Wednesday, December 10, 2008

Investors Buy U.S. Debt at Zero Yield

Editors' Note: What happens when people lose confidence in the economy? That is exactly what this story talks about. - MT

The New York Times - When was the last time you invested in something that you knew wouldn’t make money?

In the market equivalent of shoveling cash under the mattress, hordes of buyers were so eager on Tuesday to park money in the world’s safest investment, United States government debt, that they agreed to accept a zero percent rate of return.

The news sent a sobering signal: in these troubled economic times, when people have lost vast amounts on stocks, bonds and real estate, making an investment that offers security but no gain is tantamount to coming out ahead. This extremely cautious approach reflects concerns that a global recession could deepen next year, and continue to jeopardize all types of investments.

While this will lower the cost of borrowing for the United States government, economists worry that a widespread hunkering-down could have broader implications that could slow an economic recovery. If investors remain reluctant to put money into stocks and corporate bonds, that could choke off funds that businesses need to keep financing their day-to-day operations.

Investors accepted the zero percent rate in the government’s auction Tuesday of $30 billion worth of short-term securities that mature in four weeks. Demand was so great even for no return that the government could have sold four times as much.

Sunday, December 7, 2008

U.S. Loses 533,000 Jobs in Biggest Drop Since 1974

A job fair in Hialeah, Fla., in November

The New York Times - The government’s report of a giant job loss in November, the biggest monthly decline in a generation, puts more pressure on Congress and the administration to move quickly on a stimulus package, mortgage relief and perhaps financial aid for Detroit’s big automakers.

The nation’s employers cut 533,000 jobs in November, the Bureau of Labor Statistics reported Friday.

Not since December 1974, toward the end of a severe recession, have so many jobs disappeared in a single month — and the current recession, far from ending, appears to be just gathering steam.

“We are caught in a downward spiral in which employment, incomes and spending are collapsing together,” said Nigel Gault, chief domestic economist for IHS Global Insight. “With private spending frozen, we have no choice but to rely on a stimulus package to revive the economy.”

The unemployment rate rose to 6.7 percent, up just two-tenths of a percentage point from October, but up six-tenths over the last three months. More than 420,000 men and women who had been working or seeking work in October left the labor force in November.

More significantly, the unemployment rate does not include those too discouraged to look for work any longer or those working fewer hours than they would like. Add those people to the roster of the unemployed, and the rate hit a record 12.5 percent in November, up 1.5 percentage points since September.

Noting that 1.9 million jobs have been lost since the start of the recession a year ago — two-thirds of them since September — President-elect Barack Obama invoked public spending as the best way to get a dead-in-the-water economy moving again. “This painful crisis,” he said in a statement, is an opportunity “to improve the lives of ordinary people by rebuilding roads and modernizing schools for our children,” and by investing in clean energy projects.

CNBC video:

Tuesday, December 2, 2008

Recession began a year ago

Treasury Secretary Henry M. Paulson Jr. spoke at the Fortune 500 Forum in Washington on Monday.

Editor's Note - Not to brag, but I forecast nearly a year ago (last spring) that the U.S. economy had entered a recession. Appearing on Fox News, I said the numbers would sooner or later catch up with reality. See: What I didn't forecast was the depth or severity of the contraction. It looks like the current downturn is certain to be a long one. - MT

The New York Times - WASHINGTON — The United States economy officially sank into a recession last December, which means that the downturn is already longer than the average for all recessions since World War II, according to the committee of economists responsible for dating the nation’s business cycles.

In declaring that the economy has been in a downturn for almost 12 months, the National Bureau of Economic Research confirmed what many Americans had already been feeling in their bones.

But private forecasters warned that this downturn was likely to set a new postwar record for length and likely to be more painful than any recession since 1980 and 1981.

“We will rewrite the record book on length for this recession,” said Allen Sinai, president of Decision Economics in Lexington, Mass. “It’s still arguable whether it will set a new record on depth. I hope not, but we don’t know.”

As if adding a grim punctuation mark to what could become the worst holiday shopping season in decades, the Dow Jones industrial average plunged nearly 680 points, or 7.7 percent, to 8,149.09.

Part of the drop may have reflected profit-taking after last week’s surge in stock prices, but it also came in response to new data showing that manufacturing activity dropped to its lowest point in 26 years.

Both the chairman of the Federal Reserve, Ben S. Bernanke, and the Treasury secretary, Henry M. Paulson Jr., vowed to use all the tools at their disposal to restore a measure of normalcy to the economy.

Mr. Bernanke, speaking to business leaders in Austin, Tex., said it was “certainly feasible” to reduce the Fed’s benchmark overnight lending rate below its current target of 1 percent, signaling that the central bank would lower the rate at its next policy meeting in two weeks.

Sunday, November 30, 2008

A Shopping Guernica Captures the Moment

CONSUMED Bargain hunters move into a Wal-Mart in Elk City, Okla., at 5 a.m.

The New York Times - From the Great Depression, we remember the bread lines. From the oil shocks of the 1970s, we recall lines of cars snaking from gas stations. And from our current moment, we may come to remember scenes like the one at a Long Island Wal-Mart in the dawn after Thanksgiving, when 2,000 frantic shoppers trampled to death an employee who stood between them and the bargains within.

It was a tragedy, yet it did not feel like an accident. All those people were there, lined up in the cold and darkness, because of sophisticated marketing forces that have produced this day now called Black Friday. They were engaging in early-morning shopping as contact sport. American business has long excelled at creating a sense of shortage amid abundance, an anxiety that one must act now or miss out.

This year, that anxiety comes with special intensity for everyone involved — for shoppers, fully cognizant of the immense strains on the economy, which has made bargains more crucial than ever; for the stores, now grappling with what could be among the weakest holiday seasons on record; and for policy makers around the planet, grappling with how to substitute for the suddenly beleaguered American consumer, whose proclivities for new gadgets and clothing has long been the engine of economic growth from Guangzhou to Guatemala City.

For decades, Americans have been effectively programmed to shop. China, Japan and other foreign powers have provided the wherewithal to purchase their goods by buying staggering quantities of American debt. Financial institutions have scattered credit card offers as if they were takeout menus and turned our houses into A.T.M.’s. Hollywood and Madison Avenue have excelled at persuading us that the holiday season is a time to spend lavishly or risk being found insufficiently appreciative of our loved ones.

What Would Keynes Have Done?

The New York Times - IF you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics. His insights go a long way toward explaining the challenges we now confront.

According to Keynes, the root cause of economic downturns is insufficient aggregate demand. When the total demand for goods and services declines, businesses throughout the economy see their sales fall off. Lower sales induce firms to cut back production and to lay off workers. Rising unemployment and declining profits further depress demand, leading to a feedback loop with a very unhappy ending.

The situation reverses, Keynesian theory says, only when some event or policy increases aggregate demand. The problem right now is that it is hard to see where that demand might come from.

The economy’s output of goods and services is traditionally divided into four components: consumption, investment, net exports and government purchases. Any expansion in demand has to come from one of these four. But in each case, strong forces are working to keep spending down.

Crowd Tramples Wal-Mart Employee to Death

A day after a worker was trampled to death, shoppers lined up outside a Wal-Mart on Saturday and police cars patrolled the area.

The New York Times - The throng of Wal-Mart shoppers had been building all night, filling sidewalks and stretching across a vast parking lot at the Green Acres Mall in Valley Stream, N.Y. At 3:30 a.m., the Nassau County police had to be called in for crowd control, and an officer with a bullhorn pleaded for order.

Tension grew as the 5 a.m. opening neared. Someone taped up a crude poster: “Blitz Line Starts Here.”

By 4:55, with no police officers in sight, the crowd of more than 2,000 had become a rabble, and could be held back no longer. Fists banged and shoulders pressed on the sliding-glass double doors, which bowed in with the weight of the assault. Six to 10 workers inside tried to push back, but it was hopeless.

Suddenly, witnesses and the police said, the doors shattered, and the shrieking mob surged through in a blind rush for holiday bargains. One worker, Jdimytai Damour, 34, was thrown back onto the black linoleum tiles and trampled in the stampede that streamed over and around him. Others who had stood alongside Mr. Damour trying to hold the doors were also hurled back and run over, witnesses said.

Sunday, November 23, 2008

Stocks Hit New Low on Collapse of Automaker Deal

No deal for the carmakers and other bad news sent the markets tumbling Thursday. The S&P 500 hit an 11 1/2 year low. Stacey Delo reports.

Echoes of the Past

How does the current financial crisis compare to the Great Depression, and has the government learned the lessons of the 1930

Near Fears Arise in Michigan Over Economy

Editors note: This is why the government needs to step in and help the economy and the auto industry. Otherwise, we might as well say goodbye to Ohio and Michigan. - MT

The New York Times - FENNVILLE, Mich. — The bad news keeps coming to Michigan, a state long stuck in recession and at ground zero in the national economic downturn. But unlike in months and years past, there are no exceptions to the despair, not even here among the bucolic resort communities along Lake Michigan.

Sandra Peavley, 54, of Warren, near Detroit, ran out of unemployment last month.

The flailing auto industry is important here, but so is furniture building, tourism, the retail trade and construction — pieces of the economy long buffered from the downturn in Detroit. Now waves of layoffs are sweeping towns around here in wine country and elsewhere across the state, swelling the ranks of the unemployed just as tens of thousands of those already of out of work fear running out of unemployment benefits.

“You just sit and you worry,” said Pat Weber, a construction administrator in Fennville who was laid off more than a year ago. “In the last year, I’ve put in for more than 100 jobs. I stopped counting after 110. It’s just so defeating.”

All around Fennville and its neighbors here in southwest Michigan, front lawns are peppered with for-sale signs and merchants complain about slow days. But while this remains a beautiful place with none of the obvious blight of Detroit on the other side of the state, residents say the hardship beneath the surface is very real.

It is the same story in other parts of Michigan, as the state’s already entrenched recession — in at least its fifth year, according to economic experts — digs deeper as a result of the recent global financial crisis.

New data show the state’s unemployment rate crept up to 9.3 percent, almost three times what it was in 2000, and, along with Rhode Island, the highest in the country. Just last week, Herman Miller Inc., an office furniture company based in Zeeland, Mich., announced that it would eliminate or lay off 400 to 650 workers, many of them in western Michigan. SKD Automotive, an auto parts manufacturer in Jonesville, Mich., where it is the largest employer, indicated it would eliminate 300 jobs.

As a result of the steady job losses that began in the summer of 2000, 1.82 million Michigan residents, or close to 20 percent of the population, are now on some form of public assistance, including food stamps and home heating credits, a record for the state.

“It is really hard not knowing if you aren’t going to be working the next day,” said Wendy Einhardt, 47, who spent 16 years making plastic car parts before being laid off in August in Sebewaing, on Saginaw Bay of Lake Huron. “You worry a lot about what is coming.”

Around the state, home foreclosures are commonplace, the trust fund that pays unemployment benefits is millions of dollars in debt, food banks are struggling and health agencies are reporting an uptick in people with symptoms like anxiety and depression. Suicides were up in recent years, although officials caution against drawing any direct links between deaths and the economy.

In one sign of distress, in the first nine months of this year, some 130,000 Michigan residents who had lost their jobs remained out of work so long that they ran out of regular unemployment benefits. By the middle of this month, 63,000 people (who had already run out of their ordinary maximum benefit — as many as 26 weeks, at as much as $362 a week) also ran out of an extension authorized by Congress.

