Archive for the ‘Business News’ Category:
Fed To Keep Bank Oversight
Here are some business news, courtesy of HuffingtonPost.com:
The Federal Reserve has won its battle to maintain singular regulatory oversight of America’s major financial institutions, the Financial Times reported Sunday night.
Senate Banking Committee Chairman Chris Dodd (D-Conn.) gave up the fight for a new super-regulator over the weekend, and will propose financial reforms this week that leave the Fed in control of big banks and the rest of the major Wall Street players, sources told the FT.
The parties allegedly responsible for the Fed’s victory are easy to guess. The FT’s sources point the finger at Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke, who is unsurprisingly speaking up more loudly now that he’s won reconfirmation:
“Until, frankly, chairman [Ben] Bernanke was confirmed I think the Fed’s hands were kind of tied,” said a banking industry figure who has held discussions with one of those [regional] Fed presidents. “Now he is chairman for the next four yearsâ…âthe Fed has been able to be more aggressive in fighting for its authority.”
Dan Dorfman: Too Many Lurking Nightmares
Here are some business news, courtesy of HuffingtonPost.com:
Myths die fast on Wall Street. If you follow enough of them, like the dot.com craze of the early 2000s, or the 2003-2006 real estate bubble, you can easily follow them into the poorhouse. Many, in fact, have done just that.
Now, there’s a new one: the jobs myth, so I hear from Olivier Garret, the CEO of Casey Research, an economic and investing consulting firm out of Stowe, VT. That myth got added fuel from Friday’s employment report, which showed that February job losses totaled just 36,000, a big drop from the early stages of the recession when jobs were shrinking at the rate of 750,000 a month.
Actually, some economists say, had it not been for February’s snowstorms that pounded many areas of the nation, we might well have seen a six-figure employment gain. To many investors — and here’s what Garret says is the myth — namely, that last month’s jobs report was further evidence that the end of the employment mess is in its final stages, that the road to economic recovery is clearly at hand.
The New York Times, for one, buys this rosy view, declaring in a lead story in its Saturday edition that last month’s flat jobless rate of 9.7%, the same as it was in January, is a sign the worst of the slump is past. That may be so, provided, of course:
– You’re not one of the estimated 29 million Americans looking for work or one of the 8.4 million persons who lost their jobs since the recession began.
– You’re not one of the financially strapped homeowners who owe more on their houses than they’re worth (about 25% of the household population), a growing number of whom who are simply telling the banks to go to hell by walking away from their homes and renting.
– You’re able to convince yourself that the surging number of vacant offices, retail outlets and restaurants that are located within walking distance of the New York Times‘ Manhattan offices are a mirage.
–You’re not interested in borrowing any money.
In response to Friday’s jobs news, many eager investors went on a spirited buying spree, in the process driving up the Dow 122 points. If you were one of the buyers, you goofed because you bought a pig in the poke. Or simply seen by Garret, there are too many looming nightmares out there..
For starters, contrary to general thinking, he sees a slowing, not a growing economy, with 2010 GDP flat to down and the unemployment rate at year end in excess of 11%. What’s more, he views the market as currently overvalued and sees a number of prospective crises — chief among them higher interest rates, severe losses in commercial real estate which would play havoc with bank balance sheets and spreading sovereign debt woes — any one of which, he believes, could knock stock prices down about 25% from current levels.
Of particular concern, Garret looks for continued deterioration in the construction and real estate sectors and views the regional banks as especially vulnerable in commercial real estate, which he rates a multi-trillion-dollar problem that could affect us all. In this case, he says, the public will rebel at the idea of the government bailing out the banks again, “and there will be no easy solution to this problem.” Garret figures these assets on which banks hold loans are down about 25% from their acquisition costs between 2004 and 2007.
What about the plunging number of layoffs? Isn’t that an economic plus? Garret is skeptical of the latest jobless count, which is up 17% from a year ago. One reason is his belief the numbers were inflated by the start of the hiring — which began about 2.5 months ago — of 1.4 million temporary workers to conduct the 2010 census. He notes that’s roughly three times the 450,000-500,000 workers hired to conduct the 2000 census. With new technology, he observes, he would have expected greater efficiency and the hiring of less people, not more people.
“I think there may be a lot of game playing right now by the Administration to make things look good,” he says. “It’s the beauty of statistics and it could be a deliberate attempt by the government to distort them in an election year.”
The key sectors of the economy that have provided growth, such as real estate, construction, retailing and services, as Garret sees it, are now in the dumps. and he expects them to remain there for quite a while. Toss in the inability of states and municipalities to hire, factor in the likelihood they’ll look to increasingly cut costs and that, he observes, will worsen unemployment.
Making matters worse, Garret sees present modest inflation ballooning into a 4% to 5% rate by year end, spurred by money printing and government stimulus and spending. “This year, we’re going to see an end to the deflation that we had in 2008 and 2009,” he says.
Given his bleak outlook, Garret figures the stock market is poised for a major retreat. As such, he feels that any long term investor who buys a stock now is buying at a high point. He notes that he personally has unloaded the majority of stocks he owned and is very heavy in cash and precious metals. In particular, he likes silver and favors Silver Wheaton, a Canadian company traded on the Big Board (SLW) which acquires and resells silver.
