The Banks Get it Wrong—Again

The Economist reported recently that a number of the larger banks that received billions in bailout money last fall and are now paying back a portion of it are practicing a little “revisionist history” by trying to claim to their stock holders that actually they never really needed it in the first place. That’s baloney, of course, but they feel like they need to lie to us again (and again, and again) in order to get back to their normal state of squandering our hard earned economy on their global roulette wheel.

As examples, they report that "Jamie Dimon, the boss of JPMorgan, has fantasized about sending an ironic accompanying 'Dear Timmy' thank-you letter to America’s treasury secretary, Tim Geithner, saying 'We hope you enjoyed the experience as much as we did.' The boss of Wells Fargo has called the solvency tests 'asinine.'

In addition to calming the stomachs of their investors they are also (one presumes) trying to convince regulators that their banks are just fine, and that they should spend all of their time clamping down on those weak banks that really need the regulations. JP Morgan claims, for example, that it really didn't need the money in the first place and that it was forced upon them and even though in great measure they are now able to pay it back because they used TARP money to pay off creditors and liquidate bad loans, and because of that are starting to make money again, none of that had any thing to do with their taking the TARP money. They say that "out of fairness" the regulations should be lifted.

The regulations are much the issue. The banks are not allowed to pay their CEOs hundreds of gazillions an hour if they take government money, and they believe that they can never get back on their feet again unless they pay their CEOs hundreds of gazillions an hour—especially if the CEO is a great success in driving the bank into the ground. JPMorgan has made this point forcefully, but some of the others have made the point less tastelessly.

In addition to the outright grants to banks, the U.S., government also stepped up and at incredible expense, purchased from the banks, hundreds of billions of dollars worth of some of the worst, most godawful, stupid, foolish, immoral, sleazy, loans ever made. We saved their butts. If they had tried to pay the bills based on the value of some of those loans and securities they’d all be following Lehman Brothers to the poor farm, and now these guys are claiming to their stock holders that the plan was never necessary in the first place.

Let me be clear: I'm not sure it was necessary either. Part of me thinks we should have just put the bastards in jail and taken over the banks. But for them to take the money, pay down the bills, be rescued from the abyss, and then say the silly government shouldn't have intruded into their line of work is slime. It gives snake oil a bad name.

This new attitude is wrong because even if their particular bank was more or less stable (and that’s relative, given the fact that all of them had lost money, some were "zombies": the walking dead). There was an almost total loss of confidence in the market. Nobody was buying anything. If the government had not stepped in the market itself would have failed, not just the high roller cowboy banks that created the mess. All of the banks in the system benefited from the bailout, even those that were relatively better off.

Also, it could be dangerous because it (by intention) could distort the way that the new regulations are drawn up. What they are arguing for is a weak set of rules for the "healthy" banks (ahem, relatively speaking, of course) and a more stringent one for the "sick." It would give the false impression that their business model had been successful while that of the "sick" was not. Whereas in reality, all were complicit at some level in creating a system of human greed that violated everything their Sunday school teacher ever told them when they were kids (back before they were confirmed and driven out of the church). Allowing the attitude that successful greed and sin is vindicated, but unsuccessful greed and sin is not, just kicks the can down the road for real reform.

New regulations—executive pay that has some basis in reality, less risk taking, more transparency, better incentives for growth—should be applied to all banks consistently, and not to just the handful of weaker banks that were the bad apples on the bottom of the barrel.

Once-safe mortgages endangered by job losses

By Peter S. Goodman and Jack Healy, New York Times | May 25, 2009

As job losses rise, growing numbers of American homeowners with once solid credit are falling behind on their mortgages, amplifying a wave of foreclosures.

In the latest phase of the nation's real estate disaster, the locus of trouble has shifted from subprime loans - those extended to home buyers with troubled credit - to the far more numerous prime loans issued to those with decent financial histories.

With many economists anticipating the unemployment rate will rise into the double digits, from its current 8.9 percent, foreclosures are expected to accelerate. That could exacerbate bank losses, adding pressure to the financial system and the broader economy.

