prepared to sell a record-equaling $81 billion of notes and bonds in three auctions starting tomorrow. The 10-year note yield rose two basis points to 3.59 percent, according to BG Cantor Market Data. The Treasury will sell $2.43 trillion in notes and bonds this year, the most ever and a 16 percent increase from the $2.1 trillion sold in 2009, according to the average forecasts of 10 primary dealers. U.S. Economy Commodity prices advanced amid speculation economic reports this week will bolster confidence in the global recovery and metals demand. U.S. reports on wholesale inventories, consumer confidence and the country’s trade balance are due in the next two days, according to data compiled by Bloomberg. Three-month delivery copper in London jumped as much as 3 percent to $6,468.25 a metric ton, the biggest intraday gain since Jan. 11, before trading at $6,430. Zinc jumped as much as 5.8 percent to $2,053 a ton, the most since Jan. 6, before trading at $2,040 a ton. Crude oil gained 0.7 percent to $71.65 a barrel in after- hours, electronic trading on the New York Mercantile Exchange. A report tomorrow in the U.S., the world’s largest oil consumer, will probably show wholesale inventories rose for a third month in December, according to economists surveyed by Bloomberg News. “Everyone is going to be watching every piece of economic data like a hawk looking for signs of self-sustaining economic recovery,” said Anthony Nunan , an assistant general manager for risk management at Mitsubishi Corp. in Tokyo. To contact the reporter for this story: Darren Boey at in Hong Kong or dboey@bloomberg.net ; Anna Kitanaka in Tokyo at akitanaka@bloomberg.net .

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Volcker Still ‘Just A Photo Op’?

February 5, 2010

When Paul Volcker was first appointed chairman of President Obama’s Economic Recovery Advisory Board, he really didn’t expect to have much influence. Sondra Gotlieb, Volcker’s friend and associate from when they both lived in Washington during the Reagan presidency, says that the former Fed chair told her that the position was a public relations stunt: “I’m just a photo op,” Volcker told her. “All they wanted was my picture for the press.” And for more than a year, Volcker’s assessment seemed about right. “Everyone knew he didn’t have the president’s ear no matter what his title was,” Gotlieb writes. But all that seems to have changed in the past several weeks, after the president, as part of his financial reform package, proposed that Congress adopt a key reform measure that Volcker has long championed. The “Volcker Rule,” as the new regulation is known, would prohibit commercial banks from owning or investing in hedge funds, private equity funds or “proprietary trading” operations. Volcker, who stands a towering 6’7″ tall, was at the president’s side during the announcement. But whether his ideas for reform will be enacted into law is still unclear: Senate Banking Committee chair Chris Dodd (D-Conn.) has indicated that he may not amend the Senate’s reform package to include the rule, saying the administration is “getting precariously close” to asking for too much.

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Emerging Equity Funds Post Biggest Outflows in 24 Weeks on Greece, Profits

