The Era of Global Financial Instability
Written by
Friday, 21 September 2007
by Mike Whitney
"Give me control over a nation's currency and I care not who makes its laws."
-Baron M.A. Rothschild
Wall Street loves cheap money. That’s why traders were celebrating on Tuesday when Fed chief Ben Bernanke announced that he’d drop interest rates from 5.25% to 4.75%. The stock market immediately zoomed skyward adding 336 points before the bell rang. The next day the giddiness continued. By mid-morning the Dow was up another 110 points and headed for the stratosphere.
Everyone on Wall Street loves Bernanke. He brings them candy and sweets and lets the American worker pay the bill.So far, the scholarly-looking Bernanke has shown that he is no different than his predecessor Alan Greenspan. Facing his first crisis, the new Fed chief chose to reward his fat-cat friends at the hedge funds and investment banks by savaging the dollar. As soon as he announced his plan to cut the Fed funds rate by .50 basis points; gold soared to $736 per ounce, oil shot up to $82 per barrel, and the euro climbed to a new high of $1.40. These are all the predictable signs of inflation. Food and energy prices will surely follow. The bottom line is that the investor class has been bailed out at the expense of everyone else who trades in dollars.Bernanke invoked the “Greenspan put”, which means that he used his power to protect his friends from the losses they should have incurred from their bad bets. Now, the big market players know that he can be counted on to bail them out whenever they make poor investment decisions. He’s also lived up to his nickname, “Helicopter Ben”; ready to deal with every new calamity by tossing trillions of freshly-minted US greenbacks into the jet-stream over the NYSE so elated traders can jack-up their PEs and fatten their bottom line . We think Bernanke should abandon the helicopter altogether and personally deliver pallet-loads of $100 bills to Wall Street’s doorstep, just like Bush does with contractors in Iraq. That way the fund managers can keep stoking the market with cheap cash without dawdling at the Fed’s Discount Window.
Despite the merriment on Wall Street, there is a downside to Bernanke’s actions. The Fed chief has shown foreign investors that he WILL NOT DEFEND THE DOLLAR. That is a powerful message to anyone who hopes to profit by investing in the US. It alerts them to the fact that the “strong dollar” policy is a fraud and that they’re better off getting out of US Treasuries and dollar-backed assets. Apparently, many have already gotten the message. Last month, foreign central banks and investors dumped $9.4 billion of US Treasuries and bonds compared to net purchases in June of $24.7 billion. That means that foreigners have stopped buying our debt which is currently $800 billion per year. That’s the last leg holding up the wobbly greenback. The dollar will undoubtedly fall precipitously.So, why would Bernanke weaken the dollar even more by lowering rates 50 basis points?Is he crazy or did he panic?We don’t know, but we do know that this is the beginning of Capital flight — -the sudden exodus of foreign investment from US debt and equities. Most likely, it will be accompanied by the hissssing sound of gas escaping from a punctured equity bubble followed quickly by a painful round of deflation, massive unemployment and the gnashing of teeth.
The size of the current account deficit, which peaked in 2005 at 6.8% of GDP, has dropped to 5.5% by the end of the second quarter of 2007. This is an indication that the maxed-out American consumer is running out of gas and that our foreign trading partners are slowing their intake of US dollars. Now comes the painful part. As the trade deficit shrinks, foreign investment will become scarcer and the dollar will tumble. That means interest rates will have to go up and American’s will face an agonizing economic downturn.This is all part of the Federal Reserve’s master-plan for reorganizing the US economy and political system. Since Bush took office in 2000, the dollar has been deliberately weakened; losing more than 40% of its value when compared to the euro. (from $.85 per euro in 2000 to $1.40 per euro in 2007) It has fared even worse against gold. The Fed “rubber stamped” Bush’s $400 billion per year tax breaks for the wealthy and looked on approvingly while $4 trillion of national wealth was transferred to foreign investors and banks via the current account deficit (the result of currency deregulation) Also, we now know that Alan Greenspan supported the plan to invade Iraq. He even shamelessly admitted that the war was really about oil which suggests that he was attempting to preserve the dollar’s link to petroleum. That linkage is what maintains the dollar’s position as the world’s “reserve currency”. These things indicate that the Central Bank plays a vital role in the policy decisions which are reshaping American life. We assume that the Fed’s members are equally supportive of the repressive police-state measures which have been put in place in anticipation of problems that will undoubtedly arise from the economic meltdown they have painstakingly engineered.The rate cuts tell us that the Fed is now planning to balance the current account deficit on the backs of the American middle class. Prices at the supermarket and gas pump will rise immediately; probably within the next few months if not weeks. It will be harder to get credit. Wages and living standards will decline. Stocks will fall. Consumer spending will shrivel.Surprisingly, Bernanke’s rate cuts don’t even address the underlying problems they are supposed to cure. Millions of homeowners who took out subprime and Alt-a loans are headed for foreclosure. Only a small percentage of these will benefit from the rate cuts and avoid default because of lower “resets” on their loans. Most of them will not qualify for refinancing UNDER ANY TERMS because they don’t meet the new standards for securing a loan. Banks and mortgage companies have become much stricter in their lending practices.
Paul Grignon's 47-minute animated presentation of "Money as Debt" tells in very simple and effective graphic terms what money is and how it is being created. It is a painless but hard-hitting educational tool and for all groups concerned with the present unsustainable monetary system in Canada and the United States.
The rate cuts don’t really help the banks or hedge funds either. Their stocks may lurch upward for a day or two, but that won’t last. Money is getting tighter and spending is down. It’s not a good time to be holding hundreds of billions in mortgage-backed liabilities (CDOs) which may have been levered many times their original-value. There’s no market for these CDOs. They’re turkeys. The debt will either have to be written off or the companies will be forced into bankruptcy.Rate cuts won’t stem the tide of insolvencies or fix the deeply-ingrained problems in the financial markets. All they will do is forestall the impending recession by sustaining abnormal levels of liquidity. But as consumer spending contracts and unemployment continues to rise; the Fed’s “band-aid” approach to these systemic problems will prove to be ineffective. Bernanke is sacrificing the one thing he’ll need most in the bumpy months ahead; his credibility.As economist and author Henry Liu says:
“A market that catches on to the impotence of central-bank intervention can go into free fall.”The most compelling argument for interest rate cuts was made by economist Martin Feldstein in a Wall Street Journal article “Liquidly Now”. Feldstein summarized the issue like this:
“Three separate but related forces are now threatening economic activity: a credit market crisis, a decline in house prices and home building, and a reduction in consumer spending. These developments compound the general weakening of the economy earlier in the year, marked by slowing employment growth and declining real spendable income.”“The subprime mortgage defaults have triggered a widespread flight from risky assets, with a substantial widening of all credit spreads, and a general freezing of credit markets. Official credit ratings came under suspicion. Investors and lenders became concerned that they did not know how to value complex risky assets.In some recent weeks credit became unavailable. Loans to support private equity deals could not be syndicated, forcing the banks to hold those loans on their own books. Banks are also being forced to honor credit guarantees to previously off-balance-sheet conduits and other back-up credit lines, further reducing the banks' capital available to support credit of all types.The inability of credit markets to function properly will weaken the overall economy in the coming months. And even when the credit market crisis has passed, the wider credit spreads and increased risk aversion will be a damper on economic activity.In addition to these general credit market problems, the decline of house prices and home building will be a growing drag on the economy….Falling house prices would not only cause further declines in home building but would also shrink household wealth and thus consumer spending.”Feldstein has a good understanding of the problem, but backpedals on the rsolution. He says:
“Fed action to lower interest rates cannot solve the credit market problems, but it would help the economy: by stimulating the demand for housing, autos and other consumer durables; by encouraging a more competitive dollar to stimulate increased net exports; by raising share prices to increase both business investment and consumer spending; and by freeing up spendable cash for homeowners with adjustable-rate mortgages”.Feldstein paradoxically wants rate cuts even though he admits that “lower interest rates cannot solve the credit market problems” but will just stimulate more wasteful “consumer spending”.That’s not a cure. That’s just more Greenspan snake oil.“Too much liquidity” is the problem not the solution. The reason the markets are so volatile and likely to implode at any minute is because every asset-class has been foolishly inflated by a monetary policy that followed Feldstein’s prescription. Now he wants to avoid the consequences of these misguided policies by reflating the bubble and destroying the dollar in the process. It’s a bad idea. The Fed’s cuts coincide with the dismal earnings reports from Wall Street’s investment giants; Lehman Brothers, Morgan Stanley, Bear Stearns and Goldman Sachs. The four banks have taken a combined 22% haircut in the last quarter and are expected to sustain heavy losses from the billions of dollars of subprime CDOs they’ll have to either downgrade or write-off. So far, Bernanke’s rate cuts have diverted attention from the grim news and falling profits from America’s investment core.The big financials aren’t the only one’s feeling the pinch from the housing meltdown either. There are many others including Bank of America that announced “unprecedented dislocations” in credit markets will have a “meaningful impact” on third-quarter results at its corporate investment bank. “Chief Financial Officer Joe Price told investors at a conference in San Francisco, ‘These are quite challenging financial times, and I cannot remember when credit markets in particular have been as volatile and unpredictable as they have been for the last few months.”’ (Bloomberg News) Bernanke’s rate cuts are “thin gruel” for the banks bottom line, but they do offer a welcome distraction from the relentless drumbeat of bad economic news. The subprime sarcoma has spread to every part of the financial markets. It’s not just the steady up tick of foreclosures and mushrooming real estate inventory. The banks are also hoarding capital to cover their losses on unmarketable CDOs and leveraged buyouts (LBOs) which means that new mortgages will slow to a crawl even to credit-worthy applicants. An article in Bloomberg News gives us some idea of how quickly the market for housing-related bonds has deteriorated:
“Sales of US asset-backed securities, such as bonds that repackage subprime loans or credit card debts as well as collateralized debt obligations., FELL73% FROM A YEAR EARLIER to $30 billion last month, according to estimates from analysts at Deutsche Bank AG”. (Bloomberg News)Bernanke is just prolonging the pain by not allowing the market to complete its cycle so that bad debts to be written off and industry can retool for the future. He’s buying time for his banker-friends, but doing considerable damage to the dollar in the process. Jim Rogers, the chairman of Beeland Interests Inc. summed up the rate cuts like this:
"Every time the Fed turns around to save its friends on Wall Street, it makes the situation worse. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems in the U.S.''Rogers is not alone in his conclusions.Even foreign leaders, like Venezuelan President Hugo Chavez, have commented recently on the worrisome state of US markets. Three days ago Chavez said on public television that we may be facing a "global financial earthquake" as the result of "irresponsible" US economic policies. Chavez quoted Nobel Laureate Joseph Stiglitz’s warning that we may be facing a major economic disaster which could lead to “widespread misery, hunger and severe unrest. And the United State is to blame.”Chavez added that the Bush administration "has had to inject $300 US billion into the private banks this month to avoid a collapse of the dollar and the world economy ….The dollar is going down, they don't see that it isn't supported by reality” and because it is "because its fiscal deficit is the largest in history."Chavez’s predictions appear to be accurate as we can see that gold has suddenly skyrocketed while the dollar continues to fall.The firestorm that began with the Fed’s low interest rates in 2002-2003 and evolved into the subprime-lending crisis of 2006-2007 is now threatening the stability of the entire financial system and the broader global economy. The reason for this is that mortgage debt is the foundation upon which all manner of bizarre-sounding debt-instruments are now resting. These debt-instruments (derivatives) greatly magnify the leverage on the underlying asset which is often is nothing more than a shaky subprime loan.According to Satyajit Das, a respected authority on derivatives trading, “A single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion — or eight times total global gross domestic product of $60 trillion.” (Are We Headed for an Epic Bear Market” Jon Markman)We are now seeing the first signs that this enormous debt-bubble is beginning to unwind. There’s very little the Fed can do to affect the inevitable crash that (we believe) they engineered. As defaults in housing continue to rise; the swaps and derivatives in the secondary market will implode. Trillions in market capitalization will vanish in a flash.US GDP for the last 6 years has largely depended on transactions involving the exchange of massively over-levered assets.
Production in the real economy has remained flat. The investment banks are at the epicenter of this controversial new system called “structured finance”. We continue to believe that the banks that depended on mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) (as well as asset-backed commercial paper) for the bulk of their income; are in deep trouble. Robert E. Lucas alluded to potential bank-woes in an article in the Wall Street Journal,
“Mortgages and Monetary Policy”:“There is an immediate risk of a payments crisis, a modern analogue to an old-fashioned bank run. Many institutions — not just banks – HAVE PAYMENT OBLIGATIONS THAT ARE FAR IN EXCESS OF THE RESERVES TO WHICH THEY HAVE IMMEDIATE ACCESS. Against these obligations they hold short-term securities that they believed could be liquidated on short notice at little cost. If some of these securities turn out not to be liquid in this sense (and especially if no one is sure who holds them) then everyone wants to get into Treasury bonds.”It‘s rare when we are in agreement with the far-right viewpoints of the WSJ’s Editorial page, but in this case, Lucas nailed it. The banks have “obligations that are far in excess of the reserves to which they have immediate access.” This is a direct result of the new market architecture of “structured finance” which stacks debt on debt until the whole system is pushed to the breaking point. Low interest rates can’t fix this “systemic” problem. Only fiscal policy can soften the blow of a deflating credit bubble. Economist Henry Liu offers this constructive “New Deal-type” proposal which is a sensible (and ethical) way to address the prospect of growing unemployment and increasing economic hardship for the middle and lower classes: “A case can be made that what is needed under current conditions is not more cheap money from the Fed, but full employment with rising wages by government fiscal stimulants to boost consumer demand. The US government should make use of the money that the banks cannot find worthy borrowers to lend to, with money-cautious investors seeking to lend to the government, creating jobs for infrastructure rehabilitation and upgrading education to get the economy moving again off the destructive track of privatized systemic financial manipulation.” (“Either Way, It could be an Unkind Cut” Henry C K Liu, Asia Times)Liu is right. We should be enacting the policies which reflect our values on social justice and the equitable distribution of wealth. Instead, the system is being manipulated by an oligarchy of racketeers who have savaged the currency, drained our treasury, and paved the way for a painful cycle of deflation.
The US consumer is now being blamed for the massive current account deficit; as if shopping at Walmart for the lowest prices was a crime. But the Fed is the real culprit. They have been opposed to protective tariffs or currency regulation from the very beginning. No country in the history of the world has ever allowed its industrial base to be so ruthlessly decimated (offshoring, outsourcing, factory closures) just to feed the insatiable avarice of its criminal elites.The current account deficit is the logical upshot of “free trade”. And, free trade is the Orwellian moniker used to describe the millions of decent paying jobs which are sacrificed on the altar of globalization.
The workers had no part in creating this destructive self-aggrandizing system.Nor did they have any say-so in the design of the modern market, which is often referred to as “structured finance”. Structured finance has been promoted as a way of using capital more efficiency by distributing risk more evenly throughout the system. In fact, it has turned out to be a colossal swindle which is now threatening to break the banks and bring the stock market crashing down. It is essentially mortgage-laundering scheme concocted by the investment banks; winked-at by the so-called regulators, facilitated by the ratings agencies, and exploited by the hedge funds. The victims of this scam are the insurance companies, foreign investors, pension funds and over-leveraged homeowners. Their losses are liable to soar into the trillions of dollars.Fed chief Alan Greenspan enthusiastically endorsed every dodgy “structured finance” idea; including subprime lending, ARMs, Mortgage-backed securities, currency deregulation, credit expansion and structural changes to the financial services industry. These are the pavers on the road to perdition carefully put in place by the Federal Reserve.Author Gabriel Kolko summed up “structured finance” in a recent article “The Predicted Financial Storm Has Arrived”:“We are at an end of an era…Now begins global financial instability. It is impossible to speculate how long today's turmoil will last-but there now exists an uncertainty and lack of confidence that has been unparalleled since the 1930s-and this ignorance and fear is itself a crucial factor. The moment of reckoning for bankers and bosses has arrived. What is very clear is that losses are massive and the entire developed world is now experiencing the worst economic crisis since 1945, one in which troubles in one nation compound those in others.Internationalization of finance has meant less regulation than ever, and regulation was scarcely very effective even at the national level…..
Greed's only bounds are what makes money. Existing international institutions-of which the IMF is the most important — or well-intentioned advice will not change this reality.”The people must take over control of their own currency again.
The Federal Reserve must be abolished.