“It ain’t over till it’s over,” Yogi Berra once said. Garret agrees and that’s precisely what he’s saying when it comes to the hefty deterioration in the economy, in the jobs market and in stock prices.
What do think? E-mail me at Dandordan@aol.com
Garrett Johnson: The Biggest Financial Bailout of Them All
Here are some business news, courtesy of HuffingtonPost.com:
Let me take you back to Christmas Eve, 2009. It was a time to wrap gifts for loved-ones. That’s how the Obama Administration felt about the financial industry when it lifted all caps in emergency bailout money to Fannie Mae and Freddie Mac. That means the taxpayer was on the hook for all losses at these two mortgage giants no matter how large the losses. The move caused a slight stir, but never got the attention of the American public because the announcement was timed to coincide with the peak season of distraction. And so it was forgotten … but not by Fannie and Freddie.
On eight maids a milking day, also known as New Year’s Day, Fannie Mae took advantage of this generosity.
“Effective Jan. 1, 2010, Fannie Mae brought an additional $2.4 trillion of its guaranty book of business on to the balance sheet under SFAS 166/167. Therefore, Fannie Mae expects to reflect approximately 18 million loans on its books compared with approximately two million loans as of Dec. 31, 2009. Management estimates that the cumulative effect of adopting FAS 166/167 will boost its net worth by $2 billion to $4 billion in its first-quarter 2010 results.”
Stop! Hold the phone. What this statement indicates is that Fannie Mae, the largest mortgage company in the entire world, was holding eight times the amount of mortgages off-book than it had on-book.
Thus, despite the fact that it is losing tens of billions of dollars every quarter, and has borrowed $76.2 billion so far, it was actually hiding the vast majority of its worst performing mortgages off-book. The only reason you move assets off-book is if they are illiquid. And that’s not even taking into account Freddie Mac, which has borrowed another $50 Billion from the taxpayers so far.
How bad are those assets? It’s hard to say for certain, but after moving $2.4 Trillion dollars worth of assets, the net worth of Fannie Mae only improved by $2 Billion, or 0.083% of the assets.
Just how much is the taxpayer is on the hook for? Well, the former caps were limited to $200 Billion a piece, which the Treasury decided just wasn’t enough. So if the losses are north of $400 Billion then we are entering the range of TARP bailout, but with almost none of the press coverage. Or to put it another way: “The taxpayer bailout of Fannie Mae and Freddie Mac will almost certainly be the most expensive of the financial crisis…” There has been at least one attempt at estimating the losses.
“The Congressional Budget Office estimates that Fannie and Freddie added $291 billion to the federal deficit in 2009 and will cost an additional $389 billion to run over the next ten years. However, Fannie and Freddie are currently considered “off budget” meaning the actual cost to run these agencies is not considered by the Office of Management and Budget.”
This article contains two nuggets of information. For of all, we are looking at around $600 Billion in taxpayer bailout, assuming the market doesn’t take another sharp downturn. That’s nothing to sneeze at, and it certainly deserves a lot more press coverage than it has gotten. The second nugget is that all these losses are consider off-budget. So what we are talking about is moving hundreds of billions of dollars of bad assets from off-budget Fannie Mae to off-budget Treasury Department.
This accounting gimmick has disturbing parallels to another contemporary crisis. “It is the same sort of financial shell game that has brought governments like Greece to a crisis point. Hiding your debts just leads to a bigger day of financial reckoning down the road,” said Representative Spencer Bachus. Bachus may be a Republican who supported fighting two wars off-budget, but in this case he is 100% correct. Hiding debts off-budget is exactly what broke the Greek government.
The Republicans are pushing to have the money put on-budget which would, of course, immediately blow out the federal borrowing limits. After weeks of pressing by the Republicans, the Obama Administration has finally agreed to consider it.
A carefully designed disaster
The collapse of Fannie and Freddie didn’t start recently, and didn’t happen by accident. It was a calculated decision by the Bush Administration to try to extend and pretend the housing crisis into the next administration. It all started in <a href=”http://www.nytimes.com/2008/03/20/business/20fannie.html?partner=rssnyt&emc=rss”> March 2008:
“By reducing the extra cushion of capital the two companies have been required to hold since 2004, the regulator, the Office of Federal Housing Enterprise Oversight, is enabling the companies to invest $200 billion more in home loans. In essence, the companies are being allowed to take billions of dollars that had been used as a reserve against possible further losses and invest that money now in the housing market.
But critics said that if the housing market continued to decline, the move could put the two companies on a less sure footing and ultimately require a huge taxpayer bailout.
‘I think it’s very dangerous and it’s a sign that people are very frightened,’ said Thomas H. Stanton, an expert on the two companies who teaches a course on credit risk at Johns Hopkins University. ‘At a time in which finance companies are holding questionable assets and facing losses, regulators typically require more capital, not less.’”
On top of that, the size of the mortgages that Fannie and Freddie were allowed to buy was increased, from $417,000 to $729,750. This change happened in the face of collapsing asset prices.
Homes worth nearly 3/4 of a million dollars are not part of the original reasons why Fannie Mae and Freddie Mac were created, nor should they be. People that can afford homes of that price do not need public subsidies, nor should they get it.