"We're about to have a big problem," said Morris A. Davis, a real estate specialist at the University of Wisconsin. "Foreclosures were bad last year? It's going to get worse."

Economists refer to the current surge of foreclosures as the third wave, distinct from the initial spike, when speculators gave up property because of plunging real estate prices, and the secondary shock, when borrowers' introductory interest rates expired and were reset higher.

"We're right in the middle of this third wave, and it's intensifying," said Mark Zandi, chief economist at Moody's Economy.com. "That loss of jobs and loss of overtime hours and being forced from a full-time to part-time job is resulting in defaults. They're coast to coast."

Those sliding into foreclosure today are more likely to be modest borrowers whose loans fit their income than the consumers of exotically lenient mortgages that formerly typified the crisis.

Economy.com expects that 60 percent of the mortgage defaults this year will be set off primarily by unemployment, up from 29 percent last year.

From November to February, the number of prime mortgages that were delinquent at least 90 days, were in foreclosure, or had deteriorated to the point that the lender took possession of the home increased more than 473,000, exceeding 1.5 million, according to a New York Times analysis of data provided by First American CoreLogic, a real estate research group. Those loans totaled more than $224 billion.

During the same period, subprime mortgages in those three categories increased by fewer than 14,000, reaching 1.65 million. The number of similarly troubled Alt-A loans - those given to people with slightly tainted credit - rose 159,000, to 836,000.

Overall, more than 4 million loans worth $717 billion were in the three distressed categories in February, a jump of more than 60 percent in dollar terms, compared with a year earlier.

Under a program announced in February by the Obama administration, the government is to spend $75 billion on incentives for mortgage servicing companies that reduce payments for troubled homeowners. The Treasury Department says the program will spare as many as 4 million homeowners from foreclosure.

But three months after the program was announced, a Treasury spokeswoman estimated the number of loans that have been modified at "more than 10,000 but fewer than 55,000."

In the first two months of the year alone, another 313,000 mortgages landed in foreclosure or became delinquent at least 90 days, according to First American CoreLogic.

© Copyright 2009 The New York Times Company

Unusually bad and getting worse

(Here is a "Snapshot" on the economy from the Economic Policy Institute for April 29, 2009, from Josh Bevins. It's a grim reminder of just how bad the economy has become. You can find these monthly "Snapshots" and other analysis of the economy from a justice perspective at http://www.epi.org/ --Stan)



Today’s report on gross domestic product (GDP) growth in the first quarter of 2009 just confirms the obvious: the United States economy is mired in a particularly steep recession. The chart below shows the decline in GDP and its components compared to the average of all other recessions since World War II. On every indicator except government purchases the current recession is worse than average, and it should be noted that further declines are almost inevitable in coming quarters.

The last quarter of 2008 and the first quarter of 2009 together posted the worst half-year of GDP performance in over 60 years. While coming quarters may see a moderation in the pace of decline, it’s clear that this recession is already a stand-out in its severity and will only get worse.
--Josh Bivins

Job Reports

These days, whenever I meet someone for the first time and the find out that I’m an economist on the side, the next thing they always say is, “so, how log do you think this recession will last?” And my standard answer is, “five to seven years.” They’re usually shocked.

TV and radio is littered with commentators talking about the recession bottoming out, and turning the corner. The Dow and S&P are back up again, banks are giving back some of their bailout money, and talk of this being an “L” shaped recession have given way to people now calling it a “V” shaped one. Aside from a few scowling faces, such as Nouriel Roubini and Peter Shiff, the Darth Vader and Dick Cheney respectively of economics, the rest of the world seems more than ready to start partying again.

Except for one thing. Everything is coming back to life except jobs and they’re not going to come back until forever. And for an old fashioned guy from the Midwest, if your jobs are in the toilet, your economy is in the toilet. It has always seemed to me you should begin the definition of a recession with jobs and poverty and you should end it with that. If people are poor and out of work then you are in a recession, no matter how good Wall Street is performing this morning.