Friday, September 21, 2007
Thursday, September 20, 2007
Shocked, Shocked
Shocked, Shocked! James Howard Kunstler
Written by
Thursday, 20 September 2007
by James Howard Kunstler
Alan Greenspan's memoirs are being flogged across the airwaves, bandwidths and printing presses, and the cohort of those who comment on public affairs in these media are shocked by the Maestro's confessions — first, that a housing bubble emerged out of his leadership in the banking sector, and second that the Iraq war is about oil. As usual, they're getting it all wrong — about as wrong as Al himself got it. But that is the way of things in this age of cultural dissipation and gross cognitive dissonance. Greenspan claims he had no idea that his cutting of interest rates to near zero would produce any irregularities in the US economy. Apparently he hadn't noticed that the Big Fund Boyz called him "Easy Al" for a reason. Or that when you introduce nearly free "money" (as in "available for lending") into a system of financial trade, the recognition of risk tends to evaporate. As the nation's chief bank regulator, Greenspan also apparently failed to notice the upsurge in dodgy lending practices previously only seen among mafia loan sharks, drug dealers, or twelve-year-olds playing Monopoly.But the really funny part of all this is that the media columnists are acting as though the American public got hoodwinked by Al. Which raises the question: just what the fuck was the public thinking when they bought half-million dollar houses on salaries under 60-K, taking out no-money-down, interest-optional balloon mortgages and other tricked-up contracts? The answer is: they walked into these arrangements with their eyes open because they thought they could get something for nothing. They thought the trend of steeply rising house prices would continue indefinitely and enable them to wiggle free of any hazard by flipping their houses to an endless supply of greater fools who would be there waiting to turn the very same trick. And the smoothies downstream in the mortgage and banking rackets were no less guided by avarice when they cooked up their formulas for bundling half-baked mortgages into tranches of tradeable securities. Easy Al may have failed to notice what was going on here, but then so did everybody else from The Wall Street Journal to the Securities and Exchange Commission.This, of course, represents an insidious psychology. It could only happen in a culture that has come off the rails mentally, so to speak, as ours has in the sense that nobody has any sense of consequence, neither the leaders nor those who affect to follow the leaders. The leading religion in America is not evangelical Christianity, it is the worship of unearned riches, and its golden rule is the belief that is is possible to get something for nothing. Its holy shrines are Las Vegas and Wall Street. (And, by the way, has anybody heard the evangelical Christians complain about Las Vegas? They complain about a lot of things, but are themselves among the greatest believers in unearned riches — given their preference for prayer over earnest effort in the service of solving life's problems.)
No, the American public, including the cheerleaders in the media, have only themselves to blame for the bitter harvest now underway in the asset and credit markets. And thus it would be a salutary thing for Baby Jeezus, or the forces of nature, or whatever powers guide the universe, to now kick the shit out of them, so to speak, financially, because that is exactly what the American public is full of, from top to bottom, from George W. Bush at his lonely desk on Pennsylvania Avenue to the pitiful, bankrupt householders of Orange County and Boca Raton.Now, as to the shock of Al's revelation that the Iraq war is about oil — the media and the public have got this all wrong, too. The logic here seems to be that because the Iraq war is about oil it is therefore unnecessary, optional, a mistake, an indulgence, something we should not dirty our hands in. In fact, the Iraq war is not about oil, per se, so much as it is about America's behavior here at home, about the choices we make for how we live on this continent. None of those who complain most loudly about our military presence in Iraq have advanced any proposals for reforming how we live here — and hence for our enslavement to oil, much of the world's remaining supply of which happens to be in the neighborhood of Iraq. When these complainers start complaining about the ubiquitous acceptance of suburban sprawl and abject car-dependency — and this includes the environmental boy scouts out there who want to get merit badges for buying hybrid cars — then they will deserve to be taken seriously. Until then, the American people have got exactly the grinding war that they deserve. Let them whine about it all the way to the Nascar tracks, and let them console themselves with giant plastic bottles of Pepsi Cola and buckets of chicken raised on corn grown with oil byproducts.On CBS's "60-Minutes" show last night, Greenspan, in his new role as a private sector economic consultant made predictions for the coming months in the US economy. He declared that the financial sector would get over the current credit squeeze as if it were a mild case of indigestion brought on by one too many fried won-tons at the all-you-can-eat buffet, a mere burp, allowing the public to move on to the crab Rangoon and a helping of General Tsao's chicken. This gets back to the previous point about the Iraq war and oil in particular. Al doesn't get it. CBS's sycophant reporters don't get it. Nobody gets it. We are entering the zone of the long emergency in which the primary resource needed to run the industrial economies will become scarce, expensive, and profoundly destabilizing to markets and to normal life, such as it is known in this country. And the current problem in the markets is a reflection of the resource bankruptcy we are facing. Our problems are not about credit, they are about permanent insolvency. In his old age, Alan Greenspan's face — once darkly handsome in his youthful years as a jazz musician — has taken on the strange appearance of a circus clown. Something about the way his lips have settled into a kind of thick fatuous smile, even when he is apparently not amused by anything. Is it one of God's clever little tricks to leave him looking like a clown in his valedictory years, or has his face just resolved into the perfect embodiment of leadership for a clown nation?
Written by
Thursday, 20 September 2007
by James Howard Kunstler
Alan Greenspan's memoirs are being flogged across the airwaves, bandwidths and printing presses, and the cohort of those who comment on public affairs in these media are shocked by the Maestro's confessions — first, that a housing bubble emerged out of his leadership in the banking sector, and second that the Iraq war is about oil. As usual, they're getting it all wrong — about as wrong as Al himself got it. But that is the way of things in this age of cultural dissipation and gross cognitive dissonance. Greenspan claims he had no idea that his cutting of interest rates to near zero would produce any irregularities in the US economy. Apparently he hadn't noticed that the Big Fund Boyz called him "Easy Al" for a reason. Or that when you introduce nearly free "money" (as in "available for lending") into a system of financial trade, the recognition of risk tends to evaporate. As the nation's chief bank regulator, Greenspan also apparently failed to notice the upsurge in dodgy lending practices previously only seen among mafia loan sharks, drug dealers, or twelve-year-olds playing Monopoly.But the really funny part of all this is that the media columnists are acting as though the American public got hoodwinked by Al. Which raises the question: just what the fuck was the public thinking when they bought half-million dollar houses on salaries under 60-K, taking out no-money-down, interest-optional balloon mortgages and other tricked-up contracts? The answer is: they walked into these arrangements with their eyes open because they thought they could get something for nothing. They thought the trend of steeply rising house prices would continue indefinitely and enable them to wiggle free of any hazard by flipping their houses to an endless supply of greater fools who would be there waiting to turn the very same trick. And the smoothies downstream in the mortgage and banking rackets were no less guided by avarice when they cooked up their formulas for bundling half-baked mortgages into tranches of tradeable securities. Easy Al may have failed to notice what was going on here, but then so did everybody else from The Wall Street Journal to the Securities and Exchange Commission.This, of course, represents an insidious psychology. It could only happen in a culture that has come off the rails mentally, so to speak, as ours has in the sense that nobody has any sense of consequence, neither the leaders nor those who affect to follow the leaders. The leading religion in America is not evangelical Christianity, it is the worship of unearned riches, and its golden rule is the belief that is is possible to get something for nothing. Its holy shrines are Las Vegas and Wall Street. (And, by the way, has anybody heard the evangelical Christians complain about Las Vegas? They complain about a lot of things, but are themselves among the greatest believers in unearned riches — given their preference for prayer over earnest effort in the service of solving life's problems.)
No, the American public, including the cheerleaders in the media, have only themselves to blame for the bitter harvest now underway in the asset and credit markets. And thus it would be a salutary thing for Baby Jeezus, or the forces of nature, or whatever powers guide the universe, to now kick the shit out of them, so to speak, financially, because that is exactly what the American public is full of, from top to bottom, from George W. Bush at his lonely desk on Pennsylvania Avenue to the pitiful, bankrupt householders of Orange County and Boca Raton.Now, as to the shock of Al's revelation that the Iraq war is about oil — the media and the public have got this all wrong, too. The logic here seems to be that because the Iraq war is about oil it is therefore unnecessary, optional, a mistake, an indulgence, something we should not dirty our hands in. In fact, the Iraq war is not about oil, per se, so much as it is about America's behavior here at home, about the choices we make for how we live on this continent. None of those who complain most loudly about our military presence in Iraq have advanced any proposals for reforming how we live here — and hence for our enslavement to oil, much of the world's remaining supply of which happens to be in the neighborhood of Iraq. When these complainers start complaining about the ubiquitous acceptance of suburban sprawl and abject car-dependency — and this includes the environmental boy scouts out there who want to get merit badges for buying hybrid cars — then they will deserve to be taken seriously. Until then, the American people have got exactly the grinding war that they deserve. Let them whine about it all the way to the Nascar tracks, and let them console themselves with giant plastic bottles of Pepsi Cola and buckets of chicken raised on corn grown with oil byproducts.On CBS's "60-Minutes" show last night, Greenspan, in his new role as a private sector economic consultant made predictions for the coming months in the US economy. He declared that the financial sector would get over the current credit squeeze as if it were a mild case of indigestion brought on by one too many fried won-tons at the all-you-can-eat buffet, a mere burp, allowing the public to move on to the crab Rangoon and a helping of General Tsao's chicken. This gets back to the previous point about the Iraq war and oil in particular. Al doesn't get it. CBS's sycophant reporters don't get it. Nobody gets it. We are entering the zone of the long emergency in which the primary resource needed to run the industrial economies will become scarce, expensive, and profoundly destabilizing to markets and to normal life, such as it is known in this country. And the current problem in the markets is a reflection of the resource bankruptcy we are facing. Our problems are not about credit, they are about permanent insolvency. In his old age, Alan Greenspan's face — once darkly handsome in his youthful years as a jazz musician — has taken on the strange appearance of a circus clown. Something about the way his lips have settled into a kind of thick fatuous smile, even when he is apparently not amused by anything. Is it one of God's clever little tricks to leave him looking like a clown in his valedictory years, or has his face just resolved into the perfect embodiment of leadership for a clown nation?
Tuesday, September 18, 2007
U.S. Banks Brace for Storm Surge as Dollar and Credit System Reel
U.S. Banks Brace for Storm Surge as Dollar and Credit System Reel
Tuesday, 18 September 2007
Written by Mike Whitney
By now, you’ve probably seen the photos of the angry customers queued up outside of Northern Rock Bank waiting to withdraw their money. This is the first big run on a British bank in over a century. It’s lost an eighth of its deposits in three days. The pictures are headline news in the U.K. but have been stuck on the back pages of U.S. newspapers. The reason for this is obvious. The same Force 5 economic-hurricane that just touched ground in Great Britain is headed for America and gaining strength on the way. On Monday night, desperately trying to stave off a wider panic, the British government issued an emergency pledge to Northern Rock savers that their money was safe. The government is trying to find a buyer for Northern Rock.This is what a good old fashioned bank run looks like. And, as in 1929, the bank owners and the government are frantically trying to calm down their customers by reassuring them that their money is safe. But human nature being what it is, people are not so easily pacified when they think their savings are at risk. The bottom line is this: The people want their money, not excuses.But Northern Rock doesn’t have their money and, surprisingly, it is not because the bank was dabbling in risky subprime loans. Rather, NR had unwisely adopted the model of “borrowing short to go long” in financing their mortgages just like many of the major banks in the U.S. In other words, they depended on wholesale financing of their mortgages from eager investors in the market, instead of the traditional method of maintaining sufficient capital to back up the loans on their books.It seemed like a nifty idea at the time and most of the big banks in the US were doing the same thing. It was a great way to avoid bothersome reserve requirements and the loan origination fees were profitable as well. Northern Rock’s business soared. Now they carry a mortgage book totaling $200 billion dollars.$200 billion! So why can’t they pay out a paltry $4 or $5 billion to their customers without a government bailout?It’s because they don’t have the reserves and because the bank’s business model is hopelessly flawed and no longer viable. Their assets are illiquid and (presumably) “marked to model”, which means they have no discernible market value. They might as well have been “marked to fantasy”,it amounts to the same thing. Investors don’t want them. So Northern Rock is stuck with a $200 billion albatross that’s dragging them under.A more powerful tsunami is about to descend on the United States where many of the banks have been engaged in the same practices and are using the same business model as Northern Rock. Investors are no longer buying CDOs, MBSs, or anything else related to real estate. No one wants them, whether they’re subprime or not. That means that US banks will soon undergo the same type of economic gale that is battering the U.K right now. The only difference is that the U.S. economy is already listing from the downturn in housing and an increasingly jittery stock market. That’s why Treasury Secretary Henry Paulson rushed off to England yesterday to see if he could figure out a way to keep the contagion from spreading.Good luck, Hank.It would interesting to know if Paulson still believes that “This is far and away the strongest global economy I’ve seen in my business lifetime”, or if he has adjusted his thinking as troubles in subprime, commercial paper, private equity, and credit continue to mount?