“Now, thanks to Congress, junk bond investors will be able to pawn off their bad debt to Fannie and Freddie, instead of suing the big investment houses for ripping them off. This shift will certainly doom Fannie Mae and Freddie Mac, so don’t be surprised if we, the taxpayers, have to bail out poor Fannie and Freddie - to the tune of more than $1 trillion.”
It was a risky gamble, and it failed. Spectacularly.The balance sheet of Fannie and Freddie that was cut 6 months earlier was now in danger of collapse.It seems that the thin layer of cash reserves left over after the Bush Administration cut it 6 months earlier, wasn’t enough to cover their massive losses. Yet the financial media failed to note that the Bush Administration was partly responsible for this enormous calamity.
But the Bush Administration was going to make it right. They were going to backstop Fannie and Freddie and calm investors … at least that was the plan.
“The powers Paulson won from Congress last month enabling a government rescue of Freddie Mac and Fannie Mae — authority he likened to a weapon whose mere existence made it unlikely it would have to be fired — may end up making a bailout more likely, say analysts and investors.
They say the threat of government action is creating uncertainty that is raising the companies’ borrowing costs and increasing the odds Fannie and Freddie will need taxpayer funding.”
The problem with the bailout plan is that Paulson is the implied threat of a de facto nationalization of the two mortgage giants. This would leave existing shareholders with pennies on the dollar. Thus the bailout plan that Bush and Paulson assured us they would never have to do, caused stock prices of Fannie and Freddie to crater. This reduced their capital reserves even further, increasing the chances of a taxpayer bailout.
On the other side of the ledger, the Bush Administration also changed the rules in April 2008 to get the FHA more involved in the mortgage industry. According to James Bianco, “The government was using the Federal Home Loan Banks as a way to bail out the banking system early on.”
One forgotten scandal was from late September 2008, the FHLB of Atlanta loaned Countrywide Financial $51 Billion in exchange for questionable mortgages as collateral. Countrywide went under shortly afterward.
The decision to increase the FHA’s exposure to a collapsing housing market is now meeting its limits.
“The share of borrowers who are falling seriously behind on loans backed by the Federal Housing Administration jumped by more than a third in the past year, foreshadowing a crush of foreclosures that could further buffet an agency vital to the housing market’s recovery.
About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency’s figures show.
If the trend continues and the FHA’s cash reserves are exhausted, the federal government would automatically use taxpayer money to cover the losses — a first for the agency, which has always used the fees it charges borrowers to pay for its losses.
Adding to the trouble was a now-defunct FHA program that enabled sellers to cover the down payments of buyers. This meant many borrowers had no skin in the game and were more likely to walk away at early signs of trouble. The program resulted in excessive defaults before it was ended in late 2008, and it is projected to cost FHA an additional $10.5 billion in losses, Stevens said.
The program in question was another Bush Administration idea to bail out the housing industry to the benefit of Wall Street.
Meet the New Boss
After inheriting this disastrous legacy from the Bush Administration, you could only assume that the Obama Administration would do things drastically different, right?
“Fannie Mae will drop some credit-score requirements, reduce income-documentation standards and waive the need for appraisals in some cases, according to a notice yesterday to lenders posted on the Washington-based company’s Web site. The changes apply to loans that the company owns or guarantees.”
Let me translate for you. “Drop credit-score requirements” equals subprime. “Reduce income-documentation standards” equals liar loans.
And it just keeps getting better. The Obama Administration plans to subsidize at-risk borrowers. Has anyone bothered to ask “How long?” Meanwhile the Fed is buying up all those subprime, liar-loans that Fannie and Freddie are pumping out.
On top of it, the next part of Obama’s plan had a ring of familiarity to it: “The loan-to-value (LTV) limit on mortgages Fannie Mae and Freddie Mac will be able to refinance as part of Obama’s Homeowner Affordability and Stability Plan may go higher than the original 105 percent, according to National Mortgage News.” Bush’s disastrous legacy was to at first ignore the bubble, then to try to keep it inflated until he was out of office by using Fannie and Freddie. Obama’s plan is to use taxpayer money to subsidize sub-prime, liar-loans at more than 105% of the home’s value with Fannie and Freddie as a conduit. Thus attempting to recreate all the properties of the bubble that got us into trouble in the first place.
Seriously. Is this the best that Washington can do? Is our leadership really this bankrupt of ideas?
One other item to note is that when the Obama Administration lifted all bailout caps, they also promised that plans on reforming Fannie and Freddie would be drawn up by February. Last week, that <a href=”http://www.boston.com/business/articles/2010/02/25/fannie_freddie_overhaul_to_wait/”> promise was broken.
“The Obama administration will wait until 2011 to propose an overhaul of mortgage giants Fannie Mae and Freddie Mac, Treasury Secretary Timothy Geithner said yesterday, arguing that he wanted to put some distance between a new system and what he called ‘the worst housing crisis in generations.’
‘We can’t do everything right away,” he said.”
We don’t expect you to do “everything” Timmy. We only expect you to do your job, which includes coming up with plans to reform these companies within the 13 months that you previously promised.