Look at the numbers. The Labor Department’s jobless reports came out yesterday and they’re just plain ugly. The number of people who are receiving jobless benefits rose from about 6.5 million to nearly 6.7 million. That isn’t a huge leap, but it is the highest we have ever had and longest running since they started keeping records on it, back in 1967. New jobless claims dipped just slightly, but that’s just the calm before the storm. Chrysler and GM are about to close a truckload of plants and that will create tens of thousands of unemployed people, from the factories to the suppliers, to the sellers on the lot. That’s going to be deep and grim.

That’s why I say five to seven years. It’s going to be a long slog and it’s going to be painful. Tens of thousands of families will be out of work and out of their homes for a very long time. Couples will break up fighting over money. Kids will feel like they have to take sides. Bread “winners” will feel humiliated at their new status. More families will lose their homes. Some will move in with in-laws and friends causing even more tension and hurt. Homeless shelters will be full. Churches, many of which are barely surviving themselves, are going to feel compelled to give more and more money to keep the food pantry filled and the local shelter funded. And you can bet your pet cat that for the vast majority of them, if and when they return to some kind of employment it won’t have the same pay and benefits that it had before.

Nor should they. The bubble created on Wall Street was a mirage, buying and selling on fake value of money that didn’t exist, all the while creating the appearance of value while never actually creating anything. But the rest of us bit our share of the same apple. The rate of consumption and destruction that the U.S. was on (and actually is still on) was on a collision course with rapidly approaching scarcity. According to Anup Shaw, who crunched World Bank numbers for his blog, Global Issues, we who live in the top ten percent of income brackets for the earth consume upwards to sixty[1] percent of all of the resources. Think about that the next time we complain that some poor housecleaner in Tegucigalpa, Honduras has five children. Truth is, my one child will use up and destroy more resources over his or her lifetime than three families of five in Honduras. The problem isn’t them, it’s us.

So, what happens in five to seven years? What ought to happen is that we will return to something lower than “normal.” Perhaps in the current parlance, we should say that we should return to a “new normal.” A normal in which we consume less and enjoy it more. That’s the way our grand parents (or parents, depending on how old you are) learned to treat the Great Depression. That’s the good news, and perhaps this recession will teach us some of those values again. But the bad news is that many, many, many, many people actually died of disease and hunger in the Depression. Not something often talked about, but nonetheless true. Why can’t we ever be a people that learns the important lessons of life without first causing screeching horror and pain upon our weakest and most vulnerable populations?

Executive Summary of Warren Report

This month, instead of giving the brief video of Elizabeth Warren, chair of the Congressional Oversight Committee of the Troubled Asset Recovery Program (TARP, recently renamed TALF), we are reprinting the summary of their 175 page report and a somewhat testy conversation on NPR with Warren and Adam Isaacson, the host. Warning, this is the raw footage, so it doesn't have the smooth, intros and exits. However, it does include quite a few very interesting pieces that never made it into the official broadcast.

The first item below is the link that should take you to the interview, followed by the text of the summary of their report.

Best,

Stan

The Interview: Click here

The Executive Summary
The Panel adopted this report with a 4-1 vote on May 6, 2009. Rep. Jeb Hensarling voted against the report. His additional view is available in Section Two of this report.

If small businesses and households are unable to spend, then both the depth and length of the country’s economic trouble will be intensified. In the past, much of that spending has been supported by credit. Even after the widely reported credit slowdown in 2008, 40 percent of banks reported further tightening of small business lending standards in the first quarter of 2009 and no banks reported easing of standards. Meanwhile, consumer lending contracted at a rate of3.5 percent. The Term Asset-Backed Securities Loan Facility (TALF) program is intended to support more lending by financing credit through asset-backed securities. These are securities that represent interests in pools of loans made to small businesses and households for purposes such as buying automobiles or funding college. Lenders collect these loans together and then sell interests in these pools of loans to investors. With the money they receive from investors purchasing the asset-backed securities, the lenders have more money available to make more loans.

The Department of the Treasury’s new initiative through TALF raises two important questions:

· Is the TALF program well-designed to help market participants meet the credit needs of households and small businesses?