Without a second extension of benefits, signed by President Bush on Friday, tens of thousands of others had been expected to run out each month.

Wednesday, November 12, 2008

What A GM Bankruptcy Would Mean

What bankruptcy would mean to GM
What bankruptcy would mean to GM

GM Bankruptcy?
GM Bankruptcy?

GM, Teetering on Bankruptcy, Pleads for Federal Bailout

Rick Wagoner, G.M.’s chief, said his company needed help immediately.

Editor's Note: Hard to believe that things are this bad. But if GM does file for bankruptcy, this will send a shock wave through the economy nationally.

The New York Times - DETROIT — Just two months after celebrating its 100th birthday, General Motors is facing the grim prognosis that it may not survive to see another year unless it is rescued by a bailout from the federal government.

Shares in G.M. sank to their lowest point in 65 years, to $2.92, on Tuesday, the day after the company revealed in a federal filing that its “ability to continue as a going concern” is in substantial doubt because it may run out of money by the end of the year.

Its cash cushion has been shrinking by more than $2 billion a month this fall. If that continues, G.M.’s reserves will fall below the minimum of $10 billion in cash it needs to run its global operations by January, the company said in its third-quarter S.E.C. filing.

In that event, G.M. said it might be unable to pay its suppliers, meet its loan covenants or cover health care obligations in its labor contracts. The extent of G.M.’s financial crisis, revealed in greater detail in its filing than it acknowledged before, is proving to be far worse than investors and analysts expected just last week.

Monday, November 10, 2008

The Seeds of Credit Crisis Started at J.P. Morgan

Editor's Note: Interesting piece about a misunderstood subject - the rise of credit derivatives - sophisticated securities that allow the transfer of credit risk. Former WSJ alum Jesse Eisinger tells an interesting story of how these complicated financial securities got their start. - MT

by Jesse Eisinger - Portfolio Magazine - The roots of this year’s financial crisis go back to a small team of bankers at J.P. Morgan in New York. Now, their invention—credit derivatives—has helped bring down Wall Street and has left Morgan with its biggest exposure of all.

Credit derivatives aren’t, of course, solely to blame for the pandemic that has helped bring down Wall Street. They didn’t single-handedly force Bear Stearns and Lehman Brothers to bulk up on toxic debt, dooming them to collapse. But they made the financial world more complex and more opaque. Ultimately, they have exacerbated the market panic, as financial firms and regulators have belatedly come to grips with the enormity of the problems. Merrill Lynch ultimately capitulated to a sale because investors had no confidence that the firm had a handle on what its problems were. When the federal government took over A.I.G. in September, it was largely because of the insurance behemoth’s exposure to credit-default swaps, a type of derivative that flourished in the wake of Demchak and his team’s creations. By mid-September, Treasury Secretary Hank Paulson was forced into proposing the largest bailout in U.S. history. Securities and Exchange Commission chairman Christopher Cox (S.E.C. No Evil, October) called for regulating credit derivatives.

Monday, November 3, 2008

Chinese Dairymen Spiked Milk, Eggs With Toxic Protein

The Wall Street Journal - ZHANGZHUANG, China -- Before melamine-laced milk killed and sickened Chinese babies and led to recalls around the world, the routine spiking of milk with illicit substances was an open secret in China's dairy regions, according to the accounts of farmers and others with knowledge of the industry.

Farmers here in Hebei province say in interviews that "protein powder" of often-uncertain origin has been employed for years as a cheap way to help the milk of undernourished cows fool dairy companies' quality checks. When the big companies caught on, some additive makers switched to toxic melamine -- which mimics protein in lab tests and can cause severe kidney damage -- to evade detection Worries about the extent of contamination in China's food supply took on new urgency this weekend.

After melamine was discovered in eggs in Hong Kong and mainland China, Beijing called for a nationwide crackdown to stop the contamination of animal feed, which authorities believe is the source of the melamine in eggs. The Agriculture Ministry said it has found melamine in 2.4% of the feed it has checked since mid-September, and has destroyed or confiscated more than 3,600 tons. The ministry called on local officials to "resolutely crush the dark dens" making and selling melamine for feed, saying it had found 238 and was investigating 278 more.

Melamine in feed hasn't led to the same kind of high concentrations of the chemical in eggs that were found when it was directly poured into milk -- thousands of parts per million in some cases. But amounts found in eggs have been above the safety standard China and several other countries established of 2.5 parts per million.

Egg sales are down, as is demand for chicken, and some farmers have begun slaughtering chickens they can no longer use. State media criticized food companies and government consumer-protection watchdogs for the lapses, as Beijing's response showed its alarm about a broadening threat to public confidence in food safety. Meanwhile, local officials in some areas were inspecting meat and considering widening the checks to farm-raised fish.

Saturday, November 1, 2008

Call it the economy - French flock to Big Macs

Bloomberg News - It's lunchtime in Paris, and the packed restaurant has neither checkered tablecloths nor carafes of red wine. It's a McDonald's, and the French are lovin' it.

While rising prices and record low consumer confidence drive the French to throw their culinary pride to the wind and embrace le Big Mac, traditional bistros are hurting. About 3,000 independent French restaurants filed for bankruptcy in the first half of the year, a record 27 percent more than a year earlier, according to Paris-based statistics office Insee.

Meanwhile, France has cemented its position as McDonald's Corp.'s biggest earner outside the U.S., accounting for 13 percent of total sales.

"A hamburger patty and fries in a bistro around the corner from my office costs almost twice as much," said Alexandre Cavanel, a 27-year-old computer programmer, as he tucked into his 8-euro ($10.70) double-cheeseburger menu meal with colleagues at a McDonald's in Paris' Opera district.

McDonald's, accused by Jose Bove, an activist farmer who ran last year for president, of serving malbouffe, or junk food, said revenue in France will increase 12 percent this year.

In contrast, the fate of traditional French restaurants might worsen as a slumping economy drives more people to swap offerings such as duck dish confit de canard and blanquette of veal for hamburgers and fries, economists said.

France might have slipped into its first recession in more than 15 years in the third quarter, Insee said. Consumer spending will stagnate for the rest of 2008 as employment and the real-estate market deteriorate and credit for new investment dries up, the statistics office said.

"Clearly, the current economic environment speaks in favor of cheaper products," said Dominique Barbet, an economist at BNP Paribas SA in Paris.

Many French restaurateurs and cafe owners are concerned that rising prices and growing unemployment, combined with the global financial crisis, will stop people from dining out in one of the world's most pervasive restaurant cultures.

Hollywood casts business titans as villians

Michael Douglas stars as Gordon Gekko in 1990 hit movie "Wall Street." Hollywood now plans a new group of films and TV shows highlighting business excesses, including a sequel to Wall Street.
Hollywood has found its next bad guy.

Bloomberg News - Welcome back, Gordon Gekko.

Film and television studios are rushing to tap America's fixation with the financial crisis and anger at the Wall Street executives blamed for it.

News Corp.'s 20th Century Fox is making a sequel to Wall Street, where Michael Douglas's Gekko proclaimed, "Greed is good." NBC's Law & Order is building episodes around financial themes. The General Electric Co. division also is developing a one-hour series called Outrageous Behavior, a battle of the sexes set in Wall Street.

"Our development is tied to what is relevant in today's world," Teri Weinberg, NBC Entertainment's executive vice president overseeing comedy and drama programming, said in an e- mail. "We hope to exemplify the foolishness of the human condition in the world of finance."

Time Warner Inc. has slated Confessions of a Wall Street Shoeshine Boy for 2009. The movie follows a reporter who uncovers corporate criminals by befriending the man who polishes their wingtips, according to Inc. The New York-based media company will release The Wolf of Wall Street in 2010, based on the autobiography of a stockbroker involved in a 1990s securities fraud, IMDB said.

"These films may be timed just right to take advantage of the wave of interest" in Wall Street and the economy, said Paul Dergarabedian, president of box-office tracker Media By Numbers in Encino, Calif. "One of these movies may hope to be the next Wall Street."

As of Oct. 14, demand for the two-decade-old film at Netflix Inc., the mail-order movie service, had increased 11 percent since Sept. 1, according to Steve Swasey, a company spokesman.

The original Wall Street ends with police collecting evidence on Gekko for securities violations. The sequel follows the character after he emerges from prison, according to the trade magazine Variety. Douglas may reprise his role as Gekko, the magazine reported.

The rush to exploit the crisis may lead to films lacking nuance and depth of character, said Stanley Weiser, who co-wrote the original Wall Street and wrote W., the film about George W. Bush that opened on Oct. 17.

Wednesday, October 22, 2008

Suddenly, Europe Looks Pretty Smart

The New York Times - Paris — Is Europe no longer an economic museum?

In recent years, as Wall Street boomed, Americans often dismissed Europe as a place for languorous meals and vacations, not economic innovation.

London remained a financial hub, of course, but it was often treated dismissively — as a flashy aberration pumped up by petrodollars from Russia and the Gulf, an exception to the otherwise somnolent Continent.

That kind of thinking is now under challenge, because during the last 10 days Europeans have proved more nimble than Americans at getting to the root of the global financial crisis, whatever they may have lacked as innovators.

After initially dithering, Europe’s leaders came up with a financial bailout plan that has now set the pace for Washington, not the other way around, as had been customary for decades.

That was clear when the Treasury Department decided to depart from its own initial bailout plan — the one approved by Congress earlier this month — and invest up to $250 billion directly in the nation’s banks. The nuts and bolts of that approach had been laid out days earlier by European leaders as they tried to save their own financial system.

And that outcome left Gordon Brown, the British prime minister, and Nicolas Sarkozy, the French president, in something of a commanding position to claim the title of wise men. They are now speaking of creating a Bretton Woods agreement for the 21st century, while the leaders of the country that fathered the postwar financial system worked out at Bretton Woods, N.H., prefer to stay away from such big-picture talk.

In London, where Britain’s willingness to follow the United States into Iraq five years ago still evokes outrage, officials have been especially quick to point out they didn’t follow Washington’s lead this time.

“There’s no doubt that it was a British plan that was copied by the U.S.,” said Leon Brittan, who served as Home Secretary under Margaret Thatcher and was a top official at the European Commission. “It shows that the American conception of Europe as an economic basket case is outmoded and wrong.”

“Europe showed the capacity to respond to a crisis more quickly than the U.S.,” he added. “The U.S. went through agonies to come up with a plan.”

Monday, October 20, 2008

Federal Government Swimming in Red Ink

“The next president will inherit a fiscal and economic mess of historic proportions,” said Senator Kent Conrad, chairman of the Senate Budget Committee.

The New York Times - Like water rushing over a river’s banks, the federal government’s rapidly mounting expenses are overwhelming the federal budget and increasing an already swollen deficit.

The bank bailout, in the latest big outlay, could cost $250 billion in just the next few weeks, and a newly proposed stimulus package would have $150 billion or more flowing from Washington before the next president takes office in January.

Adding to the damage is that tax revenues fall as the economy weakens; this is likely just as the government needs hundreds of billions of dollars to repair the financial system. The nation’s wars are growing more costly, as fighting spreads in Afghanistan. And a declining economy swells outlays for unemployment insurance, food stamps and other federal aid.

But the extra spending, a sore point in normal times, has been widely accepted on both sides of the political aisle as necessary to salvage the banking system and avert another Great Depression.

Insiders Dump Shares To Meet Margin Calls

The New York Times - When executives own big stakes in the companies they run, investors can rest a little more easily at night, knowing those managers have the shareholders’ best interests at heart. Except when maybe they don’t.

As the staggering destruction of wealth in the stock market has recently revealed, executives can sometimes appear to own shares in a company, but have actually pledged them as collateral for a loan. And if there is a sharp drop in the stock’s value, the executive may suddenly be forced to dump those shares, very likely adding to the stock’s downdraft.

And the other shareholders probably never saw it coming.

As it turns out, while corporate insiders must disclose their comings and goings in their companies’ shares, experts say there are no hard and fast rules requiring that the public be told when an executive has put a big block of shares at risk by borrowing against them.

Already this month, there have been about $1 billion in sales by company insiders dumping stock to meet margin calls, as lenders’ demands for the stock sales are known. According to Equilar, an executive compensation research firm in Redwood Shores, Calif., executives at three dozen companies have disclosed such sales since October.

Under Securities and Exchange Commission rules, executives are typically required to disclose insider sales within two days of making them and indicate why they were sold, including as a result of a margin call. But experts say there are no rules requiring that the public be told ahead of time that an executive has pledged stock in a margin loan or how the borrowed money is being used. It might be a loan to buy more shares of the company’s stock — which would indicate a vote of confidence in the shares. Or it might be a loan to buy some other company’s stock or something else altogether — possibly a sign that the executive thinks there are better places to invest.

Friday, October 17, 2008

Tough Times Ahead for Universities

The Wall Street Journal - The financial and economic tsunami that has ripped through Wall Street and the housing market is beginning to wash across the college green.

Higher education hasn't yet seen anything to compare with foreclosures and bank nationalizations in the private sector. But seized-up credit markets, shrinking endowment funds and a reduction in state subsidies are punishing universities from California to Vermont.

A campus construction boom is slowing, administrations are cutting jobs and faculty may be forced to pay more into their pension funds. The demise of a $9.3 billion investment fund used by 900 colleges has some schools scrambling to pay their bills.

It all brings a gloomy pall to what has been, until recently, a booming industry. Higher education has grown rapidly in the last half-century into a formidable slice of the economy. U.S. colleges and universities spend $334 billion annually, employ 3.4 million people and and enroll 17.5 million students.

The boom was powered by a growing stream of donations, strong returns on endowments, rising enrollments and tuition prices that climbed well above the rate of inflation -- paid, more and more, by families who borrowed heavily to meet the bills.

All of these wealth generators for the Ivory Tower are facing threats in the current economic turmoil. The cratering stock market has already hit endowments. Falling markets typically take a toll on gifts, many of which are made, for tax reasons, in the form of appreciated stocks and bonds. Analysts and schools are predicting even bigger tuition increases than those seen so far. But this time, families may be in no position to meet the higher bills. Falling house prices have sapped their ability to use home-equity loans for tuition payments, and the credit crunch has forced many lenders to stop making student loans.

Families Strain to Pay Tuition

The New York Times - In difficult dinner-table conversations, college students and their parents are revisiting how to pay tuition as personal finances weaken and lenders get tough.

Diana and Ronnie Jacobs, of Salem, Ind., thought their family had a workable plan for college for her twin sons, using a combination of savings, income, scholarship aid and a relatively modest amount of borrowing. Then her husband lost his job at Colgate-Palmolive.

“It just seems like it’s really hard, because it is,” Ms. Jacobs, an information technology specialist, said of her financial situation. “I have two kids in college and I want to say ‘come home,’ but at the same time I want to provide them with a good education.

The Jacobs family may be a harbinger of what is to come. Ms. Jacobs pressed the schools’ financial offices for several thousand dollars more for each son’s final year of college, and each son increased his borrowing to the maximum amount through the federal loan program. So they at least will be able to finish at their respective colleges.

With the unemployment rate rising and a recession mentality gripping the country, financial aid administrators say they expect many more calls like the one from Ms. Jacobs. More families are applying for federal aid, and a recent survey found that an increasing portion of families expected to need student loans. College administrators worry that as fresh cracks appear in family finances, they will not have enough aid money to go around, given that their own endowment returns are disappointing, states are making cutbacks and fund-raising will become more difficult.

What Will The Bailout Do to The Economy?

What if the Government Bailout Fails?

The New York Times - Trust is a precious thing, and the banks still don’t have much of it. Not from the public, and not from one another.

The government’s latest bailout plan — to invest $250 billion in banks with few strings attached — could help restore that trust. But it will succeed only if the government is able to make it clear that those investments confer a sort of “Good Bookkeeping” seal of approval.

That will depend on whether the government makes sure that the cash goes only to banks that are in decent shape, or at least will be after they get the cash.

By committing half the money to nine large banks, the Treasury Department presumably has taken care of most, if not all, of the banks whose failure would threaten the system. Now it has the chance to carefully go over the books of banks that apply to join the bailout club.

The signs of possible distress that the government should look for go far beyond toxic mortgage securities and credit-default swaps. Many smaller banks were not invited to those parties, and therefore suffer no hangover from them. But real estate construction loans, both for homes and commercial buildings, were far more prevalent in banks all around the country. Credit card losses are looming as unemployment rises.

It will take weeks, if not months, for the government to prove that it will invest the money wisely. But so far, it has not even made clear that it is determined to leave out the bad banks.

Treasury officials say they have not made any decisions on what criteria will be used to decide which banks are allowed into the program, other than to consult with regulators. That is probably true; the government’s frantic efforts to halt the slide in recent weeks have had a “ready, fire, aim” feel to them.

Or, in the gentler words of the Federal Reserve chairman, Ben S. Bernanke, “Our strategy will continue to evolve and be refined as we adapt to new developments and the inevitable setbacks.”

Saturday, October 11, 2008

Monday, September 8, 2008

So much for free markets - auto companies want rescue, too

The Wall Street Journal -- Top auto executives, including General Motors Corp. Chief Executive Rick Wagoner, will launch a lobbying push this week for billions in government loans to help beleaguered auto makers and their suppliers.

They aim to get as much as $50 billion in low-cost loans, and will try to play down the idea they are seeking a bailout, arguing that Washington has offered similar help to a range of other troubled industries, people familiar with the auto makers' lobbying plans said.

The auto makers and their Congressional supporters also will argue that they need funding to meet new fuel-economy standards imposed by Congress, and that the debt markets have broken down in the credit crisis, leaving them few other options, these people said.

Most analysts agree the new fuel-economy rules that take effect in the next decade will require billions of dollars in investment by the auto industry -- money the Detroit three don't have right now.Top auto executives, including General Motors Corp. Chief Executive Rick Wagoner, will launch a lobbying push this week for billions in government loans to help beleaguered auto makers and their suppliers.

World Markets React to Bailout

U.S.Seizes Mortgage Giants

The federal government now owns the biggest piece of the $11 trillion mortgage market - Fannie and Freddie Mac.

In an stunning move, the feds seized Fannie Mae and Freddie Mac in its most dramatic market intervention in decades.

Treasury plans to replace the companies' CEOs and provide up to $200 billion as part of the rescue. What got us into this mess? Bad underwriting and sloppy management. In the end, will the government end up merging the two mortgage giants. Did I hear that Fannie + Freddie = Frannie ?

As Crisis Grew, a Few Options Shrank to One

The New York Times - For Freddie Mac, the beleaguered mortgage finance giant that was desperately trying to avoid a government takeover, the moment of truth came three weeks ago.

In a last-ditch effort to raise money to offset billions of dollars of losses, Freddie’s chief executive, Richard F. Syron, traveled to New York to huddle with potential investors at the headquarters of Goldman Sachs and a law firm, Davis, Polk & Wardwell.

Over a couple of days, he and his lieutenants made their pitch — only to have every option rejected, people briefed on the discussions said.

Empty-handed and crestfallen, Mr. Syron canceled plans to join his family at their weekend home on Cape Cod and returned to Washington to deliver the bad news to Treasury Secretary Henry M. Paulson Jr.: he still hadn’t found anyone willing to save Freddie Mac.

Mr. Paulson and a team at the Treasury had been working for months on plans to prop up both Freddie and its sister company, Fannie Mae, hoping they would never have to act.

What Bailout of Mortgage Giants Means

The New York Times - So what does the federal takeover of two mortgage finance giants mean to consumers?

Mortgage rates may fall a bit initially but probably not enough to halt the decline in home prices anytime soon. Some delinquent borrowers may have a better shot at modifying their loans and ending up with lower fixed payments. And the rules on new mortgages could slightly change.

Oh, and the federal government will help pay for it all, using your tax money.

These themes emerged over the weekend as mortgage specialists wrinkled their foreheads to determine what the federal bailout of the mortgage finance giants Fannie Mae and Freddie Mac will mean for consumers. They cautioned, however, that the unprecedented nature of the rescue makes it hard to know all of the ramifications immediately.

So first, what happened here, and why? In order to provide capital to banks that lend money to aspiring homeowners, Fannie and Freddie need to be able to sell the mortgages, packaged as securities, to investors around the world once the two companies have bought the loans from the banks.

All this worked fine until foreign investors got nervous about the housing market and the uncertainty over how a theoretical federal takeover might affect their holdings. When concerns emerged about the viability of Fannie and Freddie, the government thought it had no choice but to step in and take over.

Sunday, September 7, 2008

That Student Loan, So Hard to Shake

The New York Times - MOST people struggling to pay off their student loans keep quiet about it. They do not want to acknowledge that, perhaps in a fit of naïve, youthful optimism, they borrowed more than they could handle.

Then there is Alan Collinge, who for years has described his struggle with tens of thousands of dollars in student loan debt to anyone who will listen. He has appeared on “60 Minutes” criticizing Sallie Mae, the nation’s largest student lender, and has been quoted in the pages of this and other newspapers attacking loan companies.

Student lending is a big business, one that has been the subject of many complaints over the past two years after revelations of questionable ties between lenders and colleges’ financial aid officers. More recently, tight credit markets raised the possibility that some students might not be able to borrow to go to college in the fall.

But much less attention has been paid to what happens to students after they borrow. Lenders who make loans guaranteed by the federal government can more easily take steps against borrowers — like garnishing wages and benefits — than they can with other kinds of unsecured consumer debts. And all student loans, federally guaranteed or not, are extremely hard to get rid of in bankruptcy proceedings, more so than credit card or other debt.

Saturday, September 6, 2008

Why Journalists Never Get Wealthy Moving

The Wall Street Journal - If you're a true cheapskate, stay put.

Moving is expensive and wasteful. You spend thousands fixing up the home you sell, and then thousands more fixing up the home you buy. You throw out perfectly good packaged food in your old home, and then go out and buy that same food in your new home. You throw out drapes, and buy new drapes. You register vehicles in one state, and then register them again in another state. The list goes on and on and on.

I speak from experience. My wife and I have bought and sold four houses in the last 17 years, and we're now buying a fifth one in northern New Jersey. Each time the sale was prompted by a new assignment for The Wall Street Journal.

Career-wise, it has been worth it. But strictly in real-estate-investment terms, we usually would have come out ahead financially by staying put instead of moving to another city.

Thursday, August 28, 2008

How Medical Marijuana is Transforming the Pot Industry

Most people think business reporting is boring and is about numbers and guys in suits. But a good business writer can write about anything - as long as it involves money. That is why this recent New Yorker piece is a great business story. Read on.

The New Yorker - July 28, 2008 - The Tibetan prayer flags suspended on a string over the sleeping body of Captain Blue rose and fell in fluttering counterpoint to the wheezy rhythm of his breath. Lifted by a gentle breeze off the Pacific Ocean, each swatch of red, white, yellow, or green cotton bore a paragraph of Asian script. Every time a flag flaps in the breeze, it is thought, a prayer flies off to Heaven. Blue’s mother says that when her son was an infant he used to sleep until noon, which is still the time that he wakes up most days, on his platform bed in a one-bedroom apartment overlooking Venice Beach, a neighborhood of Los Angeles.

I recently spent six months, off and on, with Blue—at his apartment, in private homes, on farms, in pot grow rooms, and in other places where “medical marijuana” is produced, traded, sold, and consumed in California. During that time, I saw thousands of Tibetan prayer flags. The flags identify their owners with serenity and the conscious path, rather than with the sinister world of urban dope dealers, who flaunt muscles and guns, and charge exorbitant prices for mediocre product. For Blue and tens of thousands of like-minded individuals, Proposition 215 presented an opportunity to participate in a legally sanctioned experiment in altered living. The people I met in the high-end ganja business had an affinity for higher modes of thinking and being, including vegetarianism and eating organic food, practicing yoga, avoiding prescription drugs in favor of holistic healing methods, travelling to Indonesia and Thailand, fasting, and experimenting with hallucinogenic drugs. Many were also financially savvy, working long hours and making six-figure incomes.
Full story can be obtained here:

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Saturday, August 16, 2008

Is College Worth the Cost

FBI Probes Home Buying Incentives - Was there fraud?

Like the Savings and Loan bust in the 1980s, allegations of questionable practices are now surfacing and may have contributed to the hyper growth in housing sales. Stay tuned.

The Wall Street Journal - When home sales began to slow at the start of the downturn, home builders offered buyers incentives -- instead of reducing prices -- to stimulate demand. The incentives included cars, tuition and credit-card payments, and even cash.

Now, federal investigators are questioning whether some of those incentives misled lenders and caused them to write mortgages that were artificially inflated, contributing to today's home-price crash.

Using incentives to sell homes has long been a marketing tool for builders. When properly disclosed and structured, the practice is legal. But the Federal Bureau of Investigation is looking into allegations that home builders, brokers and appraisers defrauded lenders by not disclosing unusually large incentives to buyers, which could have added as much as $100,000 to the price of a home.

Dollar's Rise Could Damp Inflation

The Wall Street Journal - The U.S. dollar marched higher again on Friday, continuing a development that could ease inflationary pressures but also could slow a U.S. export boom.

Just a couple of months ago, policy makers were alarmed about how far the dollar had fallen. Now evidence is building that its seven-year slide may be ending.When a currency strengthens, it's usually a sign of health in the underlying economy. In this case, the dollar's rally is a sign of weakness in other economies. Reports in recent days showed that the economies of Japan and Europe contracted in the second quarter, and the U.K. slowed. It's now looking less likely that the rest of the world will be insulated from U.S. economic ills.

The dollar's latest rise is closely tied to recent declines in oil and other commodity prices. As economies in the rest of the world slow, demand for raw materials appears to be waning, which is taking pressure off commodity prices. These goods are typically priced in dollars. As the U.S. currency strengthens, commodity producers have less incentive to increase their prices, further easing the upward pressure on prices.

Tuesday, August 12, 2008

The Problem With Wall Street Analysts Research

New York Times - Frank P. Quattrone thinks Wall Street research has “proven to be a disaster, in my humble opinion.

You remember Mr. Quattrone, don’t you? He’s the mustachioed Silicon Valley banker who brought some of the biggest technology initial public offerings to market — Cisco Systems, Amazon, Netscape, just to name a few. His career was famously derailed by a four-year-long public battle against obstruction of justice charges at the height of the previous market bubble. The charges were ultimately dropped, and he’s now back in business.

“I do think the industry should petition to remove the Spitzer initiatives because ultimately they hurt the competitiveness of our country by denying small companies the access to research analysts,” he said, throwing a proverbial grenade into the auditorium.

Mr. Quattrone was referring, of course, to the former New York attorney general Eliot Spitzer’s landmark settlement in 2002, which forced the separation of investment banking from research. The settlement followed an investigation into whether some Wall Street analysts were providing misleading ratings of the companies they covered to bolster their firms’ investment banking business. Henry Blodget of Merrill Lynch and Jack Grubman of Citigroup were barred from the securities industry and others took their licks. (As an aside, Mr. Spitzer was not behind Mr. Quattrone’s prosecution.)

As a result, banks are no longer allowed to pay their analysts from any revenue derived from investment banking, only from trading operations. Beyond that, an investment banker can’t even call a research analyst at the same firm without a lawyer chaperoning the conversation.”

Monday, August 4, 2008

Companies Tap Workers Pension Plans To Fund Executive Benefits

At a time when scores of companies are freezing pensions for their workers, some are quietly converting their pension plans into resources to finance their executives' retirement benefits and pay.The practice has drawn scant notice. A close examination by The Wall Street Journal shows how it works and reveals that the maneuver, besides being a dubious use of tax law, risks harming regular workers. It can drain assets from pension plans and make them more likely to fail. Now, with the current bear market in stocks weakening many pension plans, this practice could put more in jeopardy.The background: Federal law encourages employers to offer pensions by giving companies a tax deduction when they contribute cash to a pension plan, and by letting the money in the plan grow tax free. Executives, like anyone else, can participate in these plans.

But their benefits can't be disproportionately large. IRS rules say pension plans must not "discriminate in favor of highly compensated employees." If a company wants to give its executives larger pensions -- as most do -- it must provide "supplemental" executive pensions, which don't carry any tax advantages.

Thursday, July 24, 2008

Amid Turmoil, U.S. Turns Away From Decades of Deregulation

WASHINGTON -- The housing and financial crisis convulsing the U.S. is powering a new wave of government regulation of business and the economy. Federal and state governments alike are increasingly hands-on in their effort to deal with failing businesses, plunging house prices, worthless mortgages and soaring energy prices. The steps add up to a major challenge to the movement toward deregulation that has defined American governance for much of the past quarter-century since the "Reagan Revolution" of the early 1980s. In fact, some proponents today of a bigger oversight role for government are Republican heirs to the legacy of President Reagan.

Wednesday, July 23, 2008

Mortgage Rates Near a Year High

Home-mortgage rates are nearing their highest levels in a year, adding to pressures on the already weak housing market.

Rates on conforming 30-year fixed-rate mortgages rose by nearly 0.40 percentage point in the past week to an average of 6.71%, according to HSH Associates in Pompton Plains, N.J. Rates on jumbo loans, which are too big to be eligible for purchase by Fannie Mae or Freddie Mac, currently average 7.84%.

The higher rates are making it more difficult for borrowers to refinance and putting another crimp on weak home sales. "It's a tough market and rates going up isn't helping it," said Steve Walsh, a mortgage broker in Scottsdale, Ariz.

Mortgage rates typically move in line with rates on 10-year Treasurys. Treasury rates have risen, but so has the spread between rates on 30-year mortgages and 10-year Treasurys, said Nicholas Strand, a mortgage strategist at Barclays Capital.

Richest Americans See Their Income Share Grow

In a new sign of increasing inequality in the U.S., the richest 1% of Americans in 2006 garnered the highest share of the nation's adjusted gross income for two decades, and possibly the highest since 1929, according to Internal Revenue Service data.

Meanwhile, the average tax rate of the wealthiest 1% fell to its lowest level in at least 18 years. The group's share of the tax burden has risen, though not as quickly as its share of income.

The figures are from the IRS's income-statistics division and were posted on the agency's Web site last week. The 2006 data are the most recent available.

The figures about the relative income and tax rates of the wealthiest Americans come as the presumptive presidential candidates are in a debate about taxes. Congress and the next president will have to decide whether to extend several Bush-era tax cuts, including the 2003 reduction in tax rates on capital gains and dividends. Experts said those tax cuts in particular are playing a major role in falling tax rates for the very wealthy.

House Passes FAA Safety Legislation

WASHINGTON -- The House passed legislation that would overhaul the Federal Aviation Administration's approach to airline safety, following disclosures of lax oversight by agency inspectors.

Sunday, July 20, 2008

Bankers get bailouts before borrowers

Published: July 20, 2008

THE credit crisis has exposed and worsened a dangerous and deepening divide in this country between a vast number of average borrowers and a fairly elite slice of corporations, banks and executives enriched by the mortgage mania.

Borrowers who are in trouble on their mortgages have seen their government move slowly — or not all — to help them. But banks and the executives who ran them are quickly deemed worthy of taxpayer bailouts.

On the ground, this translates into millions of troubled borrowers, left to work through their problems with understaffed, sometimes adversarial loan servicing companies. If they get nowhere, they lose their homes.

Taxpayers, meanwhile, are asked to stand by with money to inject into Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants, should they need propping up if loan losses balloon.

The message in this disconnect couldn’t be clearer. Borrowers should shoulder the consequences of signing loan documents they didn’t understand, but with punishing terms that quickly made the loans unaffordable. But for executives and directors of the big companies who financed these loans, who grew wealthy while the getting was good, the taxpayer is coming to the rescue.

“The banks are too big to fail and the man in the street is too small to bail,” said John C. Bogle, the founder of the Vanguard Group, the mutual funds giant, who is a philosopher of finance.

Mr. Bogle is working on his seventh book, titled “Enough,” which is scheduled to be published in November. He said he was disturbed by the extreme speculation that spread into the entire economy during the housing boom and that now threatens both consumers and investors

Tuesday, July 15, 2008

The Fannie and Freddie Fallout

The New York Times - IT’S dispiriting indeed to watch the United States financial system, supposedly the envy of the world, being taken to its knees. But that’s the show we’re watching, brought to you by somnambulant regulators, greedy bank executives and incompetent corporate directors.

This wasn’t the way the “ownership society” was supposed to work. Investors weren’t supposed to watch their financial stocks plummet more than 70 percent in less than a year. And taxpayers weren’t supposed to be left holding defaulted mortgages and abandoned homes while executives who presided over balance sheet implosions walked away with millions.

Over the course of this 18-month financial crisis, we have lurched from land mine to land mine. Last week’s was all about Fannie Mae and Freddie Mac, the giant government-sponsored enterprises set up to provide affordable housing across the nation. By issuing debt, these shareholder-owned companies guarantee or own more than $5 trillion in home mortgages. Got that? $5 trillion.

Wednesday, June 25, 2008

White House Refused to Open E-Mail on Pollutants

The New York Times - The White House in December refused to accept the Environmental Protection Agency’s conclusion that greenhouse gases are pollutants that must be controlled, telling agency officials that an e-mail message containing the document would not be opened, senior E.P.A. officials said last week.

The document, which ended up in e-mail limbo, without official status, was the E.P.A.’s answer to a 2007 Supreme Court ruling that required it to determine whether greenhouse gases represent a danger to health or the environment, the officials said.

This week, more than six months later, the E.P.A. is set to respond to that order by releasing a watered-down version of the original proposal that offers no conclusion. Instead, the document reviews the legal and economic issues presented by declaring greenhouse gases a pollutant.


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