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Global Financial and Economic Crises

Global Economic Crisis

Project: Global Financial and Economic Crisis 2007-Present
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Detroit’s Big Three CEOs testify for more than two hours in a hearing before the Senate Banking Committee, using dire language to describe the financial straits that are threatening to bankrupt their companies. Chrysler LLC CEO Robert Nardelli says that without immediate help, his company could be forced into bankruptcy. “We cannot be confident that we will be able to successfully emerge,” he says. General Motors (GM) Corporation’s CEO, Rick Wagoner, adds that the failure of the industry would be “catastrophic,” causing the loss of 3 million jobs. Ford Motor Company CEO Alan Mulally tells the committee that if one of the automakers failed, the whole industry could be disrupted. “You’re here to get life support,” says ranking minority member Richard Shelby (R-AL). “Why aren’t you making money? How would you pay this money back?”
Financial Losses Worse than Originally Believed - The automakers say that their financial losses were worse than they at first thought, with Nardelli testifying that his company ran through $5 billion this year, including $3.3 billion in the third quarter, with only $6.1 billion on hand to last through the end of the year. Wagoner says that his firm would spend $15 billion by the end of 2008, and another $10 billion in 2009. Wagoner wants $10-$12 billion for GM, while Mulally and Nardelli want $7 billion for their respective corporations. Both Wagoner and Nardelli say that their companies will run out of money in a matter of months. One senator asks if the automakers would be willing to make monthly status reports on cash flow if the Senate agrees to the loan. Nardelli offers to take $1 a year as salary compensation; neither Mulally nor Wagoner did not make the same commitment. Nardelli also committed to Chrysler’s agreeing to consider new fuel efficiency standards. “We’d be open to any requirements,” he says.
Already Cut Costs, Moved to Restructure - The automakers testify how aggressively they have moved to cut costs, restructure, and revamp their product lines to be more competitive with foreign rivals, and say their companies were making progress until they were derailed by the credit crisis that has stalled the global economy and dried up consumer confidence. Auto sales are at their lowest level in at least 15 years, they say, dropping nearly 32 percent in October. As a testament to the seriousness of their financial crisis, the three automakers assure the committee that they would spend the requested $25 billion in the United States; however, they refuse to say that they would not come back for further bailout funding. Wagoner testifies that GM has cut $9 billion in costs since 2005. He touts labor agreements with the United Auto Workers that will further cut wage and health care expenses, and says that improvements in designing and manufacturing vehicles as well as developing fuel-saving technologies will also assist in reining in manufacturing costs. “As a result of these and other actions, we are now matching—or besting—foreign automakers in terms of productivity, quality and fuel economy,” he says. Wagoner assures the committee that the company was moving quickly to right its business. “We have more work to do in all aspects of our business,” Wagoner said. “This is hard stuff.” He said that GM would use some of the money to pay suppliers and pay for part of the Chevrolet Volt program.
UAW President Grilled - In his own testimony, United Auto Workers President Ron Gettelfinger ranks the relative financial health of the Big Three as Ford being the most solvent, with Chrysler at number two, while General Motors may be at or near insolvency by the end of 2008. The UAW chief faces tough questions as well, as Senator Bob Corker (R-TN) pushes back on union work rules and the jobs bank. “I understand Mr. Gettelfinger has done a good job on behalf of all workers not working and being paid,” Corker says, calling the practice unacceptable in other businesses.
Disagreement among Democrats, Republicans - Democrats support a plan to subtract $25 billion from the $700 billion Wall Street bailout package, known as the Troubled Asset Recovery Program (TARP), while Mitch McConnell (R-KY) has joined the White House call to speed up money previously authorized for the automakers through an Energy Department loan program. “To basically change the qualifications of the money that we have already appropriated is a sound way to go forward,” said McConnell. House Democrats and many environmentalists oppose the use of the Energy Department loan, since it is approved only for projects that lead to significant fuel efficiency improvements. Carl Levin (D-MI) says that in order to get a bill, Republicans must write language that explains how they would quickly get $25 billion from the Energy Department program to automakers. But Levin is realistic about the long road they face. “Progress: No. Effort: Hell, yes. Big-time effort,” he says. “We haven’t seen progress and won’t see progress until we see the language from those who want to see the [Energy Department] funds.” Debbie Stabenow (D-MI) says she will “very reluctantly” agree to reworking the retooling loans if that was the only way to get help now. Other Senate allies of the auto industry, including Claire McCaskill (D-MO) and Ken Salazar (D-CO), opposed the proposal to shift $25 billion from TARP. “I’m not sure we want to throw good money after bad,” Salazar says. Max Baucus (D-MT), chairman of the Senate Finance Committee, says it will be nearly impossible to make a deal before Congress adjourns for the year later this week. “Reading the tea leaves, I just don’t think it’s going to happen,” Baucus says. “There’s not enough time given the opposition of the White House and opposition of the other side of the aisle.” Corker echoes the belief that nothing would get done this year, calling the hearings “the first step in a loan application.”
Further Hearings Slated - The CEOs will return to Capitol Hill for a hearing before the House Financial Services Committee on Tuesday, November 25. [Detroit News, 11/19/2008]

Entity Tags: United Auto Workers, Ford Motor Company, Debbie Stabenow, Chrysler, Carl Levin, Alan Mulally, General Motors, Senate Banking Committee, Max Baucus, Rick Wagoner, Robert Nardelli

Category Tags: Bailouts and Other Government Aid, USA

The International Monetary Fund (IMF) approves a $2.1 billion loan for Iceland, whose economy has been devastated by the global financial crisis. Iceland becomes the first Western European nation to get an IMF loan since Britain in 1976. [BBC, 2/2/2009]

Entity Tags: International Monetary Fund

Category Tags: Other, Iceland

Recently bailed-out insurance giant AIG sets the salary of its Chief Executive Officer Edward Liddy at $1 for 2008/9. It also freezes pay and scraps bonuses for its seven most senior executives. [Bloomberg, 3/5/2009] In addition, 50 more AIG executives will be locked out of pay rises in 2009. [Reuters, 4/17/2009]

Entity Tags: Edward Liddy, AIG (American International Group, Inc.)

Category Tags: Failing Companies, USA, AIG

The annual rate of inflation in Iceland rises to a record high of 17.1 percent. [BBC, 2/2/2009]

Category Tags: Other, Iceland

The British retail chain Woolworths goes into administration with debts of £385m (about $580m). The administration was brought on by a cash crisis and a loss of backing by financial institutions that had lent it money, in particular Burdale and GMAC. It is the largest casualty of the global economic crisis in Britain so far, and its failure jeopardizes 30,000 jobs across the country. The British government had intervened to save the company, but only by encouraging last-minute talks between it and the lenders, which failed. No financial support from the taxpayer was offered. The administrator, the auditor Deloitte, appoints Hilco, a company specializing in reconstruction, to run the business. Hilco had been attempting to buy Woolworths before it went into administration. Deloitte says that stores will remain open during the Christmas period, and that it will attempt to find a new owner that can satisfy the company’s lenders. [Financial Times, 11/26/2008]

Entity Tags: GMAC, Deloitte, Hilco, Burdale, Woolworth Group PLC

Category Tags: Failing Companies, Britain

The British furniture retailer MFI goes into administration, as it is unable to pay rent on many its stores. This is because of falling sales of large items such as kitchens. The company has over 100 outlets throughout the country and has been in trouble for some months. Its failure jeopardizes thousands of jobs. [Daily Telegraph, 11/27/2008] The administrators are unable to find a buyer and the group’s stores close on December 19. Customers who have not yet received their furniture are told to apply to the administrator for a refund. The logistics company DHL, which had handled deliveries for MFI, says it will probably also lay off over 300 people as a result of the failure. [BBC, 12/19/2008]

Entity Tags: MFI Group Limited, DHL

Category Tags: Failing Companies, Britain

US government-seized mortgage finance companies Fannie Mae and Freddie Mac suspend foreclosures from November 26, 2008 until January 9, 2009. The six-week suspension on both foreclosures and evictions will give loan servicers time to implement streamlined loan modifications for struggling borrowers. Since September 6, 2008, Fannie and Freddie have been federal government-controlled and sponsored entities that own or guarantee $5.2 billion of the $12 billion US home mortgage market. They offer borrowers who are 90 days or more delinquent with high loan-to-income ratios a chance to modify their mortgage terms to decrease their monthly mortgage payments by roughly 38 percent of the homeowner’s monthly pretax salary. The companies say they plan to reduce interest rates for up to 5 years while lengthening repayment terms as much as 40 years to trim monthly payments. [Bloomberg, 11/20/2008]

Entity Tags: Federal Home Loan Mortgage Corporation, Federal National Mortgage Association

Category Tags: Other, USA

The financial industry may cut as much as $2 trillion in credit card account lines over the next 18 months, according to Oppenheimer & Co analyst Meredith Whitney. This is in an effort to reduce damage risks from increasing customer delinquencies and defaults. “[W]e expect available consumer liquidity in the form of credit-card lines to decline by 45 percent,” she adds. According to Whitney, all three remaining major banks—Bank of America, Citigroup, and JP Morgan Chase—are planning or considering reducing credit lines across the board. Credit cards are the second source of liquidity available to consumers, behind wages from work. She criticizes the banking industry for offering ever fewer choices at a time when consumers need credit more than ever: “Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view.” [Consumer Affairs.com, 12/1/2008; Reuters, 12/1/2008]

Entity Tags: Meredith Whitney, Oppenheimer & Co.

Category Tags: Commentaries on Economic Issues, USA

Recently bailed-out insurer AIG agrees to sell a bank unit serving clients in Asia and the Middle East for about $250 million. [Bloomberg, 3/5/2009] This is part of a program to sell business units in order to repay the government (see September 18, 2008).

Entity Tags: AIG (American International Group, Inc.)

Category Tags: Failing Companies, USA, AIG

The recently bailed-out insurer AIG and the US government say they have reached an agreement on toxic mortgage debt held by the company. The agreement will clear AIG of its obligations on about $53.5 billion in such debt. [Reuters, 4/17/2009]

Entity Tags: AIG (American International Group, Inc.)

Category Tags: Failing Companies, USA, AIG

Edward Liddy, chief executive officer of recently bailed-out insurer AIG, pledges to repay taxpayers “every single penny we owe them.” The company currently has around $150 billion of the taxpayers’ money (see November 10, 2008). However, Liddy adds that the company will get the money by selling business units, and the timetable of such sales could change. AIG shares close at $1.73. [Bloomberg, 3/5/2009]

Entity Tags: Edward Liddy, AIG (American International Group, Inc.)

Category Tags: Failing Companies, USA, AIG

According to Jim Rogers, the co-founder of the Quantum Fund along with billionaire financier George Soros, the federal government’s efforts to fix the sector are “wrongheaded.” During a teleconference at the Reuters Investment Outlook 2009 Summit, Rogers says that the government’s $700 billion rescue package for the sector doesn’t address how banks manage their balance sheets, and rewards weaker lenders with new capital. More than two dozen banks have received infusions from the Troubled Asset Relief Program (TARP), and some TARP funds are being used for acquisitions. [White House, 10/3/2008] “Without giving specific names, most of the significant American banks, the larger banks, are bankrupt, totally bankrupt,” says Rogers, now a private investor. “What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent,” he continues. “What’s happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics.” [Reuters, 12/11/2008]

Entity Tags: Jim Rogers, Quantum Fund, George Soros

Category Tags: Commentaries on Economic Issues, USA

The International Monetary Fund (IMF) says Iceland, which has been devastated by the global financial crisis, has taken the first important steps towards restoring financial stability. It says the key objective of stabilizing Iceland’s currency, the krona, is being met. [BBC, 2/2/2009]

Entity Tags: International Monetary Fund

Category Tags: Other, Iceland

Recently bailed-out insurer AIG agrees to sell one of its insurance subsidiaries, Hartford Steam Boiler, for $742 million. However, this is about a third less than it paid for the unit eight years ago. [Bloomberg, 3/5/2009] The unit is purchased by the German reinsurer Munich Re, which wants to expand its US business. [Reuters, 4/17/2009] This sale is part of a program to sell business units in order to repay AIG’s bailout loans to the government (see September 18, 2008).

Entity Tags: AIG (American International Group, Inc.), Hartford Steam Boiler, Munich Re

Category Tags: Failing Companies, USA, AIG

According to a report published in February 2009 by the Japanese government, Japan’s economy—the world’s second largest—suffers the biggest monthly drop since records began more than half a century ago, with January marking the fourth successive month that factory output has fallen. Officials conclude that the country is in its worst recession in decades. The figures are published days after government reports that exports plunged nearly 46 percent in comparison to a year ago, reportedly suffering from a fall in foreign product demand. A preliminary report by the Ministry of Economy, Trade, and Industry predicts that output will further fall to 8.3 percent in February, but increase in March by 2.8 percent. The report concludes that a 17.3 percent production drop in transport equipment, including cars and trucks, had the largest negative impact on the overall output decline, and that electronic parts and devices was down 21.8 percent from December, followed next by general machinery and steel, with all 16 industrial areas cutting their output. According to the Japan Automobile Manufacturers’ Association, the country’s car production plunges a record 41 percent in January and vehicle productions decrease by nearly 50 percent to 576,539 vehicles produced in January 2009 compared with 976,975 in January 2008. “Fearful of losing their jobs in the global turndown, consumers no longer want to buy Japanese electronic gadgets and cars,” says Roland Buerk of BBC Tokyo. “The Japanese are shopping less and average household spending fell 5.9 percent in January compared with the same month a year ago.” Jobs are also being slashed, with unemployment rising by more than 200,000 in January 2009. “Japan was once seen as relatively immune to the global crisis because its banks were not as exposed to bad loans as those in the US and Europe,” Buerk will say. “Their reliance on foreign markets to drive its economy out of a long slump in the 1990s has left it painfully exposed.” “The recession is having an increasing impact on the real economy,” Finance Minister Kaoru Yosano will say. [BBC, 2/27/2009; Xinhua News Agency (Beijing), 2/27/2009]

Entity Tags: Roland Buerk, Kaoru Yosano, British Broadcasting Corporation, Japan Automobile Manufacturers’ Association

Category Tags: Commentaries on Economic Issues, Other

January 2009: New Home Sales Plunge in US

According to a Commerce Department report, in January, new home purchases drop 10 percent to an annual pace of 309,000, the lowest level since data tracking began in 1963. The report, published in February 2009, will attribute the fall to high unemployment and foreclosures. In addition, at 13.5 percent, the median home price falls the most in almost four decades. [Bloomberg, 2/26/2009]

Entity Tags: US Department of Commerce

Category Tags: Other, USA, Bush Policies and Actions

As more EU companies lay off workers, unemployment rises to its highest level in more than two years. The EU jobless rate rises from a revised 8.1 percent in December, and above the 7.3 percent figure in January 2008, according to a report from the BBC. Annualized inflation in the 16-nation area falls to 1.1 percent in January, its lowest in nearly a decade, down from 1.6 percent in the year to December 2008. According to EU officials, the EU has been in recession since September 2008. The latest unemployment and inflation figures increase pressure on the European Central Bank (ECB) to further cut interest rates in an effort to bolster the economy and bring inflation closer to its 2 percent target. The ECB trims rates by half a percentage point to 2 percent in January, the fourth reduction since September, when rates stood at 4.25 percent. “January’s rise in unemployment and further fall in core inflation support our view that ECB interest rates have much further to fall,” says Jennifer McKeown, an analyst at Capital Economics. “The downturn in the labor market, and indeed the wider economy, points to a further fall in core inflation in the coming months.” Unemployment among European Union nations is highest in Spain, at 14.8 percent, and lowest in the Netherlands, at 2.8 percent. [BBC, 2/27/2009]

Entity Tags: Capital Economics, Jennifer McKeown, European Central Bank

Category Tags: Other

Washington Post economics columnist Steven Pearlstein criticizes Mary Schapiro, President-Elect Barack Obama’s pick to chair the Securities and Exchange Commission (SEC), a financial market regulator. Pearlstein says that the selection of Schapiro, who has a long background in regulating the industry, is “as safe and predictable as it is disappointing.” He adds that Schapiro has some good qualities and would be a sound pick at another time. However, “The problem is that there is nothing in her record to suggest that she is likely to clean house at the agency and launch a brutal and sustained assault on Wall Street culture.”
Unethical Practices - Pearlstein adds: “Remember the good old days when corporations would routinely manipulate earnings so that they came out just as the analysts expected? Or when analysts used to issue buy recommendations for stocks they knew were lousy just because it helped their firms win investment-banking business? Or when brokerage firms would routinely put clueless customers in mutual funds that offered high commissions, not the best results? Or when investment banks would put aside shares in the hottest IPOs for the personal accounts of corporate chief executives who steered underwriting business their way? These practices weren’t secrets—to anyone even vaguely familiar with the industry, they were hidden in plain view. And yet for years, no regulator, including Schapiro, was willing to risk being demonized by the industry, criticized by Congress and overturned by the courts to do what was necessary to stop these practices.”
'Show Trials' - He then sets out his vision for what the new chairman should do, what he thinks Schapiro will not do: “We need an SEC chairman who is willing to move beyond narrow enforcement actions and no-fault consent decrees to stage a series of regulatory show trials that will expose in graphic detail how people think and behave at all levels of Wall Street firms. We need a chairman who will use the commission’s broad powers to fine and debar from the industry big-name directors, top executives, ratings agency officials and other gatekeepers whose nonfeasance resulted in significant losses for investors, customers and taxpayers. We need a chairman who will make effective use of the bully pulpit to expose other well-known industry practices that put the interests of Wall Street ahead of those of its customers.” [Washington Post, 1/7/2009]

Entity Tags: Barack Obama, Steven Pearlstein, Mary Schapiro, US Securities and Exchange Commission

Category Tags: Commentaries on Economic Issues, USA, Commentaries and Criticisms

Temasek Holdings, an arm of the government of Singapore, acquires shares in Bank of America. It does this by converting shares it had purchased in Merrill Lynch (see December 25, 2007 and July 29, 2008) into shares in Bank of America, which had recently purchased Merrill Lynch (see September 14, 2008). Temasek now owns 3.8 percent of Bank of America. [Reuters, 1/11/2009]

Entity Tags: Bank of America, Temasek Holdings

Category Tags: Western Purchases by Asians, USA

NYU Economics Professor Nouriel Roubini tells Bloomberg News that, following the $350 billion injection by the Bush Administration, President Barack Obama will have to use as much as $1 trillion of taxpayer funds to shore up capitalization of the banking sector. “The problems of Citi, Bank of America and others suggest the system is bankrupt,” Roubini said. “In Europe, it’s the same thing.” Roubini also predicts that oil prices will continue to trade between $30 to $40 a barrel all year. Regarding commodities, Roubini said, “I see commodities falling overall another 15-20%. This outlook for commodity prices is beneficial for oil importers, it’s going to imply that economic recovery might occur faster, but from the point of view of oil exporters, this will be very negative.” [Street Insider.com, 1/20/2009; Bloomberg, 1/20/2009]

Entity Tags: Barack Obama, Citibank, Nouriel Roubini, Bank of America

Category Tags: Bailouts and Other Government Aid, USA, Bush Policies and Actions, Obama Policies and Actions

The Icelandic finance ministry says the country’s economy is forecast to shrink by 9.6 percent in 2009. In addition, it predicts no growth in 2010. [BBC, 2/2/2009]

Category Tags: Other, Iceland

The rating of a plane leasing unit owned by recently bailed-out insurer AIG is downgraded by Standard & Poor’s. This prompts the US government to cut lending to the business through a bailout program for commercial paper. [Bloomberg, 3/5/2009]

Entity Tags: AIG (American International Group, Inc.)

