International Forecaster Weekly

White House Pushes for a Wall Street Overhaul

A Fed official with a Brain, Unemployment numbers now a leading indicator, Lawsuits against Goldman Sachs, no love for BP, four more banks down the  tubes, trade deficits widen and confidence falls...

Bob Chapman | July 14, 2010

Last week was the opposite of the previous week. The Dow rose 5%, S&P 5.1%, the Russell 2000 4.8% and the Nasdaq 100 4.8%. Banks rose 8.9%; broker/dealers 5.1%; consumers 4.5%; utilities 5.5%; high tech 5%; semis 5.6%; Internets 5.9% and biotechs 3%. Gold bullion was unchanged, the HUI rose 2.1% and the USDX fell 0.6% to 83.95.

The 2-year T-bills rose 1 bps to .60%, the 10-year note rose 8 bps to 3.06% and the 10-year German bund rose 5 bps to 2.63%.

Freddie Mac’s 30-year fixed rate mortgage rates fell 1 bps to 4.57%, the 15’s rose 3 bps to 4.07%, the one-year ARMs fell 5 bps to 3.75% and the 30-year jumbo’s fell 1 bps to 5.49%.

Fed credit declined $1.7 billion. Fed foreign holdings of Treasuries and Agencies rose $2.8 billion YTD, or 9.5% and YOY 11.3%.

M2, narrow, money supply rose $11.9 billion to $8.624 trillion. YTD it is up 2.6% annualized. YOY it is up 2.2%.

Total money market fund assets rose a strong $17.5 billion to $2.830 trillion. YTD their assets have fallen $464 billion, or YOY, down 22.9%.

Total commercial paper fell $7 billion to $1.091 trillion. It is off 13% annualized, or $45 billion.

Here’s a story that appeared after Monday’s close and it will be ignored because it directly rebukes the rationale for the current rally: Duke Says Fed Has ‘No Plans’ to Use More Monetary Policy Tools.

“There are a lot of reserves out there in the system,” Duke said. “We don’t think the barrier is there’s not enough money out there.” She also said “I think we are in the right place” on monetary policy.

Duke, 57, a former banker, said regulators can’t and shouldn’t urge banks to make loans that are too risky. The supply of credit may be limited by weaknesses in banks’ balance sheets, she said.

Wow! A Fed official with actual banking experience – no wonder she issues sensible declarations.

Bank of America Corp. and Wall Street firms that notched perfect trading records in the first quarter are now depending on an accounting benefit last used in the depths of the credit crisis to prop up their results.

Bank of America, the biggest U.S. bank by assets, may record a $1 billion second-quarter gain from writing down its debts to their market value, Citigroup Inc. analyst Keith Horowitz estimated in a June 23 report. The boost to earnings, stemming from an accounting rule that allows banks to book profits when the value of their own bonds falls, probably represented a fifth of pretax income, Horowitz wrote.

The oft-quoted American sports slogan, “Winning isn’t everything. It’s the only thing!” could well be attributed to the economic importance of firm formation in creating jobs. A relatively new dataset from the U.S. government called Business Dynamics Statistics (BDS) confirms that startups aren’t everything when it comes to job growth. They’re the only thing.

Put simply, this paper shows that without startups, there would be no net job growth in the U.S. economy. This fact is true on average, but also is true for all but seven years for which the United States has data going back to 1977.

That's the finding of an 18-month study conducted by Minnesota Majority, a conservative watchdog group, which found that at least 341 convicted felons in largely Democratic Minneapolis-St. Paul voted illegally in the 2008 Senate race between Franken, a Democrat, and his Republican opponent, then- incumbent Sen. Norm Coleman.

The final recount vote in the race, determined six months after Election Day, showed Franken beat Coleman by 312 votes.

In a private meeting with White House officials this weekend, Democratic governors voiced deep anxiety about the Obama administration’s suit against Arizona’s new immigration law, worrying that it could cost a vulnerable Democratic Party in the fall elections.

We have contended for many years that unemployment was a leading economic indictor, but no one agreed with us. PIMCO’s Mohamed el-Erian thinks unemployment is now a leading indicator, because the Fed and other policy markers use those numbers to influence their policies. Our only question is are they using bogus government numbers or real numbers based on those of 1980, before all the changes were made to deceive everyone as to just how bad things really are?