Meanwhile, Fannie and Freddie continue to be traded on the stock exchange, hand out dividends to stock holders (while asking for taxpayer bailouts), and pay their CEOs as much as $6 million a year.
Lloyd Chapman: Court Order Could Stop Obama Administration from Destroying Incriminating Data
Here are some business news, courtesy of HuffingtonPost.com:
Court Order Could Halt Destruction of Incriminating Contracting Data
On March 12, 2010, the Obama Administration intends to move forward with a plan that could destroy years of incriminating contracting data. The General Services Administration (GSA) plans to eliminate the socio-economic field, “SmallbusinessFlag,” on all historical and future contracting data. In the past, the Government Accountability Office (GAO), the Small business Administration Office of Inspector General (SBA IG) and other agencies have used the small business flag to uncover large businesses that have misrepresented themselves as small businesses to illegally receive federal small business contracts.
Since 2003, twenty-five federal investigations have found that Fortune 500 firms and thousands of other large businesses have received billions of dollars a month in federal contracts earmarked for small businesses. (http://www.asbl.com/documentlibrary.html)
In March of 2005, the SBA Office of Inspector General (IG) released Report 5-15 which stated, “One of the most important challenges facing the Small business Administration and the entire Federal government today is that large businesses are receiving small business procurement awards and agencies are receiving credit for these awards.” (http://www.asbl.com/documents/05-15.pdf)
In Report 5-16, the SBA IG reported that large businesses had committed fraud by falsely claiming to be small businesses by making “false certifications and, “improper certifications.” (http://www.asbl.com/documents/05-16.pdf) Another investigation from the SBA Office of Advocacy found large businesses had received federal small business contracts fraudulently through what they referred to as “vendor deception.” (http://www.asbl.com/documents/eagkeeye_report%202002.pdf)
The elimination of the small business flag will preclude any further investigations into the diversion of federal small business contracts to large corporations.
The American Small business League (ASBL) is preparing to file a preliminary injunction against the GSA to halt the destruction of the historical contracting data. The ASBL expects to file the order on Monday, March 8, 2010.
The ASBL was preparing to use the data in the small business flag field to launch civil and criminal action against large businesses that had received federal small business contracts fraudulently.
There is absolutely no reason to destroy historical contracting data. It’s no coincidence that the GSA and the SBA have tried to withhold evidence in the past that would prove that fortune 500 firms have received federal small business contracts. This is just the latest attempt by the government to reduce transparency and cover-up the fact that large businesses have received billions of dollars a month in federal small business contracts. We are not going to let them do it.
Martin Berg: Innovation ain’t what it used to be
Here are some business news, courtesy of HuffingtonPost.com:
When Wall Street wants to launch the big intellectual artillery in the argument against strong financial reform, they haul out innovation.
Regulation will strangle innovation, and we can’t have that, the financial titans contend. Innovation is the strength of America, without it we will lose our competitiveness, yadda yadda yadda.
But over the past several decades financial innovation has focused too much on mathematical models and not enough on a vision of improving the country and people’s lives.
Selling mortgages with exploding balloon payments doesn’t qualify as innovation; it’s a cruel trap.
The recent version of financial innovation, complex investments and gambling vehicles like derivatives and credit default swaps, no doubt made many bankers wildly rich, but these “weapons of mass of financial destruction,” as Warren Buffet labeled them back in 2003, also planted hidden, little-understood land mines of risk helped create the financial crisis when they blew up.
It’s no longer just the pitchforks that are questioning the value of these innovations. Paul Volcker, the former Fed chief born again as the lone voice for meaningful financial reform in the Obama administration recently said the only modern innovation that brought real benefit to people was the ATM card.
And the financing of innovation in the rest of the economy isn’t faring any better.
A couple of top economists, including a Nobel Prize winner, weighed in recently with a scathing view of the financial system in the Harvard business Review.
Edmund S. Phelps (the 2006 economics Nobel winner) and Leo M. Tilman, both of Columbia University, wrote in the January issue [no link]: “The current financial system is choking off funds for innovation…Outdated accounting conventions and inadequate disclosures make it impossible to evaluate the business models and risks of financial firms. Excessive resources are allocated to proprietary trading, to lending to overleveraged consumers, to regulatory arbitrage and to low-value-added financial engineering. Financing the development of innovation takes a back seat.”
To finance opportunities in clean and nanotechnology that the current financial system is ill equipped to serve, the authors propose a government-sponsored bank of innovation.
The bank bailouts have no doubt soured people on the notion of the government in the banking business and rightly so.
But this hasn’t always been the case.
It’s worth remembering that the greatest financial innovation of the past 70 years was a government-sponsored program called the G.I. bill.
I heard about the G.I. bill growing up because it financed my dad’s education after he returned from World War II. Many others got help with home loans.
Ed Humes, an author and former Pulitzer Prize winning investigative newspaper reporter, has written a splendid account of the G.I. bill, “Over Here.” It captures how individual lives as well as the entire nation was shaped by the ambitious program.
The idea of a massive program to help veterans was first articulated by FDR, in part to prevent a reoccurrence of the bitter 1932 Bonus March, when angry World War I veterans and their families descended on Washington, D.C. to demand promised benefits. The government response was a fiasco - soldiers were ordered to fire on the persistent veterans. Nearly 10,000 were driven from the veterans’ encampment; two babies died. The resulting stink helped Roosevelt defeat the sitting president, Herbert Hoover.
I spoke with Humes about the history behind the G.I. bill.
The proposal faced stiff opposition from the financial industry and the education community.
“They argued that the average Joe returning from World War II was capable of being neither a college student nor a homeowner. The bill was basically rammed through over their objections, because of a combination of altruism and fear.”
It didn’t hurt that the bill was created by the American Legion, a conservative veterans’ group.
The G.I. bill was an overwhelming success, not only for the veterans but the college system, the building industry (it helped create the suburbs) the economy at large and the banking industry as well (it created the modern mortgage industry). “For every dollar spent,” Humes said, “seven was returned to the economy.”
Humes draws a direct connection from the G.I. bill to today’s bailouts. “They had a dead housing market, it had never recovered from the Depression. But did they throw money at the banks? No. They encouraged people to buy homes.”
The G.I. bill shows what’s possible when those who are governing possess large vision, heart, will, persistence - and fear. No mathematical model can come close.
White House Sends Volcker Rule To Congress
Here are some business news, courtesy of HuffingtonPost.com:
WASHINGTON (AP) — The Obama administration waded into negotiations over Wall Street regulations Wednesday, calling for limits on the size of financial institutions and insisting that consumer protections remain a central objective of legislative attempts to rein in the industry.
In the Senate, talks continued on how to create a consumer protection entity. Republicans pressing for a watered-down consumer agency even as they voiced optimism that they could reach a deal with Senate Banking Committee Chairman Chris Dodd, a Connecticut Democrat, within a week.
The Treasury Department circulated proposed legislation that would prevent commercial banks from carrying out high-risk trades and that would restrict the size of financial firms to holdings no greater than 10 percent of the entire financial industry’s liabilities. That restriction would apply only to firms that grow through a merger or an acquisition.
Consumer protections and doing away with financial firms deemed too big to fail are two of the key elements of the legislative efforts to overhaul the rules that govern Wall Street and prevent a recurrence of the 2008 financial crisis. In reiterating its points, the administration was making certain its views were being heard in the Senate at a sensitive time in negotiations between Dodd and Sen. Bob Corker, R-Tenn.
The plan reiterated a proposal that the administration staked out in January. The measure is known as the Volcker Rule, after former Federal Reserve Chairman Paul Volcker, a vigorous proponent of limiting proprietary trading by commercial banks. Volcker has been advising the Obama administration.
Corker questioned the administration’s timing. “It is not helpful to the process for the administration to be putting out positions right now on financial regs, especially as it relates to the Volcker rule,” he told The Associated Press. “It’s just not helpful.”
Treasury waited until after the markets closed Wednesday to release details of the Volcker plan. When it announced the outline of its proposal in January, the administration spooked U.S. markets, contributing to several days of falling stock prices.
Treasury Secretary Timothy Geithner and White House senior adviser Valerie Jarrett met with about 30 consumer and labor advocates to assure them that the administration was not backing away from demanding strong consumer protections in the bill.
The overhaul plan the administration put forward last year called for a freestanding Consumer Financial Protection Agency. The legislation that passed the House included such an agency although many in the industry oppose it as another layer of regulation.
Corker and Dodd had proposed housing an autonomous consumer agency inside the Federal Reserve, an idea that has been panned by liberal groups. It also received a skeptical reception from other Republicans and Democrats on the Banking Committee, including the top Republican on the panel, Sen. Richard Shelby of Alabama.
House Financial Services Committee Chairman Barney Frank, D-Mass., called the proposal “a joke.” Many consumer groups believe the central bank did a poor job in protecting consumers in the lead up to the financial crisis.
On Wednesday, however, Shelby and Corker offered Dodd a revised plan with a consumer agency that had less independence to write its own regulations. Details were not available, but the offer came after Shelby, Corker and two other banking committee members — Sens. Judd Gregg and Mike Crapo — met with Senate Republican leader Mitch McConnell on Tuesday evening to decide how to proceed. Gregg has insisted that any consumer agency cannot be autonomous, a key condition for Dodd.
“The right concerns that Republicans have are being addressed, and those on the left are being addressed,” Corker said. “And we have a chance to be in a good place with this.”
Geithner insisted on an independent entity in his meeting with consumer advocates. “That means a dedicated authority with the independence and capacity it needs to be accountable,” the Treasury Department said in a statement.
Associated Press writer Martin Crutsinger contributed to this report.
Fed Proposes Limits On Credit Card Penalty Fees
Here are some business news, courtesy of HuffingtonPost.com:
NEW YORK — The Federal Reserve on Wednesday proposed strict limits on penalty fees and other charges that credit card companies can slap on customers for missteps such as late payments or going over credit limits.
The proposal outlines rules that would take effect on Aug. 22 as the third stage of credit card legislation signed by President Barack Obama last May. The majority of the new law took effect last week, and earlier provisions kicked in last August.
Among the biggest changes in the Fed proposal is capping penalty fees to no more than the dollar amount of the violation.
“A consumer who exceeds the credit limit by $5 should not be penalized to the same degree as a consumer who exceeds the limit by $500,” the proposal states. If the rule is adopted, spending $5 over the credit limit would could incur no more than a $5 penalty.
Currently, most major credit card companies charge over-the-limit fees that average $39, even when the amount spent beyond the limit is just a few dollars. Consumer advocates have complained this can turn a $5 coffee into one that costs $44.
The law that took effect last week already requires that card holders agree to paying fees if they are allowed to exceed their limit.
The Fed proposal also would limit late payment fees to no more than the minimum required payment. So a bank would not be able to charge a $39 late payment fee – the current average for major issuers – for a late payment of $20. The same rule would apply for returned payments.
The proposal would also end multiple penalty fees for a single event or transaction. So a card payment that is returned could generate a returned payment fee, but not a late payment fee as well. And it would prohibit charging fees for transactions that are declined, or for accounts that are inactive. Currently, at least one bank charges a $19 inactivity fee for cards not used in 12 months.
The Fed proposal is not quite as strong in another area: rate increase reviews. The credit card law requires card issuers to review rate increases six months after they take effect, to see if conditions changed that would merit cutting the rate back down. The Fed would allow card companies to review the increases based not only on the reason the rate was hiked, like someone’s credit score dropping, but on other factors like current market conditions. And the proposal wouldn’t require a company to return to the previous rate it charged before a penalty rate was imposed if a review finds a decrease is warranted.
The initial reaction on the proposal was mixed.
Nick Bourke, author of a study for The Pew Charitable Trusts Safe Credit Card Project that is quoted in the Fed proposal, praised most of the fee limits. But he questioned whether the Fed was meeting the “reasonable and proportional” standard set by Congress in the law in certain cases.
For instance, a bank would still be able to charge a $39 late payment fee on a $70 payment that’s past due – the average for a balance of around $2,500. That fee would equal roughly 60 percent of the payment. “The Fed doesn’t say anything about whether that’s reasonable and proportional,” Bourke said.
He also noted the Fed wouldn’t require interest rate increase reviews to consider the same factors that led to the hikes in the first place. And he pointed out there is no limit in the proposal to how much a bank could increase an interest rate. In the past nine months, millions of card holders saw increases that doubled or tripled their interest rates. Pew seeks a limit of a 7 percent hike in any given increase.
The Fed will accept public comments on the proposal for a month before finalizing the rules. The full text of the rules can be found on the regulator’s Web site at . http://www.federalreserve.gov
Kevin Connor: Goldman’s Role in Greek Crisis Is Proving Too Ugly to Ignore
Here are some business news, courtesy of HuffingtonPost.com:
Goldman Sachs appears to be testing the limits of its special talent for avoiding all accountability following revelations of its role in exacerbating the Greek debt crisis.
The bank has come under heavy criticism from European political officials over its role in helping Greece hide its debts, and on Wednesday, Greek labor unions staged a historic strike that shut down the country’s national infrastructure in response to economic policies urged by bankster elites. The European turmoil has forced US officials to take notice, and scrutiny of the bank is now coming from the unlikeliest of quarters, with Ben Bernanke telling Congress on Thursday that the Federal Reserve is looking into Goldman and questions surrounding the bank’s swap transactions with Greece.
Bernanke was vague about what, exactly, the Fed is investigating, and it is possible that the inquiry will go nowhere. But the fact that the Fed chair would make remarks that amplify concerns about Goldman’s role in Europe is a sign that the political winds have shifted significantly since Matt Taibbi’s “vampire squid” metaphor first captured the public imagination last summer. The populist outcry against bankster fraud and collusion finally shows signs of steering the authorities towards a more oppositional, watchdog role.
The truly scandalous story with respect to Goldman Sachs and Greece — that the bank may have been speculating heavily in the Greek debt markets at the same time it was trying to help the country hide its debt — is also starting to gain traction. During his testimony, Bernanke raised concerns about speculative activity in the Greek debt markets and said that the SEC was investigating, and Phil Angelides, chair of the Financial Crisis Inquiry Commission, said that he was particularly concerned about Goldman’s role in betting against securities that it had helped create.
On Thursday the New York Times published a story with the headline <a href=”http://www.nytimes.com/2010/02/25/business/global/25swaps.html?dbk”>”Banks Bet Greece Defaults on Debt They Helped Hide.” The article reported that a company backed by Goldman and other banks set up a new index in September of this year that investors could use to bet on the likelihood that Western European countries like Greece would default on their debt.
This is history repeating itself: the very same company that created this index set up a similar index in early 2006 that allowed investors to bet on the likelihood of defaults in the subprime bond market. That index was a collaboration between Markit and CDS IndexCo, a consortium of 16 banks, including Goldman Sachs, which has since been acquired by MarkIt. The acting chairman of CDS IndexCo was Goldman Sachs managing director Bradford S Levy, suggesting that Goldman has significant power within Markit now.
Guess which investors cleaned up on that index in 2006 and 2007? Goldman Sachs and partner-in-crime John Paulson, the hedge fund manager who made billions betting against the subprime sector.
The sovereign index and its subprime predecessor would be less troubling if there was some transparency around Markit, the pricing mechanisms it uses, its owners (including Goldman Sachs), and so forth, given the critical informational role it plays in markets which threaten global financial stability quite frequently. The Department of Justice opened an investigation of the company for possible anti-trust violations last summer.