Category Tags: Bailouts and Other Government Aid, Failing Companies, USA, AIG

New York University economist Nouriel “Dr. Doom” Roubini and Western Europe Finance and Banking analyst Elisa Parisi-Capone of RGE Monitor release new estimates for expected loan losses and writedowns on US originated securitizations:
bullet Loan losses on a total of $12.37 trillion unsecuritized loans are expected to reach $1.6 trillion. Of these, US banks and brokers are expected to incur $1.1 trillion.
bullet Mark-to-market writedowns based on derivatives prices and cash bond indices on a further $10.84 trillion in securities reached $1.92 trillion. According to flow-of-funds data, about 40% of these securities (and losses) are foreign-held. US banks and broker dealers are assumed to incur a share of 30-35%, or $600-700 billion in securities writedowns.
bullet US-originated assets’ total loan losses and securities writedowns are expected to reach about $3.6 trillion. The US banking sector is exposed to half of this figure, or about $1.8 trillion (i.e. $1.1 trillion loan losses + $700bn writedowns).
bullet As of the third quarter of 2008, Federal Deposit Insurance Corporation-insured banks’ capitalization is $1.3 trillion; as of the same period, investment banks had $110bn in equity capital. Roubini and Parisi-Capone say that past recapitalization through the first release of the TARP funds for $230bn, and private capital of $200bn leaves the US banking system very nearly insolvent, should loss estimates materialize.
bullet In order to restore safe lending, additional private and/or public capital of approximately $1 to 1.4 trillion is needed, thus calling for a comprehensive solution along the lines of a “bad bank” proposed by policymakers, or an outright restructuring through a new resolution trust corporation (RTC).
bullet In September 2008, Roubini proposed a solution for the banking crisis that also addresses the root causes of the financial turmoil in the housing and the household sectors. The HOME (Home Owners’ Mortgage Enterprise) program combines an RTC to deal with toxic assets, a homeowners loan corporation to reduce homeowners’ debt, and a reconstruction finance corporation to recapitalize viable banks.
They concluded that total financial system losses will likely hit $3.6 trillion, half of which, according to Roubini, “will be borne by US firms,” and that the losses will overwhelm the US financial system which, in the third quarter of 2008, had a capitalization of $1.3 trillion in commercial banks and $110 billion in investment banks. [Bloomberg, 1/20/2009; AFP Reporter, 1/22/2009] Since September 7, 2006, Dr. Roubini, an economics professor at New York University, has been known as “Dr. Doom” after telling an audience of economists at the International Monetary Fund that an economic crisis was brewing in the coming months and years. He warned that the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession, and laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he said, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac. [New York Times Magazine, 8/15/2008]

Entity Tags: Nouriel Roubini, Elisa Parisi-Capone, RGE Monitor

Category Tags: USA, Commentaries on Economic Issues

Amid reports of a $15.4 billion loss, $1.2 million in office redecorations and earlier-than-usual million-dollar bonuses using TARP funds, John Thain resigns as CEO of troubled firm Merrill Lynch, recently purchased by Bank of America.
Investigating Bonuses - While Thain forgoes a 2008 bonus, New York Attorney General Andrew Cuomo is investigating bonuses paid to Merrill executives in late December, right before the deal closed. Merrill normally pays bonuses in January or February. Cuomo is investigating performance bonuses for Merrill’s CEO and other top executives, calling the bonuses an “oxymoron” during such an “abysmal year.” According to Merrill’s securities filings, Thain’s salary was $750,000 last year.
$837,000 for Redecoration - “Spending company money on a lavish redo at a time when Merrill’s finances were rocky sends the wrong message,” said Amy Borrus, deputy director at the Council of Institutional Investors in Washington. “Given the dire straits that so many financial institutions are in, redecorating the corner office should be way down on their to-do lists.” Someone familiar with Thain’s New York office redecoration claims that the CEO paid decorator Michael Smith $837,000 and his purchases included $87,000 for area rugs, $25,000 for a pedestal table and $68,000 for a 19th century credenza. Smith, a Santa Monica, California-based decorator, was recently commissioned by Michelle Obama to decorate the White House.
35,000 Job Losses - Thain, a former executive for Goldman Sachs Group Inc. and the New York Stock Exchange, joins about 35,000 employees that Bank of America CEO Kenneth Lewis plans to eliminate over the next few years from the combined firms’ total of over 260,000 employees.
Abysmal Performance - Lewis’s credibility was undercut after Merrill reported a record fourth-quarter deficit. Lewis considered backing out of the deal after learning the extent of Merrill’s losses in December 2008, but went ahead with the buyout at the insistence of US regulators who provided a new $138 billion aid package. “There was a certain surprise that the Merrill losses were as steep as they were,” says James Post, a professor of corporate governance and business ethics at Boston University School of Management. “On top of that, I think Lewis didn’t think Thain was doing as much as he could to control the expenses and minimize the losses.” Shares in Bank of America, down 53 percent so far in 2008, slide another 14 percent to $5.71 by the close of New York Stock Exchange composite trading. Thain bought 84,600 shares in Bank of America, at $5.71 each, the day before his ouster, a filing showed. [Bloomberg, 1/22/2009]

Entity Tags: Andrew Cuomo, John Thain, Amy Borrus, Kenneth Lewis, Bank of America, Merrill Lynch

Category Tags: Bailouts and Other Government Aid, USA

Prime Minister of Iceland Geir Haarde calls a general election for the spring, two years early. The decision to have early elections is triggered by the global financial crisis, which has hit Iceland particularly badly. Haarde adds that he will not stand again because he has throat cancer. Two days previously, protesters angry at the economic crisis had surrounded his car, banging on its windows and pelting it with eggs. [BBC, 2/2/2009]

Entity Tags: Geir Haarde

Category Tags: Other, Iceland

“The worst economic turmoil since the Great Depression is not a natural phenomenon but a man-made disaster in which we all played a part,” says Guardian City editor Julia Finch, who lists individuals who led the world into its current economic crisis (see June 2008). These individuals include:
bullet Alan Greenspan, US Federal Reserve chairman, 1987-2006: “[B]lamed for allowing the housing bubble to develop as a result of his low interest rates and lack of regulation in mortgage lending. Backed sub-prime lending; urged homebuyers to swap fixed-rate mortgages for variable rate deals, leaving borrowers unable to pay when interest rates rose. Defended the booming derivatives business, which barely existed when he took over the Fed, but which mushroomed from $100tn in 2002 to more than $500tn five years later.”
bullet Mervyn King, governor of the Bank of England: “His ambition was that monetary policy decision-making should become ‘boring.’”
bullet Bill Clinton, former US president: “Beefed up the 1977 Community Reinvestment Act to force mortgage lenders to relax their rules to allow more socially disadvantaged borrowers to qualify for home loans. Repealed the 1999 Glass-Steagall Act, prompting the era of the superbank; the year before the repeal, sub-prime loans were just 5 percent of all mortgage lending. By the time the credit crunch blew up it was approaching 30 percent.” [Guardian, 1/26/2009]

Entity Tags: Mervyn King, William Jefferson (“Bill”) Clinton, Alan Greenspan, The Guardian, Julia Finch

Category Tags: Commentaries on Economic Issues, Britain, USA, Pre-2001 Policies and Actions, Bush Policies and Actions

Recently bailed-out insurer AIG says that it is looking for a buyer for a fund management unit. This is part of a program to sell business units in order to repay the government (see September 18, 2008). The fund manager operates 15 funds that had more than $12.4 billion in assets under management as of September 30, 2008. Bank of America and Merrill Lynch are helping AIG to find a buyer. [Reuters, 4/17/2009]

Entity Tags: Merrill Lynch, Bank of America, AIG (American International Group, Inc.)

Category Tags: Failing Companies, USA, AIG

Icelandic Prime Minister Geir Haarde announces the immediate resignation of the country’s government. The government became unstable when Iceland was hit particularly hard by the global financial crisis and the government had to take over three major banks. Haarde had already called an early election in Iceland (see January 23, 2009), but could have remained in office until voting. However, talks about continuing until the election with his coalition partner, the Social Democratic Alliance, break down and he leaves office. [BBC, 2/2/2009]

Entity Tags: Geir Haarde, Social Democratic Alliance

Category Tags: Other, Iceland

Depending on the extent and length of the economic crisis, the International Labor Organization (ILO) predicts in its annual Global Employment Trends Report that global unemployment could increase from 33 million to 51 million people, up 18 million from 2007 figures. The ILO urges global governments to emphasize job creation in their fiscal stimulus packages and improve social protection systems for the unemployed and the employed. “We are now facing a global jobs crisis,” Juan Somavia, ILO director general says. “Progress in poverty reduction is unraveling, and middle classes worldwide are weakening. The political and security implications are daunting.” The ILO is a United Nations organization that has painted three 2009 global unemployment scenarios, ranging from bad to worst. “In all scenarios, there will be a global unemployment rate increase in 2009, particularly the developed economies,” the ILO report says. Its most optimistic scenario is based on the International Monetary Fund’s November 2008 world economic growth projection, which indicates that there would be a global unemployment rate at 6.1 percent. This scenario has 18 million more people unemployed by the end of 2009, in comparison to the end of 2007, with a global unemployment rate of 6.1 percent. Under the ILO’s second and third scenarios, the numbers could rise by 30 million or even 51 million, with a much slower economic recovery, with unemployment reaching higher levels in developed countries. Under the ILO’s third scenario, approximately 200 million workers could be pushed into extreme poverty with incomes as low as $1.25 a day; 140 million would be in Asia. “The world is facing an unprecedented crisis that calls for creative solutions,” the organization says. [Deutsche Presse-Agentur (Hamburg), 1/28/2009]

Entity Tags: Juan Somavia, International Labor Organization (ILO), International Monetary Fund

Category Tags: Other, Commentaries on Economic Issues

Yale economist Robert Schiller reflects on the genesis of the economic recession, tracing it back in part to policies pursued by the Bush administration for the 2004 presidential election effort. At that time, Schiller warned of a “housing bubble” caused by a plethora of bad loans and toxic debt, and called for re-regulation of the housing markets. His warnings were ignored. Schiller says: “The Bush strategists were aware of the public enthusiasm for housing, and they dealt with it brilliantly in the 2004 election by making the theme of the campaign the ownership society. Part of the ownership society seemed to be that the government would encourage home ownership and, therefore, boost the market. And so Bush was playing along with the bubble in some subtle sense. I don’t mean to accuse him of any—I think it probably sounded right to him, and the political strategists knew what was a good winning combination. I don’t think that he was in any mode to entertain the possibility that this was a bubble. Why should he do that? Attention wasn’t even focused on this. If you go back to 2004, most people were just—they thought that we had discovered a law of nature: that housing, because of the fixity of land and the growing economy and the greater prosperity, that it’s inevitable that this would be a great investment. It was taken for granted.” John C. Dugan, the comptroller of the currency since 2005, says he believes a lack of regulation caused the “housing bubble.” Dugan says: “A lot of mortgages got made to people who could not afford them and on terms that would get progressively worse over time, and that created the seeds of an even bigger problem. As the whole market became even more dependent on house-price appreciation, when house prices flattened and then started to decline the whole situation began to unravel. The question you have to ask yourself: Why did credit become so easy? Why would lenders make mortgages that became increasingly less likely to be repaid? Part of the answer is that there was a huge chunk of the mortgage market that was not regulated to any significant extent. The overwhelming proportion of subprime loans were being done in entities that were not banks and not regulated as banks—I’m talking here about mortgage brokers and non-bank mortgage lenders that could originate these mortgages and then sell them to Wall Street firms that could package them into new kinds of mortgage securities, which arguably could take into account the lower credit risks and still be salable to investors worldwide. Unfortunately, the theory was not in accord with the reality. Although they thought they had accurately gauged that risk, they too were in fact depending—when you get to the bottom of it—on house prices continuing to go up and up and up. And they did not.” [Vanity Fair, 2/2009]

Entity Tags: Robert Schiller, Bush administration (43), John C. Dugan

Category Tags: Commentaries on Economic Issues, Bush Policies and Actions

Henry Paulson, the former secretary of the treasury, explains how the recession and market destruction came about on his watch. Part of his problem was his admitted lack of knowledge about regulation and regulatory authorities. “I easily could imagine and expected there to be financial turmoil,” he says. “But the extent of it, okay, I was naive in terms of—I knew a lot about regulation but not nearly as much as I needed to know, and I knew very little about regulatory powers and authorities. I just had not gone into it in that kind of detail. This’ll be the longest we’ve gone in recent history without there being turmoil, and given all the innovation in the private pools of capital and the over-the-counter derivatives and the excesses around the world, we figured that when there was turmoil, and these things were tested for the first time by stress, it would be more significant than anything else. I said at the time, I have a concern that every rally we’re going to have in the financial markets will be a false rally until we break the back of the price correction in real estate. And these things are never over until you have a couple of institutions go that surprise everyone. Bear Stearns can hardly be a shock (see March 15, 2008). But having said that, it’s one thing to see it intellectually and it’s another to see where we are.” [Vanity Fair, 2/2009]

Entity Tags: Bear Stearns, Henry Paulson, US Department of the Treasury, Bush administration (43)

Category Tags: Commentaries on Economic Issues, USA, Bush Policies and Actions

The American Recovery and Reinvestment Act (ARRA) invests $90 billion in clean energy projects for the next 10 years via loan guarantees, tax incentives, and grants. $38 billion of this is government spending and $20 billion is tax incentives. Symbolically, President Obama signs the bill into law at the Denver Museum of Nature and Science, where he takes a tour of the museum’s solar panel installation. He says he hopes the bill will inspire Americans to get involved in “green” energy the same way that President Kennedy’s goal to put a man on the moon inspired Americans in the 1960s. “I hope this investment will ignite our imagination once more in science, medicine, energy and make our economy stronger, our nation more secure, and our planet safer for our children,” Obama says before signing the bill. The bill includes:
bullet A three-year extension to the tax credit for wind, which would have expired at the end of this year, and an extension until the end of 2013 for geothermal and biomass renewable-energy projects. The credit has been increased to 30 percent of the investment.
bullet $4.5 billion in direct spending to modernize the electricity grid with smart-grid technologies.
bullet $6.3 billion in state energy-efficient and clean-energy grants, and $4.5 billion to make federal buildings more energy efficient.
bullet $6 billion in loan guarantees for renewable energy systems, biofuel projects, and electric-power transmission facilities.
bullet $2 billion in loans to manufacture advanced batteries and components for applications such as plug-in electric cars.
bullet $5 billion to weatherize homes of up to 1 million low-income people.
bullet $3.4 billion appropriated to the Department of Energy for fossil energy research and development, such as storing carbon dioxide underground at coal power plants.
bullet A tax credit of between $2,500 and $5,000 for purchase of plug-in electric vehicles, available for the first 200,000 placed into service.
Most companies in the green-tech field hail the new focus on energy efficiency and renewable energy in the bill, contrasting it with the Bush administration’s support for fossil fuel energy production and its disdain for clean energy programs. Investors and analysts say the new law is a step towards a comprehensive energy policy based on sustained commitment to renewable energy and efficiency. Michael Liebriech of New Energy Finance says: “For years, US policymakers’ support for clean energy has been uneven. No longer… the US will have a great chance to be the growth engine for our industry over the next several years.” The spending should have an almost-immediate impact, especially in areas such as smart grid technology and energy efficiency, says venture capitalist Dennis Costello. However, even this influx of government funding does not solve all the financial problems facing energy technology firms. The recession continues to grip the economy, he notes, damping demand and making financing of new projects difficult. “It’s kind of refreshing to see at least beginnings of a real energy policy, some sort of unified approach to our energy problems,” he says. “But it isn’t going to solve our energy problems. There are a lot of countervailing factors to give pause to being over-exuberant on the future of energy sector and clean tech.” [CNET News, 2/17/2009; Adam Johnston, 7/2013]

Entity Tags: Bush administration (43), Barack Obama, Michael Liebriech, Dennis Costello, Obama administration, American Recovery and Reinvestment Act of 2009, Denver Museum of Nature and Science, US Department of Energy

Timeline Tags: US Solar Industry

Category Tags: Bailouts and Other Government Aid, Obama Policies and Actions

Following the resignation of the previous cabinet (see January 26, 2009), a new government is formed in Iceland by the Left-Green Movement and the Social Democratic Alliance. The new government will be in office for only a few months, until fresh elections in the spring. New Prime Minister Johanna Sigurdardottir sets out her government’s plan to deal with the financial crisis. She says her priority will be to replace the central bank’s board, which failed to prevent the collapse of the country’s banking system. She also says she will ask a parliamentary committee to look into joining the EU. [BBC, 2/2/2009]

Entity Tags: Social Democratic Alliance, Left-Green Movement, Johanna Sigurdardottir

Category Tags: Other, Iceland

US Treasury Secretary Timothy Geithner announces a much bigger plan to rescue the US financial system than previously predicted or envisioned, including a much greater government role in markets and banks since the 1930s (see March 15, 2008). Although the administration provides few details, one central portion of the plan that investors most desired to learn about creates bad banks that rely on taxpayer and private investor funds to purchase and hold bad assets racked up by the banks from subprime mortgages, derivatives, and credit defaults. An additional focal point of the plan stretches the final $350 billion that the Treasury may use for the bailout, relying on the Fed’s capability to create money. This last tranche of funding allows the government to be involved in the management of markets and banks. For example, with the credit markets, the administration and the Fed propose to expand a lending program that spends as much as $1 trillion as a replacement for the $1.2 trillion decline between 2006 and 2008 for the issuance of securities backed primarily by consumer loans. The third component of the plan gives banks new capital to lend, but banks that receive new government assistance will have to cut the salaries and perks of their executives and limit dividends and corporate acquisitions. Banks must also publicly declare more information about their lending practices. With the newly proposed Treasury requirements, banks will have to give monthly statements on how many new loans they make, yet the plan stops short of ordering banks to issue new loans or requiring them to account in detail for the federal money. The Obama administration’s commitment to flood the banking system with funds will combine the $350 billion left in the bailout fund; the rest of the money will be from private investors and the Federal Reserve. Some market observers, along with some federal legislators and economists, criticize the plan for its lack of details. [New York Times, 2/10/2009]

Entity Tags: Obama administration, US Federal Reserve, US Department of the Treasury, Timothy Geithner

Category Tags: Bailouts and Other Government Aid, USA, Obama Policies and Actions

The new Director of National Intelligence (DNI), Dennis Blair, tells the Senate Intelligence Committee that the economic crisis, not global terrorism, is the biggest national security issue facing the US today. “The primary near-term security concern of the United States is the global economic crisis and its geopolitical implications,” Blair says. If the crisis continues for more than two years, Blair says, governments could topple, with all the unrest that would entail. About 25 percent of the world’s governments, mostly in Europe and among former Soviet Union client states, have already experienced “low-level instability,” including government changes, because of the economic climate (see February 1, 2009). Blair also warns of “high levels of violent extremism” as seen during the downturn in the 1920s and 1930s, along with “regime-threatening instability.” He explains, “Besides increased economic nationalism, the most likely political fallout for US interests will involve allies and friends not being able to fully meet their defense and humanitarian obligations.” US allies in Europe are angry over the Obama stimulus bill’s provision to “Buy American,” Blair notes, and says the provision is being used to question the US’s leadership in shoring up the global economy and international financial structure. The biggest beneficiary of this global chaos, Blair says, could be China, if that nation’s government can “exert a stabilizing influence by maintaining strong import growth and not letting its currency slide.” Global coordination is essential to rebuild trust in the financial system and to ensure that the crisis does “not spiral into broader geopolitical tensions,” Blair recommends. [EUObserver, 2/13/2009]

Entity Tags: Dennis C. Blair, Senate Intelligence Committee

Category Tags: Commentaries on Economic Issues, USA

Recently bailed-out insurer AIG says that it has sold interests in two contracts tied to natural gas and oil for $60.5 million. This brings the total amount raised through a program of sales to repay the bailout money to the government (see September 18, 2008) to $2.4 billion. AIG shares close at 85 cents. [Bloomberg, 3/5/2009]

Entity Tags: AIG (American International Group, Inc.)