$2.3 trillion and 17 months later saw GDP improve for a year and as the stimulus and the injection of Fed funds waned, the US economy was brought back to reality. The key as to why the stimulus didn’t continue was the lack of job creation and real unemployment of 22-3/8%. The recovery was only a phase in a deteriorating still inflationary depression. As we have said before there are two choices: the Fed either creates $5 trillion to carry the economy over the future 2-1/2 years, or we immediately descend into deflationary depression. The ultimate result, which is in the process of beginning, forces the economy to return to where it began, and that will become manifest in the second half of the year. The actions taken over the past year will leave the economy in a weaker position, which means it will need even greater assistance to keep from collapsing. There is simply no way to support individual and sovereign debt. Individuals will continue to liquidate debt and fall into bankruptcy, as unsustainable public debt will grow. Americans have started down a steep slope and unfortunately there is no turning back until the system is purged and all the malinvestment is eliminated. The private sector, small and medium sized companies, cannot create jobs and expand as long as banks continue to cut loan issuance by 25%. These are the enterprises that create 70% of the jobs. Increasing taxes is the last thing government should do. Spending cannot increase and the economy cannot grow. This is a self-defeating process. Individuals have cut debt. Government has increased debt, which is the socialist answer. For every increased tax dollar the economy falls by $2 to $3 dollars, hardly a worthwhile exchange. This approach points out that government is more interested in control than recovery. The end of tax breaks means individuals will lose buying power of about $2 trillion if the taxes in the medical reform act are included.

Goldman Sachs is being accused in a lawsuit by Liberty Mutual Insurance of misleading investors in 2007 when it sold Fannie Mae preferred shares while betting against the US mortgage market.

Goldman misrepresented Fannie Mae’s health when it underwrote the offerings, in which the insurer invested $62.5 million, according to a complaint filed Thursday in federal court in Boston. The investment bank said the offering was to raise surplus capital when it was actually needed to help Fannie Mae sustain its business, said Boston-based Liberty Mutual, which accused Goldman of securities fraud.

“As a knowledgeable and sophisticated investor in the US real estate financial markets, and with access to Fannie Mae’s financial records, Goldman knew or recklessly disregarded the actual status of Fannie Mae’s capital structure,’’ Liberty Mutual said in the complaint. The mortgage guarantor was seized by the US government in 2008.

A spokesman for Goldman , said the suit was without merit would be contested.

Goldman has come under fire for its underwriting and investments as mortgage markets collapsed. The Securities and Exchange Commission sued Goldman in April, claiming it sold a collateralized debt obligation without disclosing that a hedge fund helped pick underlying securities and bet against the vehicles. Goldman has denied wrongdoing.

Anadarko Petroleum Corp. says it won’t help BP pay for the worst oil spill in US history.

The Houston company, which owns 25 percent of BP’s blown-out well in the Gulf of Mexico, said yesterday that it has refused to send the $272 million contribution BP requested in June.

The company believes it should be excused from payments because of BP’s reckless handling of the failed deepwater operation.

“Multiple proceedings and independent investigations are under way into BP’s actions and decisions on the rig,’’ spokesman John Christiansen said in a statement. “Although we have notified BP that we are withholding reimbursement to BP at this time, we remain committed to working with BP in good faith.’’

BP says it is disappointed and will evaluate its options.

“They have failed to live up to their obligations,’’ BP spokesman Mark Salt said in a statement. He said BP was notified of Anadarko’s decision on Wednesday.

Another minority owner, Mitsui Oil Exploration Co., has not responded to BP’s request to help pay for the spill.

Regulators shut four banks with $1.13 billion in combined assets, sending the number of U.S. failures this year to 90.

Home National Bank of Blackwell, Oklahoma, was the largest bank to be seized, with $644.5 million of assets, according to statements on the Federal Deposit Insurance Corp.’s website. The closures cost the FDIC deposit-insurance fund $159.9 million.

Georgia, Illinois and Florida are among the states hardest hit by the banking crisis. More than 27 lenders have failed in each of those states since the beginning of 2009, according to the FDIC. Three banks each in Maryland and New York have been closed this year.

“The remaining shakeout will be geographically concentrated and much more restricted to smaller institutions,” said Steve Reider, president of Bancography, a consulting firm based in Birmingham, Alabama. “I continue to think that geography is destiny.”

In an interview yesterday, FDIC Chairman Sheila Bair reiterated the agency’s forecast that 2010 will be the peak year for bank failures after more than 230 closures since 2009 pushed the agency’s deposit insurance fund into a deficit for the first time since the 1990s. Bair spoke in an interview for Bloomberg Television’s “Political Capital with Al Hunt.”