For weeks we’ve been saying that the banks are in trouble and do not have the reserves to cover their losses. This notion was originally pooh-poohed by nearly everyone. But it’s becoming more and more apparent that it is true. We expect to see many bank failures in the months to come. Prepare yourself. The banking system is mired in fraud and chicanery. Now the schemes and swindles are unwinding and the bodies will soon be floating to the surface.“Structured finance” is touted as the “new architecture of financial markets”. It is designed to distribute capital more efficiently by allowing other market participants to fill a role which used to be left exclusively to the banks. In practice, however, structured finance is a hoax; and undoubtedly the most expensive hoax of all time. The transformation of liabilities (dodgy mortgage loans) into assets (securities) through the magic of securitization is the biggest boondoggle of all time. It is the moral equivalent of mortgage laundering. The system relies on the variable support of investors to provide the funding for pools of mortgage loans that are chopped-up into tranches and duct-taped together as CDOs (collateralized debt obligations). It’s madness; but no one seemed to realize how crazy it was until Bear Stearns blew up and they couldn’t find bidders for their remaining CDOs. It’s been downhill ever since.The problems with structured finance are not simply the result of shabby lending and low interest rates. The model itself is defective.John R. Ing provides a great synopsis of structured finance in his article, “Gold: The Collapse of the Vanities”:"The origin of the debt crisis lies with the evolution of America's financial markets using financial engineering and leverage to finance the credit expansion…. Financial institutions created a Frankenstein with the change from simply lending money and taking fees to securitizing and selling trillions of loans in every market from Iowa to Germany. Credit risk was replaced by the "slicing and dicing" of risk, enabling the banks to act as principals, spreading that risk among various financial institutions….. Securitization allowed a vast array of long term liabilities once parked away with collateral to be resold along side more traditional forms of short term assets. Wall Street created an illusion that risk was somehow disseminated among the masses. Private equity too used piles of this debt to launch ever bigger buyouts. And, awash in liquidity and very sophisticated algorithms, investment bankers found willing hedge funds around the world seeking higher yielding assets. Risk was piled upon risk. We believe that the subprime crisis is not a one off event but the beginning of a significant sea change in the modern-day financial markets.”The investment sharks who conjured up “structured finance” knew exactly what they were doing. They were in bed with the ratings agencies — -off-loading trillions of dollars of garbage-bonds to pension funds, hedge funds, insurance companies and foreign financial giants. It’s a swindle of epic proportions and it never would have taken place in a sufficiently regulated market.When crowds of angry people are huddled outside the banks to get their money, the system is in real peril. Credibility must be restored quickly. This is no time for Bush’s “free market” nostrums or Paulson’s soothing bromides (he thinks the problem is “contained”) or Bernanke’s feeble rate cuts. This requires real leadership.The first thing to do is take charge, alert the public to what is going on and get Congress to work on substantive changes to the system. Concrete steps must be taken to build public confidence in the markets. And there must be a presidential announcement that all bank deposits will be fully covered by government insurance.The lights should be blinking red at all the related government agencies including the Fed, the SEC, and the Treasury Dept. They need to get ahead of the curve and stop thinking they can minimize a potential catastrophe with their usual public relations mumbo jumbo.Last week, an article appeared in the Wall Street Journal, “Banks Flock to Discount Window”. (9-14-07) The article chronicled the sudden up-tick in borrowing by the struggling banks via the Fed’s emergency bailout program, the “Discount Window”:“Discount borrowing under the Fed’s primary credit program for banks surged to more than $7.1 billion outstanding as of Wednesday, up from $1 billion a week before.”Again we see the same pattern developing; the banks borrowing money from the Fed because they cannot meet their minimum reserve requirements.WSJ: “The Fed in its weekly release said average daily borrowing through Wednesday rose to $2.93 billion.”$3 billion.Traditionally, the “Discount Window” has only been used by banks in distress, but the Fed is trying to convince people that it’s really not a sign of distress at all. It’s “a sign of strength”. Baloney. Banks don’t borrow $3 billio unless they need it. They don’t have the reserves. Period.The real condition of the banks will be revealed sometime in the next few weeks when they report earnings and account for their massive losses in “down-graded” CDOs and MBSs.Market analyst Jon Markman offered these words of advice to the financial giants"Before they (the financial industry) take down the entire market this fall by shocking Wall Street with unexpected losses, I suggest that they brush aside their attorneys and media handlers and come clean. They need to tell the world about the reality of their home lending and loan securitization teams' failures of the past four years — and the truth about the toxic paper that they've flushed into the world economic system, or stuffed into Enron-like off-balance sheet entities — before the markets make them walk the plank.”….” Since government regulators and Congress have flinched from their responsibility to administer "tough love" with rules forcing financial institutions to detail the creation, securitization and disposition of every ill-conceived subprime loan, off-balance sheet "structured investment vehicle," secretive money-market "conduit" and commercial-paper-financing vehicle, the market will do it with a vengeance."Good advice. We’ll have to wait and see if anyone is listening. The investment banks may be waiting until Tuesday hoping that Fed-chief Ken Bernanke announces a cut to the Fed’s fund rate that could send the stock market roaring back into positive territory.But interest rate cuts do not address the underlying problems of insolvency among homeowners, mortgage lenders, hedge funds and (potentially) banks. As market-analyst John R. Ing said, “A cut in rates will not solve the problem. This crisis was caused by excess liquidity and a deterioration of credit standards….A cut in the Fed Fund rate is simply heroin for credit junkies.”The cuts merely add more cheap credit to a market that that is already over-inflated from the ocean of liquidity produced by former-Fed chief Alan Greenspan. The housing bubble and the credit bubble are largely the result of Greenspan’s misguided monetary policies. (For which he now blames Bush!) The Fed’s job is to ensure price stability and the smooth operation of the markets, not to reflate equity bubbles and reward over-exposed market participants.It’s better to let cash-strapped borrowers default than slash interest rates and trigger a global run on the dollar. Financial analyst Richard Bove says that lower interest rates will do nothing to bring money back into the markets. Instead, lower interest rates will send the dollar into a tailspin and wreak havoc on the job market.“There is no liquidity problem, but a serious crisis of confidence," Bove said:"In a financial system where there is ample liquidity and a desire for higher rates to compensate for risk, the solution is not to create more liquidity and lower the rates that are available to compensate for risk. ... (The Fed) cannot reduce fear by stimulating inflation…"It is illogical to assume that holders of cash will have a strong desire to lend money at low rates in a currency that is declining in value when they can take these same funds and lend them at high rates in a currency that is gaining in value. By lowering interest rates the Federal Reserve will not stimulate economic growth or create jobs. It will crash the currency, stimulate inflation, and weaken the economy and the job markets".Bove is right. The people and businesses that cannot repay their debts should be allowed to fail. Further weakening the dollar only adds to our collective risk by feeding inflation and increasing the likelihood of capital flight from American markets. If that happens; we’re toast.Consider this: In 2000, when Bush took office, gold was $273 per ounce, oil was $22 per barrel and the euro was worth $.87 per dollar. Currently, gold is over $700 per ounce, oil is over $80 per barrel, and the euro is nearly $1.40 per dollar. If Bernanke cuts rates, we’re likely to see oil at $125 per barrel by next spring.Inflation is soaring. The government statistics are thoroughly bogus. Gold, oil and the euro don’t lie. According to economist Martin Feldstein, “The falling dollar and rising food prices caused market-based consumer prices to rise by 4.6 per cent in the most recent quarter.” (WSJ)That’s 18.4 per cent a year, and yet Bernanke is still considering cutting interest rates and further fueling inflation.What about the American worker whose wages have stagnated for the last six years? Inflation is the same as a pay-cut for him. And how about the pensioner on a fixed income? Same thing. Inflation is just a hidden tax progressively eroding his standard of living. .Bernanke’s rate cut may be boon to the “cheap credit” addicts on Wall Street, but it’s the death-knell for the average worker who is already struggling just to make ends meet.No bailouts. No rate cuts. Let the banks and hedge funds sink or swim like everyone else. The message to Bernanke is simple: “It’s time to take away the punch bowl”.The inflation in the stock market is just as evident as it is in the price of gold, oil or real estate. Economist and author Henry Liu demonstrates this in his article “Liquidity Boom and the Looming Crisis”:"The conventional value paradigm is unable to explain why the market capitalization of all US stocks grew from $5.3 trillion at the end of 1994 to $17.7 trillion at the end of 1999 to $35 trillion at the end of 2006, generating a geometric increase in price earnings ratios and the like. Liquidity analysis provides a ready answer".(Asia Times)Market capitalization zoomed from $5.3 trillion to $35 trillion in 12 years? Why?Was it due to growth in market-share, business expansion or productivity?No. It was because there were more dollars chasing the same number of securities; hence, inflation. If that is the case, then we can expect the stock market to fall sharply before it reaches a sustainable level. As Liu says, “It is not possible to preserve the abnormal market prices of assets driven up by a liquidity boom if normal liquidity is to be restored.” Eventually, stock prices will return to a normal range.Bernanke should not even be contemplating a rate cut. The market needs more discipline not less. And workers need a stable dollar. Besides, another rate cut would further jeopardize the greenback’s increasingly shaky position as the world’s “reserve currency”. That could destabilize the global economy by rapidly unwinding the U.S. massive current account deficit. The International Herald Tribune summed up the dollar’s problems in a recent article, "Dollar's Retreat Raises Fear of Collapse.""Finance ministers and central bankers have long fretted that at some point, the rest of the world would lose its willingness to finance the United States' proclivity to consume far more than it produces - and that a potentially disastrous free-fall in the dollar's value would result."The latest turmoil in mortgage markets has, in a single stroke, shaken faith in the resilience of American finance to a greater degree than even the bursting of the technology bubble in 2000 or the terror attacks of Sept. 11, 2001, analysts said. It has also raised prospect of a recession in the wider economy."This is all pointing to a greatly increased risk of a fast unwinding of the U.S. current account deficit and a serious decline of the dollar".Other experts and currency traders have expressed similar sentiments. The dollar is at historic lows in relation to the basket of currencies against which it is weighted. Bernanke can’t take a chance that his effort to rescue the markets will cause a sudden sell-off of the dollar.The Fed chief’s hands are tied. Bernanke simply doesn’t have the tools to fix the problems before him. Insolvency cannot be fixed with liquidity injections nor can the deeply-rooted “systemic” problems in “structured finance” be corrected by slashing interest rates. These require fiscal solutions, congressional involvement, and fundamental economic policy changes.Rate cuts won’t help to rekindle the spending spree in the housing market either. That charade is over. The banks have already tightened lending standards and inventory is larger than anytime since they began keeping records. The slowdown in housing is irreversible as is the steady decline in real estate prices. Trillions in market capitalization will be wiped out. Home equity is already shrinking as is consumer spending connected to home-equity withdrawals.The bubble has popped regardless of what Bernanke does. The same is true in the clogged Commercial Paper market where hundreds of billions of dollars in short-term debt is due to expire in the next few weeks. The banks and corporate borrowers are expected to struggle to refinance their debts but, of course, much of the debt will not roll over. There will be substantial losses and, very likely, more defaults.Bernanke can either be a statesman — and tell the country the truth about our dysfunctional financial system which is breaking down from years of corruption, deregulation and manipulation — or he can take the cowards-route and buy some time by flooding the system with liquidity, stimulating more destructive consumerism, and condemning the nation to an avoidable cycle of double-digit inflation.We’ll know his decision soon enough.
Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com
Tuesday, 18 September 2007
Written by Mike Whitney
By now, you’ve probably seen the photos of the angry customers queued up outside of Northern Rock Bank waiting to withdraw their money. This is the first big run on a British bank in over a century. It’s lost an eighth of its deposits in three days. The pictures are headline news in the U.K. but have been stuck on the back pages of U.S. newspapers. The reason for this is obvious. The same Force 5 economic-hurricane that just touched ground in Great Britain is headed for America and gaining strength on the way. On Monday night, desperately trying to stave off a wider panic, the British government issued an emergency pledge to Northern Rock savers that their money was safe. The government is trying to find a buyer for Northern Rock.This is what a good old fashioned bank run looks like. And, as in 1929, the bank owners and the government are frantically trying to calm down their customers by reassuring them that their money is safe. But human nature being what it is, people are not so easily pacified when they think their savings are at risk. The bottom line is this: The people want their money, not excuses.But Northern Rock doesn’t have their money and, surprisingly, it is not because the bank was dabbling in risky subprime loans. Rather, NR had unwisely adopted the model of “borrowing short to go long” in financing their mortgages just like many of the major banks in the U.S. In other words, they depended on wholesale financing of their mortgages from eager investors in the market, instead of the traditional method of maintaining sufficient capital to back up the loans on their books.It seemed like a nifty idea at the time and most of the big banks in the US were doing the same thing. It was a great way to avoid bothersome reserve requirements and the loan origination fees were profitable as well. Northern Rock’s business soared. Now they carry a mortgage book totaling $200 billion dollars.$200 billion! So why can’t they pay out a paltry $4 or $5 billion to their customers without a government bailout?It’s because they don’t have the reserves and because the bank’s business model is hopelessly flawed and no longer viable. Their assets are illiquid and (presumably) “marked to model”, which means they have no discernible market value. They might as well have been “marked to fantasy”,it amounts to the same thing. Investors don’t want them. So Northern Rock is stuck with a $200 billion albatross that’s dragging them under.A more powerful tsunami is about to descend on the United States where many of the banks have been engaged in the same practices and are using the same business model as Northern Rock. Investors are no longer buying CDOs, MBSs, or anything else related to real estate. No one wants them, whether they’re subprime or not. That means that US banks will soon undergo the same type of economic gale that is battering the U.K right now. The only difference is that the U.S. economy is already listing from the downturn in housing and an increasingly jittery stock market. That’s why Treasury Secretary Henry Paulson rushed off to England yesterday to see if he could figure out a way to keep the contagion from spreading.Good luck, Hank.It would interesting to know if Paulson still believes that “This is far and away the strongest global economy I’ve seen in my business lifetime”, or if he has adjusted his thinking as troubles in subprime, commercial paper, private equity, and credit continue to mount?
For weeks we’ve been saying that the banks are in trouble and do not have the reserves to cover their losses. This notion was originally pooh-poohed by nearly everyone. But it’s becoming more and more apparent that it is true. We expect to see many bank failures in the months to come. Prepare yourself. The banking system is mired in fraud and chicanery. Now the schemes and swindles are unwinding and the bodies will soon be floating to the surface.“Structured finance” is touted as the “new architecture of financial markets”. It is designed to distribute capital more efficiently by allowing other market participants to fill a role which used to be left exclusively to the banks. In practice, however, structured finance is a hoax; and undoubtedly the most expensive hoax of all time. The transformation of liabilities (dodgy mortgage loans) into assets (securities) through the magic of securitization is the biggest boondoggle of all time. It is the moral equivalent of mortgage laundering. The system relies on the variable support of investors to provide the funding for pools of mortgage loans that are chopped-up into tranches and duct-taped together as CDOs (collateralized debt obligations). It’s madness; but no one seemed to realize how crazy it was until Bear Stearns blew up and they couldn’t find bidders for their remaining CDOs. It’s been downhill ever since.The problems with structured finance are not simply the result of shabby lending and low interest rates. The model itself is defective.John R. Ing provides a great synopsis of structured finance in his article, “Gold: The Collapse of the Vanities”:"The origin of the debt crisis lies with the evolution of America's financial markets using financial engineering and leverage to finance the credit expansion…. Financial institutions created a Frankenstein with the change from simply lending money and taking fees to securitizing and selling trillions of loans in every market from Iowa to Germany. Credit risk was replaced by the "slicing and dicing" of risk, enabling the banks to act as principals, spreading that risk among various financial institutions….. Securitization allowed a vast array of long term liabilities once parked away with collateral to be resold along side more traditional forms of short term assets. Wall Street created an illusion that risk was somehow disseminated among the masses. Private equity too used piles of this debt to launch ever bigger buyouts. And, awash in liquidity and very sophisticated algorithms, investment bankers found willing hedge funds around the world seeking higher yielding assets. Risk was piled upon risk. We believe that the subprime crisis is not a one off event but the beginning of a significant sea change in the modern-day financial markets.”The investment sharks who conjured up “structured finance” knew exactly what they were doing. They were in bed with the ratings agencies — -off-loading trillions of dollars of garbage-bonds to pension funds, hedge funds, insurance companies and foreign financial giants. It’s a swindle of epic proportions and it never would have taken place in a sufficiently regulated market.When crowds of angry people are huddled outside the banks to get their money, the system is in real peril. Credibility must be restored quickly. This is no time for Bush’s “free market” nostrums or Paulson’s soothing bromides (he thinks the problem is “contained”) or Bernanke’s feeble rate cuts. This requires real leadership.The first thing to do is take charge, alert the public to what is going on and get Congress to work on substantive changes to the system. Concrete steps must be taken to build public confidence in the markets. And there must be a presidential announcement that all bank deposits will be fully covered by government insurance.The lights should be blinking red at all the related government agencies including the Fed, the SEC, and the Treasury Dept. They need to get ahead of the curve and stop thinking they can minimize a potential catastrophe with their usual public relations mumbo jumbo.Last week, an article appeared in the Wall Street Journal, “Banks Flock to Discount Window”. (9-14-07) The article chronicled the sudden up-tick in borrowing by the struggling banks via the Fed’s emergency bailout program, the “Discount Window”:“Discount borrowing under the Fed’s primary credit program for banks surged to more than $7.1 billion outstanding as of Wednesday, up from $1 billion a week before.”Again we see the same pattern developing; the banks borrowing money from the Fed because they cannot meet their minimum reserve requirements.WSJ: “The Fed in its weekly release said average daily borrowing through Wednesday rose to $2.93 billion.”$3 billion.Traditionally, the “Discount Window” has only been used by banks in distress, but the Fed is trying to convince people that it’s really not a sign of distress at all. It’s “a sign of strength”. Baloney. Banks don’t borrow $3 billio unless they need it. They don’t have the reserves. Period.The real condition of the banks will be revealed sometime in the next few weeks when they report earnings and account for their massive losses in “down-graded” CDOs and MBSs.Market analyst Jon Markman offered these words of advice to the financial giants"Before they (the financial industry) take down the entire market this fall by shocking Wall Street with unexpected losses, I suggest that they brush aside their attorneys and media handlers and come clean. They need to tell the world about the reality of their home lending and loan securitization teams' failures of the past four years — and the truth about the toxic paper that they've flushed into the world economic system, or stuffed into Enron-like off-balance sheet entities — before the markets make them walk the plank.”….” Since government regulators and Congress have flinched from their responsibility to administer "tough love" with rules forcing financial institutions to detail the creation, securitization and disposition of every ill-conceived subprime loan, off-balance sheet "structured investment vehicle," secretive money-market "conduit" and commercial-paper-financing vehicle, the market will do it with a vengeance."Good advice. We’ll have to wait and see if anyone is listening. The investment banks may be waiting until Tuesday hoping that Fed-chief Ken Bernanke announces a cut to the Fed’s fund rate that could send the stock market roaring back into positive territory.But interest rate cuts do not address the underlying problems of insolvency among homeowners, mortgage lenders, hedge funds and (potentially) banks. As market-analyst John R. Ing said, “A cut in rates will not solve the problem. This crisis was caused by excess liquidity and a deterioration of credit standards….A cut in the Fed Fund rate is simply heroin for credit junkies.”The cuts merely add more cheap credit to a market that that is already over-inflated from the ocean of liquidity produced by former-Fed chief Alan Greenspan. The housing bubble and the credit bubble are largely the result of Greenspan’s misguided monetary policies. (For which he now blames Bush!) The Fed’s job is to ensure price stability and the smooth operation of the markets, not to reflate equity bubbles and reward over-exposed market participants.It’s better to let cash-strapped borrowers default than slash interest rates and trigger a global run on the dollar. Financial analyst Richard Bove says that lower interest rates will do nothing to bring money back into the markets. Instead, lower interest rates will send the dollar into a tailspin and wreak havoc on the job market.“There is no liquidity problem, but a serious crisis of confidence," Bove said:"In a financial system where there is ample liquidity and a desire for higher rates to compensate for risk, the solution is not to create more liquidity and lower the rates that are available to compensate for risk. ... (The Fed) cannot reduce fear by stimulating inflation…"It is illogical to assume that holders of cash will have a strong desire to lend money at low rates in a currency that is declining in value when they can take these same funds and lend them at high rates in a currency that is gaining in value. By lowering interest rates the Federal Reserve will not stimulate economic growth or create jobs. It will crash the currency, stimulate inflation, and weaken the economy and the job markets".Bove is right. The people and businesses that cannot repay their debts should be allowed to fail. Further weakening the dollar only adds to our collective risk by feeding inflation and increasing the likelihood of capital flight from American markets. If that happens; we’re toast.Consider this: In 2000, when Bush took office, gold was $273 per ounce, oil was $22 per barrel and the euro was worth $.87 per dollar. Currently, gold is over $700 per ounce, oil is over $80 per barrel, and the euro is nearly $1.40 per dollar. If Bernanke cuts rates, we’re likely to see oil at $125 per barrel by next spring.Inflation is soaring. The government statistics are thoroughly bogus. Gold, oil and the euro don’t lie. According to economist Martin Feldstein, “The falling dollar and rising food prices caused market-based consumer prices to rise by 4.6 per cent in the most recent quarter.” (WSJ)That’s 18.4 per cent a year, and yet Bernanke is still considering cutting interest rates and further fueling inflation.What about the American worker whose wages have stagnated for the last six years? Inflation is the same as a pay-cut for him. And how about the pensioner on a fixed income? Same thing. Inflation is just a hidden tax progressively eroding his standard of living. .Bernanke’s rate cut may be boon to the “cheap credit” addicts on Wall Street, but it’s the death-knell for the average worker who is already struggling just to make ends meet.No bailouts. No rate cuts. Let the banks and hedge funds sink or swim like everyone else. The message to Bernanke is simple: “It’s time to take away the punch bowl”.The inflation in the stock market is just as evident as it is in the price of gold, oil or real estate. Economist and author Henry Liu demonstrates this in his article “Liquidity Boom and the Looming Crisis”:"The conventional value paradigm is unable to explain why the market capitalization of all US stocks grew from $5.3 trillion at the end of 1994 to $17.7 trillion at the end of 1999 to $35 trillion at the end of 2006, generating a geometric increase in price earnings ratios and the like. Liquidity analysis provides a ready answer".(Asia Times)Market capitalization zoomed from $5.3 trillion to $35 trillion in 12 years? Why?Was it due to growth in market-share, business expansion or productivity?No. It was because there were more dollars chasing the same number of securities; hence, inflation. If that is the case, then we can expect the stock market to fall sharply before it reaches a sustainable level. As Liu says, “It is not possible to preserve the abnormal market prices of assets driven up by a liquidity boom if normal liquidity is to be restored.” Eventually, stock prices will return to a normal range.Bernanke should not even be contemplating a rate cut. The market needs more discipline not less. And workers need a stable dollar. Besides, another rate cut would further jeopardize the greenback’s increasingly shaky position as the world’s “reserve currency”. That could destabilize the global economy by rapidly unwinding the U.S. massive current account deficit. The International Herald Tribune summed up the dollar’s problems in a recent article, "Dollar's Retreat Raises Fear of Collapse.""Finance ministers and central bankers have long fretted that at some point, the rest of the world would lose its willingness to finance the United States' proclivity to consume far more than it produces - and that a potentially disastrous free-fall in the dollar's value would result."The latest turmoil in mortgage markets has, in a single stroke, shaken faith in the resilience of American finance to a greater degree than even the bursting of the technology bubble in 2000 or the terror attacks of Sept. 11, 2001, analysts said. It has also raised prospect of a recession in the wider economy."This is all pointing to a greatly increased risk of a fast unwinding of the U.S. current account deficit and a serious decline of the dollar".Other experts and currency traders have expressed similar sentiments. The dollar is at historic lows in relation to the basket of currencies against which it is weighted. Bernanke can’t take a chance that his effort to rescue the markets will cause a sudden sell-off of the dollar.The Fed chief’s hands are tied. Bernanke simply doesn’t have the tools to fix the problems before him. Insolvency cannot be fixed with liquidity injections nor can the deeply-rooted “systemic” problems in “structured finance” be corrected by slashing interest rates. These require fiscal solutions, congressional involvement, and fundamental economic policy changes.Rate cuts won’t help to rekindle the spending spree in the housing market either. That charade is over. The banks have already tightened lending standards and inventory is larger than anytime since they began keeping records. The slowdown in housing is irreversible as is the steady decline in real estate prices. Trillions in market capitalization will be wiped out. Home equity is already shrinking as is consumer spending connected to home-equity withdrawals.The bubble has popped regardless of what Bernanke does. The same is true in the clogged Commercial Paper market where hundreds of billions of dollars in short-term debt is due to expire in the next few weeks. The banks and corporate borrowers are expected to struggle to refinance their debts but, of course, much of the debt will not roll over. There will be substantial losses and, very likely, more defaults.Bernanke can either be a statesman — and tell the country the truth about our dysfunctional financial system which is breaking down from years of corruption, deregulation and manipulation — or he can take the cowards-route and buy some time by flooding the system with liquidity, stimulating more destructive consumerism, and condemning the nation to an avoidable cycle of double-digit inflation.We’ll know his decision soon enough.
Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com
Monday, September 17, 2007
Spectre of the Great Depression haunts America's top banker
Spectre of the Great Depression haunts America's top banker
He made his name on campus; now Fed chief Ben Bernanke must pluck the global economy from the abyss, writes Heather Stewart Sunday September 16, 2007The Observer
Ben Bernanke, the Federal Reserve chairman, is like a man who, after spending a lifetime playing with train sets, finally gets to drive the real thing - only to find it hurtling towards the edge of a cliff. Having honed his reputation in Ivy League classrooms, analysing the links between central banks and the real world, Bernanke now has the challenge of guiding the US economy through its most serious crisis for many years.
On Tuesday, under extraordinary scrutiny, Bernanke and his colleagues on the Fed's decision-making board will hold their regular meeting to set interest rates. Investors on Wall Street and around the world, and politicians in Washington, are pinning their hopes on the 53-year-old former Princeton professor preventing the world's biggest economy from heading into recession.
'One of Bernanke's main claims to academic fame is his study of the Great Depression, and how the failure to respond to the collapse of financial institutions turned a market crash into a bad economic problem,' says Andrew Scott, of London Business School. 'From that point of view, he's a fantastic person to have in charge.'
In Bernanke's analysis, the Fed was to blame for the Depression, for failing to realise the enormousness of the situation facing it. He won't want today's Fed to make that mistake - and is almost certain to heed Wall Street's squeals this week by cutting rates, perhaps by as much as half a percentage point. But, with many of the respected blue chip financial institutions lumbered with billions of dollars of toxic mortgage debts, bundled up in illiquid and fearsomely complex packages, the fallout from the credit crunch will be felt for many months, whatever Bernanke's response.
Hank Paulson, the US Treasury Secretary, has warned that the current turmoil will take longer to resolve than the market pain that followed the Russian debt default in the late 1990s, or the Latin American credit crisis in the 1980s.
Bernanke was appointed last year, after less than a year as chairman of George Bush's Council of Economic Advisers, which many observers had seen as probation for the Fed job. During his time at the White House he made few headlines - although the President was apparently much amused by his donnish penchant for wearing pale socks with dark suits.
Few observers could quibble with his impeccable academic CV; but there was some disquiet, on Wall Street at least, about his inflation-fighting credentials. He had been nicknamed 'helicopter Ben' after a speech in 2002 when he warned that the Fed should be alert to the risk of deflation, reminding his audience of Milton Friedman's proposal of a 'helicopter drop' of free cash, to keep prices from falling. This led some Fed-watchers to fret he was an interest-rate dove, more worried about deflation than inflation.
The other doubt expressed by investors was that as an academic, not a money man, he didn't possess the sure touch of his revered predecessor Alan Greenspan with either Wall Street or the White House. Less than a hundred days after his appointment, in May last year, he apparently let slip to a CNBC presenter at a dinner that he was worried the markets might see him as too dovish. Maria Bartiromo duly publicised his remarks, and the markets dropped sharply.
The political sensitivity of his job is immense, as shown by the fact that, as the crisis was unfolding last month, he was hauled in for a meeting with Paulson and the chairman of the Senate banking committee, Christopher Dodd, who said afterwards the Fed governor had pledged to use 'all tools available'.
Ironically, though, many economists believe that it was his predecessor's propensity for appeasing the Wall Street barons that created the nasty legacy Bernanke now has to live with. By cutting interest rates at the first sign of trouble, Greenspan is accused of encouraging investors to take excessive risks, in the belief the Fed would ride to the rescue.
'This is a very, very difficult one, and in some sense it is partly Greenspan's doing, because he bailed out the system in 1987, and 1998,' says Ken Rogoff, Harvard economics professor and former chief economist at the International Monetary Fund. 'He left a legacy where, even after a decade and a half of spectacular productivity gains, inflation was still at the high end of the range and rising. And there was a huge credit bubble.'
Despite the Bank of England's unprecedented bailout of Northern Rock last Thursday, governor Mervyn King has been careful to distance himself from a policy of emergency rate cuts, or cut-price lending to the banks. In a letter to the Treasury select committee last week, he said that approach 'penalises those financial institutions that sat out the dance, encourages herd behaviour and increases the intensity of future crises'.
But unlike King - and Chancellor Alistair Darling, who also laid into the banks for their imprudence last week - Bernanke doesn't have the luxury of a relatively robust economy behind him. The credit crunch was triggered by a downturn in the US housing market, which was already causing collateral damage in the rest of the country's economy.
Bernanke faces a dilemma. If he cuts rates too far, too fast, he will be accused of caving in to Wall Street's Masters of the Universe. If he fails to act, and America's housing crash, combined with a tightening of credit conditions, tips the economy into a full recession, he will take much of the blame. Disentangling the impact of the mess the banks are in, and the housing market slowdown, would flummox even the most adept number-cruncher.
'I'm sure he realises that this is an extremely delicate moment,' says Rogoff. 'He's well prepared for this.'
Bernanke is less inscrutable and more democratic than Greenspan, Rogoff says, and he's a good person to have in charge during a crisis. 'He responds very quickly, he thinks very quickly, and he's a very good listener. This isn't someone who is shutting himself into a room and trying to work out what's going on.'
With the sub-prime crisis far from over, and signs that the housing market downturn may , Bernanke will need all those skills, and perhaps a dose of good luck, to avoid becoming the kind of case study in bad policy-making on which he built his academic career.
The CV
Name Ben Shalom Bernanke
Born 13 December 1953, Augusta, Georgia; grew up in South Carolina
EducationBA in economics from Harvard, 1975; PhD from MIT, 1979
Career 1979-1985, teaching posts at Stanford University; 1985-2005, professor of economics at Princeton; June 2005-February 2006, chairman of George Bush's Council of Economic Advisers; February 2006, chairman of the Federal Reserve
Family Married to Anna, two children
He made his name on campus; now Fed chief Ben Bernanke must pluck the global economy from the abyss, writes Heather Stewart Sunday September 16, 2007The Observer
Ben Bernanke, the Federal Reserve chairman, is like a man who, after spending a lifetime playing with train sets, finally gets to drive the real thing - only to find it hurtling towards the edge of a cliff. Having honed his reputation in Ivy League classrooms, analysing the links between central banks and the real world, Bernanke now has the challenge of guiding the US economy through its most serious crisis for many years.
On Tuesday, under extraordinary scrutiny, Bernanke and his colleagues on the Fed's decision-making board will hold their regular meeting to set interest rates. Investors on Wall Street and around the world, and politicians in Washington, are pinning their hopes on the 53-year-old former Princeton professor preventing the world's biggest economy from heading into recession.
'One of Bernanke's main claims to academic fame is his study of the Great Depression, and how the failure to respond to the collapse of financial institutions turned a market crash into a bad economic problem,' says Andrew Scott, of London Business School. 'From that point of view, he's a fantastic person to have in charge.'
In Bernanke's analysis, the Fed was to blame for the Depression, for failing to realise the enormousness of the situation facing it. He won't want today's Fed to make that mistake - and is almost certain to heed Wall Street's squeals this week by cutting rates, perhaps by as much as half a percentage point. But, with many of the respected blue chip financial institutions lumbered with billions of dollars of toxic mortgage debts, bundled up in illiquid and fearsomely complex packages, the fallout from the credit crunch will be felt for many months, whatever Bernanke's response.
Hank Paulson, the US Treasury Secretary, has warned that the current turmoil will take longer to resolve than the market pain that followed the Russian debt default in the late 1990s, or the Latin American credit crisis in the 1980s.
Bernanke was appointed last year, after less than a year as chairman of George Bush's Council of Economic Advisers, which many observers had seen as probation for the Fed job. During his time at the White House he made few headlines - although the President was apparently much amused by his donnish penchant for wearing pale socks with dark suits.
Few observers could quibble with his impeccable academic CV; but there was some disquiet, on Wall Street at least, about his inflation-fighting credentials. He had been nicknamed 'helicopter Ben' after a speech in 2002 when he warned that the Fed should be alert to the risk of deflation, reminding his audience of Milton Friedman's proposal of a 'helicopter drop' of free cash, to keep prices from falling. This led some Fed-watchers to fret he was an interest-rate dove, more worried about deflation than inflation.
The other doubt expressed by investors was that as an academic, not a money man, he didn't possess the sure touch of his revered predecessor Alan Greenspan with either Wall Street or the White House. Less than a hundred days after his appointment, in May last year, he apparently let slip to a CNBC presenter at a dinner that he was worried the markets might see him as too dovish. Maria Bartiromo duly publicised his remarks, and the markets dropped sharply.
The political sensitivity of his job is immense, as shown by the fact that, as the crisis was unfolding last month, he was hauled in for a meeting with Paulson and the chairman of the Senate banking committee, Christopher Dodd, who said afterwards the Fed governor had pledged to use 'all tools available'.
Ironically, though, many economists believe that it was his predecessor's propensity for appeasing the Wall Street barons that created the nasty legacy Bernanke now has to live with. By cutting interest rates at the first sign of trouble, Greenspan is accused of encouraging investors to take excessive risks, in the belief the Fed would ride to the rescue.
'This is a very, very difficult one, and in some sense it is partly Greenspan's doing, because he bailed out the system in 1987, and 1998,' says Ken Rogoff, Harvard economics professor and former chief economist at the International Monetary Fund. 'He left a legacy where, even after a decade and a half of spectacular productivity gains, inflation was still at the high end of the range and rising. And there was a huge credit bubble.'
Despite the Bank of England's unprecedented bailout of Northern Rock last Thursday, governor Mervyn King has been careful to distance himself from a policy of emergency rate cuts, or cut-price lending to the banks. In a letter to the Treasury select committee last week, he said that approach 'penalises those financial institutions that sat out the dance, encourages herd behaviour and increases the intensity of future crises'.
But unlike King - and Chancellor Alistair Darling, who also laid into the banks for their imprudence last week - Bernanke doesn't have the luxury of a relatively robust economy behind him. The credit crunch was triggered by a downturn in the US housing market, which was already causing collateral damage in the rest of the country's economy.
Bernanke faces a dilemma. If he cuts rates too far, too fast, he will be accused of caving in to Wall Street's Masters of the Universe. If he fails to act, and America's housing crash, combined with a tightening of credit conditions, tips the economy into a full recession, he will take much of the blame. Disentangling the impact of the mess the banks are in, and the housing market slowdown, would flummox even the most adept number-cruncher.
'I'm sure he realises that this is an extremely delicate moment,' says Rogoff. 'He's well prepared for this.'
Bernanke is less inscrutable and more democratic than Greenspan, Rogoff says, and he's a good person to have in charge during a crisis. 'He responds very quickly, he thinks very quickly, and he's a very good listener. This isn't someone who is shutting himself into a room and trying to work out what's going on.'
With the sub-prime crisis far from over, and signs that the housing market downturn may , Bernanke will need all those skills, and perhaps a dose of good luck, to avoid becoming the kind of case study in bad policy-making on which he built his academic career.
The CV
Name Ben Shalom Bernanke
Born 13 December 1953, Augusta, Georgia; grew up in South Carolina
EducationBA in economics from Harvard, 1975; PhD from MIT, 1979
Career 1979-1985, teaching posts at Stanford University; 1985-2005, professor of economics at Princeton; June 2005-February 2006, chairman of George Bush's Council of Economic Advisers; February 2006, chairman of the Federal Reserve
Family Married to Anna, two children
Saturday, September 15, 2007
Economic Crisis: The U.S. Political Leadership Has Failed
Economic Crisis: The U.S. Political Leadership Has Failed
Saturday, 15 September 2007
by Richard C. Cook As the 2007 economic collapse picks up speed, it’s time to take a hard look at the performance of the U.S. national political leadership in meeting some of their most fundamental responsibilities. It’s time to face the fact of serious failure over the last quarter century. During this time, the leaders of both political parties and of major institutions such as the Federal Reserve have presided over the abandonment of some of the most solemn obligations of constitutional government. They have done this in order to embrace an agenda favorable mainly to the financial, corporate, and government elites. On January 20, 1981, a full generation ago, President Ronald Reagan said in his first inaugural address, "Government is not a solution to our problem, government is the problem."Reagan was both right and wrong. The problem the U.S. was facing then was the collapse of the nation’s manufacturing base through a recession that happened when the Federal Reserve raised interest rates to over the twenty percent level. It did so almost a decade after President Richard Nixon removed the gold peg for the dollar, leading to the inflation of the 1970s when our currency flooded world markets through the oil trade. Reagan’s statement that "government is the problem" was correct to the extent that failed financial policies and the out-of-control actions of a Federal Reserve beholden to private financial interests combined in the worse economic downturn since the Great Depression to wreck the world’s greatest industrial powerhouse.But he was wrong in thinking that the solution was deregulation of the economy, particularly deregulation of financial and investment institutions which took place during his two terms. The result was enormous growth in the power and influence of Wall Street and the big banks over the rest of the economy. The era of leveraged mergers, acquisitions, and buyouts was the predecessor of the disaster of today with the unfolding fiasco of equity, hedge, and derivative funds in the process of collapse.
After Reagan came President George H.W. Bush. By the end of his term, the loss of manufacturing jobs had produced another recession. Within a couple of years of Bill Clinton’s election in 1992, action by Secretary of the Treasury Robert Rubin to strengthen the dollar attracted enough foreign investment to create the dot.com bubble. Clinton then cut the federal budget enough by reducing federal employment that he was able to achieve a budget surplus. This lessened the drag on the economy from the national debt which Reagan had left behind from his tax cuts and trillion dollar military build-up. But the over-leveraged dot.com bubble burst with the stock market collapse of 2000, leaving us in recession again.Enter President George W. Bush. Despite the "achievement" of Federal Reserve Chairman Alan Greenspan in creating another bubble — the housing one — big enough to float the U.S. economy for four consecutive years — 2002 to 2005 — the economic fundamentals today are horrendous. We are living in an economy that has begun to crash, with the Federal Reserve, the Treasury Department, and Congress cobbling together bail-outs of various descriptions which they hope will right what is obviously a sinking ship. We can only hope they will succeed to some extent, because it would be heartless to wish disaster on the ones who suffer the most from the consequences of the greed and stupidity of people in power — namely the ordinary people who work for a living and who honestly try to raise their families and hold to a decent standard of living. But life is becoming very hard for the vast majority of Americans who have been bearing the brunt of our failed economic and monetary polices of the last three decades. Our political leadership has let us down in the following critical respects:
Going back to the 1930s, President Franklin D. Roosevelt established an economic system — the New Deal — that pulled the U.S. out of the Great Depression, enabled us to fight World War II, and created the world’s greatest industrial democracy. He did this largely through programs that, taken together, were based on the principle of low-cost credit treated as a public utility. This persisted into the 1960s and 70s, when it was replaced with the system of monetarism, whereby the economy is now regulated by the Federal Reserve through raising and lowering of interest rates. This system, with interest rates much higher, on average, than during previous decades, has been catastrophic for the U.S. economy. It has enriched the financial industry at the expense of everyone else through what can only be called institutionalized usury. Under this system, every period of economic growth since 1983 has been a bank-created bubble, while the general population has become steadily poorer. The Federal Reserve claims that it raises interest rates to reduce inflation, when in fact higher interest rates cause inflation by making every transaction more expensive. Under the reign of monetarism, the U.S. dollar has lost over eighty percent of its value. In fact, government policies are designed to generate inflation, because this makes it cheaper to pay down the national debt and while augmenting tax revenues.
It has been well-documented that since the early 1980s the federal government has acquiesced in every respect to economic policies that have resulted in the steady erosion of our manufacturing base, elimination of millions of skilled industrial jobs, creation of a crushing burden of household and individual debt, crumbling of our physical infrastructure, privatization or elimination of public services, failure to meet such crises as the Katrina disaster, export of jobs to low-cost foreign labor markets, unfair distribution of taxation, and toleration of the influx of millions of illegal aliens who keep wages low within the domestic economy.
Since the Clinton administration, the government has misled the public through distortion of economic indicators. Calculations of the GDP are too high and exaggerate the growth of the economy. The consumer price index on which government cost-of-living adjustments are based has eliminated such items as food, fuel, and home buying. Actual inflation is running at a rate of three times what the government estimates; i.e. closer to ten percent than the three percent which is claimed. Regarding the money supply, the Federal Reserve has stopped reporting one of the most important indicators, which is M3 — the amount of money available to the largest institutional investors. Data which are available today show without question that the producing economy — that is, the everyday world of people who work for a living — has been in recession for over a year. Meanwhile, the financial economy that lives off the producers as a parasite continues to float on rollovers of mega-loans originating with the Federal Reserve and its policy of allowing banks to capitalize the massive amounts of repurchase agreements generated by electronic funds transfer.
Insufficient attention has been paid to the disastrous effects of NAFTA in destroying family farming in the U.S., Canada, and Mexico. On top of this has been the diversion of agricultural products into bio-fuel production with the attendant inflationary effects. Meanwhile, our food supply has been taken over by agribusiness and the financial markets at the same time that two-thirds of the nation has been in the grip of long-term drought. The high interest rates of the monetarist regime have worked to make farming at the local level impossible and have destroyed the production of entire regions, such as the once-great Idaho potato industry. Unless local farming can be revived, there is a real-danger of massive food shortages breaking out under a prolonged economic crisis.
Finally, there are our failed foreign and military policies. After the U.S. lost the Vietnam War, we had reason to believe that our political leaders might have learned a lesson about military adventures abroad, particularly land wars on the continent of Asia. Instead, starting in earnest with the "Reagan doctrine" of endless proxy conflicts on every continent, the U.S. has embarked on a policy of world military conquest. The Iraq War, the planned permanent occupation of that country, and the designs being formulated against Iran, are part of a policy of military control of the Middle East that has been ongoing for almost twenty years. The dual objectives of this policy are to control Middle Eastern oil and advance the interests of Israel. Talk of the "surge," troop drawdown, etc., are nonsense, because the U.S. plans to occupy permanent bases and control the remaining oil reserves in the region. These wars are being paid for by sale of Treasury bonds to possible future adversaries such as China, while the U.S. bubble economy that is backing up our military forces overseas is deflating. Clearly something has to give, either through exhaustion of our military capability abroad, economic collapse at home, or the catastrophe of a world war. The denouement seems to be drawing closer as foreign governments dump their U.S. dollars which are declining in value due to the twin trade and fiscal deficits. What our leaders should now be doing is recognize the fact that we live in a multilateral world where conflicts can only be resolved by nations acting as equals under the umbrella of the U.N. So many mistakes have been made over the last several decades that it is difficult to see how real change could take place without a revolutionary transformation of American society. Those who worked for change in the 1960s through opposition to the Vietnam War hoped for such a transformation, but the opposite has happened. The cause has been the assertion of influence by the corporate-financial-government elites, who have essentially negated the ability of the people through their elected representatives to manage affairs for the sake of the general welfare as stated in the preamble to our Constitution. The government under the leadership of both political parties has even violated some of its basic constitutional mandates.Congress, for instance, has failed to exercise its duties with respect to oversight and control of the monetary system, having ceded its authority to the private banking industry through the Federal Reserve Act of 1913. Congress has also failed to provide effective regulation of the financial industry under the interstate commerce clause of Article One, as the subprime mortgage debacle and other abuses have clearly demonstrated. The government as a whole has failed to provide for equal protection of the laws as specified in the Fourteenth Amendment by allowing so much of the wealth of the nation to be transferred to the upper income brackets who manipulate the corporate and financial systems to their advantage. It could also be argued that the passivity of the government in standing by while millions of people have lost their homes, jobs, or pensions due to fraudulent financial practices or speculative bubbles violates the Fifth Amendment provision which specifies that "no person shall be…deprived of life, liberty, or property, without due process of law." Finally, it could be argued that many of our economic and tax policies violate the Thirteenth Amendment which states that, "Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction." We’re used to interpreting the Thirteenth Amendment as applying only to chattel slavery, but economic servitude can be almost as onerous. Certainly the provision of the 2005 bankruptcy reform legislation which makes student loan debt and unpaid taxes a lifetime obligation, not subject to bankruptcy write-off, constitutes "involuntary servitude." So too may a cumulative tax burden where up to fifty percent of an individual’s income goes for taxes at the federal, state, and local levels. It is obvious that the elite intend to make every effort to ride out the current crisis. This is what the so-called "soft landing" is about. At the point in time when it may become possible to have real change, it can only be done effectively as it was accomplished during the New Deal — through control of credit as a public utility. This is because the causes of social distress are economic, and the economy is controlled through the monetary system. The essence of monetary policy is who controls credit and for what ends.It would not be difficult to create programs, institutions, and systems to develop an updated New Deal to meet present conditions. The knowledge is there, as is the technology. What is lacking is political recognition and will. Today most individuals are passive spectators to the ongoing train wreck, and none of the leading presidential candidates is addressing basic policy issues. Ninety-five percent of what they are saying is media fluff. As an example of what could be done, it would be possible immediately to place all pubic infrastructure programs within the U.S. under a funding mechanism whereby a federal infrastructure bank could be self-capitalized by special Treasury infrastructure bonds with lending at zero percent interest for a multitude of long-term projects. A new money supply would thereby come into being that would completely by-pass the Federal Reserve System. This could be supplemented by a citizens’ basic income guarantee and a National Dividend, similar to the Alaska Permanent Fund, which would reduce poverty and inject purchasing power at the grassroots level. The denial of purchasing power except through more debt in a country where the wage and salary base has stagnated is an economic crime. One purpose is doubtless to create an impoverished underclass as a source of military recruitment. Such measures would revolutionize local economies and restore the ability of the general population to participate in the economic life of the nation. But until enough people wake up to what is going on and the fact that they have the power within themselves to make a difference, nothing will change. They will continue to be fleeced by the rich and powerful as they have been throughout most of history.
Richard C. Cook is a retired federal analyst, whose career included service with the U.S. Civil Service Commission, the Food and Drug Administration, the Carter White House, and NASA, followed by twenty-one years with the U.S. Treasury Department. His articles on monetary reform, economics, and space policy have appeared on Global Research, Economy in Crisis, Dissident Voice, Atlantic Free Press, and elsewhere. He is the author of "Challenger Revealed: An Insider’s Account of How the Reagan Administration Caused the Greatest Tragedy of the Space Age." His website is at http://www.richardccook.com/.
Saturday, 15 September 2007
by Richard C. Cook As the 2007 economic collapse picks up speed, it’s time to take a hard look at the performance of the U.S. national political leadership in meeting some of their most fundamental responsibilities. It’s time to face the fact of serious failure over the last quarter century. During this time, the leaders of both political parties and of major institutions such as the Federal Reserve have presided over the abandonment of some of the most solemn obligations of constitutional government. They have done this in order to embrace an agenda favorable mainly to the financial, corporate, and government elites. On January 20, 1981, a full generation ago, President Ronald Reagan said in his first inaugural address, "Government is not a solution to our problem, government is the problem."Reagan was both right and wrong. The problem the U.S. was facing then was the collapse of the nation’s manufacturing base through a recession that happened when the Federal Reserve raised interest rates to over the twenty percent level. It did so almost a decade after President Richard Nixon removed the gold peg for the dollar, leading to the inflation of the 1970s when our currency flooded world markets through the oil trade. Reagan’s statement that "government is the problem" was correct to the extent that failed financial policies and the out-of-control actions of a Federal Reserve beholden to private financial interests combined in the worse economic downturn since the Great Depression to wreck the world’s greatest industrial powerhouse.But he was wrong in thinking that the solution was deregulation of the economy, particularly deregulation of financial and investment institutions which took place during his two terms. The result was enormous growth in the power and influence of Wall Street and the big banks over the rest of the economy. The era of leveraged mergers, acquisitions, and buyouts was the predecessor of the disaster of today with the unfolding fiasco of equity, hedge, and derivative funds in the process of collapse.
After Reagan came President George H.W. Bush. By the end of his term, the loss of manufacturing jobs had produced another recession. Within a couple of years of Bill Clinton’s election in 1992, action by Secretary of the Treasury Robert Rubin to strengthen the dollar attracted enough foreign investment to create the dot.com bubble. Clinton then cut the federal budget enough by reducing federal employment that he was able to achieve a budget surplus. This lessened the drag on the economy from the national debt which Reagan had left behind from his tax cuts and trillion dollar military build-up. But the over-leveraged dot.com bubble burst with the stock market collapse of 2000, leaving us in recession again.Enter President George W. Bush. Despite the "achievement" of Federal Reserve Chairman Alan Greenspan in creating another bubble — the housing one — big enough to float the U.S. economy for four consecutive years — 2002 to 2005 — the economic fundamentals today are horrendous. We are living in an economy that has begun to crash, with the Federal Reserve, the Treasury Department, and Congress cobbling together bail-outs of various descriptions which they hope will right what is obviously a sinking ship. We can only hope they will succeed to some extent, because it would be heartless to wish disaster on the ones who suffer the most from the consequences of the greed and stupidity of people in power — namely the ordinary people who work for a living and who honestly try to raise their families and hold to a decent standard of living. But life is becoming very hard for the vast majority of Americans who have been bearing the brunt of our failed economic and monetary polices of the last three decades. Our political leadership has let us down in the following critical respects:
Going back to the 1930s, President Franklin D. Roosevelt established an economic system — the New Deal — that pulled the U.S. out of the Great Depression, enabled us to fight World War II, and created the world’s greatest industrial democracy. He did this largely through programs that, taken together, were based on the principle of low-cost credit treated as a public utility. This persisted into the 1960s and 70s, when it was replaced with the system of monetarism, whereby the economy is now regulated by the Federal Reserve through raising and lowering of interest rates. This system, with interest rates much higher, on average, than during previous decades, has been catastrophic for the U.S. economy. It has enriched the financial industry at the expense of everyone else through what can only be called institutionalized usury. Under this system, every period of economic growth since 1983 has been a bank-created bubble, while the general population has become steadily poorer. The Federal Reserve claims that it raises interest rates to reduce inflation, when in fact higher interest rates cause inflation by making every transaction more expensive. Under the reign of monetarism, the U.S. dollar has lost over eighty percent of its value. In fact, government policies are designed to generate inflation, because this makes it cheaper to pay down the national debt and while augmenting tax revenues.
It has been well-documented that since the early 1980s the federal government has acquiesced in every respect to economic policies that have resulted in the steady erosion of our manufacturing base, elimination of millions of skilled industrial jobs, creation of a crushing burden of household and individual debt, crumbling of our physical infrastructure, privatization or elimination of public services, failure to meet such crises as the Katrina disaster, export of jobs to low-cost foreign labor markets, unfair distribution of taxation, and toleration of the influx of millions of illegal aliens who keep wages low within the domestic economy.
Since the Clinton administration, the government has misled the public through distortion of economic indicators. Calculations of the GDP are too high and exaggerate the growth of the economy. The consumer price index on which government cost-of-living adjustments are based has eliminated such items as food, fuel, and home buying. Actual inflation is running at a rate of three times what the government estimates; i.e. closer to ten percent than the three percent which is claimed. Regarding the money supply, the Federal Reserve has stopped reporting one of the most important indicators, which is M3 — the amount of money available to the largest institutional investors. Data which are available today show without question that the producing economy — that is, the everyday world of people who work for a living — has been in recession for over a year. Meanwhile, the financial economy that lives off the producers as a parasite continues to float on rollovers of mega-loans originating with the Federal Reserve and its policy of allowing banks to capitalize the massive amounts of repurchase agreements generated by electronic funds transfer.
Insufficient attention has been paid to the disastrous effects of NAFTA in destroying family farming in the U.S., Canada, and Mexico. On top of this has been the diversion of agricultural products into bio-fuel production with the attendant inflationary effects. Meanwhile, our food supply has been taken over by agribusiness and the financial markets at the same time that two-thirds of the nation has been in the grip of long-term drought. The high interest rates of the monetarist regime have worked to make farming at the local level impossible and have destroyed the production of entire regions, such as the once-great Idaho potato industry. Unless local farming can be revived, there is a real-danger of massive food shortages breaking out under a prolonged economic crisis.
Finally, there are our failed foreign and military policies. After the U.S. lost the Vietnam War, we had reason to believe that our political leaders might have learned a lesson about military adventures abroad, particularly land wars on the continent of Asia. Instead, starting in earnest with the "Reagan doctrine" of endless proxy conflicts on every continent, the U.S. has embarked on a policy of world military conquest. The Iraq War, the planned permanent occupation of that country, and the designs being formulated against Iran, are part of a policy of military control of the Middle East that has been ongoing for almost twenty years. The dual objectives of this policy are to control Middle Eastern oil and advance the interests of Israel. Talk of the "surge," troop drawdown, etc., are nonsense, because the U.S. plans to occupy permanent bases and control the remaining oil reserves in the region. These wars are being paid for by sale of Treasury bonds to possible future adversaries such as China, while the U.S. bubble economy that is backing up our military forces overseas is deflating. Clearly something has to give, either through exhaustion of our military capability abroad, economic collapse at home, or the catastrophe of a world war. The denouement seems to be drawing closer as foreign governments dump their U.S. dollars which are declining in value due to the twin trade and fiscal deficits. What our leaders should now be doing is recognize the fact that we live in a multilateral world where conflicts can only be resolved by nations acting as equals under the umbrella of the U.N. So many mistakes have been made over the last several decades that it is difficult to see how real change could take place without a revolutionary transformation of American society. Those who worked for change in the 1960s through opposition to the Vietnam War hoped for such a transformation, but the opposite has happened. The cause has been the assertion of influence by the corporate-financial-government elites, who have essentially negated the ability of the people through their elected representatives to manage affairs for the sake of the general welfare as stated in the preamble to our Constitution. The government under the leadership of both political parties has even violated some of its basic constitutional mandates.Congress, for instance, has failed to exercise its duties with respect to oversight and control of the monetary system, having ceded its authority to the private banking industry through the Federal Reserve Act of 1913. Congress has also failed to provide effective regulation of the financial industry under the interstate commerce clause of Article One, as the subprime mortgage debacle and other abuses have clearly demonstrated. The government as a whole has failed to provide for equal protection of the laws as specified in the Fourteenth Amendment by allowing so much of the wealth of the nation to be transferred to the upper income brackets who manipulate the corporate and financial systems to their advantage. It could also be argued that the passivity of the government in standing by while millions of people have lost their homes, jobs, or pensions due to fraudulent financial practices or speculative bubbles violates the Fifth Amendment provision which specifies that "no person shall be…deprived of life, liberty, or property, without due process of law." Finally, it could be argued that many of our economic and tax policies violate the Thirteenth Amendment which states that, "Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction." We’re used to interpreting the Thirteenth Amendment as applying only to chattel slavery, but economic servitude can be almost as onerous. Certainly the provision of the 2005 bankruptcy reform legislation which makes student loan debt and unpaid taxes a lifetime obligation, not subject to bankruptcy write-off, constitutes "involuntary servitude." So too may a cumulative tax burden where up to fifty percent of an individual’s income goes for taxes at the federal, state, and local levels. It is obvious that the elite intend to make every effort to ride out the current crisis. This is what the so-called "soft landing" is about. At the point in time when it may become possible to have real change, it can only be done effectively as it was accomplished during the New Deal — through control of credit as a public utility. This is because the causes of social distress are economic, and the economy is controlled through the monetary system. The essence of monetary policy is who controls credit and for what ends.It would not be difficult to create programs, institutions, and systems to develop an updated New Deal to meet present conditions. The knowledge is there, as is the technology. What is lacking is political recognition and will. Today most individuals are passive spectators to the ongoing train wreck, and none of the leading presidential candidates is addressing basic policy issues. Ninety-five percent of what they are saying is media fluff. As an example of what could be done, it would be possible immediately to place all pubic infrastructure programs within the U.S. under a funding mechanism whereby a federal infrastructure bank could be self-capitalized by special Treasury infrastructure bonds with lending at zero percent interest for a multitude of long-term projects. A new money supply would thereby come into being that would completely by-pass the Federal Reserve System. This could be supplemented by a citizens’ basic income guarantee and a National Dividend, similar to the Alaska Permanent Fund, which would reduce poverty and inject purchasing power at the grassroots level. The denial of purchasing power except through more debt in a country where the wage and salary base has stagnated is an economic crime. One purpose is doubtless to create an impoverished underclass as a source of military recruitment. Such measures would revolutionize local economies and restore the ability of the general population to participate in the economic life of the nation. But until enough people wake up to what is going on and the fact that they have the power within themselves to make a difference, nothing will change. They will continue to be fleeced by the rich and powerful as they have been throughout most of history.
Richard C. Cook is a retired federal analyst, whose career included service with the U.S. Civil Service Commission, the Food and Drug Administration, the Carter White House, and NASA, followed by twenty-one years with the U.S. Treasury Department. His articles on monetary reform, economics, and space policy have appeared on Global Research, Economy in Crisis, Dissident Voice, Atlantic Free Press, and elsewhere. He is the author of "Challenger Revealed: An Insider’s Account of How the Reagan Administration Caused the Greatest Tragedy of the Space Age." His website is at http://www.richardccook.com/.
Countrywide Caught in Mortgage Spiral
Countrywide Caught in Mortgage Spiral
Saturday September 15, 5:42 am ET
By Alex Veiga, AP Business Writer
Countrywide Financial Tries to Regain Footing As Housing Market Turn From Boom to Bust
LOS ANGELES (AP) -- Countrywide Financial Corp. grew from a two-man startup in 1969 to become the nation's leading mortgage lender by deftly riding out housing boom-and-bust cycles. This time around, however, the ride has been a lot rougher, leaving the company in a scramble to regain its footing as the housing market has turned from boom to bust.
To survive, it's been forced to borrow billions of dollars, announce thousands of job cuts and dramatically restructure its lending practices to nearly eliminate risky subprime loans to borrowers with shaky credit that have led to massive foreclosures and defaults wracking the housing market.
"In an absolute level sense, this is the biggest challenge" Countrywide has ever faced, said Frederick Cannon, an analyst with Keefe, Bruyette & Woods Inc.
Several analysts believe Countrywide will survive the crisis, based on the strength of its retail banking operation, track record in the industry and operating changes made in recent weeks.
But they said it could see deeper cutbacks and lose ground to competitors while weathering a housing crisis expected to last at least 18 more months.
"At the end of the day, in this environment, Countrywide is not in as strong a position as its biggest competitor, Wells Fargo," Cannon said.
Stan Ross, chairman of the Lusk Center for Real Estate at the University of Southern California, said Countrywide will face intense competition as big and small lenders move to focus on prime loans, a sector once dominated by Countrywide.
"It's going to take time, and I think their cutbacks are going to be greater than perhaps we anticipate," Ross said.
Countrywide dominated the industry when interest rates began to plummet at the start of the decade and competitors rushed to make subprime loans.
The company didn't lead the charge to make those loans, "but as an industry leader, they were right there," said Robert Napoli, an analyst with Piper Jaffray.
"They have an effect on the market. They have to, being the biggest," he said.
The Calabasas, Calif.-based company's loan production last year totaled $468 billion and it accounted for more than 13 percent of the loan servicing market as of June 30, according to the mortgage industry publication Inside Mortgage Finance.
Countrywide and the rest of the mortgage industry also got caught up in the frenzy to make nontraditional loans then resell the mortgages for hefty profits to Wall Street banks.
Fortunes dove when demand for those loan packages plummeted amid rising defaults. The resulting credit crunch that tore through the markets has left Countrywide and others holding loans they couldn't sell and hurting for cash to keep funding new ones.
"The market changed very quickly on them ... they just underestimated how rapidly the market changed," Napoli added.
A report in The New York Times cited unnamed former Countrywide employees saying the company used financial incentives to encourage employees to steer borrowers into subprime loans to boost profits.
The allegations prompted North Carolina Treasurer Richard Moore to send a letter dated Tuesday to Countrywide asking for an explanation. Moore is the trustee of a pension fund that holds more than $11 million in Countrywide shares.
"Countrywide has sacrificed long-term sustainability for short-term profits," Moore wrote. "As an investor, I expect assurances that these practices have ceased and that the company is returning to a business model that both respects consumers and protects shareholder value."
Countrywide has strongly refuted the report, noting its business processes are designed to prohibit pushing customers who qualify for prime loans into subprime loans, and that its loan officers do not receive higher commissions for selling subprime loans.
During a conference call with Wall Street analysts in January, Countrywide Chairman and Chief Executive Angelo Mozilo said the company expected rising delinquencies and a weak housing market but was "well positioned and extremely optimistic about our prospects to continue generating growth and superior returns over future cycles."
Since then, Countrywide stock has dropped about 60 percent and is now trading around $19 a share.
In a recent letter to employees announcing as many as 12,000 layoffs, he characterized the current housing market cycle as "the most severe in the contemporary history of our industry."
Countrywide didn't return calls seeking an interview with Mozilo.
The son of a butcher, he has guided Countrywide through a number of housing cycles.
He co-founded the company nearly four decades ago with fellow New Yorker David Loeb, taking the fledgling company public only six months after it launched.
Trading at less than $1 a share, the startup failed to generate much investment capital, so Mozilo and Loeb headed West in the fall of 1969 and set up shop in suburban Los Angeles, a housing hotbed.
Its rise was part of a broader trend in which banks and traditional savings and loans lost market share as borrowers turned to more market-savvy mortgage firms offering a wider variety of loan programs.
Countrywide's expansion was also fueled by its move to sell conventional mortgage loans that were then resold to government-sponsored mortgage companies the Federal National Mortgage Association, also known as Fannie Mae, and the Federal Home Loan Mortgage Corp, or Freddie Mac.
The strategy helped Countrywide weather the crash of the high-flying housing market at the end of the 1980s. In 1990 the company reported its loan production totaled more than $3 billion.
The interest rate upheaval during the 1990s had a mixed impact on the company. Low rates at the start of the decade helped boost business amid a surge in refinancing.
But when rates eventually kicked back up, the company and other mortgage lenders saw loan production fall off.
Countrywide coped with that downturn by diversifying into more financial services, eventually opening its retail bank.
When interest rates began to plunge at the start of this decade, Countrywide joined the rest of the industry in rushing to feed an unprecedented demand on Wall Street for home loans.
Last fall, Wall Street investors began to sour on mortgage loans, particularly subprime loans.
While Countrywide was less exposed to subprime loans than the rest of the market, it had stepped up high-yield loan products such as pay option loans, which give borrowers the option to make a lower payment but can result in the unpaid portion being added to the principal balance.
In recent weeks, the company has drawn down on an $11.5 billion line of credit and raised $2 billion by selling a stake to Bank of America.
This week, it boosted its borrowing capacity by another $12 billion through new or existing credit agreements.
To further help reassure investors of the company's stability, management has implemented layoffs and shifted its loan production through its banking arm.
It's also closed the door to all subprime loans except for those it can sell back to U.S. government-backed lenders.
"Countrywide is quickly adjusting to market conditions and ... now has the breathing room to do so," said Bart Narter, senior analyst at Celent, a Boston-based financial research and consulting firm. "One sees glimmers of hope."
Saturday September 15, 5:42 am ET
By Alex Veiga, AP Business Writer
Countrywide Financial Tries to Regain Footing As Housing Market Turn From Boom to Bust
LOS ANGELES (AP) -- Countrywide Financial Corp. grew from a two-man startup in 1969 to become the nation's leading mortgage lender by deftly riding out housing boom-and-bust cycles. This time around, however, the ride has been a lot rougher, leaving the company in a scramble to regain its footing as the housing market has turned from boom to bust.
To survive, it's been forced to borrow billions of dollars, announce thousands of job cuts and dramatically restructure its lending practices to nearly eliminate risky subprime loans to borrowers with shaky credit that have led to massive foreclosures and defaults wracking the housing market.
"In an absolute level sense, this is the biggest challenge" Countrywide has ever faced, said Frederick Cannon, an analyst with Keefe, Bruyette & Woods Inc.
Several analysts believe Countrywide will survive the crisis, based on the strength of its retail banking operation, track record in the industry and operating changes made in recent weeks.
But they said it could see deeper cutbacks and lose ground to competitors while weathering a housing crisis expected to last at least 18 more months.
"At the end of the day, in this environment, Countrywide is not in as strong a position as its biggest competitor, Wells Fargo," Cannon said.
Stan Ross, chairman of the Lusk Center for Real Estate at the University of Southern California, said Countrywide will face intense competition as big and small lenders move to focus on prime loans, a sector once dominated by Countrywide.
"It's going to take time, and I think their cutbacks are going to be greater than perhaps we anticipate," Ross said.
Countrywide dominated the industry when interest rates began to plummet at the start of the decade and competitors rushed to make subprime loans.
The company didn't lead the charge to make those loans, "but as an industry leader, they were right there," said Robert Napoli, an analyst with Piper Jaffray.
"They have an effect on the market. They have to, being the biggest," he said.
The Calabasas, Calif.-based company's loan production last year totaled $468 billion and it accounted for more than 13 percent of the loan servicing market as of June 30, according to the mortgage industry publication Inside Mortgage Finance.
Countrywide and the rest of the mortgage industry also got caught up in the frenzy to make nontraditional loans then resell the mortgages for hefty profits to Wall Street banks.
Fortunes dove when demand for those loan packages plummeted amid rising defaults. The resulting credit crunch that tore through the markets has left Countrywide and others holding loans they couldn't sell and hurting for cash to keep funding new ones.
"The market changed very quickly on them ... they just underestimated how rapidly the market changed," Napoli added.
A report in The New York Times cited unnamed former Countrywide employees saying the company used financial incentives to encourage employees to steer borrowers into subprime loans to boost profits.
The allegations prompted North Carolina Treasurer Richard Moore to send a letter dated Tuesday to Countrywide asking for an explanation. Moore is the trustee of a pension fund that holds more than $11 million in Countrywide shares.
"Countrywide has sacrificed long-term sustainability for short-term profits," Moore wrote. "As an investor, I expect assurances that these practices have ceased and that the company is returning to a business model that both respects consumers and protects shareholder value."
Countrywide has strongly refuted the report, noting its business processes are designed to prohibit pushing customers who qualify for prime loans into subprime loans, and that its loan officers do not receive higher commissions for selling subprime loans.
During a conference call with Wall Street analysts in January, Countrywide Chairman and Chief Executive Angelo Mozilo said the company expected rising delinquencies and a weak housing market but was "well positioned and extremely optimistic about our prospects to continue generating growth and superior returns over future cycles."
Since then, Countrywide stock has dropped about 60 percent and is now trading around $19 a share.
In a recent letter to employees announcing as many as 12,000 layoffs, he characterized the current housing market cycle as "the most severe in the contemporary history of our industry."
Countrywide didn't return calls seeking an interview with Mozilo.
The son of a butcher, he has guided Countrywide through a number of housing cycles.
He co-founded the company nearly four decades ago with fellow New Yorker David Loeb, taking the fledgling company public only six months after it launched.
Trading at less than $1 a share, the startup failed to generate much investment capital, so Mozilo and Loeb headed West in the fall of 1969 and set up shop in suburban Los Angeles, a housing hotbed.
Its rise was part of a broader trend in which banks and traditional savings and loans lost market share as borrowers turned to more market-savvy mortgage firms offering a wider variety of loan programs.
Countrywide's expansion was also fueled by its move to sell conventional mortgage loans that were then resold to government-sponsored mortgage companies the Federal National Mortgage Association, also known as Fannie Mae, and the Federal Home Loan Mortgage Corp, or Freddie Mac.
The strategy helped Countrywide weather the crash of the high-flying housing market at the end of the 1980s. In 1990 the company reported its loan production totaled more than $3 billion.
The interest rate upheaval during the 1990s had a mixed impact on the company. Low rates at the start of the decade helped boost business amid a surge in refinancing.
But when rates eventually kicked back up, the company and other mortgage lenders saw loan production fall off.
Countrywide coped with that downturn by diversifying into more financial services, eventually opening its retail bank.
When interest rates began to plunge at the start of this decade, Countrywide joined the rest of the industry in rushing to feed an unprecedented demand on Wall Street for home loans.
Last fall, Wall Street investors began to sour on mortgage loans, particularly subprime loans.
While Countrywide was less exposed to subprime loans than the rest of the market, it had stepped up high-yield loan products such as pay option loans, which give borrowers the option to make a lower payment but can result in the unpaid portion being added to the principal balance.
In recent weeks, the company has drawn down on an $11.5 billion line of credit and raised $2 billion by selling a stake to Bank of America.
This week, it boosted its borrowing capacity by another $12 billion through new or existing credit agreements.
To further help reassure investors of the company's stability, management has implemented layoffs and shifted its loan production through its banking arm.
It's also closed the door to all subprime loans except for those it can sell back to U.S. government-backed lenders.
"Countrywide is quickly adjusting to market conditions and ... now has the breathing room to do so," said Bart Narter, senior analyst at Celent, a Boston-based financial research and consulting firm. "One sees glimmers of hope."
Friday, September 14, 2007
Northern Rock shares plunge 32%
Northern Rock shares plunge 32%
Shares in one of the UK's largest mortgage lenders, Northern Rock, have fallen 32% after it had to ask the Bank of England for emergency funding.
But experts and officials insist that Northern Rock, which has £113bn in assets, is not in danger of going bust.
Despite the reassurances lines of customers formed outside many Northern Rock branches around the UK.
The bank has struggled to raise money to finance its lending ever since money markets seized up over the summer.
Stock market hit
NORTHERN ROCK FACTS
Founded in 1965 after merger of Northern Counties Permanent Building Society and Rock Building Society
Headquarters in Newcastle
Became a public company in 1997
Has 6,400 staff
Has 18.9% share of new UK lending
Loans and assets of £113bn
Deposits from customers of £24bn
Other bank shares fell, with Bradford & Bingley, Alliance & Leicester and HBOS down nearly 8%, 7% and 4% respectively.
House builders were also hit, with companies like Persimmon, Taylor Wimpey, Bovis Homes and Berkeley Group falling around 6% and more.
The London stockmarket's benchmark index, the FTSE 100, at one point dropped more than 2.2% before recovering during the afternoon. The index closed at 6,289 - a loss of 74 points or 1.17%.
Northern Rock said that its profits for 2007 would be hit, but that it remained solvent.
Unlike most banks, which get their money from customers making deposits into savings accounts, Northern Rock is built around its mortgage business.
It raises most of the money which it provides for mortgages by borrowing from banks and other financial institutions.
Speaking on BBC Radio 4's Today programme, Chancellor Alistair Darling said: "The problem here is there is a lot of money in the system but they are reluctant to lend it to each other at the moment."
Queues at branches
Mr Darling said that "in order to create a stable banking system, the Bank [of England] steps in and it makes facilities available to the Northern Rock."
It is much more exposed than its rivals to this distaste for mortgage debt Robert Peston BBC Business Editor
"Northern Rock can draw on them when it requires, but it means it can carry on trading, people can use their accounts in the normal way, they carry on making their mortgage payments in the usual way, Northern Rock will be able to carry on its business."
Angela Knight, chief executive of the British Bankers' Association, said that anybody who was "either a saver with Northern Rock or has got a mortgage... can be absolutely confident that they have got their money with or they have borrowed from a very sound financial institution."
All the calming words did not stop some Northern Rock customers to move some or all of their many to accounts with other banks.
Several customers showed BBC reporters slips that suggest some did withdraw sums of £100,000 and more.
Dozens of Northern Rock customers have contacted the BBC to complain that the bank's website was inaccessible, while all the bank's phone lines were jammed.
Emergency reserve untouched
The emergency lending facility to Northern Rock was agreed by Mr Darling, on advice from Mervyn King, governor of the Bank of England.
Northern Rock chief executive Adam Applegarth said that it had not yet borrowed any of the "unlimited" funds available.
He urged customers to remain calm, and stressed that it was "business as normal".
However he indicated that it may, in future, be more expensive worldwide for institutions to borrow money, and that in turn could mean that mortgages generally become more expensive.
'Lender of last resort'
On the assumption that the current conditions remain until the end of 2007, there will clearly be an impact on Northern Rock's 2007 asset growth and, therefore, on profits Northern Rock statement
The decision for the Bank of England to become the "lender of last resort" is extremely rare - and also comes after consultation with the Financial Services Authority (FSA).
It is an unlimited facility, with interest rated at a "penal rate" of more than 1% above Bank base rate.
To obtain the money, the Northern Rock will have to deposit some of its customers' mortgages as collateral, which are regarded by the Bank of England as sound.
In a statement, Northern Rock said it had "agreed with the Bank of England that it can raise such amounts of liquidity as may be necessary by either borrowing on a secured basis from the Bank of England or entering into repurchase facilities with the Bank of England".
"On the assumption that the current conditions remain until the end of 2007, there will clearly be an impact on Northern Rock's 2007 asset growth and, therefore, on profits."
An FSA statement said Northern Rock "exceeds its regulatory capital requirement and has a good quality loan book".
WHAT'S HAPPENING AT NORTHERN ROCK?
Mortgage lending Northern Rock lends a large amount for mortgages, and finances this with money from banks and savers
Savings Northern Rock receives a relatively small amount of money from savers
Money markets Have stopped lending money to Northern Rock due to the crisis in the US sub-prime mortgage market
Bank of England Steps into the breach to give Northern Rock an emergency loan Images: PA, Getty
Shares in one of the UK's largest mortgage lenders, Northern Rock, have fallen 32% after it had to ask the Bank of England for emergency funding.
But experts and officials insist that Northern Rock, which has £113bn in assets, is not in danger of going bust.
Despite the reassurances lines of customers formed outside many Northern Rock branches around the UK.
The bank has struggled to raise money to finance its lending ever since money markets seized up over the summer.
Stock market hit
NORTHERN ROCK FACTS
Founded in 1965 after merger of Northern Counties Permanent Building Society and Rock Building Society
Headquarters in Newcastle
Became a public company in 1997
Has 6,400 staff
Has 18.9% share of new UK lending
Loans and assets of £113bn
Deposits from customers of £24bn
Other bank shares fell, with Bradford & Bingley, Alliance & Leicester and HBOS down nearly 8%, 7% and 4% respectively.
House builders were also hit, with companies like Persimmon, Taylor Wimpey, Bovis Homes and Berkeley Group falling around 6% and more.
The London stockmarket's benchmark index, the FTSE 100, at one point dropped more than 2.2% before recovering during the afternoon. The index closed at 6,289 - a loss of 74 points or 1.17%.
Northern Rock said that its profits for 2007 would be hit, but that it remained solvent.
Unlike most banks, which get their money from customers making deposits into savings accounts, Northern Rock is built around its mortgage business.
It raises most of the money which it provides for mortgages by borrowing from banks and other financial institutions.
Speaking on BBC Radio 4's Today programme, Chancellor Alistair Darling said: "The problem here is there is a lot of money in the system but they are reluctant to lend it to each other at the moment."
Queues at branches
Mr Darling said that "in order to create a stable banking system, the Bank [of England] steps in and it makes facilities available to the Northern Rock."
It is much more exposed than its rivals to this distaste for mortgage debt Robert Peston BBC Business Editor
"Northern Rock can draw on them when it requires, but it means it can carry on trading, people can use their accounts in the normal way, they carry on making their mortgage payments in the usual way, Northern Rock will be able to carry on its business."
Angela Knight, chief executive of the British Bankers' Association, said that anybody who was "either a saver with Northern Rock or has got a mortgage... can be absolutely confident that they have got their money with or they have borrowed from a very sound financial institution."
All the calming words did not stop some Northern Rock customers to move some or all of their many to accounts with other banks.
Several customers showed BBC reporters slips that suggest some did withdraw sums of £100,000 and more.
Dozens of Northern Rock customers have contacted the BBC to complain that the bank's website was inaccessible, while all the bank's phone lines were jammed.
Emergency reserve untouched
The emergency lending facility to Northern Rock was agreed by Mr Darling, on advice from Mervyn King, governor of the Bank of England.
Northern Rock chief executive Adam Applegarth said that it had not yet borrowed any of the "unlimited" funds available.
He urged customers to remain calm, and stressed that it was "business as normal".
However he indicated that it may, in future, be more expensive worldwide for institutions to borrow money, and that in turn could mean that mortgages generally become more expensive.
'Lender of last resort'
On the assumption that the current conditions remain until the end of 2007, there will clearly be an impact on Northern Rock's 2007 asset growth and, therefore, on profits Northern Rock statement
The decision for the Bank of England to become the "lender of last resort" is extremely rare - and also comes after consultation with the Financial Services Authority (FSA).
It is an unlimited facility, with interest rated at a "penal rate" of more than 1% above Bank base rate.
To obtain the money, the Northern Rock will have to deposit some of its customers' mortgages as collateral, which are regarded by the Bank of England as sound.
In a statement, Northern Rock said it had "agreed with the Bank of England that it can raise such amounts of liquidity as may be necessary by either borrowing on a secured basis from the Bank of England or entering into repurchase facilities with the Bank of England".
"On the assumption that the current conditions remain until the end of 2007, there will clearly be an impact on Northern Rock's 2007 asset growth and, therefore, on profits."
An FSA statement said Northern Rock "exceeds its regulatory capital requirement and has a good quality loan book".
WHAT'S HAPPENING AT NORTHERN ROCK?
Mortgage lending Northern Rock lends a large amount for mortgages, and finances this with money from banks and savers
Savings Northern Rock receives a relatively small amount of money from savers
Money markets Have stopped lending money to Northern Rock due to the crisis in the US sub-prime mortgage market
Bank of England Steps into the breach to give Northern Rock an emergency loan Images: PA, Getty
Monday, September 10, 2007
Fed Officials Suggest Division Over Interest-Rate Cut
Fed Officials Suggest Division Over Interest-Rate Cut (Update3)
By Scott Lanman and Vivien Lou Chen
Sept. 10 (Bloomberg) -- Federal Reserve bank presidents suggested they are divided on how much to cut interest rates, offering a range of views on the economy after the first decline in payrolls in four years.
Janet Yellen, head of the San Francisco Fed, today cited ``significant downward pressure'' on growth because of housing and financial-market turmoil. Dallas Fed President Richard Fisher said he's ``generally encouraged'' about the economy, while Atlanta's Dennis Lockhart backed off remarks he made four days ago that the housing slump was having a limited impact.
The scope of remarks may reflect a debate inside the central bank over whether to lower the benchmark rate on Sept. 18 by a quarter-percentage point, or a half-point as some investors expect, Fed watchers said.
``It sounds like everyone's marked down their growth outlook, and everyone realizes the credit-market events are something that require a Fed response,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York who used to work at the Fed. ``It's just a question of magnitude.''
Treasuries rallied as traders interpreted the officials as confirming a reduction in borrowing costs to preserve the six- year expansion.
The job market began slowing in June, data now indicate, Lockhart told an audience in Atlanta today. Employers cut 4,000 workers in August, the Labor Department said Sept. 7. Revised figures showed job gains diminished from a 188,000 pace in May to 69,000 in June and 68,000 in July.
Main Indicators
Payrolls are one of the main indicators, along with sales, wages and production, which help determine the start of economic contractions.
``It is critical to take a forward-looking approach -- gauging the effects of recent developments on the outlook, and, importantly, the risks to that outlook,'' Yellen, 61, said in a speech to a conference in San Francisco. Declining home prices and rising unemployment may cause ``significant'' risks to consumer spending, she said.
Lockhart and Yellen both vote on rates in 2009, and Fisher votes next year, though they participate in the FOMC discussions. Officials gather in Washington on Sept. 18. Fed Governor Frederic Mishkin speaks later today.
`Real Debate'
``The real debate in the end, although nobody's saying this, is whether they're going to cut 25 or 50'' basis points, said Nariman Behravesh, chief economist at researcher Global Insight Inc. in Lexington, Massachusetts. ``They should do 50, but I think they'll do 25, precisely because they've got a bit of a debate going on.''
A basis point is 0.01 percentage point.
Gains in Treasuries sent the yield on the benchmark two-year note down to the lowest since September 2005. The yield fell to 3.85 percent at 5:30 p.m. in New York, below the Fed's 5.25 percent target rate for overnight loans between banks. The Standard & Poor's 500 Index fell 0.1 percent.
``Last Thursday, I said in a speech that I have not seen conclusive signs of weakness in the broader economy,'' Lockhart, 60, said at an event sponsored by the Atlanta Business Chronicle. ``Friday's data, however, shows employment was beginning to soften back in June. This news should be evaluated with recently positive reports in retail sales.''
Fisher, speaking in Laredo, Texas, said that ``our economy appears to be weathering the storm thus far.''
No `Major Impact'
``As yet, tighter credit conditions do not appear to have had a major impact on overall economic activity outside of real estate,'' said Fisher, 58, the bank's president since 2005.
Speaking with reporters afterward, Fisher said he was ``not necessarily'' taking a different position from Yellen. He said he hadn't read Yellen's remarks.
Charles Plosser, 58, who took his post in August 2006, said at the weekend that policy makers shouldn't put too much stress on the loss of jobs in August, and that he hadn't made up his mind yet on a rate cut.
``We want to be careful not to overweight one piece of information,'' Plosser said in an interview after a speech in Waikoloa, Hawaii, on Sept. 8. While the employment drop ``was not encouraging,'' he said ``there's a lot of conflicting data out there,'' noting gains in retail sales.
Economists and investors expect the Federal Open Market Committee to lower its main interest rate by at least a quarter- percentage point from 5.25 percent next week.
After the Fed on Aug. 7 said inflation was still its ``predominant'' concern, the central bank revised its outlook on Aug. 17 to say that economic risks had risen ``appreciably.''
That assessment ``apparently is similar to that of market participants,'' Yellen said in her first speech on the economic outlook in almost two months. ``Investors' perceptions of increased downside risks have resulted in a notable decline in the rates on federal funds futures contracts,'' she said.
Still, market turmoil sometimes has little effect on the economy, Yellen cautioned. In 1998, when forecasters feared the implications of a Russian debt default and the Fed lowered rates three times, ``growth turned out to be robust,'' she said.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net ; Vivien Lou Chen in San Francisco at vchen1@bloomberg.net . Last Updated: September 10, 2007 17:31 EDT
By Scott Lanman and Vivien Lou Chen
Sept. 10 (Bloomberg) -- Federal Reserve bank presidents suggested they are divided on how much to cut interest rates, offering a range of views on the economy after the first decline in payrolls in four years.
Janet Yellen, head of the San Francisco Fed, today cited ``significant downward pressure'' on growth because of housing and financial-market turmoil. Dallas Fed President Richard Fisher said he's ``generally encouraged'' about the economy, while Atlanta's Dennis Lockhart backed off remarks he made four days ago that the housing slump was having a limited impact.
The scope of remarks may reflect a debate inside the central bank over whether to lower the benchmark rate on Sept. 18 by a quarter-percentage point, or a half-point as some investors expect, Fed watchers said.
``It sounds like everyone's marked down their growth outlook, and everyone realizes the credit-market events are something that require a Fed response,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York who used to work at the Fed. ``It's just a question of magnitude.''
Treasuries rallied as traders interpreted the officials as confirming a reduction in borrowing costs to preserve the six- year expansion.
The job market began slowing in June, data now indicate, Lockhart told an audience in Atlanta today. Employers cut 4,000 workers in August, the Labor Department said Sept. 7. Revised figures showed job gains diminished from a 188,000 pace in May to 69,000 in June and 68,000 in July.
Main Indicators
Payrolls are one of the main indicators, along with sales, wages and production, which help determine the start of economic contractions.
``It is critical to take a forward-looking approach -- gauging the effects of recent developments on the outlook, and, importantly, the risks to that outlook,'' Yellen, 61, said in a speech to a conference in San Francisco. Declining home prices and rising unemployment may cause ``significant'' risks to consumer spending, she said.
Lockhart and Yellen both vote on rates in 2009, and Fisher votes next year, though they participate in the FOMC discussions. Officials gather in Washington on Sept. 18. Fed Governor Frederic Mishkin speaks later today.
`Real Debate'
``The real debate in the end, although nobody's saying this, is whether they're going to cut 25 or 50'' basis points, said Nariman Behravesh, chief economist at researcher Global Insight Inc. in Lexington, Massachusetts. ``They should do 50, but I think they'll do 25, precisely because they've got a bit of a debate going on.''
A basis point is 0.01 percentage point.
Gains in Treasuries sent the yield on the benchmark two-year note down to the lowest since September 2005. The yield fell to 3.85 percent at 5:30 p.m. in New York, below the Fed's 5.25 percent target rate for overnight loans between banks. The Standard & Poor's 500 Index fell 0.1 percent.
``Last Thursday, I said in a speech that I have not seen conclusive signs of weakness in the broader economy,'' Lockhart, 60, said at an event sponsored by the Atlanta Business Chronicle. ``Friday's data, however, shows employment was beginning to soften back in June. This news should be evaluated with recently positive reports in retail sales.''
Fisher, speaking in Laredo, Texas, said that ``our economy appears to be weathering the storm thus far.''
No `Major Impact'
``As yet, tighter credit conditions do not appear to have had a major impact on overall economic activity outside of real estate,'' said Fisher, 58, the bank's president since 2005.
Speaking with reporters afterward, Fisher said he was ``not necessarily'' taking a different position from Yellen. He said he hadn't read Yellen's remarks.
Charles Plosser, 58, who took his post in August 2006, said at the weekend that policy makers shouldn't put too much stress on the loss of jobs in August, and that he hadn't made up his mind yet on a rate cut.
``We want to be careful not to overweight one piece of information,'' Plosser said in an interview after a speech in Waikoloa, Hawaii, on Sept. 8. While the employment drop ``was not encouraging,'' he said ``there's a lot of conflicting data out there,'' noting gains in retail sales.
Economists and investors expect the Federal Open Market Committee to lower its main interest rate by at least a quarter- percentage point from 5.25 percent next week.
After the Fed on Aug. 7 said inflation was still its ``predominant'' concern, the central bank revised its outlook on Aug. 17 to say that economic risks had risen ``appreciably.''
That assessment ``apparently is similar to that of market participants,'' Yellen said in her first speech on the economic outlook in almost two months. ``Investors' perceptions of increased downside risks have resulted in a notable decline in the rates on federal funds futures contracts,'' she said.
Still, market turmoil sometimes has little effect on the economy, Yellen cautioned. In 1998, when forecasters feared the implications of a Russian debt default and the Fed lowered rates three times, ``growth turned out to be robust,'' she said.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net ; Vivien Lou Chen in San Francisco at vchen1@bloomberg.net . Last Updated: September 10, 2007 17:31 EDT
Saturday, September 8, 2007
Countrywide Reaps What It Sowed
Countrywide Reaps What It Sowed
MSNMoney is reporting Countrywide to reduce workforce by 10,000 to 12,000.
Countrywide Financial Corporation CFC today announced a plan of action to address changing market conditions that positions the Company for continued growth and success.The Company presently estimates a total workforce reduction of 10,000 to 12,000 over the next three months representing up to 20 percent of its current workforce. Based on current interest rate levels, Countrywide presently expects that total market origination volumes will decline approximately 25 percent in 2008 compared to 2007 levels.Product guideline revisions have been made to ensure that all loans which the Company produces can be sold into the secondary market or are high quality prime loans to be held in Countrywide Bank's investment portfolio. This includes the Company's recent decision to no longer originate any subprime loans other than those eligible for sale or securitization under programs supported by Fannie Mae, Freddie Mac or the FHA.[Mish comment: So with no Alt-A, no jumbos, no subprime, no nonconforming loans of any sort, and with increased competition for prime loans, Countrywide is only expecting loan volumes to drop by 25%!?]Growth plans will continue in areas of opportunity. Countrywide's retail and wholesale lending divisions plan to continue aggressively pursuing the increased opportunities presenting themselves in the current environment for profitable market share growth.[Mish comment: Growth plans? Yeah right. Let's talk growth while firing 20% of the workforce and reducing the types of loans you are willing to do?]"Each employee at Countrywide is considered an important member of the Countrywide family," said David Sambol, President and Chief Operating Officer. "While workforce reductions are therefore always very difficult, these decisions are being made with the utmost attention and sensitivity to the impact they will have on our Company and our people."
Inside the Countrywide Lending SpreeBut how and why did countrywide get so bloated in the first place? In case you missed it, the New York Times recently published a stunning look Inside the Countrywide Lending Spree.