· Even if the program is well-designed, is it likely to have a significant impact on the access to credit of small businesses and consumers?

The first question is whether the TALF program is well-designed to attract new capital.

The program should be attractive to investors in asset-backed securities. The investors must contribute a portion of the purchase price for the securities (5-16 percent in the May offering), with the government financing the remainder. If the securities increase in value, the investors reap a substantial portion of that benefit. If, however, the securities decline in value, the investors could default on the government loans, forfeiting their investment but leaving the taxpayers to absorb any remaining losses with only the collateral to cover the loan amount. On the other hand, there are also some reasons why investors would not want to participate in the program. There are restrictions on sale of the securities, so that investors are “locked in” to their investment for a number of years. The interest rate payable on TALF loans may be higher than the investors could get from other lenders. There are also restrictions on the internal operations of participants, and investors fear that they may be subject to additional restrictions in the future. With these uncertainties, and the fact that so far there have been fewer issuances under the program than expected, it is not yet clear that the program has been well-designed to meet its purpose.

The second question is whether any securitization program, no matter how well designed, is likely to help market participants meet the credit needs of small businesses and households.

While small businesses are experiencing significant credit constriction, it is not clear whether that constriction is primarily the product of reduced creditworthiness of borrowers or of tightening in bank lending. TALF cannot address the creditworthiness issue. It can provide more funds to the lenders for lending, but asset-backed securities have never been the source of significant funding for small businesses. This report raises the question of whether TALF will have a meaningful impact on small business credit.

Consumer lending raises a very different aspect of the question of the likely effect of TALF efforts. Leading into this recession, families were already awash in debt. Larger economic forces have left families with little savings, while declines in the value of housing and in the stock market have shrunk household net worth by 20 percent in just over a year. As wages have stagnated and unemployment has risen, the ability of households to manage ever-larger debt loads is increasingly unlikely. Any reduction in consumer lending may be the result of reduced demand as families try to cut costs or changes in banks’ lending decisions as they assess the deteriorating creditworthiness of American households.

Despite these larger concerns, it is noteworthy that even with the sharp contraction in the securitization market, consumer lending has shown only a modest decrease, with a projected annualized downturn of 3.5 percent. The contraction has been exclusively in revolving debt (such as credit cards), not in installment loans (such as automobile and student loans). There is much discussion among finance professionals about the negative impact of the current contraction in the securitization market, but consumer loans do not seem to have been as strongly affected as mortgage loans.

Another issue that arises when discussing the revival of lending deals with the terms of small business and consumer lending.

Recently, there have been reports of large increases in credit card rates by banks that are both Capital Purchase Program (CPP) recipients and originators of loans eligible to be sold under the TALF program, even for customers who have made all their payments according to the terms of their agreements. In the three month period from November 2008 to February 2009, interest rates on credit cards grew by 8.8 percent from 12.02 percent to 13.08 percent, while the cost of funds declined. This also raises the question: If a bank wants taxpayer support through the Troubled Asset Relief Program (TARP) or TALF, should the bank be obligated to go beyond what the law requires for consumer and small business lending standards?

The resolution of this question involves broader policy concerns. For some, Congress is the appropriate body to address consumer protections that are more stringent than current law; additional conditions set by Treasury outside the legislative process could deter industry participation in TARP and TALF, undermining the program’s goal of ensuring access to affordable credit for small businesses and consumers. Others are concerned that financial institutions should not take taxpayer support and then increase their interest rates on outstanding loans for many of the same taxpayers. The Panel takes no position on whether conditions should be placed on the terms of credit set by TARP recipients, but it hopes that the discussion provided here is useful to Congress.

http://www.npr.org/blogs/globalpoolofmoney/images/2009/05/warren.mp3

The Mexican Truckers' Dispute--a Backgrounder

You have probably read something (or more than something) already about the ongoing dispute between the US and Mexico over our broken promises to lift a ban on Mexican trucks coming into this country. Recently there has been one more lawsuit filed by Mexico against the U.S. over it. Here is a bit of background about the dispute that can put the issue in context.