The FDIC included 775 banks with $431 billion in assets on the confidential list of problem lenders as of March 31, an increase from 702 banks with $402.8 billion at the end of the fourth quarter, the agency said in its quarterly banking report.

Two-thirds of U.S. states saw budget deficits widen this year as tax revenue fell to 2005 levels while demand for services grew. BMO Capital Markets analyst Justin Hoogendoorn said.  The growing budget pressure underscores the ‘lagging nature’ of municipal finance, said Hoogendoorn, managing director with BMO’s fixed-income group. ‘States will need to continue to trim expenses and raise taxes,’ Hoogendoorn said… ‘We remain comfortable that states will ultimately take appropriate action.


As the White House pushed for a Wall Street overhaul this year, Republicans hammered Democrats for ignoring two of the biggest problems in American finance: Fannie Mae and Freddie Mac.  The government-backed mortgage giants have cost taxpayers $145 billion and counting. The political struggle could be long and bitter.  Some Republicans in Congress contend that killing Fannie and Freddie is the only wise course.

Office vacancies in the U.S. rose to the highest level since 1993 in the second quarter as the sluggish economic recovery damps demand from corporate tenants, Reis Inc. said in a report.  The vacancy rate climbed to 17.4% from 16% a year earlier and 17.3% in the first quarter. Effective rents fell 5.7% from a year earlier and 0.9% from the previous three months.

New York Governor David Paterson delivered 6,709 vetoes -- a stack of paper 31 inches high -- to absent lawmakers, trimming $805.3 million of spending that still doesn’t close the state’s $9.2 billion deficit.  With its Senate adjourned, the nation’s third-biggest state by population has a spending plan without enough revenue to pay for it.

State and local government officials across the country are laying off government employees left and right in a futile effort to balance their ever collapsing budgets. State and local governments laid off 95,000 employees in the first six months of 2010, and Mark Zandi, chief economist of Moody's, estimates that 400,000 more layoffs will come in the next year. As previously reported, a report by the Center on Budget and Policy Priorities calculates that when private employers that work for state and local governments are included, job losses could reach 900,000. What do these people do who once could count on job security, if not always high pay? A March 2008 Census Bureau survey found that states employed 3.8 million full time, and local governments had over 11 million full time employees, with a total payroll of over $61 billion just for that month. These people not only provide police and fire protection, but also run state and local judicial systems, build and maintain highways, protect the public health, run hospitals, pick up the garbage, provide fresh water and treat the sewage, run transit systems, teach our school children and do myriad other vital tasks in society and economy. So, as state and local governments lay off more and more people, that has a cascading effect throughout local economies and accelerates the breakdown crisis.

At the county level, for example, a survey of 800 counties, last month by the National Association of Counties found that most counties in the US are freezing pay, delaying infrastructure repairs and resorting to layoffs due to revenue losses. "Counties large and small are experiencing their worst budget and revenue crisis since the early 1990s, said NACo Executive Director Larry Naake in a statement. Staffing reductions are hitting sheriffs, police and fire and rescue, with more than a third of the counties reporting they had furloughed or laid off workers in these departments. More than a fourth had cut staffing for jails and 25 percent had cut health workers.

And there's no end in sight without the LaRouche Plan. Newark, N.J. Mayor Cory Booker told Bloomberg News that cities will have to make "gut wrenching" decisions to reduce spending another 20 percent next year, which means hundreds of thousands more layoffs. "Government has to start shifting into this new era that we're in and dealing with the realities of this," the mayor said. "Cities are really in the eye of the storm right now as far as shortfalls," said Chris Hoene, director of research for the National League of Cities. "Pretty much all of them are facing budget shortfalls and are in the second year, so they have to make personnel cuts."

Many public universities face “dramatic declines” in funding and possible ratings downgrades as states cut and delay annual appropriations, Moody’s Investors Service said.

States are reducing funding to public universities by as much as 6 percent this fiscal year compared with last, Moody’s analysts led by Dennis Gephardt wrote in a report dated today. Institutions rated A2 and A3, five and six steps below the top grade, face the greatest risk of downgrade, New York-based Moody’s said.

“Many U.S. public universities face dramatic declines in state funding on a scale that surpasses past experience,” the analysts wrote. States spent a combined $90 billion on public universities in fiscal 2009, which amounted to about 30 percent of the revenue at the institutions, down from 50 percent two decades ago, according to Moody’s.

Public colleges and universities also face a potential “funding cliff” beginning in fiscal 2012 when stimulus funds are no longer available, the analysts wrote. In 20 states, money from the American Recovery and Reinvestment Act made up more than 4 percent of budgeted support for public universities in fiscal 2010.

State governments face a combined $127.4 billion budget gap in the fiscal years 2010 through 2012 as the economy recovers from the recession, according to a report last month by the National Governors Association and the National Association of State Budget Officers. Most state fiscal years begin July 1.

Moody’s said in February it was reviewing all the public university bonds it rates from Illinois as a result of the state Legislature’s “extensive delays in budgeted appropriations,” according to the report. It also downgraded five of the institutions, including Illinois State University, to A3 from A2, according to a separate report.

The traditional hot bed of haute couture and fashion retail is experiencing an unprecedented plunge in end demand as Italy, absent trillions in fiscal and monetary stimulus boosts, has become a prime example of what US retail would look like absent the generosity of the government and the Fed. According to this Bloomberg TV report, "sales are worse than last year and business is getting worse and worse. The situation is not good." Summer sales revenues are expected to be down 5% across the board. Another factor blamed for poor sales: the weak performance by the Italian football team, and the resultant glut of jerseys. And when Prada and Gucci are seen offering extra discounts just to get shoppers into the stores, the whole concept of ultrapremium retail goes out of the window, putting the "aspirational shopper" paradigm on hold.

Bloomberg ran this story:

Purchases fell 0.3 percent after a 1.2 percent decline in May, according to the median estimate of 59 economists in a Bloomberg News survey ahead of figures due July 14. [What happened to best sales in 4 years?]

Investors who lost billions on boatloads of faulty mortgage securities have had a hard time holding Wall Street accountable for selling the things in the first place.

Because many of the worst lenders are now out of business, investors in search of recoveries have turned to the banks that packaged the loans into securities. But successfully arguing that Wall Street aided lenders in a fraud is tough under federal securities laws. This is largely a result of Supreme Court decisions barring investors from bringing federal securities fraud cases that accuse underwriters and other third parties as enablers.

Where there’s a will, however, there’s a way. And state courts are proving to be a more fruitful place for mortgage investors seeking redress, legal experts say.

A fading recovery, persistently high unemployment, Europe's debt troubles and commercial real estate losses have garnered most of the attention. But some Fed officials have begun talking more about another trouble zone -- recession-hit U.S. state and local government finances.

Minutes from the Fed's last meeting, on June 22-23, set for release on Wednesday, are likely to show the central bank trimmed its economic growth forecast, largely because of a run of disappointing data and fears of a European slowdown.

Bandholz said the Fed may be reluctant to say much more about state and local government budgets because that would involve treading into the realm of fiscal policy, which is the Treasury Department's responsibility. But they may draw more attention as the problem gets worse. Next year's state and local government budget gap is expected to reach $140 billion, or a little more than 1 percent of gross domestic product.

US small businesses are having to pay more to borrow relative to the Federal Reserve’s benchmark rate than at any time in at least a quarter of a century, according to official data from the central bank.

The Fed’s data show that in early May interest rates on small commercial and industrial loans, on average worth about $500,000, were 3½ per cent higher than the federal funds rate, the widest gap since the series began in 1986.

Businesses have hired 4.5 million workers under a new program that provides tax breaks for hiring unemployed workers, the Treasury Department said Monday.

It is unclear, however, how many of those workers would have been added without the tax break.

President Barack Obama signed a law in March that exempts businesses hiring people who have been unemployed for at least 60 days from paying the 6.2 percent Social Security payroll tax through December. Employers get an additional $1,000 credit if new workers stay on the job a full year.

Treasury released a report Monday estimating that from February through May, businesses hired 4.5 million workers who qualify for the tax breaks. Those businesses are projected to save $8.5 billion in taxes.

Many businesses also cut jobs during the period, though there was a net increase of about 993,000 jobs from February through May, according to the government's business payroll survey. The economy shed 125,000 jobs in June, according to the survey.

The United States trade deficit grew in May to more than $42 billion, its widest gap in nearly two years, mostly because of a rise in imports of consumer goods, according to government figures.

Imports rose to $194.51 billion in May, outstripping exports of $152.25 billion, the Commerce Department figures showed. The monthly report showed a trade imbalance of $42.26 billion, the largest since November 2008, when it stood at $43.8 billion.

Confidence among U.S. small businesses fell in June to the lowest level in three months as projections for profits, sales and economic conditions weakened, a private survey found.

The National Federation of Independent Business’s optimism index decreased to 89 from May’s 92.2 reading that was the highest since September 2008, the Washington-based group said today. Seven of the index’s 10 components dropped, led by a decline in the economic outlook six months from now.

Smaller firms need to increase hiring and business spending to ensure the economic recovery that began a year ago is sustained. The report shows employment stalled last month while executives planned to trim investment and inventories as they waited for demand to strengthen.

“Headwinds for the economy are still strong, making forward progress difficult to make and to hold,” William Dunkelberg, the group’s chief economist, said in a statement. “The small business sector is not on a positive trajectory and with this half of the private sector missing in action, the poor growth performance is no surprise.”

The index remains below levels associated with past economic rebounds. The gauge of expectations for better business conditions six months from now fell to minus 6 percent, a 14- point drop that accounted for the biggest share of the monthly decline in the overall index, today’s report showed.

A measure of earnings expectations fell 4 points to minus 32 percent in June. The net percent of owners projecting higher sales, adjusting for inflation, declined 10 points to minus 5 percent.

The survey’s net figures are calculated by subtracting the percent of business owners giving a negative answer from those giving a positive response.

Florida banks—already weakened by the real-estate bust and hit again by customers suffering from the BP PLC oil spill—are asking federal regulators for a reprieve from government-ordered capital raising as they struggle to stay alive.

In a Monday letter to Federal Deposit Insurance Corp. Chairman Sheila Bair and Federal Reserve Chairman Ben Bernanke, Florida's top banking lobbyist requested all local banks be granted a 12-month break from higher capital requirements, loan appraisals and new regulatory sanctions.

"Unless we work together in giving our banks more time to work through this oil crisis," more financial institutions will go under, wrote Florida.

Taxpayers have paid out nearly $1 million per year in settlements to congressional employees who have been harassed or otherwise treated badly by their political bosses over the past 14 years, according to records from the Office of Compliance.

The payouts stem from hundreds of complaints from employees, some of whom may have been sexually harassed or treated so poorly that third-party mediators were brought in to negotiate cash payoffs to settle the cases.

The controversy over allegations White House officials at least as high as Obama Chief of Staff Rahm Emanuel offered two congressional candidates jobs in return for campaign favors, which apparently would violate the law, is reheating – with a claim that one of the candidates colluded with the White House on what story to tell.

The U.S. trade deficit hit its widest level in a year and a half, as increased imports from China more than offset growth in exports, an imbalance that is weighing on the tepid economic recovery.

The U.S. trade deficit, the difference between exports and imports, increased 4.8% to $42.3 billion in May, the Commerce Department said Tuesday. That was the widest since November 2008. April's trade gap was revised upward from earlier estimates.

U.S. exports grew 2.4% to a 20-month high of $152.3 billion. Imports grew faster, expanding 2.9% to $194.5 billion.

The credit scores of millions more Americans are sinking to new lows.

Figures provided by FICO Inc. show that 25.5 percent of consumers — nearly 43.4 million people — now have a credit score of 599 or below, marking them as poor risks for lenders. It's unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use.

Because consumers relied so heavily on debt to fuel their spending in recent years, their restricted access to credit is one reason for the slow economic recovery.

"I don't get paid for loan applications, I get paid for closings," said Ritch Workman, a Melbourne, Fla., mortgage broker. "I have plenty of business, but I'm struggling to stay open."

FICO's latest analysis is based on consumer credit reports as of April. Its findings represent an increase of about 2.4 million people in the lowest credit score categories in the past two years. Before the Great Recession, scores on FICO's 300-to-850 scale weren't as volatile, said Andrew Jennings, chief research officer for FICO in Minneapolis. Historically, just 15 percent of the 170 million consumers with active credit accounts, or 25.5 million people, fell below 599, according to data posted on

More are likely to join their ranks. It can take several months before payment missteps actually drive down a credit score. The Labor Department says about 26 million people are out of work or underemployed, and millions more face foreclosure, which alone can chop 150 points off an individual's score. Once the damage is done, it could be years before this group can restore their scores, even if they had strong credit histories in the past.

On the positive side, the number of consumers who have a top score of 800 or above has increased in recent years. At least in part, this reflects that more individuals have cut spending and paid down debt in response to the recession. Their ranks now stand at 17.9 percent, which is notably above the historical average of 13 percent, though down from 18.7 percent in April 2008 before the market meltdown.

There's also been a notable shift in the important range of people with moderate credit, those with scores between 650 and 699. The new data shows that this group comprised 11.9 percent of scores. This is down only marginally from 12 percent in 2008, but reflects a drop of roughly 5.3 million people from its historical average of 15 percent.