If Goldman is, in fact, using swaps to bet heavily on the likelihood of a Greek default at the same time that it is helping the country hide its debts, the parallels to its corrupt, cynical, and incredibly greedy housing bubble investment strategy extend beyond the Markit index. The game plan is fairly simple: stuff some entity full of hidden liabilities by devising securities that mask true levels of exposure, collect enormous fees for doing it, then find ways to make enormously profitable bets against the financial carcass created in the process.
<a href=”http://blog.littlesis.org/2010/02/16/goldman-john-paulson-cdo-scheme-stinks-of-fraud/”>Goldman Sachs and John Paulson did this with AIG, devising complex securities known as “synthetic CDOs” which were composed entirely of bets on a set of mortgage pools. Paulson (not to be confused with former Treasury Secretary Hank Paulson) picked the mortgage pools, selecting the ones that were most likely to experience high levels of foreclosure. Goldman then created the securities and sold them to investors like AIG. The bets were essentially designed to fail, with Paulson (and Goldman) on the winning end. The hidden exposure was massive enough to take down AIG, threaten the world financial system, and necessitate a government bailout. These bailout funds were then passed through to Goldman Sachs.
Carolyn Maloney has noted these parallels and is now calling for a Congressional hearing on Goldman’s involvement in the Greek crisis.
Greece is far less likely to implode than AIG, and the liabilities that Goldman tucked into its national accounts are less severe. But now that the country is dealing with the prospect of financial ruin, <a href=”http://blog.littlesis.org/2010/02/15/what-is-john-paulson-doing-in-greece/”>Paulson and Goldman appear to share the same vulture flight pattern, once again. Paulson & Co is reported to have been speculating heavily in Greek debt markets with a team of 20-30 traders focused on the country. Goldman is also rumored to have been one of these speculators.
According to the Wall Street Journal, Paulson has since exited his large bearish bet on Greek debt. But in a sign that Paulson’s Greek adventures haven’t ended, Goldman recently took representatives of his hedge fund on a “field trip” to Greece:
On Jan. 28 and 29, analysts from Goldman Sachs Group Inc. took a group of investors on a field trip to meet with banks in Greece. The group included representatives from about a dozen different money managers, say attendees, including Chicago hedge-fund giant Citadel Investment Group, the New York hedge fund Eton Park Capital Management, and Paulson, which sent two employees, say people who were there. Eton Park declined to comment.
During meetings with the Greek deputy finance minister and executives from the National Bank of Greece, among other banks, some investors raised tough questions about the state of the country’s economy, according to these people.
Greece appears to have been negotiating for its economic future with Goldman Sachs and its network of hedge fund colluders, many of whom have taken large speculative positions on Greek debt. This amounts to an unofficial diplomatic mission, a negotiation between a sovereign country and the sociopathic financiers who hold sway over its economic fortunes. Is Europe really ok with that?
The Wall Street Journal article goes on to report on a Manhattan dinner party where a group of hedge fund managers discussed their bearish bets on the Euro. The article suggests that the funds are partnering on their trades, and includes a somewhat confusing sentence: “There is nothing improper about hedge funds jumping on the same trade unless it is deemed by regulators to be collusion.” So it isn’t collusion unless regulators have “deemed” it as such? And Madoff wasn’t actually running a Ponzi scheme before the SEC noticed?
The growing turmoil in Europe and Bernanke’s comments may signal that we’ve reached a tipping point — that these financial firms will no longer be able to avoid all substantial inquiries into their business practices, and that they’ll no longer hold sway over economic policies here and abroad. Not that Bernanke himself will follow through. But the need for a significant, public investigation of these individuals and their firms has become so pressing that even the most compromised US officials are paying it lip service.
Whether it happens here or in Europe, Goldman’s day in court is drawing near.
Dennis A. Henigan: Starbucks Sticks To Its Guns. Why?
Here are some business news, courtesy of HuffingtonPost.com:
In case you missed it, last Saturday was “Starbucks Appreciation Day.” No, it was not a gesture of support from lovers of strong coffee (like me). The “appreciation” was on behalf of Americans who believe it is their sacred right to have a handgun with them wherever they go - even to carry it openly to make sure the rest of us know who are the real defenders of the Second Amendment.
The “open carry” movement has been convening groups of its followers to meet up at restaurants and coffee shops, with pistols, revolvers and ammo hanging from their hips. Two major retail chains who were “open carry” targets (so to speak) - California Pizza Kitchen and Peet’s Coffee & Tea - reacted quickly by announcing strict “no guns” policies. Starbucks, on the other hand, has earned the “appreciation” of the gun-toters by becoming the “safe house” for the “open carry” movement.
Starbucks’ official response has been to offer the assurance that it will “continue to adhere closely to local, state and federal laws” on this issue. This is an evasion, not an answer.
The fact is that Starbucks would also “adhere closely to local, state and federal laws” by prohibiting guns on its premises. The law allows Starbucks and other retail businesses to make their own policy on guns. Starbucks has made a choice to recognize the rights of a few gun extremists to show off their weaponry in its stores and ignore the rights of the vast majority of its customers to enjoy their coffee and muffins free of the fear, intimidation and risk of violence inherent in the “open carry” experience. Starbucks seeks to hide behind “local, state and federal law,” but in truth, there is no place for it to hide.
For a glimpse into its future as the corporate best friend of the gun-toters, Starbucks should consider the experience of a California restaurant chain, Buckhorn Grill. On February 6, a Buckhorn restaurant in Walnut Creek, California, was visited by about 100 men carrying their highly-visible guns. A recent New York Times editorial said this must have “looked like a casting call for a Sam Pekinpah shoot-’m-up.” Shortly thereafter, Buckhorn’s management made clear that the restaurant had always had a “no weapons” policy and apologized for the “misunderstanding” that had led to the “open carry” event. How many gun carriers need to show up at Starbucks for the company to realize what a nightmare it is creating for its customers and employees?
The issue here is much bigger than Starbucks and involves more than just “open carry.” Starbucks’ new gun-wielding friends envision an America in which guns permeate American society. A pitched battle is underway that will determine whether their vision is realized. It started with the gun lobby’s largely successful campaign to make it easier to obtain a license to carry concealed weapons in public. Now the “gun rights” extremists are trying to break down the barriers limiting where concealed weapons can be carried. As of this week, with the shameful acquiescence of the Obama Administration, loaded guns will be allowed in national parks for the first time since they were banned by the Reagan Administration. In over twenty states, the gun lobby has tried, and thankfully failed, to pass legislation to force colleges and universities to allow guns on campus. The battle continues.
It may be that “open carry” will turn out to be the “secondhand smoke” of the gun debate. On the tobacco issue, it was one thing for people to subject themselves to the unhealthy effects of cigarettes. It was quite another for the effects of smoking to be so visibly inflicted on non-smokers. Smoking in public became a new, and transforming, focus of the debate, leading to far-reaching restrictions on where people can smoke.
On the gun issue, although the carrying of concealed weapons in public subjects everyone to enormous risk, the risk is, by definition, concealed. Perhaps this is why my tobacco-growing home state of Virginia now no longer allows restaurant customers to smoke, but will allow them to carry concealed weapons (and may now be poised to allow them even to carry concealed in restaurants that serve alcohol!). “Open carry,” unlike concealed carry, confronts everyone with the risks of guns in public, in a very direct and highly-visible way. We can only hope that the “open carry” movement will backfire, bringing our country back from the brink of the “guns everywhere” vision of America now being foisted on us by the NRA and the most dedicated supporters of its extremist agenda.
Over 27,000 Americans so far have signed the “no guns” petition circulated by the Brady Campaign to Prevent Gun Violence and CREDO Action calling on Starbucks to keep guns out of its stores. Please join them by going to www.bradycampaign.org. Tell Starbucks that, in your America, parents ought to be able to take their families into coffee shops without facing the intimidation and danger of guns.
For more information, see Dennis Henigan’s new book, Lethal Logic: Exploding the Myths that Paralyze American Gun Policy.
Fannie Mae Posts 4Q Loss, Wants $15.3 Billion In Additional Government Aid
Here are some business news, courtesy of HuffingtonPost.com:
WASHINGTON — Fannie Mae needs another $15 billion in federal assistance, bringing its total to more than $75 billion. And worse, the mortgage finance company warned its losses will continue this year.
The rescue of Fannie Mae and sister company Freddie Mac is turning out to be one of the most expensive aftereffects of the financial meltdown. The new request means the total bill for the duo will top $126 billion.
And the pain isn’t over. Fannie warned Friday that it will need even more money from the Treasury, as unemployment remains high and millions of Americans lose their homes through foreclosure.
Fannie Mae reported Friday that it lost $74.4 billion, or $13.11 a share, last year, including $2.5 billion in dividends paid to the government. That compares with a loss of $59.8 billion, or $24 a share, a year earlier.
Fannie Mae, which was seized by federal regulators in September 2008, has racked up losses totaling $136.8 billion over the past three year.
Late last year, the Obama administration pledged to cover unlimited losses through 2012 for Freddie and Fannie, lifting an earlier cap of $400 billion.
Earlier in the week, Freddie reported a loss of almost $26 billion for last year. The company didn’t request any more money, but expect to do so later this year.
Fannie and Freddie play a vital role in the mortgage market by purchasing mortgages from lenders and selling them to investors. Together the pair own or guarantee almost 31 million home loans worth about $5.5 trillion. That’s about half of all mortgages.
“Through this prolonged stress in the housing market, we are helping homeowners across the country, supporting affordable housing, and providing financing to keep the residential markets functioning,” the company’s chief executive, Mike Williams, said in a statement.
The two companies, however, loosened their lending standards for borrowers during the real estate boom and are reeling from the consequences. At the end of last year, nearly 5.4 percent of Fannie Mae’s borrowers had missed at least one payment – dramatically higher than historic levels.
During the most recent quarter, Washington-based Fannie suffered $11.9 billion in credit losses and a $5 billion write-down for low income tax credit investments.
That led to a fourth-quarter loss of $16.3 billion, or $2.87 a share, including $1.2 billion in dividends paid to the Treasury Department. It compares with a loss of $25.2 billion, or $4.47 a share, in the year-ago period.