Category Tags: Failing Companies, USA, AIG

According to economists and other finance experts, most of the major US banks are broke, awash in losses from bad bets that overwhelm the banks’ assets. [Link TV, 2/10/2009; Financial Times, 2/10/2009] None of the experts focus on individual banks, and there are exceptions among the 50 largest banks in the country. Consumers and businesses do not need to fret about their federally insured deposits, and even banks that are technically insolvent can continue operating, and could recover their financial health once the economy improves. Until there is a cure for banks’ bad assets, the credit crisis that is dragging down the economy will linger, since banks cannot resume the lending needed to restart commerce.
Suggested Response - Economists and experts say that the answer is a larger, more direct government role than the recently-unveiled Treasury Department plan. The Obama-Geithner plan leans heavily on sketchy public-private investment funding to buy up the banks’ troubled mortgage-backed securities. Experts say that the government needs to delve in, weed out the weakest banks, inject capital into surviving banks and sell off bad assets. “The historical record shows that you have to do it eventually,” said Adam Posen, a senior fellow at the Peterson Institute for International Economics. “Putting it off only brings more troubles and higher costs in the long run.” The Obama administration’s recovery plan could help spur a timely economic spurt, and the value of the banks’ assets could begin to rise. Absent that, the prescription would not be easy or cheap. Estimates of the capital injection needed range from $1 trillion and beyond. By contrast, the commitment of taxpayer money is the $350 billion remaining in the financial bailout approved by Congress last fall.
Pessimism - In a new report Nouriel Roubini, professor of economics at the Stern School of Business at New York University, estimates that total losses on loans by American financial firms and the fall in the market value of the assets they hold will reach $3.6 trillion, up from his previous estimate of $2 trillion. [Global Economic Monitor, 2/10/2009] Of the total, he calculates that American banks face half that risk, or $1.8 trillion, with the rest borne by other financial institutions in the United States and abroad. “The United States banking system is effectively insolvent,” Roubini says. [International Herald Tribune, 2/13/2009]

Entity Tags: Peterson Institute for International Economics, James K. Galbraith, Nouriel Roubini

Category Tags: Bailouts and Other Government Aid, USA, Commentaries on Economic Issues

Less than one month after his inauguration, President Barack Obama signs into law a $787 billion recovery package, stating that this will “set our economy on a firmer foundation.” However, Obama reiterates during the bill’s signing ceremony at the Denver Museum of Nature and Science that he will not pretend “that today marks the end of our economic problems, nor does it constitute all of what we have to do to turn our economy around. Today marks the beginning of the end, the beginning of what we need to do to create jobs for Americans scrambling in the wake of layoffs.” The legislative battle on the bill ended with only three Republican votes in the Senate and none in the House. As president-elect, Obama initially expected to spend between $675 billion and $775 billion on the recovery package, and the final number is almost exactly that. However, Congress included $70 billion worth of tax cuts in the bill they approved, although more than a few economists say $70 billion in tax cuts won’t create as many new jobs as $70 billion in spending would. According to the government’s Recovery (.gov) Web site, the 2009 American Recovery and Reinvestment Act:
bullet Saves and creates more than 3.5 million jobs over the next two years;
bullet Takes a big step toward computerizing Americans’ health records, reducing medical errors, and saving billions in health care costs;
bullet Revives the renewable energy industry and provides the capital over the next three years to eventually double domestic renewable energy capacity;
bullet Undertakes the largest weatherization program in history by modernizing 75 percent of federal building space and more than one million homes;
bullet Increases college affordability for seven million students by funding the shortfall in Pell Grants, increasing the maximum award level by $500, and providing a new higher education tax cut to nearly four million students;
bullet Enacts the largest increase in funding of the nation’s roads, bridges, and mass transit systems since the creation of the national highway system in the 1950s;
bullet Provides an $800 “Making Work Pay” tax credit for 129 million working households, and cuts taxes for the families of millions of children through an expansion of the Child Tax Credit;
bullet Requires unprecedented levels of transparency, oversight, and accountability.
White House press secretary Robert Gibbs says Obama will seek additional stimulus/recovery funding if needed. [New York Times, 2/17/2009; recovery.gov, 2/17/2009]

Entity Tags: Obama administration, Barack Obama, Robert Gibbs

Category Tags: Bailouts and Other Government Aid, Commentaries on Economic Issues, USA, Obama Policies and Actions

CNBC commentator Rick Santelli ‘rants’ about the Obama economic policies.CNBC commentator Rick Santelli ‘rants’ about the Obama economic policies. [Source: CNBC / Media Matters]In what is purportedly an impromptu on-air “rant,” CNBC financial commentator Rick Santelli exhorts viewers to join in what he calls a “Chicago tea party” to oppose the Obama administration’s plans to bail out several large financial institutions. Santelli’s rant comes during CNBC’s Squawk Box broadcast. [CNBC, 2/19/2009; CNBC, 2/19/2009] Santelli’s “impromptu rant” is actually preceded by a number of “tea party” protests and activities, and some of the protests’ organizers claim to have given Santelli the idea for his on-air “tea party” statement (see After November 7, 2008, February 1, 2009, and February 16-17, 2009).
'It's Time for Another Tea Party' - Broadcasting from the Chicago Mercantile Exchange, Santelli tells viewers in part: “The government is promoting bad behavior. We certainly don’t want to put stimulus pork and give people a whopping $8 or $10 in their check and think that they ought to save it.… I have an idea. The new administration is big on computers and technology. How about this, Mr. President and new administration. Why don’t you put up a website to have people vote on the Internet as a referendum to see if we really want to subsidize the losers’ mortgages? Or would they like to at least buy buy cars, buy a house that is in foreclosure… give it to people who might have a chance to actually prosper down the road and reward people that can carry the water instead of drink the water? This is America! How many people want to pay for your neighbor’s mortgages that has an extra bathroom and can’t pay their bills? Raise their hand! President Obama, are you listening?… It’s time for another tea party. What we are doing in this country will make Thomas Jefferson and Benjamin Franklin roll over in their graves.” Santelli also compares the US to Cuba: “Cuba used to have mansions and a relatively decent economy,” he says. “They moved from the individual to the collective. Now they’re driving ‘54 Chevys.” [RightPundits, 2/19/2009] Santelli’s “tea party” metaphor is in reference to the Boston Tea Party, a Revolutionary War protest against taxation by America’s British rulers. [New York Daily News, 2/20/2009]
Financial Traders Are the 'Real Americans' - Santelli tells viewers that the “real” Americans are not the working-class citizens trying to pay mortgages larger than they can handle, but the stock traders and other members of the Chicago Mercantile, New York Stock Exchange, and other members of the financial industry. [Business Insider, 2/19/2009] Santelli says, “We’re thinking of having a Chicago Tea Party in July (see After November 7, 2008), all you capitalists that want to show up to Lake Michigan, I’m gonna start organizing.” [Institute for Research & Education on Human Rights, 8/24/2010]
Cheers and Applause - Behind Santelli, traders erupt in cheers and applause at his comments. [College News, 2/20/2009]
Active Promotion of the Video - Within hours, CNBC begins promoting the video of Santelli’s comments, calling it “the rant of the year” and posting it on YouTube and its own website. [CNBC, 2/20/2009]
Protests, Organizations Begin Forming - Within minutes of Santelli’s broadcast, “tea party” organizations and groups begin forming (see February 19, 2009 and After).
More Studied Response - Three days later, Santelli will explain the thinking behind his comments, saying: “America is a great country and we will overcome our current economic setbacks. The issues that currently face us and the solutions to correct them need to be debated, vetted, and openly studied. This should not be an issue about the political left or right. This is an issue of discourse on a topic that affects the foundation and principles that make our country great… free speech, contract law, freedom of the press, and most of all the legacy we leave our children and grandchildren.” [CNBC, 2/22/2009]
Human Rights Organization: 'Racial' Component to Santelli's Rhetoric - In 2010, a report by the Institute for Research & Education on Human Rights (IREHR) will say that “[a]n unstated racial element colored Santelli’s outrage over the Obama administration’s home mortgage rescue plan.” The report will explain that many of the “losers” responsible for the “bad loans” Santelli is criticizing were made by banks that “disproportionately targeted communities of color for subprime loans.” Santelli’s “losers” are largely African-American or Hispanic borrowers who had “been oversold by lenders cashing in on the subprime market. Their situations were worsened by derivatives traders, like Santelli, who packaged and re-packaged those loans until they were unrecognizable and untenable.” [Institute for Research & Education on Human Rights, 8/24/2010]

Entity Tags: CNBC, Chicago Mercantile Exchange, Barack Obama, Rick Santelli, Institute for Research & Education on Human Rights, New York Stock Exchange, Obama administration

Timeline Tags: Domestic Propaganda, 2010 Elections

Category Tags: Bailouts and Other Government Aid, Commentaries on Economic Issues, Commentaries and Criticisms

A day after CNBC’s Rick Santelli engaged in a “rant” against President Obama’s economic policies, and called for a modern-day “tea party” to protest those policies (see February 19, 2009), White House press secretary Robert Gibbs invites Santelli to the White House for coffee and to discuss Obama’s plan to help homeowners. “I’d be happy to buy him a cup of coffee,” Gibbs says. “Decaf.” Gibbs has said that Santelli needs to learn more about the economic bailout before engaging in such sharp criticism. “I’ve watched Mr. Santelli on cable the past 24 hours or so,” he says. “I’m not entirely sure where Mr. Santelli lives or in what house he lives but the American people are struggling every day to meet their mortgages, stay in their jobs, pay their bills, send their kids to school.… Mr. Santelli has argued, I think quite wrongly, that this plan won’t help everyone. This plan helps people who have been playing by the rules.… I would encourage him to read the president’s plan.… It’s tremendously important for people who rant on cable TV to be responsible and understand what it is they’re talking about. I feel assured that Mr. Santelli doesn’t know what he’s talking about.” Santelli, who has admitted to not reading the White House’s bailout proposals, tells CNBC viewers he “would love to accept” the invitation, but—holding a tea bag to the cameras—says he prefers “tea” to coffee. [CNBC, 2/20/2009; Politico, 2/20/2009; Think Progress, 2/23/2009; New York Times, 2/23/2009; Associated Press, 3/2/2009] Shortly thereafter, Santelli will say that he felt “threatened” by Gibbs’s reference to not knowing where he lives (see February 23, 2009).

Entity Tags: CNBC, Barack Obama, Obama administration, Rick Santelli, Robert Gibbs

Timeline Tags: Domestic Propaganda

Category Tags: Bailouts and Other Government Aid, Commentaries and Criticisms, Obama Policies and Actions

President Obama names Earl Devaney to head the new Recovery Act Transparency and Accountability Board, a new agency designed to oversee the allocation and spending of the $787 billion economic stimulus plan. Devaney is a former Secret Service agent who, as the inspector general of the Department of the Interior, helped expose lobbyist corruption there; he will work closely with Vice President Joseph Biden, who will coordinate oversight of the stimulus spending. Devaney helped expose Republican lobbyist Jack Abramoff’s dealings with the Interior Department, and helped finger former Deputy Interior Secretary Steven Griles, who later pled guilty to charges of lying to Congress over his acceptance of bribes. Devaney also led an investigation of workers at the Interior Department’s Minerals Management Service, where he discovered what he called a “culture of substance abuse and promiscuity” at the Denver and Washington offices of the service. [Associated Press, 2/22/2009]

Entity Tags: Minerals Management Service, Barack Obama, Earl Devaney, Recovery Act Transparency and Accountability Board, J. Steven Griles, US Department of the Interior, Joseph Biden

Category Tags: Bailouts and Other Government Aid, Obama Policies and Actions

Citigroup CEO Vikram Pandit is in talks with the US government to increase the amount of public ownership of the bank in a move both politicians and bank bosses hope will avert the need for the ailing corporation to be taken into FDIC receivership (see March 15, 2008). Talks commenced after Citigroup shares dropped more than 20 percent in late trading on Friday, leaving the business with a share value of $10.6 billion, with balance sheet assets of $1.95 trillion. Government receivership of Citigroup is seen as politically unpalatable, and US taxpayers could conceivably own up to 40 percent of Citigroup. Economists see government takeover of the corporation as evidence of other major banks struggling with insolvency. The failure of major banks will have calamitous repercussions. The US treasury says it remains committed to helping the banking industry recover without taking complete control. “Because our economy functions better when financial institutions are well managed in the private ­sector, the strong presumption… is that banks should remain in private hands,” the Treasury Department said in a joint statement with the Federal Reserve. Speculation that a major Wall Street institution could be taken into public ownership toppled the market on Friday, February 20; likely targets were heavily rumored to be Citigroup and Bank of America. Bank of America lost nearly half its share value in three days before rallying late Friday afternoon. The latest talks center on a Treasury Department proposal to convert preference shares in Citigroup into new ordinary shares. This move would not involve additional taxpayer funds, but taxpayers would surrender the guaranteed dividends that come with preference stock, as well as some degree of protection in the event of a corporate collapse. Serious questions remain, such as the price at which new shares are issued. Estimates of the size of the government’s eventual stake range from 25 percent to 40 percent. With this move, Barack Obama’s administration would become a major presence on Citigroup’s ordinary share register, thus diluting the interests of existing investors, and heightening fears of political pressure being brought on US banks. Some analysts suggest that banks relying on taxpayer bail-outs are being encouraged to focus lending and liquidity on the national US market. [Guardian, 2/23/2009]

Entity Tags: Obama administration, Citigroup, Vikram Pandit, US Department of the Treasury, US Federal Reserve

Category Tags: Bailouts and Other Government Aid, USA, Obama Policies and Actions

The European Commission announces that an index of euro-region executive and consumer sentiment has dropped to 65.4 from 67.2. This is a record low and is caused by the global economic crisis. Responding to this and other bad news Jacques Cailloux, chief euro area economist at Royal Bank of Scotland in London, says, “Today’s data has dashed any hope of a tentative stabilization” in the economy. He also predicts a change in policy by the European Central Bank (ECB): “Any sense that the ECB may pause after a March rate cut can be thrown out the window. They will go very low and they will have to start embarking on additional measures.” [Bloomberg, 2/26/2009]

Entity Tags: Royal Bank of Scotland, Jacques Cailloux

Category Tags: Commentaries on Economic Issues, Britain

The European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), and the World Bank pledge to invest €24.5 billion in countries such as Latvia and Hungary that have been hit by the global economic slump. In a joint statement, the three groups announce that the two-year joint initiative will include equity and debt financing, and access to credit and risk insurance aimed at encouraging lending, on top of the countries’ national government responses. The bailout is designed to “deploy rapid, large-scale and coordinated financial assistance… to support lending to the real economy through private banking groups, in particular to small-and medium-sized enterprises.… The response takes into account the different macroeconomic circumstances in, and financial pressures on countries in Eastern Europe, acknowledging the diversity of challenges stemming from the global financial retrenchment,” the groups add. The EBRD was founded in 1991 to assist the transition of former communist nations to market economies—investing across 30 countries including Ukraine, Moldova, and Russia. “The institutions are working together to find practical, efficient and timely solutions to the crisis in eastern Europe,” says EBRD President Thomas Mirow. [BBC, 2/27/2009]

Entity Tags: European Bank for Reconstruction and Development, Thomas Mirow, World Bank, European Investment Bank

Category Tags: Bailouts and Other Government Aid

Citigroup logo.Citigroup logo. [Source: Citigroup]The latest government bailout gives Citigroup bond holders excellent terms and doesn’t provide the bank with new money. Instead, Citigroup cut expenses with the elimination of preferred stock dividends, and also converted shares into common equity at an above-market-value of $3.25, positioning itself to take the first hit if it encounters additional losses. Analysts are predicting that the company’s losses will continue to increase. Since the beginning of 2009, Citigroup’s stock has fallen 78 percent. “Debt holders could eventually be required to participate in further government-led restructuring actions,” Standard and Poor’s says. [Bloomberg, 3/2/2009] Citigroup CEO Vikram Pandit tells investors that increasing the bank’s “tangible” common equity from $29.7 billion to as much as $81 billion should “take confidence issues off the table,” about the bank’s loss absorption ability. The bank lost $27.7 billion in 2008, and is predicted to lose $1.24 billion during the first six months of 2009. “There’s no difference here,” says Christopher Whalen, co-founder of Institutional Risk Analytics, a Torrance, California risk-advisory firm. “It won’t fix revenue, and you’re still going to see loss rates.” Whalen says that the government’s efforts are mainly protecting other financial institutions and foreign goverments that are Citigroup bonds holders. “The taxpayer is funding the operating loss and protecting the bondholders,” Whalen notes. “The subsidy for the banks will become one of the biggest lines in Washington’s budget.”
Government Should Organize Citigroup, AIG Bondholders - Whalen also says it would be better if the government organized Citigroup and insurer American International Group Inc. bondholders, since the insurer received a $150 billion US bailout, and also made a deal with the government to convert some of its debt to equity. US government investment fell by more than 50 percent, and the government plans to convert up to $25 billion of its preferred stock to common shares, gaining a 36 percent stake in the bank. At Friday’s closing price of $1.50, government investment is worth approximately $11.5 billion. The bank itself has a stock market value of $8.2 billion as of market closing on February 27.
Analyst: Investors Should Avoid Citigroup Shares - Richard Ramsden, head of a group of analysts at Goldman Sachs Group, recommends that investors avoid investing in Citigroup shares: “It is unclear whether this is the last round of capital restructuring, which means that existing equity may be further diluted in the future.” The bank’s move to convert preferred shares to common equity led Moody’s Investors Service to adjust its senior debt rating for the bank from A3 to A2. Standard and Poor’s also changed its outlook on the bank’s debt from negative to stable. “Citi will face a tough credit cycle in the next two years, which will likely result in weak and volatile earnings,” S&P analyst Scott Sprinzen says. “We cannot rule out the possibility that further government support may prove necessary.” With the first two Citigroup rescue bailouts, the US Treasury bought $45 billion of preferred stock, and the Federal Reserve and FDIC guaranteed the bank against all but $29 billion of losses on a $301 billion portfolio of assets. With the third bailout, the Treasury, the Government of Singapore Investment Corporation, Saudi Prince Alwaleed bin Talal, and other preferred stockholders, agreed to take common stock at $3.25 a share, giving up dividends. The chairman of the House Ways and Means Committee, Charles Rangel (D-NY), says: “The administration and the past administration have tried so many different ways that we can only hope and pray that this time they get it right. It seems like with the banks it is a never-ending thing.” [Bloomberg, 2/28/2009]
Third US Rescue Forces Citigroup Board Changes - The Obama administration demonstrated its willingness to force changes on executives at top banks that receive taxpayer-funded rescue packages by pressing Citigroup to reorganize its 15-member board with new, more independent members. The move sends a message to Wall Street that there are consequences when taxpayer dollars are used to save them. “The government is the new boss, and the new executive committee is no longer on Park Avenue,” says Michael Holland who, as chairman and founder of New York’s Holland & Co., manages nearly $4 billion in investments. [Bloomberg, 3/2/2009]

Entity Tags: Government of Singapore Investment Corporation, Christopher Whalen, Charles Rangel, Alwaleed bin Talal, AIG (American International Group, Inc.), Federal Deposit Insurance Corporation, Vikram Pandit, US Department of the Treasury, Citigroup, Richard Ramsden, Moody’s Investors Service, Standard & Poor’s, Michael Holland, Institutional Risk Analytics, Scott Sprinzen, US Federal Reserve

Category Tags: Bailouts and Other Government Aid, USA, AIG, Failing Companies, Obama Policies and Actions

European Union Leaders hold an emergency summit in Brussels, saying they are determined to avoid protectionist moves in response to the economic crisis that might cause a rift between nations in the East and West. The summit comes on the heels of French President Nicolas Sarkozy’s pledge to help his nation’s car industry, if jobs were safeguarded in France. Sarkozy’s pledge raised fears that national protectionism could scuttle hopes of a Eurozone recovery. Speaking after their meeting, European Commission President Jose Manuel Barroso says, “There was consensus on the need to avoid any unilateral protectionist measures.” German Chancellor Angela Merkel says that the newest EU member states that are former communist countries were not all in the same situation. Czech Republic Prime Minister Mirek Topolanek, the current EU president who also chairs the talks, condemns Sarkozy’s comments, saying: “We need a Europe without barriers but also a just and fair Europe. I think that it was perfectly clear that the European Union isn’t going to leave anybody in the lurch.” British Prime Minister Gordon Brown adds: “Today was the start of a European consensus on all these major issues that are facing the world community, including ‘no’ to protectionism. Bold global action, a global grand bargain, is not now just necessary, but it is vitally urgent.” President Sarkozy denies accusations of protectionism levied at his €6 billion (approximately $8 billion) bail-out plan to keep French carmakers manufacturing in France, but says that if the US defended its own industries, perhaps Europe should do the same. There is no announcement of a new EU aid package for the badly-hit economies of Central and Eastern Europe. The summit comes a week after the same EU leaders met to discuss reforming the EU’s financial system. Brown says the G20 talks next month represent an opportunity to agree on a new deal. “Only by working together will we deliver the EU and international recovery we need,” he says. This week, Brown will become the first European leader to hold talks with President Obama, who is also expected to visit Prague in April. [BBC, 3/1/2009]

Entity Tags: Nicolas Sarkozy, Angela Merkel, Barack Obama, European Parliament, Gordon Brown, Mirek Topolanek, Jose Manuel Barroso

Category Tags: Other, Britain

On the same day AIG announces the biggest loss ever in corporate history (see October-November 2008), the bailout of the troubled insurer is again increased and its terms eased. First, the US Treasury and Federal Reserve announce a plan to spend up to $30 billion more on preferred shares. However, the Treasury says the dividend on preferred stock, previously 10 percent, might fall. In addition, the bailout’s terms and conditions are altered to give the insurer a billion-dollar-a-year break on interest and dividend payments. [Bloomberg, 3/5/2009; Reuters, 4/17/2009] The size of the bailout, initially $85 billion, has now more than doubled, and the terms have been eased repeatedly (see September 16, 2008, October 8, 2008, and November 10, 2008).

Entity Tags: US Federal Reserve, AIG (American International Group, Inc.), US Department of the Treasury

Category Tags: Bailouts and Other Government Aid, Failing Companies, USA, AIG

According to a survey of factories released by Credit Lyonnais South Asia (CLSA), a brokerage firm that monitors Asia-Pacific markets, although Chinese manufacturing contracted in January and February, the rate was slower in February than the previous month. The survey is issued as China’s legislature and a top government advisory body meet in Beijing. It is expected that the meeting will yield additional measures to stimulate the economy. In a statement released with the survey, CLSA declares, “The rate of contraction remained marked, reflecting a reduction in global demand and an uncertain economic outlook.” Manufacturing is reportedly 40 percent of China’s economic output. A drop in exports demand has led to thousands of factory closures, prompting protests by laid-off workers. Chinese leaders are concerned that additional job losses may fuel unrest. According to the CLSA survey, production and new orders fell in February, and manufacturers continued to shed jobs in an effort to cut costs. “Manufacturing activity is still contracting, only at a more moderate pace than at the end of 2008,” says Eric Fishwick, the head of CLSA’s economic research. China is one of the few major economies still growing, although growth fell to a seven-year low of 6.8 percent in the final quarter of 2008, compared with the same period a year earlier. Last November, the government announced a $586 billion plan to boost domestic consumption in an attempt to assist in cushioning the impact of the global slowdown. Officials say that the effects of public works spending will be slow. Quoting Premier Wen Jiabao, Xinhua News Agency reports that some indicators, such as recent upturns in power demand and rising steel output, suggest that the economy is stabilizing. However, trends remain dismal in the US and around the globe. “China cannot expect to recover just by spending its way out of the slowdown,” says Jing Ulrich, JP Morgan’s chairwoman of China equities in a report issued today. “While early signs of economic stabilization are encouraging, it remains to be seen if this uptrend is sustainable.” [International Herald Tribune, 3/2/2009]

Entity Tags: JP Morgan Chase, Credit Lyonnais South Asia, Jing Ulrich, Eric Fishwick, Xinhua News Agency, Wen Jiabao

Category Tags: Commentaries on Economic Issues, Other

US Federal Reserve Chairman Ben Bernanke tells a Senate committee that having to rescue the insurer AIG made him “more angry” than any other episode during the financial crisis. “AIG exploited a huge gap in the regulatory system, there was no oversight of the financial products division,” Bernanke says. “This was a hedge fund basically that was attached to a large and stable insurance company.” In addition, on this day stock in AIG closes at 43 cents. [Bloomberg, 3/5/2009]

Entity Tags: US Federal Reserve, Ben Bernanke, AIG (American International Group, Inc.)