February 5, 2010

By Shiyin Chen and Chan Tien Hin Feb. 5 (Bloomberg) — Emerging market equity funds lost $1.6 billion in weekly withdrawals, the biggest outflows in 24 weeks, as earnings and Greece’s debt woes raised concerns that the global recovery may falter, EPFR Global said. Investors removed almost $1 billion from global emerging market stock funds in the week ended Feb. 3, the most in more than a year, and withdrew $516 million from Asian equities outside of Japan, the research company said in a statement. The MSCI Emerging Markets Index fell 2.6 percent to 902.12 as of 5 p.m. in Hong Kong, the lowest since Oct. 2. The gauge of 22 developing nations, which rallied a record 75 percent in 2009, has slumped 12 percent from this year’s peak on Jan. 11, entering a correction, on speculation central banks from China to Brazil will start to raise borrowing costs to curb inflation. “Recoveries have been reliant on policy measures,” said Michael Auyeung , who manages about $500 million as chief investment officer at Pacific Mutual Fund Bhd. outside Kuala Lumpur. “As we move into the transition phase where the burden of growth shifts back towards the private economy on stimulus withdrawal, we will start to get a better idea of how bad the damage has been to the structural integrity of the financial and business architecture. We may not like what we find.” Global stocks are plunging for a second straight day as U.S. initial jobless claims rose unexpectedly last week and companies from MasterCard Inc. to Monster Worldwide Inc. reported earnings that trailed analyst estimates. Shares also retreated on concern Greece’s attempts to cut the European Union’s biggest budget deficit may hurt other nations in the region. ‘Reasons For Caution’ “Investors had plenty of reasons for caution going into February as corporations continued to paint a gloomy picture for earnings in 2010, Greece’s debt story went from bad to worse and policy makers began to flesh out their ideas for closing yawning budget deficits,” EPFR wrote. Emerging market currencies also weakened today in Asia amid concern that Europe’s fiscal woes have eroded investor appetite for riskier developing-nation assets. South Korea’s won dropped the most in two months while India’s rupee was headed for its biggest two-day loss since October. Indonesia’s rupiah dropped the most in 10 weeks. The cost of protecting Asian corporate and sovereign bonds from default surged. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose 11 basis points to 128 basis points, Deutsche Bank AG prices show. That’s the biggest increase since Aug. 17 and takes the index to its highest since Sept. 9, CMA prices show. China Losses During the week, Latin American funds posted outflows, while those buying emerging Europe, Africa and the Middle East shares reported “modest” net inflows, EPFR said. Within Asia, China equity funds reported net outflows for the fifth time in six weeks while Indian funds lost $180 million, the most in 68 weeks, according to the statement. China’s Shanghai Composite Index has dropped 10 percent this year, among the 10 worst performers globally. In India, the Bombay Stock Exchange’s benchmark Sensitive Index has slipped 9.1 percent. A report this week that showed China sustained its manufacturing last month heightened speculation the government will take additional measures to prevent the economy from overheating, while India’s central bank increased its cash reserve ratio by more than economists had forecast. Too Early to Buy? JPMorgan Chase & Co. said last month it was turning “less bullish” on developing-nation equities in the first half of 2010 amid concern central banks will tighten monetary policy to combat accelerating inflation. Nikhil Srinivasan , the chief investment officer for Asia and the Middle East at Allianz Investment Management, also said this week it was too early to buy stocks, including those in China, even as they decline. Still, BofA Merrill Lynch Global Research said this week that China’s stocks are “approaching a bottom” as concerns of tightening are overstated, joining CLSA Ltd., Morgan Stanley and Macquarie Group Ltd., in predicting a rebound in the nation’s equities. During the week, developing-nation bond funds attracted $406 million, according to EPFR. Overall, equity funds with $3.1 trillion in assets lost $981 million while bond funds with $1.1 trillion in assets drew $4.6 billion in new inflows, the Cambridge, Massachusetts-based research company said. To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net ; Chan Tien Hin in Kuala Lumpur at thchan@bloomberg.net

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Keith Ferrazzi: Report from Day 1 in Guatemala

December 29, 2009

Life is so amazing and my first night in Guatemala (12/26) humbled and reminded me yet again. I spent my first day touring the city from 2-5, after an 8 a.m. landing. Honestly, I was frustrated: I wanted to get doing what I was going there to do, service to others. Meanwhile, unknown to me, a young lady in Guatemala City who has been following me on Twitter was trying to find me. Her boss had introduced her to Never Eat Alone a few years ago and changed her thinking about professional relationships. Then when Who’s Got Your Back came out, she read it and gave it to her office mates and created one of the region’s first Lifeline Groups. She and her friend were driving around Antigua trying to use my Twitter updates as clues to find me to get me to sign their books. (“Do you recognize this picture…?”) Finally they got the courage to message me: “We’re in the same city, can we buy you a drink?” Well, skip ahead to dinner with us all: Susette and Sara, my Twitter stalkers, now emerging friends, and of course Emlyn who is my travel coordinator from Cultural Embrace … Read the rest of this article on my blog . To donate to the kids I’m helping in Guatemala, click here .