The dispute actually goes back to 1982 when the U.S. Congress passed a law banning the entry of foreign trucks. Actually the official language was that foreign trucks would not be allowed to operate within the U.S., which effectively meant a block at all of the borders to their entry. The stated reason was that foreign trucks were not as clean or safe as our trucks. The unstated reason was that our truckers wanted in on the business. Eventually Canada lobbied and got the ban lifted from their trucks, leaving Mexico to be the only dirty, unsafe country on the list. For the next thirty years, no matter what Mexico might do to clean up its trucks or professionalize its drivers, the ban stuck. Eventually having little to do with the first reason and a lot to do with the second.

What they have to do is, when a Mexican truck full of, say, corn or televisions or cars, comes to the border, it has to stop, be emptied out, reloaded on a U.S. truck with a U.S. driver and off it goes. It is a lengthy, expensive way to do business. For Mexican trucking companies, the difference in costs between the Mexican drivers they hire on their side of the border and the U.S. drivers they have to hire on our side is significant and Mexico has been complaining about it from the start. In the suit filed this year they note that it adds an additional U.S. $2 billion each year to their costs.

In the late 1980s and early 1990s, when NAFTA was being negotiated, Mexico insisted that a cancellation of the trucking ban be written into the treaty. The U.S. reluctantly agreed and in 1994, when it came to operation, the the U.S. promised to phase out the ban.

Except that the very next year, 1995, the U.S. Congress passed another law extending the ban on Mexican trucks indefinitely.

Later that same year the Mexican government sued the U.S. under NAFTA’s Chapter 20 party-to-party dispute resolution mechanism. They won the dispute, but the U.S. politely did not comply.

In 2001, the NAFTA dispute tribunal unanimously found against the U.S. again saying that, the ban violated NAFTA’s provisions on national treatment and most favored nation obligations. The U.S. then lifted a ban a bit, but only on Mexican citizens owning American trucking companies, which did not really get at the heart of the dispute, because Mexican-owned companies were still not granted the necessary permits to operate in the U.S.

Following that, the Mexican trucking federation, CANACAR began what turned out to be years of negotiations with people in the Bush Administration to get them to obey the law. The administration argued that even if the federation could win over members of the Bush Whitehouse, Congress would never vote to obey the provisions of the treaty or the tribunal’s ruling. What they offered to do instead was to set up a pilot program in 2007 which would allow certain inscribed Mexican trucking companies to operate in the United States.

Yet even then, with a Democratic majority in both houses, the U.S. Congress refused to fund the project. And when President Obama’s budget was unveiled this year, money for the limited pilot project was not in it. In April, the trucking federation responded by once again filing Chapter 11 arbitration suit against the U.S., claiming this time that the U.S. was violating its NAFTA commitments by blocking the entry of Mexican trucks.

Although there are no damages demanded in the arbitration suit, as I noted above, the suit does mention that presently it costs the Mexican trucking companies over US $2 billion each year for the higher priced U.S. truckers and trucks. So, however it will be resolved (if ever) it will be worth a significant fortune to one side or the other of the border.

Obama Doesn’t Plan to Reopen Nafta Talks

After you have read about Obama backing away from his campaign pledge to revisit and re-vision NAFTA, click here and go to an earlier post about the upcoming United Church of Christ General Synod resolution encouraging him to not back away from his campaign pledge to revisit and re-vision NAFTA.
Stan


New York Times

April 21, 2009

By BRIAN KNOWLTON

WASHINGTON — The administration has no present plans to reopen negotiations on the North American Free Trade Agreement to add labor and environmental protections, as President Obama vowed to do during his campaign, the top trade official said on Monday.

“The president has said we will look at all of our options, but I think they can be addressed without having to reopen the agreement,” said the official, Ronald Kirk, the United States trade representative. It was perhaps the clearest indication yet of the administration’s thinking on whether to reopen the core agreement to add labor and environmental rules.