On its way to becoming the nation's largest mortgage lender, the Countrywide Financial Corporation encouraged its sales force to court customers over the telephone with a seductive pitch that seldom varied. "I want to be sure you are getting the best loan possible," the sales representatives would say.Instead, potential borrowers were often led to high-cost and sometimes unfavorable loans that resulted in richer commissions for Countrywide's smooth-talking sales force, outsize fees to company affiliates providing services on the loans, and a roaring stock price that made Countrywide executives among the highest paid in America.Countrywide's entire operation, from its computer system to its incentive pay structure and financing arrangements, is intended to wring maximum profits out of the mortgage lending boom no matter what it costs borrowers, according to interviews with former employees and brokers who worked in different units of the company and internal documents they provided. One document, for instance, shows that until last September the computer system in the company's subprime unit excluded borrowers' cash reserves, which had the effect of steering them away from lower-cost loans to those that were more expensive to homeowners and more profitable to Countrywide.Homeowners, meanwhile, drawn in by Countrywide sales scripts assuring "the best loan possible," are behind on their mortgages in record numbers. As of June 30, almost one in four subprime loans that Countrywide services was delinquent, up from 15 percent in the same period last year, according to company filings. Almost 10 percent were delinquent by 90 days or more, compared with last year's rate of 5.35 percent.Many of these loans had interest rates that recently reset from low teaser levels to double digits; others carry prohibitive prepayment penalties that have made refinancing impossibly expensive, even before this month's upheaval in the mortgage markets."In terms of being unresponsive to what was happening, to sticking it out the longest, and continuing to justify the garbage they were selling, Countrywide was the worst lender," said Ira Rheingold, executive director of the National Association of Consumer Advocates.In a mid-March interview on CNBC, Mr. Mozilo said Countrywide was poised to benefit from the spreading crisis in the mortgage lending industry. "This will be great for Countrywide," he said, "because at the end of the day, all of the irrational competitors will be gone."But Countrywide documents show that it, too, was a lax lender. For example, it wasn't until March 16 that Countrywide eliminated so-called piggyback loans from its product list, loans that permitted borrowers to buy a house without putting down any of their own money. And Countrywide waited until Feb. 23 to stop peddling another risky product, loans that were worth more than 95 percent of a home's appraised value and required no documentation of a borrower's income.As recently as July 27, Countrywide's product list showed that it would lend $500,000 to a borrower rated C-minus, the second-riskiest grade.The company would lend even if the borrower had been 90 days late on a current mortgage payment twice in the last 12 months, if the borrower had filed for personal bankruptcy protection, or if the borrower had faced foreclosure or default notices on his or her property.Such loans were made, former employees say, because they were so lucrative — to Countrywide. The company harvested a steady stream of fees or payments on such loans and busily repackaged them as securities to sell to investors. As long as housing prices kept rising, everyone — borrowers, lenders and investors — appeared to be winners.One former employee provided documents indicating Countrywide's minimum profit margins on subprime loans of different sizes. These ranged from 5 percent on small loans of $100,000 to $200,000 to 3 percent on loans of $350,000 to $500,000. But on subprime loans that imposed heavy burdens on borrowers, like high prepayment penalties that persisted for three years, Countrywide's margins could reach 15 percent of the loan, the former employee said.One reason these loans were so lucrative for Countrywide is that investors who bought securities backed by the mortgages were willing to pay more for loans with prepayment penalties and those whose interest rates were going to reset at higher levels. Investors ponied up because pools of subprime loans were likely to generate a larger cash flow than prime loans that carried lower fixed rates.As a result, former employees said, the company's commission structure rewarded sales representatives for making risky, high-cost loans. For example, according to another mortgage sales representative affiliated with Countrywide, adding a three-year prepayment penalty to a loan would generate an extra 1 percent of the loan's value in a commission. While mortgage brokers' commissions would vary on loans that reset after a short period with a low teaser rate, the higher the rate at reset, the greater the commission earned, these people said.Persuading someone to add a home equity line of credit to a loan carried extra commissions of 0.25 percent, according to a former sales representative."The whole commission structure in both prime and subprime was designed to reward salespeople for pushing whatever programs Countrywide made the most money on in the secondary market," the former sales representative said.When borrowers tried to reduce their mortgage debt, Countrywide cashed in: prepayment penalties generated significant revenue for the company — $268 million last year, up from $212 million in 2005. When borrowers had difficulty making payments, Countrywide cashed in again: late charges produced even more in 2006 — some $285 million.The company's incentive system also encouraged brokers and sales representatives to move borrowers into the subprime category, even if their financial position meant that they belonged higher up the loan spectrum. Brokers who peddled subprime loans received commissions of 0.50 percent of the loan's value, versus 0.20 percent on loans one step up the quality ladder, known as Alternate-A, former brokers said. For years, a software system in Countrywide's subprime unit that sales representatives used to calculate the loan type that a borrower qualified for did not allow the input of a borrower's cash reserves, a former employee said.A few weeks ago, the former sales representative priced a $275,000 loan with a 30-year term and a fixed rate for a borrower putting down 10 percent, with fully documented income, and a credit score of 620. While a F.H.A. loan on the same terms would have carried a 7 percent rate and 0.125 percentage points, Countrywide's subprime loan for the same borrower carried a rate of 9.875 percent and three additional percentage points.The monthly payment on the F.H.A. loan would have been $1,829, while Countrywide's subprime loan generated a $2,387 monthly payment. That amounts to a difference of $558 a month, or $6,696 a year — no small sum for a low-income homeowner.Independent brokers who have worked with Countrywide also say the company does not provide records of their compensation to the Internal Revenue Service on a Form 1099, as the law requires. These brokers say that all other home lenders they have worked with submitted 1099s disclosing income earned from their associations.One broker who worked with Countrywide for seven years said she never got a 1099."When I got ready to do my first year's taxes I had received 1099s from everybody but Countrywide," she said. "I called my rep and he said, "We're too big. There's too many. We don't do it."Few borrowers of any sort, even the most creditworthy, appear to escape Countrywide's fee machine. When borrowers close on their loans, they pay fees for flood and tax certifications, appraisals, document preparation, even charges associated with e-mailing documents or using FedEx to send or receive paperwork, according to Countrywide documents. It's a big business: During the last 12 months, Countrywide did 3.5 million flood certifications, conducted 10.8 million credit checks and 1.3 million appraisals, its filings show. Many of the fees go to its loan closing services subsidiary, LandSafe Inc.According to dozens of loan documents, LandSafe routinely charges tax service fees of $60, far above what other lenders charge, for information about any outstanding tax obligations of the borrowers. Credit checks can cost $36 at LandSafe, double what others levy. Some Countrywide loans even included fees of $100 to e-mail documents or $45 to ship them overnight. LandSafe also charges borrowers $26 for flood certifications, for which other companies typically charge $12 to $14, according to sales representatives and brokers familiar with the fees.A different broker supplied an e-mail message from a Countrywide official stating that it was not company practice to submit 1099s. It is unclear why Countrywide apparently chooses not to provide the documents.A former sales representative and several brokers interviewed for this article were granted anonymity because they feared retribution from Countrywide.
Closing Thoughts
It's really hard to know where to begin with this but for starters I hope the IRS cracks down good and hard on Countrywide over the 1099's.
I have been wanting to comment on the sleaze at Countrywide for a week but tonight it finally seems appropriate.
Certainly there are allegations of what can be construed as fraud and I would love to see Mozilo have a day of reckoning in court over this but I doubt that ever happens.
And while I have a hard time cheering for the demise of others, at a minimum it's certainly hard to feel sorry for anyone losing their job who was involved in such sleaze.
But what sums it up best is this: As Ye Sow, So Shall Ye Reap.Addendum:Here is Countrywide's Letter To Employees, addressing both the layoffs as well as taking exception to the New York Times article. You can choose to believe Countrywide's innocence if you choose. I don't.
MSNMoney is reporting Countrywide to reduce workforce by 10,000 to 12,000.
Countrywide Financial Corporation CFC today announced a plan of action to address changing market conditions that positions the Company for continued growth and success.The Company presently estimates a total workforce reduction of 10,000 to 12,000 over the next three months representing up to 20 percent of its current workforce. Based on current interest rate levels, Countrywide presently expects that total market origination volumes will decline approximately 25 percent in 2008 compared to 2007 levels.Product guideline revisions have been made to ensure that all loans which the Company produces can be sold into the secondary market or are high quality prime loans to be held in Countrywide Bank's investment portfolio. This includes the Company's recent decision to no longer originate any subprime loans other than those eligible for sale or securitization under programs supported by Fannie Mae, Freddie Mac or the FHA.[Mish comment: So with no Alt-A, no jumbos, no subprime, no nonconforming loans of any sort, and with increased competition for prime loans, Countrywide is only expecting loan volumes to drop by 25%!?]Growth plans will continue in areas of opportunity. Countrywide's retail and wholesale lending divisions plan to continue aggressively pursuing the increased opportunities presenting themselves in the current environment for profitable market share growth.[Mish comment: Growth plans? Yeah right. Let's talk growth while firing 20% of the workforce and reducing the types of loans you are willing to do?]"Each employee at Countrywide is considered an important member of the Countrywide family," said David Sambol, President and Chief Operating Officer. "While workforce reductions are therefore always very difficult, these decisions are being made with the utmost attention and sensitivity to the impact they will have on our Company and our people."
Inside the Countrywide Lending SpreeBut how and why did countrywide get so bloated in the first place? In case you missed it, the New York Times recently published a stunning look Inside the Countrywide Lending Spree.
On its way to becoming the nation's largest mortgage lender, the Countrywide Financial Corporation encouraged its sales force to court customers over the telephone with a seductive pitch that seldom varied. "I want to be sure you are getting the best loan possible," the sales representatives would say.Instead, potential borrowers were often led to high-cost and sometimes unfavorable loans that resulted in richer commissions for Countrywide's smooth-talking sales force, outsize fees to company affiliates providing services on the loans, and a roaring stock price that made Countrywide executives among the highest paid in America.Countrywide's entire operation, from its computer system to its incentive pay structure and financing arrangements, is intended to wring maximum profits out of the mortgage lending boom no matter what it costs borrowers, according to interviews with former employees and brokers who worked in different units of the company and internal documents they provided. One document, for instance, shows that until last September the computer system in the company's subprime unit excluded borrowers' cash reserves, which had the effect of steering them away from lower-cost loans to those that were more expensive to homeowners and more profitable to Countrywide.Homeowners, meanwhile, drawn in by Countrywide sales scripts assuring "the best loan possible," are behind on their mortgages in record numbers. As of June 30, almost one in four subprime loans that Countrywide services was delinquent, up from 15 percent in the same period last year, according to company filings. Almost 10 percent were delinquent by 90 days or more, compared with last year's rate of 5.35 percent.Many of these loans had interest rates that recently reset from low teaser levels to double digits; others carry prohibitive prepayment penalties that have made refinancing impossibly expensive, even before this month's upheaval in the mortgage markets."In terms of being unresponsive to what was happening, to sticking it out the longest, and continuing to justify the garbage they were selling, Countrywide was the worst lender," said Ira Rheingold, executive director of the National Association of Consumer Advocates.In a mid-March interview on CNBC, Mr. Mozilo said Countrywide was poised to benefit from the spreading crisis in the mortgage lending industry. "This will be great for Countrywide," he said, "because at the end of the day, all of the irrational competitors will be gone."But Countrywide documents show that it, too, was a lax lender. For example, it wasn't until March 16 that Countrywide eliminated so-called piggyback loans from its product list, loans that permitted borrowers to buy a house without putting down any of their own money. And Countrywide waited until Feb. 23 to stop peddling another risky product, loans that were worth more than 95 percent of a home's appraised value and required no documentation of a borrower's income.As recently as July 27, Countrywide's product list showed that it would lend $500,000 to a borrower rated C-minus, the second-riskiest grade.The company would lend even if the borrower had been 90 days late on a current mortgage payment twice in the last 12 months, if the borrower had filed for personal bankruptcy protection, or if the borrower had faced foreclosure or default notices on his or her property.Such loans were made, former employees say, because they were so lucrative — to Countrywide. The company harvested a steady stream of fees or payments on such loans and busily repackaged them as securities to sell to investors. As long as housing prices kept rising, everyone — borrowers, lenders and investors — appeared to be winners.One former employee provided documents indicating Countrywide's minimum profit margins on subprime loans of different sizes. These ranged from 5 percent on small loans of $100,000 to $200,000 to 3 percent on loans of $350,000 to $500,000. But on subprime loans that imposed heavy burdens on borrowers, like high prepayment penalties that persisted for three years, Countrywide's margins could reach 15 percent of the loan, the former employee said.One reason these loans were so lucrative for Countrywide is that investors who bought securities backed by the mortgages were willing to pay more for loans with prepayment penalties and those whose interest rates were going to reset at higher levels. Investors ponied up because pools of subprime loans were likely to generate a larger cash flow than prime loans that carried lower fixed rates.As a result, former employees said, the company's commission structure rewarded sales representatives for making risky, high-cost loans. For example, according to another mortgage sales representative affiliated with Countrywide, adding a three-year prepayment penalty to a loan would generate an extra 1 percent of the loan's value in a commission. While mortgage brokers' commissions would vary on loans that reset after a short period with a low teaser rate, the higher the rate at reset, the greater the commission earned, these people said.Persuading someone to add a home equity line of credit to a loan carried extra commissions of 0.25 percent, according to a former sales representative."The whole commission structure in both prime and subprime was designed to reward salespeople for pushing whatever programs Countrywide made the most money on in the secondary market," the former sales representative said.When borrowers tried to reduce their mortgage debt, Countrywide cashed in: prepayment penalties generated significant revenue for the company — $268 million last year, up from $212 million in 2005. When borrowers had difficulty making payments, Countrywide cashed in again: late charges produced even more in 2006 — some $285 million.The company's incentive system also encouraged brokers and sales representatives to move borrowers into the subprime category, even if their financial position meant that they belonged higher up the loan spectrum. Brokers who peddled subprime loans received commissions of 0.50 percent of the loan's value, versus 0.20 percent on loans one step up the quality ladder, known as Alternate-A, former brokers said. For years, a software system in Countrywide's subprime unit that sales representatives used to calculate the loan type that a borrower qualified for did not allow the input of a borrower's cash reserves, a former employee said.A few weeks ago, the former sales representative priced a $275,000 loan with a 30-year term and a fixed rate for a borrower putting down 10 percent, with fully documented income, and a credit score of 620. While a F.H.A. loan on the same terms would have carried a 7 percent rate and 0.125 percentage points, Countrywide's subprime loan for the same borrower carried a rate of 9.875 percent and three additional percentage points.The monthly payment on the F.H.A. loan would have been $1,829, while Countrywide's subprime loan generated a $2,387 monthly payment. That amounts to a difference of $558 a month, or $6,696 a year — no small sum for a low-income homeowner.Independent brokers who have worked with Countrywide also say the company does not provide records of their compensation to the Internal Revenue Service on a Form 1099, as the law requires. These brokers say that all other home lenders they have worked with submitted 1099s disclosing income earned from their associations.One broker who worked with Countrywide for seven years said she never got a 1099."When I got ready to do my first year's taxes I had received 1099s from everybody but Countrywide," she said. "I called my rep and he said, "We're too big. There's too many. We don't do it."Few borrowers of any sort, even the most creditworthy, appear to escape Countrywide's fee machine. When borrowers close on their loans, they pay fees for flood and tax certifications, appraisals, document preparation, even charges associated with e-mailing documents or using FedEx to send or receive paperwork, according to Countrywide documents. It's a big business: During the last 12 months, Countrywide did 3.5 million flood certifications, conducted 10.8 million credit checks and 1.3 million appraisals, its filings show. Many of the fees go to its loan closing services subsidiary, LandSafe Inc.According to dozens of loan documents, LandSafe routinely charges tax service fees of $60, far above what other lenders charge, for information about any outstanding tax obligations of the borrowers. Credit checks can cost $36 at LandSafe, double what others levy. Some Countrywide loans even included fees of $100 to e-mail documents or $45 to ship them overnight. LandSafe also charges borrowers $26 for flood certifications, for which other companies typically charge $12 to $14, according to sales representatives and brokers familiar with the fees.A different broker supplied an e-mail message from a Countrywide official stating that it was not company practice to submit 1099s. It is unclear why Countrywide apparently chooses not to provide the documents.A former sales representative and several brokers interviewed for this article were granted anonymity because they feared retribution from Countrywide.
Closing Thoughts
It's really hard to know where to begin with this but for starters I hope the IRS cracks down good and hard on Countrywide over the 1099's.
I have been wanting to comment on the sleaze at Countrywide for a week but tonight it finally seems appropriate.
Certainly there are allegations of what can be construed as fraud and I would love to see Mozilo have a day of reckoning in court over this but I doubt that ever happens.
And while I have a hard time cheering for the demise of others, at a minimum it's certainly hard to feel sorry for anyone losing their job who was involved in such sleaze.
But what sums it up best is this: As Ye Sow, So Shall Ye Reap.Addendum:Here is Countrywide's Letter To Employees, addressing both the layoffs as well as taking exception to the New York Times article. You can choose to believe Countrywide's innocence if you choose. I don't.
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