Category Tags: Failing Companies, USA, AIG

Regulatory reports on Bank of America, Citibank, HSBC Bank USA, JP Morgan Chase, and Wells Fargo indicate that, as loan defaults of every kind soar, the institutions face “catastrophic losses” should economic conditions “substantially worsen.” Already suffering as a result of what the banks term “exotic investments,” the reports disclose that, as of December 31, 2008, current net loss risks from derivatives—quasi-insurance bets tied to loans or other underlying assets—have swelled to $587 billion. According to McClatchy journalists Greg Gordon and Kevin G. Hall, obscured in the year-end regulatory reports that they reviewed were figures reflecting a jump of 49 percent net loss in just 90 days.
Bailout Money Shoring Up Reserves - Taxpayer bailout money has already shored up four of the five banks’ reserves, with Citibank receiving $50 billion and Bank of America $45 billion, in addition to a $100 billion loan guarantee. According to their quarterly financial reports as of December 31:
bullet JP Morgan had potential current derivatives losses of $241.2 billion, overrunning its $144 billion in reserves, and future exposure of $299 billion.
bullet Citibank had potential current losses of $140.3 billion, outstripping its $108 billion in reserves, and future losses of $161.2 billion.
bullet Bank of America reported $80.4 billion in current exposure, lower than its $122.4 billion reserve, but $218 billion in total exposure.
bullet HSBC Bank USA had current potential losses of $62 billion, over three times its reserves, and potential total exposure of $95 billion.
bullet San Francisco-based Wells Fargo, which took over Charlotte, N.C.-based Wachovia in October 2008, reported current potential losses totaling almost $64 billion, below the banks’ combined reserves of $104 billion, but total future risks of about $109 billion. [McClatchy Newspapers, 3/9/2009; Idaho Statesman.com, 3/9/2009]

Entity Tags: Kevin G. Hall, Citibank, Greg Gordon, Bank of America, HSBC Bank USA, Wells Fargo Bank, N.A., Wachovia Bank, N.A., JP Morgan Chase

Category Tags: Bailouts and Other Government Aid, Failing Companies, Commentaries on Economic Issues

Troubled insurer AIG discloses that several US and European banks have been beneficiaries of the government’s bailout of the insurance company (see September 17-October 7, 2008). It announces that more than $90 billion was paid to various banks between the September bailout and the end of 2008. The banks include Goldman Sachs, Société Générale, Deutsche Bank, Barclays, Merrill Lynch, and Bank of America. Goldman Sachs, which received $12.9 billion between mid-September and the end of December—making it the largest beneficiary, will later say it did nothing wrong by accepting payments to close out trades before and after the insurer was rescued. [Reuters, 4/17/2009]

Entity Tags: Barclays Bank, Bank of America, Société Générale, Goldman Sachs, AIG (American International Group, Inc.), Deutsche Bank, Merrill Lynch

Category Tags: Failing Companies, USA, AIG

Having received over $170 billion in taxpayer bailout funds in the last five months, troubled insurance giant American International Group (AIG) pays executives nearly $200 million in bonuses. The largest are bonus payouts that cover AIG Financial Products executives who sold risky credit default swap contracts that caused huge losses for the insurer (see September 16, 2008). Despite a request by US Treasury Secretary Timothy Geithner for the insurance conglomerate to curtail future bonus pay—and AIG’s agreement to do so—the global insurer cuts bonus checks on Sunday, March 15, 2009, in order to meet a bonus payment agreement deadline. The Treasury Department has publicly acknowledged that the government does not have the legal authority to block current bonus payments, although AIG stated in early March that it suffered its largest corporate loss in history, when it reported fourth quarter 2008 losses of $61.7 billion.
Treasury Tried to Prevent Payments - An anonymous Obama administration official says that on March 11 Geithner called AIG Chairman Edward Liddy demanding that the CEO renegotiate the insurer’s present bonus structure. In a letter, Liddy informed Geithner that outside lawyers had advised AIG that the company could face lawsuits, should they not make the contractually obligated payments. “AIG’s hands are tied,” Liddy wrote, although acknowledging that, with the company’s fiduciary situation, he found it “distasteful and difficult” to approve and pay the bonuses. He wrote that the early 2008 bonus payments agreement was entered into prior to the company being forced last fall to obtain the first taxpayer bailout because of the company’s severe financial distress.
Some Monies Already Paid Out - A white paper generated by AIG asserted that the firm had already distributed $55 million in “retention pay” to nearly 400 AIG Financial Products employees. According to the white paper, the global entity “will labor to reduce 2009 bonus payment amounts,” trimming payouts by at least 30 percent this year. [Associated Press, 3/15/2009]

Entity Tags: Edward Liddy, AIG (American International Group, Inc.), Timothy Geithner, US Department of the Treasury

Category Tags: Bailouts and Other Government Aid, USA, AIG, Failing Companies

US President Barack Obama attacks the payment of over $200 million in bonuses to top AIG employees (see March 15, 2009). As the company is being propped up by the government using public money (see September 16, 2008, October 8, 2008, and November 10, 2008), Obama calls the bonuses an “inappropriate use of taxpayer funds.” [Reuters, 4/17/2009]

Entity Tags: Barack Obama, AIG (American International Group, Inc.)

Category Tags: Failing Companies, USA, AIG, Obama Policies and Actions

Edward Liddy, chief executive officer of troubled insurer AIG, asks employees to repay part of their bonuses. The bonuses were to be paid out in late 2008 and earlier this month, but there has been a public outcry over them, due to the billions of dollars taxpayers have spent rescuing the company (see September 16, 2008 and March 15, 2009). According to Liddy, employees receiving more than $100,000 in bonuses should repay at least half. [Reuters, 4/17/2009]

Entity Tags: Edward Liddy, AIG (American International Group, Inc.)

Category Tags: Failing Companies, USA, AIG

The US House of Representatives passes a bill imposing a 90 percent tax on bonuses paid to AIG executives. The bonuses were set to be paid in December 2008 and earlier in the month, but there has been a public outcry against them, as the company had to be bailed out by the taxpayer six months ago (see September 16, 2008 and March 15, 2009). [Reuters, 4/17/2009] However, President Obama soon challenges the bill’s legality, saying: “I think that as a general proposition, you don’t wanna be passing laws that are just targeting a handful of individuals. You wanna pass laws that have some broad applicability. And as a general proposition, I think you certainly don’t wanna use the tax code to punish people.” The Democratic leadership in the Senate then says that it will wait and see what happens, instead of immediately acting on the bill forwarded by the House of Representatives. This effectively shelves the bill, although several of the executives give their bonuses back anyway (see March 24, 2009). [Politics Daily, 3/24/2009]

Entity Tags: Barack Obama, US Congress, AIG (American International Group, Inc.)

Category Tags: AIG, Failing Companies, USA, Obama Policies and Actions

Fifteen of the top 20 beneficiaries of bonuses at troubled insurer AIG have given the payments back, says New York Attorney General Andrew Cuomo. The bonuses were to be paid out at the end of 2008 and earlier this month, but there was a public outcry over them as the taxpayer had spent about $180 bailing the company out (see September 16, 2008, March 15, 2009, March 18, 2009, and March 19, 2009). [Reuters, 4/17/2009]

Entity Tags: Andrew Cuomo, AIG (American International Group, Inc.)

Category Tags: Failing Companies, USA, AIG

Republican Representative Paul Ryan (R-WI) admits that the “budget proposal” offered the previous week by the GOP in response to President Obama’s own budget proposal (see March 26, 2009) was never anything more than a “marketing document.” On MSNBC’s “Morning Joe,” Ryan says, “The thing you saw last week was not the alternative budget, this is our alternative budget.” Ryan is referring to a budget the GOP intends to release later today. The “budget” touted on the floor of the House by Minority Leader John Boehner (R-OH) was a “marketing document,” Ryan says. “Somewhere along the line there was a misimpression given that that was our budget.” In the Wall Street Journal, Ryan says the GOP budget will include the following:
bullet A five-year non-defense spending freeze;
bullet Cutting the deficit 50 percent more than Obama’s proposal by 2019;
bullet More oil exploration and fewer regulations on pollution;
bullet A revamping of Medicare for those currently below age 55;
bullet Making permanent the Bush administration’s tax cuts for wealthy Americans, and a simplified tax code that taxpayers could choose to use.
Of President Obama’s budget, Ryan says, “If this agenda comes to pass, it will mark this period in history as the moment America turned European.” [The Hill, 4/1/2009] The Center for American Progress, a progressive think tank, says that a spending freeze as advocated by the GOP budget would be calamitous for the American economy. The freeze would negate the entirety of the Obama administration’s multi-billion stimulus package, and would rely entirely on economic recovery generated by supply-side tax cuts. MSNBC’s Chris Matthews compares the idea to the economic ideas that led to the Great Depression: “[I]t sounds very much like [former President Herbert] Hoover. This is a doctrine which was tried in 1932 and failed. In a period of international deflation, the worst thing you can do is join in the deflation by cutting spending.” [Think Progress, 4/1/2009]

Entity Tags: Paul Ryan, Chris Matthews, Center for American Progress, Barack Obama, John Boehner

Category Tags: Commentaries on Economic Issues, Commentaries and Criticisms

In a speech to the Tulsa Chamber of Commerce, Federal Reserve Bank of Kansas City President Thomas Hoenig declares that US banks’ ability to remain viable during a deeper recession—while undergoing federal government stress tests—demonstrates that most don’t need more taxpayer money. “Although the United States has several thousand banks, only 19 have more than $100 billion of assets,” Hoenig says. “After supervising authorities evaluate their condition, it is likely that few would require further government intervention.” Designed to demonstrate how much extra capital banks may need to survive a deeper economic downturn, the stress tests are to conclude by April 30, 2009, with the 19 biggest banks’ test results to be disseminated to President Barack Obama in meetings with his economic team. Hoenig reiterates his view that the government shouldn’t prop up failing financial institutions but take them over temporarily and wind them down, as with the 1984 takeover of Continental Illinois National Bank & Trust Co. “I encourage Congress to enact a new resolution process for systematically important firms,” he says. “There has been much talk lately about a new resolution process for systemically important firms that Congress could enact, and implement it as quickly as possible, but we do not have to wait for new authority. We can act immediately, using essentially the same steps we used for Continental. An extremely large firm that has failed would have to be temporarily operated as a conservatorship or a bridge organization and then reprivatized as quickly as is economically feasible. We cannot simply add more capital without a change in the firm’s ownership and management and expect different outcomes.” Hoenig declares that calling a firm “too big to fail” is a “misstatement” because a bank deemed insolvent “has failed.” “I believe that failure is an option,” he says. After the government’s fourth rescue of American International Group Inc. (AIG), Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke called for new powers to take over and sell off failing financial companies, and also called for stronger regulation to constrict risks that might endanger the financial system. The Federal Deposit Insurance Corporation has the authority to take over failing firms, and dispose of their assets, but no such authority exists for non-banking financial firms such as a hedge fund or AIG, which have extensive links throughout the banking system. During a Q&A after his speech, Hoenig tells the audience that the Fed must be prepared to make a timely removal of its stimulus to deter a period of high inflation that could be likened to that of the early 1980s. “You cannot wait until you know for sure the economy is recovering,” Hoenig says, adding that “employment growth tends to lag” and may not be the best indicator of recovery. “We will watch every indicator of data that suggests we have a recovery under way.” He also says that if the US manages its economy well, the US dollar should remain the world’s reserve currency. “It is a matter of running your economy properly,” he says. “When the US does that, and I think we will, I think we will remain the largest, most successful reserve currency on the face of the earth.” [Bloomberg, 4/9/2009]

Entity Tags: Federal Deposit Insurance Corporation, AIG (American International Group, Inc.), Ben Bernanke, US Federal Reserve, Thomas Hoenig, Timothy Geithner, US Department of the Treasury

Category Tags: Bailouts and Other Government Aid, AIG, Failing Companies

Wells Fargo, the second largest home lender in the US, posts a surprising record first-quarter profit, outperforming the most hopeful estimates on Wall Street. The bank’s earnings are the most since July 16, 2007, with shares down 33 percent in 2009. The report also states that Wachovia Corporation, acquired by Wells Fargo in October 2008, is exceeding expectations. According to data compiled by Bloomberg, Wachovia’s $101.9 billion in losses and writedowns are the most for any US lender, and its adjustable-rate home loans are considered among the industry’s riskiest. Yet, in its preliminary report, Wells Fargo states that acquiring Wachovia “has proven to be everything we thought it would be.” Official first-quarter results will be released the third week in April.
Other Banks Also Gain; Profits Expected - The preliminary earnings report rallies the stock market, and the S&P 500 caps a fifth consecutive weekly gain and adds 3.8 percent to a two-month high of 856.56, the longest stretch since the bear market began in October 2007. The Dow Jones Industrial Average rises 246.27, to 8,083.38. The largest US lender, Bank of America, gains 35 percent today; JPMorgan 19 percent, and Citigroup 13 percent. The 24-company KBW Bank Index surges 20 percent, its biggest one-day gain since May 1992. Oppenheimer & Co. analyst Chris Kotowski says of these firms, “Barring an act of God, they had better report some number that is in the black or potentially risk being involved in some of the most intense securities litigation on record.”
Accounting Rules May Have Helped Profit Statements - Christopher Whalen, a managing director of Risk Analytics, says that the Financial Accounting Standards Board’s relaxation of accounting rules may have helped banks—including Wells Fargo—report a profit. “Most analysts are expecting loss rates to be much, much higher than we have seen in the last 20 to 30 years, even longer,” he says. “Given that, provisions of the large banks are not high enough.”
Wells Fargo 'Underperforming?' - While Wells Fargo Chief Financial Officer Howard Atkins says that increasing the bank’s provision for loan losses to $23 billion is adequate compared with other large US banks, FBR Capital Markets analyst Paul Miller wrote in a report that the bank’s addition of a $4.6 billion provision was below his estimate of $6.25 billion. “We remain cautious based on what we don’t know.” Miller rates Wells Fargo shares “underperform” and said that the preliminary report did not contain the percentage of non-performing loans and trends in Wachovia’s option-adjustable rate mortgate portfolio, a percentage Miller deems important. Atkins says that Wells Fargo benefited from strong trading results at Wachovia’s capital markets business, which the bank continues to shrink. He said that the improvement will not reverse those plans. Approximately 75 percent of Wells Fargo’s mortgage applications are refinance. President Obama said that homeowner interest rates, at less than five percent, are the lowest since 1971, and that it was “money in their pocket” for homeowners. Wells Fargo’s biggest shareholder is Berkshire Hathaway Inc., an acquisitions and investments firm owned by Warren Buffett. [Bloomberg, 4/9/2009]

Entity Tags: Dow Jones Industrial Average, Christopher Whalen, Wells Fargo Bank, N.A., Bank of America, Wachovia Bank, N.A., Standard & Poor’s, Warren Buffett, Paul Miller, Howard Atkins, JP Morgan Chase, Chris Kotowski, Risk Analytics, New York Stock Exchange, Oppenheimer & Co.

Category Tags: Bailouts and Other Government Aid

The insurer AIG, bailed out by the US government the previous year (see September 16, 2008), is in talks with the US Federal Reserve over extra credit, according to the Financial Times. The negotiations concern a $5 billion credit line that could be used to facilitate the sale of the company’s aircraft leasing business. [Reuters, 4/17/2009]

Entity Tags: US Federal Reserve, AIG (American International Group, Inc.)

Category Tags: Failing Companies, USA, AIG

President Barack Obama implements a home mortgage rescue plan that he says will prevent as many as 9 million Americans from losing their homes to foreclosure. Obama says that turning around the battered economy requires stemming the continuing tide of foreclosures. He says that the housing crisis that began last year set many other factors in motion and helped lead to the current, widening recession. “In the end, all of us are paying a price for this home mortgage crisis,” Obama says. “All of us will pay an even steeper price if we allow this crisis to deepen. The American dream is being tested by a home mortgage crisis that not only threatens the stability of our economy but also the stability of families and neighborhoods. While this crisis is vast, it begins just one house and one family at a time.” Of the nearly 52 million US homeowners with a mortgage, about 13.8 million, or nearly 27 percent, owe more on their mortgage than their home is currently worth. Obama’s plan contains three initiatives:
bullet Fannie Mae and Freddie Mac homeowners owing between 80 and 105 percent of what their homes are worth can refinance their mortgage. Prior to implementation of the rescue plan, only those borrowers with at least 20 percent home equity could refinance. Refinancing at a lower rate may save borrowers thousands of dollars yearly on their mortgage payments.
bullet Banks will be encouraged to work with homeowners to modify existing mortgages, which is different from refinancing. The Bush administration plan, “Hope for Homeowners,” passed late in 2008, tried to do what Obama has now accomplished, but, since banks were not eager to modify terms to help people stay in their houses, the Bush plan is considered a failure. Under Obama’s plan, banks who received TARP funding will have to participate and, if they do not, Obama may request that the Congress allow bankruptcy judges to modify mortgage terms. Before Obama’s new plan, judges already had the power to modify mortgage terms on a homeowner’s second and third homes, although not on their primary residences.
bullet Interest rates will be kept low by having the Treasury Department buy up mortgage-backed securities from Fannie Mae and Freddie Mac, in the hope of re-inflating the market for mortgage-related products, even if Treasury may be overpaying for toxic assets in a market with few, if any, other buyers. [Mother Jones, 2/18/2009; CNN, 4/16/2009]

Entity Tags: US Department of the Treasury, Barack Obama, Fannie Mae, Freddie Mac, George W. Bush, Troubled Asset Relief Program

Category Tags: Bailouts and Other Government Aid, USA, Obama Policies and Actions

The insurance company AIG sells its US auto insurance unit to Zurich Financial Services AG for $1.9 billion. This will make the Swiss company the third largest US personal line insurer. [Reuters, 4/17/2009] This sale is part of an AIG program to sell business units in order to repay bailout loans to the government (see September 18, 2008).

Entity Tags: Zurich Financial Services AG, AIG (American International Group, Inc.)

Category Tags: Failing Companies, USA, AIG

The US Senate rejects an amendment to the US Bankruptcy Code supported by President Barack Obama that would have saved nearly 2 million homeowners facing foreclosure. Sponsored for the second time in as many years by Senate Majority Whip Richard Durbin (D-IL), the controversial amendment would have given judges the power to modify home mortgages, but strong opposition from the banking industry—as well as 39 Republicans and 12 Democrats—prevents passage. The House version of the controversial measure passed in March 2009. Called the ‘cramdown,’ the provision was supported by Obama as a final recourse for people to keep their homes. The amendment was a major priority of congressional Democrats and the Obama administration in a drive to tackle the housing crisis. “[H]ard to believe in a time when we’re facing a banking crisis that many of the banks created—[that the banks] are still the most powerful lobby on Capitol Hill. And they frankly own the place,” Durbin said earlier in the week during an interview with Illinois radio. [ProgressIllinois.com, 4/29/2009; MinnPost.com, 4/30/2009]

Entity Tags: Barack Obama, Richard (“Dick”) Durbin

Category Tags: Bailouts and Other Government Aid, USA, Obama Policies and Actions

In its May 2009 Global Employment Trends Update, the United Nation’s International Labor Organization (ILO) revises its 2009 unemployment projections to levels ranging from 210 million to 239 million unemployed, with corresponding global unemployment rates of 6.5 and 7.4 percent respectively. The ILO specifically cautions that youth around the globe are hardest hit, and warns that the world was headed for an “impending labor crisis.” Describing the global unemployment crisis as “unprecedented,” ILO Director General Juan Somavia says that despite reports of a 2010 global economic recovery, “On average, it can take four to five years after a crisis starts for pre-crisis unemployment levels to be recuperated.” Somavia warns of political unrest should unemployment increase with little or no safety nets in place, and states that more workers are at risk of losing their jobs and falling into poverty. The report is released one week ahead of the June 3-19 Annual International Labor Conference in Geneva, Switzerland, where at least 10 heads of state, including US Secretary of Labor Hilda Solis, France’s Nicolas Sarkozy, and Brazil’s Luiz Inacio Lula da Silva, are expected to attend. Somavia also says that attendees will consider an emergency “global jobs pact” designed to promote a coordinated policy response to the global jobs crisis. “We are seeing an unprecedented increase in unemployment and the number of workers at risk of falling into poverty around the world this year,” he says. “To avoid a global social recession, we need a global jobs pact to address this crisis, and mitigate its effects on people. The choice is ours and the time to act is now.” [Thaindian News, 5/28/2009; International Labour Organisation, 5/28/2009]

Entity Tags: Juan Somavia, Hilda Solis, International Labor Organization (ILO), Nicolas Sarkozy, United Nations, Luiz Inacio Lula da Silva

Category Tags: Commentaries on Economic Issues, Other

Silverton Bank, a commercial bank that provided major wholesale banking services to client banks, is shuttered by regulators, making it the 30th US bank to fail in 2009. Based in Atlanta, it is the sixth Georgia bank to close this year and is taken over by the federal Office of the Comptroller of the Currency, which appoints the Federal Deposit Insurance Corp. (FDIC) as receiver. Silverton was a correspondent bank that did not take public deposits or make consumer loans, but provided credit card operations, investments, and loan purchases to client banks. At its closure, the bank’s total assets are approximately $4.1 million and total deposits are about $3.3 billion. The FDIC says it has created Silverton Bridge Bank N.A. to manage bank business and minimize disruption to customers over the next 60 days; the FDIC estimates it will cost the Deposit Insurance Fund $1.3 billion.
Consequences of Collapse - The failure’s impact is expected to ripple through the banking industry and industry experts believe it will have catastrophic consequences for banks across the Sun Belt, potentially impacting hundreds of bank balance sheets. Founded in the mid-1980s, Silverton provided credit and deposit services for other banks, acting as a middleman for fiduciary services for 1,500 small US banks in 44 states. Services included federal funds repayments, a check clearinghouse, and loans to bank holding companies, directors, and executives. Local bank attorneys describe Silverton as a mini-Federal Reserve for community banks.
Other Banks Also Closing - As the deepening recession makes it more difficult for consumers and businesses to pay their loans, local banks have closed in droves. So far, on nearly every Friday this year, there has been at least one bank failure. During the third week in April, while banks prepared for the Obama administration’s ‘stress tests,’ four regional banks closed. Despite federal commitment of amounts in the trillions to increase liquidity as well as jumpstart the economy, the speed of bank failures has accelerated. In 2008, a total of 25 banks failed, yet, in the first four months of 2009, 30 banks have failed. Prior to Silverton’s closure, American Southern Bank in Kennesaw, Georgia, was the last FDIC-insured bank to fail; it was shut down on April 24. [Marketwatch, 5/1/2009; CNN, 5/1/2009; Associated Press, 5/1/2009]

Entity Tags: Silverton Bank, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency

Category Tags: Failing Companies, USA

According to unemployment statistics compiled by Eurostat, the European Union unemployment rate has risen to 9.2 percent, its highest since September 1999, with 3.1 million jobs lost in April 2009, an increase of 556,000 from March. In the Eurozone, 396,000 jobs were shed and almost 15 million became unemployed. The lowest unemployment figures were in the Netherlands at 3.0 percent and Austria at 4.2 percent. The highest figures were in Spain at 18.1 percent, Latvia, 17.4 percent, and Lithuania, 16.8 percent. Eurostat is the Statistical Office of the European Communities located in Luxumbourg and is charged with providing statistics for comparisons between European countries and regions. The Eurozone is comprised of the 15 EU states that have adopted the euro and created a currency union. [MercoPress, 6/3/2009; Eurostat.com, 6/3/2009; Ezine Articles, 6/3/2009]

Entity Tags: European Union, Eurostat

Category Tags: Other

Wells Fargo & Co. confirms that it is not one of the 10 megabanks that will repay TARP capital and also says it is not hastening to repay the money. There had been rumors, perhaps because it had objected to the TARP funding in 2008, that Wells was prepared to write a check to repay its $25-billion TARP infusion—at any given moment—to escape government restrictions on executive pay, dividends, etc., but these rumors are now found to be false. The San Francisco-based bank bought Wachovia Corporation last year when it was on the verge of collapse and in its statement Wells cites its need to focus on assimilating loss-ridden Wachovia. “We want to pay back the government’s investment on behalf of the US taxpayer at the earliest practical date, but we haven’t applied yet to our regulators to repay the investment,” the statement says. From the beginning, Wells Chairman Richard Kovacevich stoked anti-TARP sentiment and opposed his bank’s inclusion in the program. Mr. Kovacevich said then-Treasury Secretary Henry Paulson “forced” the money on the bank because Mr. Paulson believed that all of the nation’s largest banks should have been TARP participants so that none appeared to be singled out for federal involvement. Mr. Kovacevich also attacked the government’s “stress test” of the 19 major banks to determine whether they had enough capital to survive a worse-than-expected economy over the next two years. “We do stress tests all the time on all of our portfolios,” Kovacevich said, according to Bloomberg News. “We share those stress tests with our regulators. It is absolutely asinine that somebody would announce we’re going to do stress tests for banks and we’ll give you the answer in 12 weeks.” On May 7, the Federal Reserve judged Wells and nine other major banks short of capital and Wells was ordered to raise $13.7 billion in additional capital by November 2009. The following day, Wells quickly raised $8.6 billion in a stock sale. Wells says it will “work closely with our regulators to determine the appropriate time to repay the TARP funds while maintaining strong capital levels.” [Los Angeles Times, 6/9/2009]

Entity Tags: US Department of the Treasury, Richard Kovacevich, Wells Fargo Bank, N.A., US Federal Reserve, Wachovia Bank, N.A.

Category Tags: Bailouts and Other Government Aid

The US Treasury Department concludes that financial firms American Express, Bank of New York Mellon, Branch Banking & Trust (BB&T), Capital One Financial, Goldman Sachs, JP Morgan Chase, Morgan Stanley, Northern Trust, State Street, and US Bancorp can return $68.3 billion in emergency bailout funds to government coffers although some of the banks have assets that are still government-controlled, with warrants worth approximately $4.6 billion. Twenty-two smaller banks already returned $1.9 billion. Morgan Stanley receives Treasury permission to return its TARP funding despite bank stress test details released early last May ordering the bank to increase its capital cushion fund by raising $1.8 billion. In a Treasury release, Secretary Timothy Geithner explains, “These repayments are an encouraging sign of financial repair, but we still have work to do.” President Obama comments that the ability of companies to repay the government does not detract from the need for reform. “The return of these funds does not provide forgiveness for past excesses or permission for future misdeeds,” he says. “This is not a sign that our troubles are over. Far from it.” [United Press International, 6/9/2009; New York Times, 6/9/2009]

Entity Tags: Capital One Financial, Bank of New York Mellon, American Express, Branch Banking & Trust (BB&T), US Bancorp, US Department of the Treasury, State Street, Goldman Sachs, JP Morgan Chase, Morgan Stanley, Northern Trust, Barack Obama, Timothy Geithner

Category Tags: Bailouts and Other Government Aid, USA

According to a recent Manpower, Inc. survey, US employers’ plans to hire for the third quarter of 2009 are at a record low, and the jobless will have to wait many months more before finding a job. The agency reported that after they adjusted results for seasonal employment variations, its employment gauge for July through September 2009 was negative. In a statement released to media, Jonas Prising, president of Americas for Manpower, says employers are “treading slowly and watching with guarded optimism, hoping a few quarters of stability will be the precursor to recovery.” The report underlines economists’ predictions that unemployment will continue to climb even if layoffs subside. Recent Labor Department statistics reported a loss of 345,000 US jobs in May. Although less than the job losses recorded in the last eight months, the May 2009 jobless rate surged to its highest level in nearly 26 years. In a repeat of results from the two previous periods, 67 percent of employers anticipated zero change in third quarter 2009, Manpower says. Those who expected to boost their payrolls remained at 15 percent for a second time in a row, while those projecting additional job cuts fell to 13-14 percent. “While the numbers may not be as optimistic as we would like, it is positive to see no further deterioration,” says Jeffrey Joerres, Manpower’s chairman and chief executive officer. Six of 13 industries employers surveyed estimated better employment conditions than in the second quarter, with gains in leisure, hospitality, wholesale, and retail trades, while those in construction stated they would add staff for the first time in a year. The biggest hiring corrosion occurred in education, health services, and at government agencies. In three of four regions, the net employment gauge measured negative, and was zero in the Northeast. The measurement improved in the South, dropped in the West, and was little changed in the Northeast and Midwest. Net employment gauge figures are tallied by subtracting the percentage of employers that predict an employment decrease from those that foresee an increase. Manpower’s global outlook survey demonstrated that the net employment gauge for third quarter 2009 improved in 12 countries from the previous three months. Plans for hiring were strongest in India, Norway, and Poland. The Manpower Inc. survey is a quarterly measurement with a margin of error of plus or minus 0.49 percentage point in the US. The employment agency interviewed over 28,000 US employers for its national outlook and surveyed 70,000 companies for its third quarter global measurement. Manpower Inc. is billed as the largest temporary workers employment agency in the world. [Bloomberg, 6/9/2009]

Entity Tags: US Department of Labor, Jonas Prising, Jeffrey Joerres, Manpower Inc.

Category Tags: Commentaries on Economic Issues, Other, USA

The Congressional Oversight Panel, charged with monitoring the $700 billion TARP, says that as long as banks keep large amounts of toxic assets on their books, regulators should conduct stress tests on them. Noting that the worst-case unemployment rate used in recent bank stress tests will soon be surpassed, panel chair and Harvard law professor Elizabeth Warren tells Congress’s Joint Economic Committee, “We have not actually broken through the worst-case scenario, but the numbers are bad and they’re heading in the wrong direction.” The Congressional Oversight Panel, which includes a former senator and a current member of the House of Representatives, also advocates replicate periodic tests as long as banks hold “appreciable amounts” of illiquid mortgage securities. Warren says the “US unemployment rate average for 2009, now at 8.5 percent, will soon exceed the 8.9 percent as the worst-case scenario used in regulators’ capital evaluations of the 19 largest US bank holding companies.” Unemployment climbed to 9.4 percent in May; many analysts expect the rate to increase. “The worst-case scenario number for 2009 is in fact not the worst case. We’re going to see worse numbers,” Warren affirms. Ordered for the top 19 US bank holding companies by the US Treasury Department, the panel’s monthly report says the stress tests used a risk-modeling approach that, in its totality, was “reasonable and conservative.” However, the panel also says that an external party would find it impossible to imitate the loss projections forming the core of the tests. Warren adds that to ensure they are valued properly, the oversight panel will also review transactions in which banks repurchase stock warrants from the Treasury. Valuation of warrants, intended to provide taxpayers a potential for gains from government capital injections, will be a key focus of the panel’s July report. While the panel’s report acknowledges that the stress tests had a positive effect on market confidence, it cautions against assigning too much value to them. “They do not model bank holding company performance under ‘worst case’ scenarios and, as a result, they do not project the capital necessary to prevent banks from being stressed to near the breaking point,” the panel says. Warren notes her oversight board was rebuffed although it “pressed really hard on the Fed” for more stress test details. She adds that the Treasury under Secretary Timothy Geithner has been more open. She also tells lawmakers that giving the panel subpoena power would make it easier to acquire documents and testimony from officials at Treasury and the Federal Reserve. [Reuters, 6/9/2009]

Entity Tags: Timothy Geithner, US Department of the Treasury, Elizabeth Warren, US Federal Reserve

Category Tags: Bailouts and Other Government Aid

In an interview with Bill Moyers, Robert Reich, former labor secretary under President Clinton, says: “I believe that there’s no doubt that we’re going down to government intervention everywhere, government ownership unprecedented in this country. And it’s a long road and a slippery slope. Essentially, capitalism has swamped democracy. The Bush administration started the bank bailouts because the financial system had overreached with wild speculation and was on the verge of breaking down. Tim Geithner and [President] Obama are continuing these big bank bailouts, and I happen to think the bailouts have not worked very well, except as a kind of socialism for big corporations. There’s no such thing as pure capitalism without rules and regulations that set limits on profit making, because otherwise it’s everybody out for themselves. Otherwise, nobody can trust anybody. Otherwise, it’s the law of the jungle.… We rely upon government to set the boundaries—this can’t happen because it’s fraud, that can’t happen because you’re stealing something, this can’t happen because you’re imposing a huge burden on other people. Unless you have a democratic system that allows the rules to be created not by the companies but by the people and the people’s representatives reflecting what the public needs—not what the corporations need—you’re going to have a system that is not a democracy and not democratic capitalism. It’s super capitalism without the democracy. People pressuring their individual Congress members and Obama standing up to the banking industry will force real regulation. There will be no recovery in the sense of going back to where we were because the old path was unsustainable. If we don’t lift middle class wages, if we don’t get some control over Wall Street, if we don’t have genuine health care reform, if we don’t do something about the environment and global warming, we will not have a recovery. The next downturn is going to be worse than the downturn we just had, so there’s no going backwards. In every conversation I’ve participated in with the president, I was left with the impression that he understood this very, very well. I think most of the people around him understand this. The question is can he pull this off? Can he overcome the vested interests? It will be a clear indication of his toughness with regard to the willingness to twist arms and demand that the public interest be foremost.” [Bill Moyers Journal, 6/12/2009]

Entity Tags: Timothy Geithner, Bill Moyers, Robert Reich, Barack Obama

Category Tags: Commentaries on Economic Issues, Commentaries and Criticisms, Bush Policies and Actions, Obama Policies and Actions

The World Bank predicts a 2.9 percent contraction in the global economy and adds that unemployment and poverty will continue to rise in developing nations in 2009. The revised previous estimate of a 1.7 percent decline causes a slide in US and European stocks and commodities. Three months ago, the World Bank issued a new estimate of 2 percent in 2010. Although the S&P 500 remains up 33 percent from its 12-year low in March, since June 12, the index has fallen 5.1 percent. Last week, the S&P 500 lost 2.6 percent, as a turndown in crude oil wounded fuel producers and Standard & Poor’s rating agency downgraded 18 banks’ credit ratings. Speaking in Paris today, economics professor Nouriel Roubini—who predicted the current financial crisis as early as 2006—says the global economy could suffer another slump due to higher oil prices and increasing budget deficits. “I see the worry of a double whammy” because of energy costs and fiscal burdens, thus increasing the risk of a setback in the economic recovery. He says that oil might rise to $100 a barrel. The increase in the value of the dollar blunted the appeal of commodities as an alternative investment, and sent copper, gasoline and oil prices lower. Amid the resignations of two more board members, bringing the total of departing directors to seven since April, Bank of America stock falls 6.1 percent to $12.41, the bank’s steepest intraday decline since May 15. It is expected that at the end of their two-day meeting on June 24, Federal Reserve officials might announce that the US is showing signs of surfacing from the worst recession in 50 years, although, after their last meeting in April, they announced that the economy would “remain weak for a time.” It is anticipated that central bankers will keep the benchmark interest rate in the range of zero to 0.25 percent. [Bloomberg, 6/22/2009]

Entity Tags: World Bank, Bank of America, Nouriel Roubini, US Federal Reserve, Standard & Poor’s

Category Tags: Commentaries on Economic Issues

The jobless rate in Britain climbs to its highest level since 1995, according to the Office of National Statistics in London. The number of people out of work hits 2.47 million, while unemployment claims rise to 1.61 million for the month of July. Data recently released by the statistics office indicate that unemployment through July rose to 7.9 percent, the most since 1996, compared to the European Union’s latest figure of 9.5 percent, 9.7 percent in the US, and 5.7 percent in Japan. Bank of England Governor Mervyn King says that even after the economy stops shrinking, households will continue feeling the recession’s pain, since “unemployment is either going to continue rising or remain high.” As much as £175 billion ($288 billion) is being printed to aid economic growth and avoid deflation. “If anything, the UK economy is only just emerging from recession, and this is a lagging indicator,” says economist Philip Shaw of London’s Investec Securities. “We’re looking at unemployment peaking towards the middle of next year. Things are likely to improve at a slow rate, but it’s likely to remain uncomfortable for a long time.” Employment minister Jim Knight tells BBC News: “Unemployment still remains a real problem for families up and down the country. We’ve got to keep the support going and not be tempted to celebrate the recovery.” In speaking on the recovery, Prime Minister Gordon Brown—up for re-election in 2010—says the economic rebound “is still fragile” and stimulus programs that boost the economy should be maintained. “There are no signs of recovery here,” Trades Union Congress General Secretary Brendan Barber says. “It might look rosier in city dealing rooms but, out in the real world, unemployment is the number one issue.” [Bloomberg, 9/16/2009]

Entity Tags: Investec Securities, Bank of England, Brendan Barber, European Union, Gordon Brown, United Kingdom, Office for National Statistics, Mervyn King, Jim Knight

Category Tags: Other, Britain

On his website “Roubini Global Economics (RGE) Monitor,” New York University economics professor Nouriel Roubini interprets June’s unemployment report as a strong indication that any economic recovery indicators are “alleged green shoots” that are “mostly yellow weeds that may eventually turn into brown manure.” Known as “Dr. Doom” for his prescient 2006 speech to the International Monetary Fund warning fellow economists that the housing bubble would eventually lead to major global recession, Roubini analyzed June’s loss of 460,000 jobs as a strong indication that conditions in the labor market remain “extremely weak.” He also predicts that unemployment could reach 10 percent by the end of summer and that, by the end of 2009, the jobless rate “may well be at 10.5 if not 11 percent.” Roubini cites numerous reasons that an economic recovery, stumped by record high joblessness, is not likely to occur until unemployment falls below 8.5 percent in late 2013.
Roubini June 2009 Jobs Report Analysis -
bullet Details of the unemployment report are worse than reported since, not only are there presently large job losses, but firms are inducing workers to reduce their hours and their hourly wages. According to Roubini, when observing the effect of the labor market on labor income, include three important elements in the total value of labor income—jobs, hours, and average hourly wages. Roubini says all three elements are currently falling, making their effects on labor income much more significant than job losses alone.
bullet Job losses continue to exceed those in the last two recessions, and the unemployment rate has been rising steadily in the current cycle.
bullet Rising unemployment will raise default on consumer loans and further pressure bank balance sheets.
bullet Without home equity or easy credit, ongoing job losses and slower income growth will also keep up the pressure on consumer spending.
bullet Large unemployment, underutilization of labor, and sharp slowdown in wages will add to deflationary pressures in the coming quarters.
bullet Bank losses and tight lending are impacting households who already face wealth losses from housing and equity markets.
bullet Impact of financial sector problems on the real economy are intensifying job losses and leading to lower work hours and wage growth. This puts further pressure on consumer spending while raising mortgage, credit card, and other debt defaults (the unemployment rate is highly correlated with delinquencies on credit cards and auto loans), also putting additional pressure on financial and corporate sector balance sheets.
bullet US labor market aspects are worsening. Factor discouraged and partially-employed workers into jobless statistics, and the true and current unemployment rate is above 16 percent.
bullet Temporary jobs are falling sharply, also an indicator that labor market conditions are becoming worse.
bullet The average unemployment duration is at an all-time high, indicating that people are not only losing jobs, they’re finding it much more difficult to find new jobs.
bullet Based on the birth/death model, the Bureau of Labor Statistics (BLS) continues to add approximately 150,000 to 200,000 jobs, distorting downward the number of job losses. However, based on the initial claims for unemployment benefits, job losses are closer to 600,000 per month rather than officially reported figures such as the 467,000 in the June report.
bullet Should unemployment rates peak at or around 11 percent in 2010, expected bank loans and securities losses will be much higher than estimated in recent stress tests.
bullet While there was a retail sales boost and a boost in real consumer spending during January and February 2009, the numbers from April, May, and now June remain extremely weak in real terms.
bullet The significant increase in real personal income in April and May occurred only because of tax rebates and unemployment benefits.
bullet There was a sharp fall in real personal spending in April, with only a marginal increase in May, suggesting that, just as in 2008, most tax rebates were saved rather than spent. In 2008, people expected the tax rebate to stimulate consumption through September, yet the personal spending increase in April, May, and June 2008 fizzled out by July.
bullet Expect further significant reduction in consumer spending in the fall after the effects of the tax rebates fade since, according to Roubini, 2009 households are much more worried about jobs, income, credit cards, and mortgages than they are in personal consumption and spending. Roubini suggests that only approximately 20 cents on the dollar—rather than the 30 cents of 2008—is going to be spent in the fall of 2009.
bullet By the end of 2010 and in 2011, large budgets and their monetization will eventually increase expected inflation, leading to a further increase in 10-year treasuries, long-term government bond yields, and mortgage and private-market rates. Combined with higher oil prices partly driven to increase by the treasuries, bonds, mortgage, and private market wall of liquidity, as opposed to fundamentals alone, this “could produce a double whammy that could push the economy into a double-dip or W-shaped recession by late 2010 or 2011, so the outlook ahead for the US and global economy remains extremely weak.”
bullet The unemployment rate is already over 10 percent in approximately 13 states—and steadily rising. The ISM Employment Index for manufacturing and non-manufacturing has been contracting at a slower pace in recent months. Manpower Survey shows most employers plan to hold head count steady in the third quarter of 2009 relative to the second quarter of 2009. Online job vacancies fell in June, but have shown some improvement since March. JOLTS: The job openings level in April was at its lowest point since the series began in 2001. The hiring and job openings rates were unchanged and remained low (see June 9, 2009).
Nobel Laureate Agrees - Economist Paul Krugman, 2008 Nobel laureate, comments: “Workers at any one company can help save their jobs by accepting lower wages and helping make the company more competitive. But when employers across the economy cut wages at the same time, the result is higher unemployment and lower wages in the economy. This will keep pressure on paying off debt and on consumer spending and the real economy.” [RGE Monitor, 7/2/2009]

Entity Tags: US Department of Labor, Paul Krugman, Nouriel Roubini, International Monetary Fund, Bureau of Labor Statistics

Category Tags: Commentaries on Economic Issues, USA

The Federal Deposit Insurance Corporation (FDIC) spent $314.3 million to shut down 16 banks in June 2009, according to reports released today. The federal insurer closed seven banks on June 25, pushing the number of bank failures for 2009 to 52, more than double the failures for all of 2008. The late June closures included six Illinois regional banks, all controlled by one family whose bank business model, according to the FDIC, “created concentrated exposure in each institution.” The FDIC says that the failure of the six family-owned banks is due to the banks’ investments in collateralized debt obligations and other losses. The failures and subsequent government takeover of the Illinois banks brought total 2009 Illinois bank failures to 12. Local and regional banks have been especially hard hit by plummeting home values that devalued mortgage-backed assets, while rising unemployment rates forced increased numbers of consumers to default on their loans.
June 2009 Bank Failures FDIC Update through July 2, 2009 -
bullet Founders Bank, Worth, Illinois, with approximately $962.5 million in assets, closed. The PrivateBank and Trust Company, Chicago, Illinois, agreed to assume all deposits, approximatedly $848.9 million.
bullet Millennium State Bank of Texas, Dallas, Texas, approximately $118 million in assets, closed. State Bank of Texas, Irving, Texas, agreed to assume all deposits, approximately $115 million.
bullet The First National Bank of Danville, Danville, Illinois, approximately $166 million in assets, closed. First Financial Bank, N. A., Terre Haute, Indiana, assumed all deposits, approximately $147 million.
bullet The Elizabeth State Bank, Elizabeth, Illinois, approximately $55.5 million in assets, closed. Galena State Bank and Trust Company, Galena, Illinois, agreed to assume all deposits, approximately $50.4 million.
bullet Rock River Bank, Oregon, Illinois, approximately $77 million in assets, closed. The Harvard State Bank, Harvard, Illinois, agreed to assume all deposits, approximately $75.8 million.
bullet The First State Bank of Winchester, Winchester, Illinois, approximately $36 million in assets, closed. The First National Bank of Beardstown, Beardstown, Illinois, agreed to assume all deposits, approximately $34 million.
bullet The John Warner Bank, Clinton, Illinois, with approximately $70 million in assets, was closed. State Bank of Lincoln, Lincoln, Illinois, agreed to assume all deposits, approximaedly $64 million.
bullet Mirae Bank, Los Angeles, California, approximately $456 million in assets, closed. Wilshire State Bank, Los Angeles, California, agreed to assume all deposits, approximately $362 million.
bullet MetroPacific Bank, Irvine, California, approximately $80 million in assets, closed. Sunwest Bank, Tustin, California, agreed to assume all non-brokered deposits, approximately $73 million.
bullet Horizon Bank, Pine City, Minnesota, approximately $87.6 million in assets, closed. Stearns Bank N. A., St. Cloud, Minnesota, agreed to assume all deposits, excluding certain brokered deposits, approximately $69.4 million.
bullet Neighbor Community Bank, Newnan, Georgia, approximately $221.6 million in assets, closed. CharterBank, West Point, Georgia, agreed to assume all deposits, approximately $191.3 million.
bullet Community Bank of West Georgia, Villa Rica, Georgia, approximately $199.4 million in assets and approximately $182.5 million in deposits, approved for payout by the FDIC board of directors.
bullet First National Bank of Anthony, Anthony, Kansas, approximately $156.9 million in assets, closed. Bank of Kansas, South Hutchinson, Kansas, agreed to assume all deposits, approximately $142.5 million.
bullet Cooperative Bank, Wilmington, North Carolina, approximately $970 million in assets, closed. First Bank, Troy, North Carolina, agreed to assume all deposits, excluding certain brokered deposits, approximately $774 million.
bullet Southern Community Bank, Fayetteville, Georgia, approximately $377 million in assets, closed. United Community Bank, Blairsville, Georgia, agreed to assume all deposits, approximately $307 million.
bullet Bank of Lincolnwood, Lincolnwood, Illinois, approximately $214 million in assets, closed. Republic Bank of Chicago, Oak Brook, Illinois, agreed to assume all deposits, approximately $202 million. [CNN, 7/2/2009; FDIC.gov, 7/2/2009]

Entity Tags: Martin J. Gruenberg, Sheila Bair, John E. Bowman, Thomas J. Curry, John C. Dugan, Federal Deposit Insurance Corporation

Category Tags: Bailouts and Other Government Aid, Failing Companies, USA, Obama Policies and Actions

While California grapples with budget problems as a result of the havoc wreaked by the global recession, a collection of banks—Bank of America, Citigroup, Wells Fargo, and JP Morgan Chase among them—say that commencing Friday, July 10, they will not accept state IOUs, adding pressure for the state to close its $26.3 billion budget gap.
IOUs Result of Credit Crisis - The banks initially made a commitment to accept IOU payments when the economically devastated state announced that it would issue more than $3 billion in IOUs beginning on or around July 1. Since the beginning of the year, state leaders have tried and failed to agree on a budget, and Governor Arnold Swarzenegger imposed monthly one to three-day monthly furloughs on at least 200,000 state employees; the furloughs are still in effect. The state began issuing IOUs—‘individual registered warrants’—to hundreds of thousands of creditors one day after the end of the 2009 fiscal year. John Chiang, California state controller, said, “Without IOUs, California will run out of cash by the end of July.” California’s annual budget is the eighth largest in the world. If the state continues issuing warrants, creditors will be forced to hold them until their maturity on October 2 or find other banks willing to honor them before maturity. The maturity of the IOUs will allow the state to pay back creditors directly at a 3.75 percent annual interest rate.
Response by California Bankers Association - California Bankers Association spokeswoman Beth Mills says that some banks might work with creditors to develop a short-term resolution, such as extending lines of credit to creditors. Mills says the banks were concerned that there aren’t processes in place to accept IOUs; she said that some of the banks were also worried about fraud issues, and notes that the July 10 deadline was not set by all banks. She adds that dozens of state credit unions would continue to accept IOUs.
Significance of California's Problems - Twelve percent of the nation’s gross domestic product comes from California and the state has the largest share of retail sales of any state. Retail consultant Burt P. Flickinger, managing director of Strategic Resource Group, explains, “California is the key catalyst for US retail sales, and if California falls further you will see the US economy suffer significantly.” Flickinger warns of more national retail chain and brand suppliers bankruptcies. At one dollar for every 80 cents, the state sends more in tax revenues to the federal government than it receives in return. Although California’s deep recession primarily only affects the state itself, it could make it harder for a national economic recovery since, because of its size—38.3 million people—it affects businesses from Texas to Michigan. Even if lawmakers solve the state’s deficit swiftly, there will likely be more government furloughs and layoffs with tens of billions of dollars more in spending cuts. This could cause a ripple effect throughout the state’s economy and fear of even more job losses. Jeff Michael, director of the Business Forecasting Center for the University of the Pacific at Stockton, predicts that one million jobs are expected to be lost in the state in two years, with unemployment estimated to peak at 12.3 percent in early 2010. In 2008, for the first time since the Great Depression, personal income of Californians declined. Income revenue fell 34 percent for the first five months of 2009. [Associated Press, 6/29/2009; Wall Street Journal, 7/7/2009]

Entity Tags: California Bankers Association, Bank of America, Arnold Schwarzenegger, Beth Mills, California, John Chiang, JP Morgan Chase, Jeff Michael, Wells Fargo Bank, N.A., Burt P. Flickinger, Citigroup, Strategic Resource Group

Category Tags: Commentaries on Economic Issues, Other, USA

Eighteen consecutive months of job losses and an economy on the verge of collapse have left record numbers of US consumers either unable to pay their debts or chronically late in payments during the first quarter of 2009. According to the American Bankers Association, home equity loan delinquencies rose to 3.52 percent, from 3.03 percent of all accounts in the last quarter of 2008. Late payments on home equity credit lines climbed a record 1.89 percent, and an index of eight types of loans rose to 3.23 percent from 3.22 percent for a fourth consecutive quarter. In a telephone interview with Bloomberg, the American Bankers Association’s chief economist, James Chessen says: “The number one driver of delinquencies is job losses, which we’ve seen build and build. Delinquencies won’t come down without a dramatic improvement in the economy, and businesses will have to start hiring again.” For the first quarter of 2009, the US economy lost an average of 691,000 jobs in each of the quarter’s three months. According to a Bloomberg survey of 61 economists, since the recession began in December 2007, more than 6.5 million jobs have been cut, and the US economy will shrink in 2009 the most since 1946. Outstanding debt on bank card delinquencies rose a record 6.60 percent in first quarter 2009, from 5.52 percent in the fourth quarter of 2008, indicating that unemployed borrowers are relying on bank cards, as housing prices corrode their home equity. The ABA stated that more borrowers are using cards to meet daily expenses following their job losses. US banks distributed 9.8 million credit cards from January through April 2009, a 38 percent decline from the same period a year earlier, with the average limit for a new bank card falling 3 percent to $4,594, according to data released by credit reporting agency Equifax. “There is less equity to draw on and certainly financial institutions have been scaling back the available lines of credit,” Chessen says. [Bloomberg, 7/7/2009; American Bankers Association, 7/7/2009]

Entity Tags: James Chessen, American Bankers Association (ABA)

Category Tags: Commentaries on Economic Issues, Other, Bush Policies and Actions, Obama Policies and Actions

Group of 8 (G-8) leaders from across the globe release a statement from their meeting in L’Aquila, Italy, saying that economic recovery from the worst recession since World War II is too frail for them to consider repealing efforts to infuse money into the economy. US President Barack Obama, British Prime Minister Gordon Brown, European Commission President Jose Barroso, German Chancellor Angela Merkel, Canadian Prime Minister Stephen Harper, French President Nicolas Sarkozy, Japanese Prime Minister Taro Aso, Italian Prime Minister Silvio Berlusconi, and Russian President Dmitriy Medvedev assembled for the annual gathering where Obama pressed to maintain an open door for additional stimulus actions. A new drop in stocks generated global concern that, to date, the $2 trillion already sunk into economies had not provided the economic bump that would bring consumers and businesses back to life. “The G-8 needed to sound a second wakeup call for the world economy,” Brown told reporters after the gathering’s opening sessions. “There are warning signals about the world economy that we cannot ignore.” A G-8 statement embraces options ranging from a second US stimulus package—advocated by some lawmakers and economists—to an emphasis by Germany on shifting the focus to deficit reduction.
What Next? - Disagreements over what to do next, as well as calls from developing nations to do more to counteract the slump, emphasize that the Group of 8 has little if any room to maneuver, since the largest borrowing binge in 60 years has, so far, failed to stop rising unemployment and has left investors doubting the potency of the recovery. Even as G-8 leaders held their first meeting, the Morgan Stanley Capital International (MSCI) World Index of stocks continued a five-day slide, and the 23-nation index had dropped 8 percent since its three-month rally that ended on June 2. The International Monetary Fund (IMF) upgraded its 2010 growth forecast, saying the rebound would be “sluggish,” and urged governments to stay the course with economic stimuli. The IMF also said that emerging countries such as China would lead the way, with an expansion of 4.7 percent in 2010, up from their April prediction of 4 percent. “It’s a very volatile situation,” said European Commission President Barroso in a Bloomberg Television interview from L’Aquila. “We are not yet out of the crisis, but it seems now that the free fall is over.”
Exit Strategems Discussion - “Exit strategies will vary from country to country depending on domestic economic conditions and public finances,” the leaders conclude, but deputy US National Security Adviser Mike Froman tells reporters, “There is still uncertainty and risk in the system.” Froman says that although exit strategies should be drawn up, it’s not “time to put them into place.” The IMF forecasts that, in 2014, the debt of advanced economies will explode to at least 114 percent of US gross domestic product because of bank bailouts and recession-battling measures. German Chancellor Merkel, campaigning for re-election in September and the leading opponent of additional stimulus, warned against burgeoning budget deficits, which the IMF has predicted will rise to an average of 6 percent of the EU’s 2009 gross domestic product, from 2.3 percent in 2008. At last month’s European Union summit, Merkel pushed through a statement that called for “a reliable and credible exit strategy,” and insisted, “We have to get back on course with a sustainable budget, but with the emphasis on when the crisis is over.” [G8 Summit 2009, 7/2/2009; Bloomberg, 7/9/2009]

Entity Tags: Morgan Stanley Capital International (MSCI) World Index, Mike Froman, Jose Manuel Barroso, International Monetary Fund, Taro Aso, National Security Council, Nicolas Sarkozy, Silvio Berlusconi, Angela Merkel, Gordon Brown, Barack Obama, Standard & Poor’s, Stephen Harper, Dmitriy Medvedev

Category Tags: Britain, USA, Commentaries on Economic Issues

Federal Deposit Insurance Corporation (FDIC) regulators take over real estate lender Colonial BancGroup Inc. in the biggest US bank failure this year. Regulators also close four banks in Arizona, Nevada and Pennsylvania. This increases to 77 the number of federally insured banks that have failed in 2009. The FDIC is appointed receiver of Colonial BancGroup, based in Montgomery, Alabama; Community Bank of Arizona, based in Phoenix; Union Bank, based in Gilbert, Arizona; Community Bank of Nevada, based in Las Vegas; and Dwelling House Savings and Loan Association, located in Pittsburgh. The FDIC approves the sale of Colonial’s $20 billion in deposits and about $22 billion of its assets to BB&T Corp., which is based in Winston-Salem, North Carolina. According to the FDIC, the failed bank’s 346 branches in Alabama, Florida, Georgia, Nevada, and Texas will reopen at normal times starting on Saturday as BB&T offices. A temporary government bank is established by the FDIC for Community Bank of Nevada to give depositors approximately 30 days to open accounts at other financial institutions. As of June 30, Community Bank of Nevada had assets of $1.52 billion and deposits of $1.38 billion; Community Bank of Arizona had assets of $158.5 million and deposits of $143.8 million; Union Bank had assets of $124 million and deposits of $112 million as of June 12. MidFirst Bank, based in Oklahoma City, agrees to assume all the deposits and $125.5 million of the assets of Community Bank of Arizona, as well as about $24 million of the deposits and $11 million of the assets of Union Bank, with the FDIC retaining what’s left for eventual sale. Dwelling House had $13.4 million in assets and $13.8 million in deposits as of March 31. PNC Bank, part of Pittsburgh-based PNC Financial Services Group Inc., agrees to assume all of Dwelling House’s deposits and about $3 million of its assets; the FDIC will hold the rest for eventual sale. The FDIC expects Colonial BancGroup’s failure to cost it an estimated $2.8 billion and that of Community Bank of Nevada, $781.5 million; Union Bank, $61 million; Community Bank of Arizona, $25.5 million; and Dwelling House, $6.8 million. The 77 bank failures nationwide this year compare with 25 last year and three in 2007. As the economy spiraled downward, bank failures increased seismically, siphoning billions out of the FDIC which, at $13 billion as of the first quarter, is at its lowest level since 1993. While losses on home mortgages may be leveling, commercial real estate loan delinquencies remain a potential trouble spot, say FDIC officials. The FDIC’s list of problem institutions soared to 305 in first quarter 2009—the highest since the savings and loan crisis in 1994—increasing from 252 in fourth quarter 2008. Regulators anticipate US bank failures will cost the FDIC about $70 billion through 2013. The shutdown in May of Florida thrift BankUnited is expected to cost the federal insurer $4.9 billion, the second-largest hit since the financial crisis commenced. So far, the costliest is the seizure of big California lender IndyMac Bank in 2008, where it is estimated that the FDIC lost $10.7 billion. In September 2008, the largest US bank failure was the failure of Seattle-based Washington Mutual Inc. (WAMU), with about $307 billion in assets. In a deal brokered by the FDIC, JP Morgan Chase and Co. purchased WAMU for $1.9 billion. [fdic.gov, 8/2009; ABC News, 8/14/2009]

Entity Tags: Federal Deposit Insurance Corporation, Colonial BancGroup, Inc., IndyMac Bank, JP Morgan Chase, Washington Mutual Inc.

Category Tags: Failing Companies, USA, Obama Policies and Actions

Since implementing a program to help millions of homeowners restructure their mortgages to prevent foreclosure, only 235,247 loans have actually been modified, according to the US Treasury Department in its first progress report. After the plan was announced in February, the first banking institutions began accepting applications in April. Between now and 2012, the Obama administration says it is on track to assist 4 million homeowners. The report occurs a week after the administration summoned institutions to Washington to discuss speeding up the program after large numbers of borrowers’ complaints that assistance was barely occurring. The Obama administration plans 500,000 modifications by November 1, and hopes to hold the institutions responsible for their performance with the release of monthly reports that allow consumers to see which banks are slow to implement the plan. So far, institutions have extended offers to 15 percent or 406,542 homeowners in danger of losing their homes, with uneven performances by 38 participating servicers. Morgan Stanley’s subsidiary, Saxon Mortgage Services, tops the list with 25 percent of its delinquent loans placed in trial modifications. Saxon is followed by Aurora Loan Services, a Lehman Brothers Bank subsidiary, with 21 percent. GMAC Mortgage, partially owned by the US government, has put 20 percent of its troubled loans into trial modifications, while major banks JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America have late loan trial modifications of 20 percent, 15 percent, 6 percent, and 5 percent respectively. The lenders acknowledge that they must improve their performance, and say that they are committed to President Obama’s foreclosure prevention plan, stressing that they were already performing modifications prior to the administration’s program. Wells Fargo says that it will soon have the ability to send eligible borrowers trial modification agreements within 48 hours. “We set a high bar for ourselves in terms of customer service, and we didn’t hit that bar in all cases in the first seven months of this year,” says Mike Heid, co-president of Wells Fargo Home Mortgage, “We have added 4,000 employees to our loan workout division this year. JPMorgan Chase says it has another 150,000 applications in need of processing and is currently training an extra 950 workout specialists hired earlier in 2009, bringing its modification staff to 3,500 people. “We know we’ve got more work to do,” says Chase spokesman Tom Kelly. “But the bank is pleased with its performance to date.” CitiGroup’s mortgage agency, CitiMortgage, added 1,400 staffers to its modification team, with 800 dedicated to loss mitigation at its recently opened Tucson, AZ call center. It began placing troubled borrowers in trial modifications in early June. “In the next quarter, one can expect the pace will be even higher,” Sanjiv Das, CitiMortgage head, says. Bank of America says it needs to improve its reach out efforts, while noting that it holds nearly one in four trial modifications offered under the Obama plan and has extended nearly 100,000 offers, although only 28,000 trial modifications are in process. Bank of America purchased mortgage giant Countrywide Financial last year, and has the largest number of eligible delinquent loans with almost 800,000. Borrowers have been pressuring the Obama administration as well as servicers and are complaining that servicers are not responding to applications and calls, are losing their paperwork, and are not making timely decisions. Servicers say they are increasing their staffing and upgrading their computer systems to handle the hefty increase in applications. Says Michael Barr, assistant US Treasury secretary for financial institutions, “We are working with servicers to ensure that they can adequately implement the program and servicers are increasing staff and training, but they must also treat borrowers more respectfully and respond in a much timelier manner.” [CNN News, 8/9/2009]

Entity Tags: Countrywide Financial, Wells Fargo Bank, N.A., Bank of America, Aurora Loan Services, US Department of the Treasury, Citigroup, Tom Kelly, Sanjiv Das, GMAC, JP Morgan Chase, CitiMortgage, Lehman Brothers, Morgan Stanley, Michael Barr, Saxon Mortgage Services

Category Tags: Bailouts and Other Government Aid, Commentaries on Economic Issues, Failing Companies, Obama Policies and Actions

McClatchy reports that economies in Latin America are beginning to improve following the global financial crisis. The signs of the recovery include a “booming” construction industry in Peru, strong property sales in Peru, and expanding software companies in Chile. However, McClatchy says that the recovery in Mexico and other Central American countries is lagging behind, due to the slow recovery in the US. Prior to the global financial crash, Latin America had experienced its best five years of prosperity since the 1950s. [McClatchy Newspapers, 9/28/2009]

Entity Tags: Peru, Brazil, Mexico, Chile

Category Tags: Other, Other Nations

In their new report, “The State of Working America 2008-2009,” two economists at leading US think tank Economic Policy Institute (EPI) issue warnings that US workers will face harsh challenges as what they term “the Great Recession of 2007” draws to a close.
Unemployment - Heidi Shierholz and Lawrence Mishel, co-authors of the report, say that the extent of the huge global crash would have been much worse without President Obama’s American Recovery and Reinvestment Act of 2009. “The disaster would have been even worse without the stimulus law President Obama pushed through earlier this year,” Shierholz says. “Job losses would have been so high that the July unemployment figures would have been 9.6 percent or 9.7 percent, not 9.4 percent. We expect a steady climb in the unemployment rate up and over 10 percent by the end of the year. And it’ll rise slightly above 10 percent for a few months in 2010 before turning downwards. Until the economy is adding 122,000 jobs per month to take care of the people coming into the job market, unemployment will stay high. We still have a long way to go.”
Human Cost - Both economists speak of the human penalty. “This is more than a bunch of dry numbers,” Mishel declares. “One-third of the jobless—a record—have been out of work at least six months. Many have exhausted their unemployment benefits, which translate into bankruptcies, lost homes, no medical care, and more ills afflicting workers—even employed workers. This recession is much more than just the numbers of unemployed and underemployed, which is also setting a record,” he says. “Employed workers are seeing their hours cut, there’s an implosion in wage growth, and about 17 percent of large private employers have resorted to unpaid furloughs to save money.” Mishel explains that a one-week furlough is the equivalent of a 2 percent pay cut for a worker and his or her family.
Media Coverage Poor - In their report, the economists also criticize major media’s coverage of the crisis, urging workers not to fall for the usual chatter that things will automatically improve once productivity rises. “In the popular media, economic experts endlessly debate dynamics and causes of the downturn but most of these debates have very little to do with the real economic challenges facing working families today. The men and women of the workforce have worked harder and smarter to make the US a world-class economy and the mantra among economists and policy makers is that ‘as grows productivity, so shall living standards improve.’ Would that it was so.”
'YOYO Economics' - Prior to the crash, the report says, workers faced “rising inequality and lower real incomes for all but the richest 5 percent, diminished bargaining power, less health coverage, riskier pensions if any at all, income constraints that prevent workers’ kids from getting college educations to better themselves, and fewer high-paying jobs for those college grads, due to off-shoring and outsourcing.” The report nicknames it “YOYO (‘You’re on your own’) economics.” “We are in a unique position to judge the results of this experiment in reduced worker bargaining power and YOYO economics,” write the two economists. “The macro-economy is in serious disrepair and policymakers must move beyond temporary patches to fundamentally remake the economy so that it works for workers.”
Effect of Stimulus - The two offer praise for the Obama administration’s move to correct economic imbalances with the $787 billion stimulus package, the “cash for clunkers” program, initiatives to help the Detroit auto industry, and the $500 million “green jobs” initiative that have “partially staunched the bleeding.” Mishel predicts that, in conjunction with these programs, Congress will pass a second federal extension of unemployment benefits. They also argue that there should be fundamental restructuring away from “free market” policies that give corporations and financiers free sovereignty while the masses are forced to tighten their belts. [People's Weekly World Newspaper, 9/4/2009]

Entity Tags: Lawrence Mishel, Economic Policy Institute, Heidi Shierholz

Category Tags: Commentaries on Economic Issues, Bush Policies and Actions, Obama Policies and Actions

Research conducted by the Experian credit bureau and the international management consulting group Oliver Wyman reveals an alarming tendency: homeowners with excellent credit are more likely to “strategically default” on their homes than those who are financially strapped. Using an enormous sample of 24 million individual credit files, the study found that those with super prime credit scores are 50 percent more likely to “abruptly and intentionally” dump their mortgage. Researchers found that, with foreclosures, delinquencies, and loan losses at record levels, so-called “walkaways” are at or near the top of the most-discussed real estate finance topics. The Experian-Wyman study group identified specific patterns with strategic defaults. Among its findings:
bullet Strategic default numbers are much higher than industry estimates. For example, 588,000 super-prime credit holders defaulted during 2008, double the number from 2007;
bullet Warning signs, such as non-payment of other debts, are virtually non-existent;
bullet Walkaways often go from perfect payment histories to no mortgage payments whatsoever, in severe contrast with most financially stressed borrowers, who attempt mortgage payments even when delinquent on other credit accounts;
bullet Strategic defaults are located mostly in negative equity markets where home values skyrocketed during the boom before taking a huge dive after 2006. For example, last year in California, strategic defaults were 68 times higher than in 2005; in Florida, they were 46 times higher than in 2005. In most of the rest of the country, walkaways were nine times higher in 2008 than in 2005;
bullet People with large mortgage balances are more likely to walk away. Those with the two highest VantageScore credit ratings (as created by Experian and the other national credit bureaus, Equifax and TransUnion) are far more likely to default than homeowners in lower score categories;
bullet Walkaways seem to understand the consequences of their actions but may view it as a business decision, and the most practical solution under the circumstances.
Although the Experian-Wyman study does not explore the ethical and legal facets of strategic defaults, a major suggestion arising from it is that lenders and loan servicers take steps to spot walkaways in advance to avoid offering them loan modifications, since they will probably default on these as well. [Los Angeles Times, 9/20/2009]

Entity Tags: Experian Credit Bureau, Oliver Wyman Group

Category Tags: Other, USA

The tasks before the forthcoming Group of 20 (G-20) summit to be hosted by President Barack Obama in Pittsburgh, Pennsylvania, are rolled out in the media. The number one agenda item for global leaders will be restraining financial institutions’ compensation and forcing them to clean their balance sheets to avert a duplicate of the near-meltdown of global financial systems. They will also attempt to find new methods for controlling over-the-counter derivatives markets, which are said to have augmented the global crash. The leaders are also scheduled to “increase oversight of hedge funds, credit rating agencies, and debt securitization.” Most leaders agree that it is essential to find a resolution for the huge financial imbalances in trade, savings, and consumption, all of which played a role in the global financial crisis, and ultimately may leave global economies vulnerable to future financial shocks. Christine Lagarde, the French Finance Minister, says that signs of economic recovery should not act as an excuse to avoid economic reforms. Officials of France and Germany are recommending stringent financial sector regulations, which incorporate limits on executive pay. The mandate of the G-20 is to “promote open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability.” The G-20 is comprised of finance ministers and central bank governors from 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States, and the European Union, which is represented by the rotating council presidency and the European Central Bank. [Reuters, 9/22/2009; New York Times, 9/22/2009; Voice of America, 9/22/2009; G-20.org, 9/22/2009]

Category Tags: Other, USA, Britain, Other Nations

Having received what the Obama administration calls “exceptional assistance,” American International Group (AIG), Citigroup, Bank of America, General Motors (GM), GMAC, Chrysler, and Chrysler Financial are now meeting with executive pay czar, Kenneth Feinberg, and must submit 2009 pay plans for their top 25 executives. In turn, Feinberg must perform a 60-day assessment while working with the seven companies on their salary configurations. Plans for the other 75 executives of the seven corporations are due later. Exorbitant executive pay and bonuses has its critics, with many outraged that the companies are collecting taxpayer money only to pay out expensive bonuses during a massive recession. Others fear that the feds have insinuated themselves too deeply into private business affairs. Feinberg himself admits that his job has built-in conflicts. “Historically, the American people frown on the notion of government insinuating itself into the private marketplace,” he says in an interview, one day after his appointment. “My answer to those critics is I understand that concern, I share that concern, and the question is how do you strike a balance between that legitimate concern and the populist outrage at prior industry compensation practices?” The Obama administration has already seen and experienced taxpayers’ fury; Feinberg hopes to avoid such outrage. Corporations must prove to him that they are rewarding good performance and discouraging undue risk-taking. “We are not going to provide a running commentary on that process, but it’s clear that Mr. Feinberg has broad authority to make sure that compensation at those firms strikes an appropriate balance,” say US Treasury Department spokespersons, while noting that Feinberg can’t force companies to renege on contract obligations executed prior to February 12, 2009. However, this hasn’t prevented cries of foul play by critics upset over excessive government interference in private businesses. “No matter which way I turn, you’re facing criticism either from those who are appalled at what these companies did versus those who question the value of the government getting involved,” Feinberg says. The recently appointed executive compensation czar is used to dealing with contentious sides having served as compensation fund chairman for the families of victims of the September 11 attacks. [ABC News, 8/12/2009]

Entity Tags: Chrysler Financial, AIG (American International Group, Inc.), Bank of America, Citigroup, Chrysler, General Motors, GMAC, US Department of the Treasury

Category Tags: Bailouts and Other Government Aid, Commentaries on Economic Issues, Obama Policies and Actions

“The global recession is now over and a recovery has begun,” says Olivier Blanchard, chief economist of the International Monetary Fund (IMF). However, he says, the global recession has not been typical, so neither will the economic revival be. Writing in an article released by the IMF, Blanchard states: “One should not expect very high growth rates in the recovery. The turnaround will not be simple. The crisis has left deep scars, which will affect both supply and demand for many years to come.” The word “recovery” has a precise technological meaning—that the economy is again growing but, essentially, has not returned to previous levels of output, wealth, and employment. In other words, the economy is healing, yet is not yet healed. According to Blanchard, “The recession has been so destructive that we may not go back to the old growth path [and] potential output may be lower than it was before the crisis.” Blanchard says that growth is coming for most countries, for at least the next few quarters, but will not be sturdy enough to decrease unemployment. He says growth is still dependent on fiscal and monetary government stimulus policies. “To sustain growth will require delicate rebalancing acts, both within and across countries,” he says. “Sustained recovery in the United States and elsewhere eventually requires rebalancing from public to private spending.” He also says that big fiscal deficits orchestrated to rouse the economy must be unwound. “The United States can’t rely on low interest rates to sustain the recovery, nor can it rely on consumer spending or investment filling the gap. Consumers are likely to save more in coming years. Businesses don’t need to invest much for the next few years, because so much of their capacity is idle. Sustained recovery is likely to require an increase in US net exports and a corresponding decrease in the rest of the world, coming mainly from Asia. China, for one, should increase its domestic demand,” he adds. [Marketwatch, 8/18/2009]

Entity Tags: International Monetary Fund, Olivier Blanchard

Category Tags: Commentaries on Economic Issues

After surveying 28,000 US companies on their future hiring plans, Manpower CEO Jeff Joerres reports that two-thirds of US employers will not change their staffing in the fourth quarter, thus dealing a blow to a consumer-led US economic recovery. Education and health services US employers are more positive about job prospects, while the remaining 11 employment sectors surveyed are more cautious in their plans to hire. The largest declines are in construction, leisure and hospitality, and professional and business services. The survey comes just a few days after the US jobless rate rose to a 26-year high in August to 9.7 percent, although job losses slowed. “Companies are still not going to be in hiring mode,” Joerres says. “They are in cautious mode.” According to Manpower’s international survey of 72,000 employers, previous quarter hiring expectations improved in 20 of 34 countries, although all 34 countries and territories report weaker hiring plans than a year ago. Employers in 15 countries and territories are cutting rather than adding jobs, but Asia and Europe are likely to be first to recover from the global recession. Job prospects in several Latin American countries improved. Prospects in most of Asia and Western Europe are stronger or more stable, although weaker in countries in Eastern Europe. As in the US, Mexico’s hiring plans are the weakest in the survey’s history, but optimism is higher in Canada, revealing better prospects in finance, construction, and real estate. The most optimistic employers in Asia are in India; future hiring looks improved in China, Hong Kong, and Singapore, while Japan’s fourth quarter employment view is flat. “Consumers in Asia and Europe had no need to curtail spending to the extent that Americans did,” says Joerres. “You look at major countries like the UK, Italy, France, Germany, Sweden, they’re all up. Their economies haven’t had the same hits. Other than Spain, you didn’t have a housing market as bad as this. Britain’s housing bust hurt the London area, but hiring plans are stronger in the Midlands.” Joerres cautions that because many economies still rely on exports, especially to the US, an Asian or European recovery could prove short-lived. “They can come out, but they can’t sustain the coming out until the US starts spending.” The US survey by Manpower, a global employment services company based in Milwaukee, is considered a leading indicator of labor trends. The company does business in 80 countries, generating most sales and earnings outside the United States, and conducts quarterly employer surveys. Its US survey dates back to 1962. [Reuters, 9/8/2009]

Entity Tags: Manpower Inc., Jeffrey Joerres

Category Tags: Other, USA

Fox News host Sean Hannity has as a guest Fox business commentator Stuart Varney. Varney accuses the Obama administration of implementing “socialist,” “un-American” economic policies. “We’ve had an 18-month experiment with American socialism,” Varney claims, and “we do not like it, we want to reverse it.” President Obama’s economic policies, Varney says, are “un-American.” [Media Matters, 11/17/2010]

Entity Tags: Fox News, Barack Obama, Sean Hannity, Obama administration, Stuart Varney

Timeline Tags: Domestic Propaganda

Category Tags: Bailouts and Other Government Aid, USA, Obama Policies and Actions, Commentaries and Criticisms

President Obama tells how his ideas of bipartisan compromise with Republican lawmakers were dashed. Obama reflects on the American Recovery and Reinvestment Act of 2009, signed into law in February 2009. Interviewer Jann Wenner of Rolling Stone asks: “When you came into office, you felt you would be able to work with the other side. When did you realize that the Republicans had abandoned any real effort to work with you and create bipartisan policy?” Obama responds: “Well, I’ll tell you that given the state of the economy during my transition, between my election and being sworn in, our working assumption was that everybody was going to want to pull together, because there was a sizable chance that we could have a financial meltdown and the entire country could plunge into a depression. So we had to work very rapidly to try to create a combination of measures that would stop the free-fall and cauterize the job loss. The recovery package we shaped was put together on the theory that we shouldn’t exclude any ideas on the basis of ideological predispositions, and so a third of the Recovery Act were tax cuts. Now, they happened to be the most progressive tax cuts in history, very much geared toward middle-class families. There was not only a fairness rationale to that, but also an economic rationale—those were the folks who were most likely to spend the money and, hence, prop up demand at a time when the economy was really freezing up. I still remember going over to the Republican caucus to meet with them and present our ideas, and to solicit ideas from them before we presented the final package. And on the way over, the caucus essentially released a statement that said, ‘We’re going to all vote “No” as a caucus.’ And this was before we’d even had the conversation. At that point, we realized that we weren’t going to get the kind of cooperation we’d anticipated. The strategy the Republicans were going to pursue was one of sitting on the sidelines, trying to gum up the works, based on the assumption that given the scope and size of the recovery, the economy probably wouldn’t be very good, even in 2010, and that they were better off being able to assign the blame to us than work with us to try to solve the problem.” No House Republican voted for the package; only three Republican Senators voted for it. [BBC, 2/14/2009; Rolling Stone, 9/28/2010]

Entity Tags: Barack Obama, American Recovery and Reinvestment Act of 2009, Republican Party, Jann Wenner

Category Tags: Bailouts and Other Government Aid, USA, Commentaries and Criticisms

US Senator Mike Lee (R-UT) posts a video on his YouTube channel in which he declares federal child labor laws “unconstitutional.” Lee says: “Congress decided it wanted to prohibit [child labor], so it passed a law—no more child labor. The Supreme Court heard a challenge to that and the Supreme Court decided a case in 1918 called Hammer v. Dagenhardt. In that case, the Supreme Court acknowledged something very interesting—that, as reprehensible as child labor is, and as much as it ought to be abandoned—that’s something that has to be done by state legislators, not by members of Congress.… This may sound harsh, but it was designed to be that way. It was designed to be a little bit harsh. Not because we like harshness for the sake of harshness, but because we like a clean division of power, so that everybody understands whose job it is to regulate what. Now, we got rid of child labor, notwithstanding this case. So the entire world did not implode as a result of that ruling.” Think Progress reporter Ian Millhiser calls Lee’s interpretation flawed. The Constitution gives Congress the power “[t]o regulate commerce… among the several states [and to] make all Laws which shall be necessary and proper for carrying into Execution” this power to regulate commerce. This provision has been upheld in many Court cases. Lee failed to note that in 1941, the Court unanimously overruled Hammer v. Daggenhardt in United States v. Darby. Moreover, Millhiser notes, child labor exploitation did not stop until Congress placed strict limits on it in the Fair Labor Standards Act of 1938, a law upheld by United States v. Darby. [Think Progress, 1/31/2011] Senate Republicans will give Lee a seat on the Senate Judiciary Committee, which works with constitutional interpretation. Lee has also declared Social Security, Medicare, the Federal Emergency Management Agency (FEMA), the Food and Drug Administration (FDA), food stamps, and income assistance to the poor all unconstitutional. [Think Progress, 1/27/2011]

Entity Tags: Ian Millhiser, US Supreme Court, Michael Shumway (“Mike”) Lee, Senate Judiciary Committee

Timeline Tags: Civil Liberties

Category Tags: US Labor Issues, Commentaries and Criticisms

Missouri State Senator Jane Cunningham (R-St. Louis ) introduces SB 22 into consideration. The bill would eliminate many state child labor protections, most notably lifting the ban on children under 14 being allowed to work. The bill’s official summary reads in part: “This act modifies the child labor laws. It eliminates the prohibition on employment of children under age 14. Restrictions on the number of hours and restrictions on when a child may work during the day are also removed. It also repeals the requirement that a child ages 14 or 15 obtain a work certificate or work permit in order to be employed. Children under 16 will also be allowed to work in any capacity in a motel, resort, or hotel where sleeping accommodations are furnished. It also removes the authority of the director of the Division of Labor Standards to inspect employers who employ children and to require them to keep certain records for children they employ. It also repeals the presumption that the presence of a child in a workplace is evidence of employment.” While the federal Fair Labor Standards Act would continue to protect child workers in Missouri, Lee’s law, if passed, would let employers hire children under 14, let them work far longer hours, and prohibit state oversight agencies from monitoring employers for possible exploitation or abuse. AFL-CIO blogger Mike Hall calls Lee’s proposal “absolutely insane.” [Mike Hall, 2/14/2011; Think Progress, 2/15/2011]

Entity Tags: Mike Hall, Fair Labor Standards Act, Jane Cunningham, Missouri Division of Labor Standards

Timeline Tags: Civil Liberties

Category Tags: US Labor Issues

A list of 10 companies that have avoided paying US income taxes is provided by Senator Bernie Sanders (I-VT), who is pushing for legislation that will close the legal tax loopholes that allow large corporations to avoid the bulk of their tax responsibilities. Chicago Sun-Times reporter Lynn Sweet writes, “Some people call the income tax system with generous loopholes for big companies corporate welfare or corporate entitlements.” Sanders’s list, based on returns and Securities and Exchange Commission (SEC) documents filed in 2009 and earlier, includes:
bullet ExxonMobil. The oil giant made $19 billion in profits in 2009, but paid no federal income taxes, and received a $156 million tax rebate.
bullet Bank of America (BoA). The financial corporation made $4.4 billion in profits in 2009, and received nearly $1 trillion in Federal Reserve and Treasury Department “bailout” funds. The bank received a $1.9 billion tax refund.
bullet General Electric. This multinational conglomerate made $26 billion in profits in the US, and over the last five years has received $4.1 billion in tax refunds.
bullet Chevron. The oil giant made $10 billion in profits in 2009, and received a $19 million refund from the IRS.
bullet Boeing. The defense contractor received a $30 billion contract from the US Department of Defense in 2009 to build 179 airborne tankers, and received a $124 million tax refund.
bullet Valero Energy. This energy corporation, the 25th largest company in the US, garnered $68 billion in sales in 2009, and received $157 million in tax refunds. Over the last three years, Valero has received a $134 million tax break from the oil and gas manufacturing tax deduction.
bullet Goldman Sachs. The financial giant paid only 1.1 percent of its income in taxes in 2008, though it recorded $2.3 billion in profits. It also received nearly $800 billion from the Federal Reserve and the Treasury Department.
bullet Citigroup. The financial conglomerate made over $4 billion in profits in 2010, but paid no federal income taxes. It received a $2.5 trillion “bailout” from the Federal Reserve and Treasury.
bullet ConocoPhillips. The oil conglomerate garnered $16 billion in profits from 2007 through 2009, paid no taxes, and received $451 million in tax breaks through the oil and gas manufacturing deduction.
bullet Carnival Cruise Lines. This entertainment giant made over $11 billion in profits between 2006 and 2011, but paid only 1.1 percent of its income in taxes during that period.
In a press release calling for “shared sacrifice,” Sanders writes: “While hard working Americans fill out their income tax returns this tax season, General Electric and other giant profitable corporations are avoiding US taxes altogether.… [T]he wealthiest Americans and most profitable corporations must do their share to help bring down our record-breaking deficit.” Sanders writes that “it is grossly unfair for Congressional Republicans to propose major cuts to Head Start, Pell Grants, the Social Security Administration, nutrition grants for pregnant low-income women, and the Environmental Protection Agency while ignoring the reality that some of the most profitable corporations pay nothing or almost nothing in federal income taxes.” Sanders calls for closing corporate tax loopholes and eliminating the deductions for oil and gas companies. He is also introducing legislation that would impose a 5.4 percent surtax on millionaires that would garner as much as $50 billion a year in tax revenues. Sanders says: “We have a deficit problem. It has to be addressed, but it cannot be addressed on the backs of the sick, the elderly, the poor, young people, the most vulnerable in this country. The wealthiest people and the largest corporations in this country have got to contribute. We’ve got to talk about shared sacrifice.” [Chicago Sun-Times, 3/27/2011]

Entity Tags: Boeing Company, Carnival Cruise Lines, Citigroup, Bernie Sanders, Bank of America, ConocoPhillips, Goldman Sachs, Chevron, Lynn Sweet, Valero Energy Corporation, General Electric, ExxonMobil

Category Tags: US Monetary Policy, Bailouts and Other Government Aid, USA, Bush Policies and Actions, Obama Policies and Actions

Maine State Representative David Burns (R-Whiting) introduces a child labor bill that would allow employers to pay workers under 20 years of age a $5.25/hour “training wage.” Such a law would go against Maine’s minimum wage of $7.50/hour. Critics say that Burns’s proposal devalues young workers, and takes money out of the hands of laborers and gives it to business. Burns’s proposal is part of a larger package he presents, LD 1346, which would make a number of changes to Maine’s child labor laws, including lifting restrictions that limit the maximum hours a minor over the age of 16 can work during school days. Burns calls his legislation “empowering” for young workers, and says employers would be more apt to hire minors if they could pay them the smaller wage. “An employer’s got to have employees, so they can decide what they want to pay,” he says. “The student wants to have a job, and they can decide what they’re willing to work for.” Maine Democrats and labor advocates have come out strongly against the bill. Maine Democratic Party chairman Ben Grant accuses Burns of “trying to erase the progress of child labor laws.” The bill, if passed, would roll back wages earned by teens to a point not seen since the 1980s. Laura Harper of the Maine Women’s Lobby says the bill would undermine efforts to “teach teens the value of hard work.” Instead, she says, the bill “sends them the message that they aren’t valued. That doesn’t fit with Maine values. At a time when business leaders recognize that student achievement is critical to Maine’s economic growth, this bill will shortchange students and impair Maine’s economic success.” She cites a 2000 US Department of Labor study that showed “working a limited number of hours in the junior and senior years of high school has a positive effect on educational attainment.” Representative Timothy Driscoll (D-Westbrook) says the bill, and another measure in Maine’s Senate, would result in “kids working more hours during the school week and making less money.” [Bangor Daily News, 3/30/2011] Think Progress reporter Ian Millhiser observes: “Burns’s bill is particularly insidious, because it directly encourages employers to hire children or teenagers instead of adult workers. Because workers under 20 could be paid less than adults under this GOP proposal, minimum wage workers throughout Maine would likely receive a pink slip as their 20th birthday present so that their boss could replace them with someone younger and cheaper.” Millhiser notes that Burns’s proposal is just one of a number efforts that would dramatically roll back child labor restrictions (see January 4, 2011 and February 14, 2011). [Think Progress, 3/31/2011] The Maine House Labor Committee will reject the bill on a unanimous vote that will come without discussion. Burns will not be present for the vote. Another proposal loosening work restrictions for 16- and 17-year-olds is pending in the Maine Senate. [Lewiston/Auburn Sun Journal, 5/6/2011]

Entity Tags: Ian Millhiser, Timothy Driscoll, David Burns, Ben Grant, Laura Harper

Timeline Tags: Civil Liberties, Domestic Propaganda

Category Tags: US Labor Issues

Bruce Caswell.Bruce Caswell. [Source: Hillsdale County GOP]Michigan State Senator Bruce Caswell (R-Hillsdale) suggests legislation that would force foster children to use their state-funded clothing allowance only in thrift stores. Caswell says that foster children should get “gift cards” to be used only at Salvation Army, Goodwill, or other thrift stores. He explains: “I never had anything new. I got all the hand-me-downs. And my dad, he did a lot of shopping at the Salvation Army, and his comment was—and quite frankly it’s true—once you’re out of the store and you walk down the street, nobody knows where you bought your clothes.” Gilda Jacobs of the Michigan League for Human Services says, “Honestly, I was flabbergasted” to hear of Caswell’s proposal. “I really couldn’t believe this. Because I think, gosh, is this where we’ve gone in this state? I think that there’s the whole issue of dignity. You’re saying to somebody, you don’t deserve to go in and buy a new pair of gym shoes. You know, for a lot of foster kids, they already have so much stacked against them.” Caswell initially admits his proposal would not save Michigan any money, but later says that the proposal would save money. He insists he has no interest in stigmatizing foster children. [Hillsdale County GOP, 2011; Michigan Radio 91.7 FM, 4/15/2011; Michigan Messenger, 4/22/2011] Jessica Pieklo of the humanitarian organization Care2 writes that the proposal is another example of what she calls “the single-focused attack on the poor and politically powerless” being carried out by Michigan’s Republican leadership. “Reasonable checks and transparency in the administration of public benefits is one thing, but Caswell’s proposal is hardly that. It is a pronouncement on the value of these kids, poor and almost homeless usually through no fault their own.” [Care2 (.org), 4/24/2011] In a post on Twitter, MSNBC talk show host Rachel Maddow says: “This is cartoon evil, right? This can’t be real. This cannot be a real thing. Gotta be performance art.” [Talksy, 4/24/2011]

Entity Tags: Bruce Caswell, Rachel Maddow, Jessica Pieklo, Gilda Jacobs

Timeline Tags: Domestic Propaganda

Category Tags: USA, Other

Instead of releasing €12 billion ($17.2 billion) to help the Greek government’s worsening economic and political crises, EU leaders assembling in Luxembourg for seven hours, from Sunday night into Monday morning, place more pressure on the Greek government after the International Monetary Fund (IMF) required Europe to guarantee Greece’s finances for the next 12 months. Rather than act with a sense of urgency, EU finance ministers expect the Greek Parliament and President George Papandreou to pass an austerity bill. Greece’s crises threaten to topple the euro and EU financial markets. [New York Times, 6/20/2011]

Entity Tags: European Union, International Monetary Fund, Greece, Georgios Papandreou

Category Tags: Bailouts and Other Government Aid, Greece

Eurozone policymakers fail to reach an agreement over the weekend on financial aid to bail out Greece, resulting in a sharp market drop on Monday morning as disappointed traders react to the leaders’ failure to guarantee the next €12 billion installment of Greece’s original bailout. Widespread speculation is that a disorganized Greek default will send Eurozone single-currency nations, as well as nations around the globe, into another panic. [Guardian, 6/20/2011]

Entity Tags: European Union, International Monetary Fund, Greece, Eurozone

Category Tags: Bailouts and Other Government Aid, Greece

Joydeep Mukherji, the senior director for the credit firm Standard & Poor’s, says that one of the key reasons the US lost its AAA credit rating (see August 5, 2011) was because many Congressional figures expressed little worry about the consequences of a US credit default, and some even said that a credit default would not necessarily be a bad thing (see May 20, 2011). Politico notes that this position was “put forth by some Republicans.” Mukherji does not name either political party, but does say that the stability and effectiveness of American political institutions were undermined by the fact that “people in the political arena were even talking about a potential default. That a country even has such voices, albeit a minority, is something notable. This kind of rhetoric is not common amongst AAA sovereigns.” Since the US lost its AAA credit rating, many Republicans have sought to blame the Obama administration (see August 6-9, 2011), even though House Speaker John Boehner (R-OH) said that he and his fellow Republicans “got 98 percent” of what they wanted in the debt ceiling legislation whose passage led to the downgrade (see August 1, 2011). Representative Michele Bachmann (R-MN), running for the Republican presidential nomination in 2012, led many Republican “tea party” members in voting against raising the nation’s debt ceiling, and claimed that even if the US did not raise its debt ceiling, it would not go into default, a statement unsupported by either facts or observations by leading economists (see April 30, 2011, June 26, 2011, July 13, 2011, and July 14, 2011). “I want to state unequivocally for the world, as well as for the markets, as well as for the American people: I have no doubt that we will not lose the full faith and credit of the United States,” she said. Now, however, one of Bachmann’s colleagues, Representative Tom McClintock (R-CA), says that the media, and S&P, misinterpreted the Republican position. “No one said that would be acceptable,” McClintock says of a possible default. “What we said was in the event of a deadlock it was imperative that bondholders retain their confidence that loans made to the United States be repaid on schedule.” Treasury Secretary Timothy Geithner says of S&P’s response to the default crisis: “They, like many people, looked at this terrible debate we’ve had over the past few months, should the US default or not, really a remarkable thing for a country like the United States. And that was very damaging.” [Politico, 8/11/2011] TPMDC reporter Brian Beutler recalls: “For weeks, high-profile conservative lawmakers practically welcomed the notion of exhausting the country’s borrowing authority, or even technically defaulting. Others brazenly dismissed the risks of doing so. And for a period of days, in an earlier stage of the debate, Republican leaders said technical default would be an acceptable consequence, if it meant the GOP walked away with massive entitlement cuts in the end.” He accuses McClintock of trying to “sweep the mess they’ve made down the memory hole” by lying about what he and fellow Republicans said in the days and weeks before the debt ceiling legislation was passed. Beutler notes statements made by House Budget Committee chairman Paul Ryan (R-WI) and House Majority Leader Eric Cantor (R-VA), where they either made light of the consequences of a possible credit default or said that a default was worthwhile if it, as Cantor said, triggered “real reform.” Representative Louis Gohmert (R-TX), one of the “tea party” members, accused the Obama administration of lying about the consequences of default; Beutler writes, “This was a fairly common view among conservative Republicans, particularly in the House” (see July 14, 2011). [TPMDC, 8/11/2011]

Entity Tags: Michele Bachmann, Eric Cantor, Brian Beutler, Joydeep Mukherji, US Congress, Standard & Poor’s, Timothy Geithner, Paul Ryan, Obama administration, John Boehner, Tom McClintock, Politico

Category Tags: USA, 2011 US Credit Default, Commentaries on Economic Issues

Newt Gingrich during a recent debate among Republican presidential candidates.Newt Gingrich during a recent debate among Republican presidential candidates. [Source: Associated Press]Former House Speaker Newt Gingrich (R-GA), a Republican candidate for the 2012 presidential nomination, says that schools should save educational expenses by firing all custodians except for one “master janitor” and have the children do the rest of the maintenance work for their schools. Gingrich recommends this particularly for schools in poorer areas.
Attacks Unions, Child Labor Laws - Child labor laws prohibit such actions; Gingrich blames these laws, and the unions to which many maintenance workers and custodians belong, for causing “unnecessary” expenditures and for what he says is blocking poorer children from bootstrapping their way to economic success. “This is something that no liberal wants to deal with,” he tells an audience at the John F. Kennedy School of Government at Harvard. “Core policies of protecting unionization and bureaucratization against children in the poorest neighborhoods, crippling them by putting them in schools that fail has done more to create income inequality in the United States than any other single policy,” he continues. “It is tragic what we do in the poorest neighborhoods, entrapping children in, first of all, child laws, which are truly stupid. You say to somebody, you shouldn’t go to work before you’re what, 14, 16 years of age, fine. You’re totally poor. You’re in a school that is failing with a teacher that is failing. I’ve tried for years to have a very simple model. Most of these schools ought to get rid of the unionized janitors, have one master janitor, and pay local students to take care of the school. The kids would actually do work, they would have cash, they would have pride in the schools, they’d begin the process of rising.… You go out and talk to people, as I do, you go out and talk to people who are really successful in one generation. They all started their first job between nine and 14 years of age. They all were either selling newspapers, going door to door, they were doing something, they were washing cars. They all learned how to make money at a very early age. What do we say to poor kids in poor neighborhoods? Don’t do it. Remember all that stuff about don’t get a hamburger flipping job? The worst possible advice you could give to poor children. Get any job that teaches you to show up on Monday. Get any job that teaches you to stay all day even if you are in a fight with your girlfriend. The whole process of making work worthwhile is central.”
Proposal Called 'Absurd,' 'Insane' - Gingrich, who in 1994 proposed placing children whose families were on welfare into state-run orphanages, is quickly targeted for criticism by experts and observers. Randi Weingarten, the president of the American Federation of Teachers (AFT), calls Gingrich’s proposal “absurd,” and says: “Who in their right mind would lay off janitors and replace them with disadvantaged children—who should be in school, and not cleaning schools? And who would start backtracking on laws designed to halt the exploitation of children?” Gingrich says he has a number of “extraordinarily radical proposals to fundamentally change the culture of poverty in America and give people a chance to rise very rapidly.” [Politico, 11/18/2011; New York Times, 11/19/2011] Jordan Weissman, an associate editor of The Atlantic, calls Gingrich’s proposal “insane.” He writes: “This suggestion is, on its face, insane. It sounds like a bad Stephen Colbert joke [referring to a popular political satirist]. But if you stop and consider its merits for a minute or two… well no, it’s still quite insane. And if you spend an evening researching the nitty gritty of what public school custodians actually do for a living, it turns out to be downright cruel.” He says the proposal is “a jarring illustration of Gingrich’s casual disdain for American workers.” Weissmann refers to a job description for a New York City public school custodial engineer: that job requires the worker to use hazardous chemicals such as hydrochloric acid; repair heating and air conditioning systems; do electrical and plumbing repair; and other potentially dangerous tasks. Weissman asks, “What parent wants a nine-year-old, or even a 13-year-old, toying with the HVAC in her school?” Custodial jobs are among the most physically taxing of all jobs, causing workers to suffer an unusually high number of on-the-job injuries and causing long-term physical debilitation. Weissman concludes: “It would be easy to chalk Gingrich’s comments up simply to his well-known animus towards unions. But I don’t think that quite explains it. Rational people can argue about how much someone should be paid to clean.… But that decision starts from the respectful assumption that maintaining a school is something worthwhile for an adult to spend their lives on. That’s not the case in Gingrich’s worldview. Forget that an adult might need that job to put food on the table for their own children. Forget that he’s suggesting we flood an ailing job market with part time, minimum-wage-earning students. This isn’t about labor economics. It’s about respect, and the fact that the leading Republican presidential candidate doesn’t have a spit’s worth of it for manual labor. In his eyes, a janitor’s job just doesn’t mean much. It’s so easy, a child could do it.” [Atlantic Monthly`, 11/21/2011]
Former Custodian: Gingrich 'Doesn't Even Know Why' He is Wrong - A diarist for the liberal blog Daily Kos describes himself as a former “custodian for a very large child care center.” He writes: “I was the guy mopping up vast amounts of wet, sticky rice from the floor, sanitizing the tables, chairs and high-chairs, and washing the dishes. I sanitized doorknobs. I filed down jagged parts of metal that somehow, every once in a while, stuck out from steel door jam[b]s and bathroom stalls. I hauled out dozens of bags of dirty diapers Every Single Day… and yes, I cleaned up an unholy amount of poop from a dozen itty bitty toilets. [T]hese are many of the things Newt Gingrich believes should be jobs for poor children in our public school systems. Cleaning up vomit. Cleaning feces off of toilet seats. Handling cleaning solvents that can eat right through latex gloves. Washing dishes with an industrial dish washer that heats the water over 180 degrees, enough to scald young skin.… Plunging toilets plugged with diarrhea and toilet paper, then sanitizing the toilet seat for the Non Poor students. Newt Gingrich wants our children cleaning blood, mucous, feces, urine, dried snot, vomit loaded with God-Knows-What pathogens from floors and walls and door knobs with chemicles [sic] that can eat the skin right off your arm or cause permanent blindness if it splashed into the eyes or loss of smell if some Janitor Kid jammed his finger up his nose… which kids never do, right? Never. Because an eight-year-old is going to observe strict safety regulations, right?” The diarist concludes: “[Gingrich] should be embarrassed for suggesting we make poor children clean our schools. There is SO much wrong with that statement and the most irritating thing is, he doesn’t even know WHY.” [Daily Kos, 11/21/2011]

Entity Tags: Daily Kos, Jordan Weissman, Randi Weingarten, Newt Gingrich

Timeline Tags: Domestic Propaganda, 2012 Elections

Category Tags: USA, US Labor Issues, Commentaries and Criticisms

Donald Trump and Newt Gingrich. The two have combined to offer 10 poor children a chance to become Trump’s ‘apprentices.’Donald Trump and Newt Gingrich. The two have combined to offer 10 poor children a chance to become Trump’s ‘apprentices.’ [Source: MSNBC / Raw Story]Republican presidential candidate Newt Gingrich (R-GA) modifies his previously stated stance that union janitors at public schools should be fired and poor schoolchildren should be put to maintenance and custodial tasks in their places (see November 18, 2011 and After). Gingrich now says that he recognizes some custodial jobs are dangerous, and says that poor students should be limited to jobs such as cleaning bathrooms. During a campaign rally, he asks, “What if they became assistant janitors and their jobs were to mop the floor and clean the bathroom?” Gingrich goes on to say that making poor kids work as janitors is similar to a successful program, Earning by Learning, that pays children to read books. He also says that poor children “have no habit of work” and no knowledge of how to make an income “unless it’s illegal.” He says: “Really poor children in really poor neighborhoods have no habits of working and have nobody around them who works, so they literally have no habit of showing up on Monday. They have no habit of staying all day. They have no habit of ‘I do this and you give me cash’ unless it’s illegal.” Gingrich then goes on to attack child labor laws and the “liberals” who support them, saying: “This is something that no liberal wants to deal with. Core policies of protecting unionization and bureaucratization against children in the poorest neighborhoods, crippling them by putting them in schools that fail has done more to create income inequality in the United States than any other single policy. It is tragic what we do in the poorest neighborhoods, entrapping children in, first of all, child laws, which are truly stupid.… If we are all endowed by our creator with the right to pursue happiness, that has to apply to the poorest neighborhoods in the poorest counties, and I am prepared to find something that works, that breaks us out of the cycles we have now to find a way for poor children to work and earn honest money.” Alex Seitz-Wald of the progressive news Web site Think Progress responds, “Of course, reading books is not hard labor and is directly relevant to education—cleaning bathrooms is not.” [Think Progress, 12/1/2011; The Hill, 12/1/2011; ABC News, 12/1/2011] The next day, Fox News anchor Megyn Kelly opines, “He seemed to try to clarify that… and say what he’s talking about is maybe having kids be assistants to those union members.” Jeremy Holden of the progressive media watchdog site Media Matters says of Gingrich’s entire proposal: “Here’s a thought. What if we focused on fixing the economy and schools, and the students’ ‘job’ was to go to school?” [Media Matters, 12/2/2011] Fox News correspondent Geraldo Rivera later writes that it is obvious Gingrich knows little to nothing about the daily lives of poor people: “If he knew about the culture of poverty… Gingrich never would have proposed suspending child labor laws and putting ghetto public school students to work as junior janitors in fifth or sixth Grade. Like his earlier calls to bring back orphanages and to deny support to unmarried woman who have children while on welfare, this Gingrich proposal is crass and creepy.” Rivera notes that many poor families have breadwinners who work long hours in menial, physically demanding jobs, so poor children have many, many working role models in their lives. “[T]hese children know about work,” Rivera observes. [Fox News, 12/8/2011] Gingrich later says that he will address the issue of poor children and work by taking part in a “program” by billionaire Donald Trump, the host of NBC’s The Apprentice, where Trump will hire 10 poor children as “apprentices.” Gingrich will elaborate, “I’ve asked [Trump] to take one of the poorer schools in New York and basically offer at least 10 apprenticeships to kids from that school to get them into the world of work, and to get them into an opportunity to earn money, and get them into the habit of showing up and realizing that effort gets rewarded, and that American is all about the work ethic.” [Raw Story, 12/5/2011]

Entity Tags: Megyn Kelly, Alex Seitz-Wald, Geraldo Rivera, Donald Trump, Jeremy Holden, Newt Gingrich

Timeline Tags: Domestic Propaganda, 2012 Elections

Category Tags: USA, US Labor Issues, Commentaries and Criticisms

Shadrack McGill.Shadrack McGill. [Source: Huntsville Times]State Senator Shadrack McGill (R-AL) tells listeners at a prayer breakfast in Fort Payne, Alabama, that state legislators such as himself deserve pay raises, but raising schoolteachers’ pay would lead to less-qualified teachers in the classrooms and violate a “Biblical principle.” Alabama legislators were given a 62 percent raise in 2007, and McGill says the raise discourages corruption among lawmakers. The previous low salaries “played into the corruption, guys, big time,” he says. “You had your higher-ranking legislators that were connected with the lobbyists making up in the millions of dollars. They weren’t worried about that $30,000 paid salary they were getting.” By paying lawmakers more up front, he says, they are less susceptible to taking bribes: “He needs to make enough that he can say no, in regards to temptation.” However, if teachers were given pay raises, then people who are not “called” to teach would begin joining the profession, he says. “Teachers need to make the money that they need to make. There needs to be a balance there. If you double what you’re paying education, you know what’s going to happen? I’ve heard the comment many times, ‘Well, the quality of education’s going to go up.’ That’s never proven to happen, guys. It’s a Biblical principle. If you double a teacher’s pay scale, you’ll attract people who aren’t called to teach. To go in and raise someone’s child for eight hours a day, or many people’s children for eight hours a day, requires a calling. It better be a calling in your life. I know I wouldn’t want to do it, OK? And these teachers that are called to teach, regardless of the pay scale, they would teach. It’s just in them to do. It’s the ability that God give ‘em. And there are also some teachers, it wouldn’t matter how much you would pay them, they would still perform to the same capacity. If you don’t keep that in balance, you’re going to attract people who are not called, who don’t need to be teaching our children. So, everything has a balance.” In 2010, McGill introduced a bill in the Alabama Senate that would tie legislators’ pay to teachers’ pay, requiring the state to give raises to legislators if it gave teachers raises. He claimed, falsely, that Alabama teachers’ salaries were the fourth highest in the nation. Some Alabama Republicans are backing a bill that would give a 2.5 percent raise to teachers with less than nine years’ experience. Representative Craig Ford (D-Gadsden) says the small raise unfairly excludes veteran teachers, and the entire controversy surrounding teachers’ and legislators’ raises is “one of the most absurd things… the Republican supermajority ha[s] ever tried to pull.” [DeKalb County Times-Journal, 1/31/2012; Huffington Post, 2/1/2012] Currently, part-time legislators in Alabama such as McGill make more than full-time teachers with master’s degrees and 15 years of experience. [Think Progress, 2/1/2012] After the national media picks up on McGill’s comments, WAAY-TV airs an interview with McGill taped earlier in the week where he told a reporter he did not believe in the separation of church and state (see 1782-1786). According to a WAAY report, both the television station’s commentators and editorial writers and commentators around the nation “raked [McGill] over the coals” for his comments. McGill tells a WAAY reporter: “Some things got taken out of context. I’m not hearing any negative feedback out of those who were there.” The audience at the prayer breakfast was very supportive of his stance, he says. “The point that I was trying to make in the speech is simply that.… Things ought to be in balance. I believe God made everything to be in balance. He weighed the Earth and the valley and the mountains and the hills on a scale to keep them in balance because he knew he was going to be spinning it real fast, so that’s the [g]ist of it.… Legislators pay ought to be in balance. They don’t need to make too much, they don’t need to make too little, both lead to corruption. Likewise, I think with teachers salaries, things need to be balanced on their education, based on the performance, class size, etc. Work load.… But by no means was I insinuating that a teacher should make less.” McGill says he hopes that after the economy turns around, Alabama teachers can get raises. McGill says he is learning that legislators such as himself are constantly being pursued by those who want to “turn” an innocent statement “into a dagger and stab you with it.” He says that he cannot understand how those who gave him “negative feedback” on his comments can call themselves Christians. [WAAY-TV, 2/2/2012]

Entity Tags: Alabama State Senate, Shadrack McGill, WAAY-TV, Craig Ford

Category Tags: US Labor Issues

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