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Dollar Set for Weekly Drop on Speculation Fed to Maintain Stimulus Program

December 25, 2009

By Yasuhiko Seki Dec. 25 (Bloomberg) — The dollar was poised to end three consecutive weeks of gains against the euro on speculation the Federal Reserve will maintain stimulus measures to secure the U.S. economy’s recovery. The greenback traded near the lowest level in one week against the 16-nation euro before reports forecast to show a slide in U.S. business activity and a rebound in initial jobless claims . The yen was set to break a two-week advance against the euro after a government report showed Japan’s consumer prices slid in November, backing expectations the Bank of Japan will keep interest rates near zero. “Speculation about an early exit from credit easing in the U.S. may weaken if incoming data confirm a patchy recovery,” said Keiji Matsumoto , a strategist in Tokyo at Nikko Cordial Securities Inc. “It looks to be premature to conclude that the dollar carry-trade will come to a full end.” The dollar was at $1.4390 per euro at 4:33 p.m. in Tokyo from $1.4338 a week ago and $1.4380 yesterday in New York. It appreciated to $1.4218 on Dec. 22, the strongest level since Sept. 4, and fell back to $1.4418 yesterday, the lowest since Dec. 17. The dollar lost 0.4 percent this week following a 1.9 percent advance in the previous week. The dollar traded at 91.45 yen from 91.54 yesterday. It rose 1.1 percent this week. The euro was at 131.65 yen from 131.63 in New York. It gained 1.5 percent this week following a 0.4 percent decline. Many global markets, including those in the U.S., Singapore and Australia, are closed today for Christmas. Jobless Claims The Institute for Supply Management-Chicago Inc. will report on Dec. 30 its barometer of U.S. business activity fell to 55.1 in December from 56.1 the previous month, according to a Bloomberg News survey. Readings above 50 signal expansion. The number of Americans filing claims for unemployment benefits in the week ending 27 probably rose to 460,000 after dropping to 452,000 in the previous week, the lowest level since September 2008, according to a separate survey ahead of the release of the data on Dec. 31. Fed Bank of St. Louis President James Bullard said he sees interest rates remaining near zero in 2010 as the central bank tries to keep the recovery on track, the Wall Street Journal reported this week. Clear Picture “Unless we see a more clear picture about the withdrawal of dollars by the Fed, there is a good chance of investors tapping excess dollars again and resuming investments on higher-yielding currencies,” said Yuichiro Harada , senior vice president of the foreign-exchange division at Mizuho Corporate Bank Ltd., a unit of Japan’s second-largest lender. The dollar pared weekly losses on speculation Treasuries will draw buying interest from global money managers. The difference in yields between 2- and 10-year Treasuries reached a record 2.88 percentage points on Dec. 22 and was at 2.84 percentage points yesterday. “Investors can generate stable returns just by re- investing funds raised in the U.S. back into Treasuries, and thereby avoiding the risks of currency fluctuations,” said Akio Yoshino , chief economist in Tokyo at Societe Generale Asset Management (Japan) Co., a unit of France’s third- largest bank. “The dollar will benefit from this change of investment strategy.” The spread between 10-year Treasury yields and the same maturity Japanese government bonds reached 2.53 percentage points yesterday, the widest gap since December 2007. November Deflation The yen was headed for a 5.2 percent drop against the dollar this month, the biggest since February. The Japanese government said today consumer prices, excluding fresh food, fell 1.7 percent in November from a year earlier, matching the median forecast in a Bloomberg survey. Bank of Japan Governor Masaaki Shirakawa said in an interview with TV Tokyo this month that the central bank will “persistently” keep interest rates at “virtually zero” to fight deflation. No Fast Exit “The BOJ can’t possibly seek an exit from stimulus anytime before other central banks do so,” said Masahiro Ito , senior manager of foreign-exchange sales and marketing at Central Tanshi FX Co., a unit of Japan’s largest money broker. “This will keep a lid on the yen.” The Japanese currency traded as weak as 91.87 yen on Dec. 22 and 23, the lowest level since Oct. 27. Losses in the yen were tempered on speculation Japanese exporters were taking advantage of this month’s decline to bring home foreign earnings. “Exporters seem to be buying the yen in a last-minute attempt before the new year,” said Kazutoshi Yasuda , general manager of the markets department in Tokyo at FX Prime Corp., a foreign-exchange unit of Japanese trading house Itochu Corp. Large Japanese manufacturers expect the yen to average 91.16 per dollar in the six months to March 2010, according to the Bank of Japan’s quarterly Tankan survey. To contact the reporter on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

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