Mr. Kirk spoke in a conference call with reporters after returning from a regional summit meeting that Mr. Obama attended over the weekend in Trinidad. He said that Mr. Obama had conferred with the leaders of Mexico and Canada — the other parties to the trade agreement — and that “they are all of the mind we should look for opportunities to strengthen Nafta.”

But while he said that a formal review of the 1992 pact had yet to be completed, Mr. Kirk noted that both Mr. Obama and President Felipe Calderon of Mexico had said that “they don’t believe we have to reopen the agreement now.”

Mexico in particular, whose exports have exploded under Nafta, has little interest in such a renegotiation.

Not only Mr. Obama but also one of his rivals for the presidency, Hillary Rodham Clinton, had promised during their campaigns to renegotiate the accord — a politically popular position in some electorally important Midwestern states that have lost thousands of manufacturing jobs.

Thea Lee, the A.F.L.-C.I.O. policy director, said that the workers federation would have preferred “more definitive” language on addressing key labor concerns, but that it was understandable for a new administration to start its review with a less confrontational approach.

“We were obviously very encouraged by what Obama the candidate was saying on the campaign trail in terms of needing to recognize the deficiencies of Nafta and to strengthen it,” said Margrete Strand Rangnes, a labor and trade specialist with the Sierra Club.

Her group opposed Nafta from the start as lacking adequate environmental provisions, and contends that the side agreements added later have proved inadequate. “You have an environmental side agreement that doesn’t have as many teeth as the commercial provisions of the agreement,” she said. “You have an investment chapter that allows companies to basically file suit against common-sense environmental and public health measures.”

But she said the Sierra Club recognized that change would not come easily, and added, “We’re eager to work with the administration in having that conversation.”

Since the election, neither the president nor Mrs. Clinton, now secretary of state, has said much about trying to move side agreements on labor and the environment — which are subject to limited enforcement — into the main part of the trade pact, a potentially tangled and protracted process. As candidates in the Democratic presidential primaries last year, both said they would renegotiate or even opt out of Nafta, citing flaws in its labor and environmental provisions, while trading accusations over past support for the agreement.

Mr. Kirk, who as mayor of Dallas was known as a strong advocate of free trade, also said the administration planned expeditious reviews of pending trade agreements with Colombia and Panama.

He said that Colombia had made “remarkable progress” in reducing violence — attacks against labor activists have been a key sticking point — but that other issues remained, and he vowed intensive consultation with Congress on the matter.

The Bush administration signed the agreement with Colombia in November 2006. But Congressional Democrats and United States labor groups have said the Uribe government must do more to stop the antilabor violence and hold perpetrators accountable, a position Mr. Obama supported during his campaign.

Regarding Panama, Mr. Kirk said that differences on labor standards, and the question of the country “possibly being a tax haven,” needed resolution.

Mr. Obama and Mr. Kirk met with leaders of both countries during the Trinidad meeting.

Dangers of Inflation with the Fed

The Federal Reserve right now has a huge balance sheet. It has just given or loaned out or allowed cheap credit for, trillions of trillions of dollars. Far more than the TARP or the Obama stimulus package combined. If it works, it means that the demand (read: “value”) for money will eventually start going down because there will be a lot more of it flushing around in the system. The Fed will eventually have to get rid of all of the debt or else we’ll have a big rise in inflation. If it does that by selling bonds (hundreds of billions of them), and does it too quickly, it could cause bond prices to fall and yields to rise. If that caused (and it probably would) interest rates to go up, it would hit the mortgage loans again and corporate lending markets and could kick off a new recession.

Elizabeth Warren update on TARP Expenditures

Elizabeth Warren is the chair of the Congressional Oversight Panel and since January has been issuing monthly reports on how the Fed and the US government are doing (and what they are doing) in spending the bank and finance rescue monies known as the TARP. This is her April report.

Two Economists on the Bailout and theRecovery

Nassim Taleb (author of the best seller, The Black Swan), on how the bailout/recovery plan is insufficient:




Nouriel Roubini, of RGE Monitor, on how the recovery is going to be a long slow slog, and not quick as forcast by most economists: