Article 43
Tuesday, September 30, 2008
NRLN President’s Testimony To Congress
TESTIMONY OF BILL KADEREIT, PRESIDENT
NATIONAL RETIREE LEGISLATIVE NETWORK
BEFORE THE COMMITTEE ON EDUCATION AND LABOR
U.S. HOUSE OF REPRESENTATIVES
On “Safeguarding Retiree Health Benefits”
September 25, 2008
Good morning, Chairman Miller and Members of the Committee. My name is Bill Kadereit and I am from Heath, Texas . I appear before you this morning as President of the National Retiree Legislative Network or NRLN, an organization that represents more than 2 million retirees across America . I commend you, Mr. Chairman, and the Committee for focusing on this vitally important topic and appreciate this opportunity to spend a few minutes with you this morning.
Our retiree organizations serves a cross section of the top Fortune 500 companies such as Boeing, IBM, Johns Manville, Alcatel Lucent, Prudential, Raytheon, Detroit Edison, Pacific Bell, GM, Ford, Chrysler, AT&T, and a dozen more.
Our members live in all 50 states and over 300 Congressional Districts. Although the majority of our membership is retired management employees, over 15% are retired union workers. Most of them feel betrayed by their former employers.
At the heart of this betrayal is that so many employees, even retired managers, were unaware that their former companies could break their promises to their retirees. For example, many retired managers say they were not aware that the lump sum pension payments offered as inducements to older workers to retire often came from workers’ own pension plan assets. Nor did they realize that health care benefit plans contained statements that reserved to the company the right to reduce or cancel health care benefits. Retiree exit interviews ended with a handshake and the passing of an envelope stuffed with benefit promises.
Sandy ...... a retired IBM Manager who saw his own insurance bill triple in 2004 put it this way: “I feel I misled a lot of people, that I’ve lied to people;” then he said, “It does not sit well with me at all.”
Capping and cancelling health care liabilities in the 90’s was the beginning of a disturbing trend that continues to this day. International Paper used FASB 106 to book health care liabilities and then introduced caps. The effect was $18.7 million in earnings gains each year through 2000. In 2000, 2001 and 2002 they capped benefits of newly acquired companies and through 2004 benefited by another $65 million. Sears implemented caps during the 90’s and fed $383 million to earnings since 1997.
IBM implemented caps in 1999 that affected 190,000 retirees. It took three years for retiree health care costs to reach the $625 cap but in 2002 retiree premiums increased nearly 67% and another 29% in 2003.
Adding the greatest insult to this injury is the heinous Equal Employment Opportunity Commission, or EEOC rule of 2007 which permits companies to discriminate against over-age-65 retirees who can have their benefits eliminated completely with companies claiming necessity in order to maintain benefits for younger workers. There are over 10,000,000 retirees over age 65.
Over-age-65 GM retirees will be forced onto Medicare without the catastrophic, dental, vision, or hearing insurance they now have, effective January 1, 2009. A GM retiree, who must purchase supplemental insurance, plus the four elements just cited, will be in the hole over $400 a month starting in January 2009. A retiree on a fixed income pension of $36,000 is going to lose between 18-20% of his or her after tax income if they replace all lost coverage. Ford, Chrysler and GM are casting a big shadow over the retirement landscape. Singling out over age 65 retirees sets an example that will lead to more companies targeting them. It is ironic that retirees under age 65 are no better protected now than before the EEOC rule became effective.
I am not blaming the Big Three. The trend is universal. The EEOC rule and the fact that ERISA does not vest retiree benefits are the real culprits. For this reason, maintenance of health care benefits in effect on the day of retirement is a top NRLN priority.
Congress must address the problem of catastrophic insurance for all retirees and Medicare eligible Americans. It is not just uninsured people who are vulnerable.
Robert ......, a 66-year-old Dallas retiree, has brain cancer. He gets free supplies of a tumor-fighting drug through a program for low-income families. His premiums have jumped by $365 a month, his deductible and co-pays and other out of pocket expenses are on top of that; “it eats up all the pension” which is $850 a month his wife, LaRue, says. They have cashed in his 401(k) account and taken out a second mortgage on their home. Two other NRLN priorities are the inclusion of catastrophic coverage in Medicare and the creation of a Medicare buy-in option, at cost, for all under age 65 retirees.
Elizabeth Warren, a Harvard Law School professor and one of the authors of Consumer Bankruptcy Project, examined a sampling of noncommercial bankruptcies from 1991 to 2007, and people 65 and up were more than twice as likely to file and the filing rate for those 75 and older more than quadrupled. This is very real and frightening!
So given all of this, what can Congress do to provide greater safeguards for retiree health benefits? The NRLN has three main recommendations:
First, prevent broken promises to retirees and mitigate the harm from the EEOC ruling by offering incentives to companies but requiring them to maintain their existing level of health care contributions for retirees. This incentive could take the form of tax credits that would offset part of the cost. The NRLN calls this Maintenance of Cost Protection (MCP).
Second, amend ERISA to prohibit the use of defined benefit pension plan assets to make lump-sum severance payments-an operating expense that should be paid from a restructuring reserve or from operating revenues. This will ensure that any pension fund surplus can be applied to retiree health care costs through use of IRS Sec 420 transfers to 401(h) trusts, as long as a cushion of 120% of current assets is maintained in the pension fund.
Third, in 1986, Congress passed the “Medicare Catastrophic Act of 1988” that provided catastrophic insurance that would protect fixed income seniors from devastating health care bills. But it was attacked by seniors who declared it prohibitively expensive at the time. The law was repealed in 1989. Now is the right time to work out a new bill that solves the catastrophic dilemma.
Thank you, Mr. Chairman and members of the Committee. We stand ready to work with you and your staffs on these and other legislative proposals that you may consider. I’d be happy to answer any questions you or the Committee members may have.
Credit: Steve Scott
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The Shift - Part 1
And if any man will hurt them, fire (Scripture) proceeds out of their mouth, and devours their enemies: and if any man will hurt them, he must in this manner be killed. These have power to shut heaven, that it rain not in the days of their prophecy: and have power over waters to turn them to blood, and to smite the earth with all plagues, as often as they desire.
-Revelation 11:3-6
A shattering Moment In America’s Fall From Power
The global financial crisis will see the US falter in the same way the Soviet Union did when the Berlin Wall came down. The era of American dominance is over.
By John Gray
The Guardian
September 29, 2008
Our gaze might be on the markets melting down, but the upheaval we are experiencing is MORE THAN a financial crisis, however large. Here is a historic geopolitical shift, in which the balance of power in the world is being altered irrevocably. The era of American global leadership, reaching back to the Second World War, is over.
You can see it in the way America’s dominion has slipped away in its own backyard, with Venezuelan President Hugo Chvez taunting and ridiculing the superpower with impunity. Yet the setback of America’s standing at the global level is even more striking. With the nationalisation of crucial parts of the financial system, the American free-market creed has self-destructed while countries that retained overall control of markets have been vindicated. In a change as far-reaching in its implications as the fall of the Soviet Union, an entire model of government and the economy has collapsed.
Ever since the end of the Cold War, successive American administrations have lectured other countries on the necessity of sound finance. Indonesia, Thailand, Argentina and several African states endured severe cuts in spending and deep recessions as the price of aid from the International Monetary Fund, which enforced the American orthodoxy. China in particular was hectored relentlessly on the weakness of its banking system. But China’s success has been based on its consistent contempt for Western advice and it is not Chinese banks that are currently going bust. How symbolic yesterday that Chinese astronauts take a spacewalk while the US Treasury Secretary is on his knees.
Despite incessantly urging other countries to adopt its way of doing business, America has always had one economic policy for itself and another for the rest of the world. Throughout the years in which the US was punishing countries that departed from fiscal prudence, it was borrowing on a colossal scale to finance tax cuts and fund its over-stretched military commitments. Now, with federal finances critically dependent on continuing large inflows of foreign capital, it will be the countries that spurned the American model of capitalism that will shape America’s economic future.
Which version of the bail out of American financial institutions cobbled up by Treasury Secretary Hank Paulson and Federal Reserve chairman Ben Bernanke is finally adopted is less important than what the bail out means for America’s position in the world. The populist rant about greedy banks that is being loudly ventilated in Congress is a distraction from the true causes of the crisis. The dire condition of America’s financial markets is the result of American banks operating in a free-for-all environment that these same American legislators created. It is America’s political class that, by embracing the dangerously simplistic ideology of deregulation, has responsibility for the present mess.
In present circumstances, an unprecedented expansion of government is the only means of averting a market catastrophe. The consequence, however, will be that America will be even more starkly dependent on the world’s new rising powers. The federal government is racking up even larger borrowings, which its creditors may rightly fear will never be repaid. It may well be tempted to inflate these debts away in a surge of inflation that would leave foreign investors with hefty losses. In these circumstances, will the governments of countries that buy large quantities of American bonds, China, the Gulf States and Russia, for example, be ready to continue supporting the dollar’s role as the world’s reserve currency? Or will these countries see this as an opportunity to tilt the balance of economic power further in their favour? Either way, the control of events is no longer in American hands.
The fate of empires is very often sealed by the interaction of war and debt. That was true of the British Empire, whose finances deteriorated from the First World War onwards, and of the Soviet Union. Defeat in Afghanistan and the economic burden of trying to respond to Reagan’s technically flawed but politically extremely effective Star Wars programme were vital factors in triggering the Soviet collapse. Despite its insistent exceptionalism, America is no different. The Iraq War and the credit bubble have fatally undermined America’s economic primacy. The US will continue to be the world’s largest economy for a while longer, but it will be the new rising powers that, once the crisis is over, buy up what remains intact in the wreckage of America’s financial system.
There has been a good deal of talk in recent weeks about imminent economic armageddon. In fact, this is far from being the end of capitalism. The frantic scrambling that is going on in Washington marks the passing of only one type of capitalism - the peculiar and highly unstable variety that has existed in America over the last 20 years. This experiment in financial laissez-faire has imploded.While the impact of the collapse will be felt everywhere, the market economies that resisted American-style deregulation will best weather the storm. Britain, which has turned itself into a gigantic hedge fund, but of a kind that lacks the ability to profit from a downturn, is likely to be especially badly hit.
The irony of the post-Cold War period is that the fall of communism was followed by the rise of another utopian ideology. In American and Britain, and to a lesser extent other Western countries, a type of market fundamentalism became the guiding philosophy. The collapse of American power that is underway is the predictable upshot. Like the Soviet collapse, it will have large geopolitical repercussions. An enfeebled economy cannot support America’s over-extended military commitments for much longer. Retrenchment is inevitable and it is unlikely to be gradual or well planned.
Meltdowns on the scale we are seeing are not slow-motion events. They are swift and chaotic, with rapidly spreading side-effects. Consider Iraq. The success of the surge, which has been achieved by bribing the Sunnis, while acquiescing in ongoing ethnic cleansing, has produced a condition of relative peace in parts of the country. How long will this last, given that America’s current level of expenditure on the war can no longer be sustained?
An American retreat from Iraq will leave Iran the regional victor. How will Saudi Arabia respond? Will military action to forestall Iran acquiring nuclear weapons be less or more likely? China’s rulers have so far been silent during the unfolding crisis. Will America’s weakness embolden them to assert China’s power or will China continue its cautious policy of ‘peaceful rise’? At present, none of these questions can be answered with any confidence. What is evident is that power is leaking from the US at an accelerating rate. Georgia showed Russia redrawing the geopolitical map, with America an impotent spectator.
Outside the US, most people have long accepted that the development of new economies that goes with globalisation will undermine America’s central position in the world. They imagined that this would be a change in America’s comparative standing, taking place incrementally over several decades or generations. Today, that looks an increasingly unrealistic assumption.
Having created THE CONDITIONS that produced history’s biggest bubble, America’s political leaders appear unable to grasp the MAGNITUDE of the dangers the country now faces. Mired in their rancorous culture wars and squabbling among themselves, they seem oblivious to the fact that American global leadership is fast ebbing away. A new world is coming into being almost unnoticed, where America is only one of several great powers, facing an uncertain future it can no longer shape.
John Gray is the author of Black Mass: Apocalyptic Religion and the Death of Utopia.
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Monday, September 29, 2008
The Next Depression Part 12 - Distrust
“I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. . . . corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed.”
- Abraham Lincoln
I’ve watched the economy for 30 years. Now I’m truly scared
By Will Hutton
The Guardian
September 29, 2008
If more people understood what has happened in the British and American banking system, the financial crisis would only be containable by the immediate partial nationalisation of every bank in Britain and America. There was not a run on the banks by depositors queuing in the streets to withdraw their savings. Rather, it was an escalating and terrifying run on the banks in effect by themselves, which, if it spread to millions of small savers, would reproduce the events of 1929.
In Britain, the money markets that the banks organise between themselves completely froze. Such was the break down in trust and sense of panic that some of the most familiar names in British high street banking would not lend to each other at all or, at best, just overnight. Instead, the Bank of England had to supply tens of billions to banks who found the normal sources of funds blocked.
I have been writing on the financial markets for nearly 30 years. I have known the system was becoming increasingly fragile, but for all the ferocity of my criticisms, I never expected the scale of today’s events. Or that I would begin to wonder whether my own bank would survive without nationalisation. The negotiations in Washington over this weekend to finalise the $700bn Paulson financial bail-out plan, and the expected vote on Sunday, are all that stands between the Anglo-American banking system and a first-order disaster. The scheme had better work.
This is not the end of capitalism, as some wildly claim; there is no intellectual, social or political challenge to a market system based on respect for private property rights, even by the Chinese Communist party. Rather, it is a crisis of a particular capitalism that has set aside respect for trust, integrity and fairness as fuddy-duddy obstacles to ‘wealth generation’. What we are relearning is that without trust and fairness, capitalism risks its own sustainability, even while it unleashes forces that undermine those self-same values. London’s money markets froze because of a trust collapse; banks simply don’t believe each other when they say their businesses are sound and will not default on their obligations. Trust matters.
And although some conservatives in Britain and America continue to make the ideological case against any government action as a response to the recent turmoil - governments necessarily do everything worse than the market - they have no alternative proposal about how to restore trust once it has gone. Trust is a reciprocal relationship, dependent upon a desire to be considered decent and honourable. Even in the dog-eat-dog financial markets, trust and integrity are matters of self-interest. However amoral you may be, it is in your interest to care about your reputation, because if you behave badly you will not do business with me - or others - on favourable terms again.
But the scale of the personal rewards now available in London and Wall Street - 15m-ã20m at the top is the norm - along with the greed-is-good doctrine associated with extreme laissez-faire economics, has trashed the need for individuals to worry about integrity. They don’t need to be concerned about their reputations; they just need one deal or one year at the top and they need never work again. The incentive structure has so departed from one of the principal norms of fairness - proportionality between value added and reward - that it has eviscerated trust relationships and integrity.
Everybody tries to ‘game’ the system on their route to vast personal fortunes - whether short-selling, packaging up dud mortgages as prime mortgages or telling lies about their financial viability - and the result is that the system is getting wise. The best course today in any financial transaction is to presume zero integrity. Credit is drying up and with it the very lifeblood of the economy.
Worse, now that the system is in trouble, financiers are turning to taxpayers in the US and Britain for help without understanding the other key principal of fairness - that we will consider helping those who for no fault of their own get into trouble, but not those who freely created their own bad circumstances.
Hank Paulson certainly acted decisively in launching his plan, but the former Goldman Sachs CEO, who negotiated a special exemption from tax when he took the job, like his former Wall Street colleagues is not well endowed with the fairness gene. It polluted the very design of the scheme.
He knows that unless the US government does something comprehensive, the entire financial system is at stake, but his original plan was designed to bail out the system intact. It made no demands that any financial executives sacrifice pay or bonuses despite having driven their firms and wider economy to the point of bankruptcy. He does not want the government to provide new bank capital to help recapitalise a bust banking system. Instead, he wants the government to buy their toxic debt and so leave the banks unreformed. On top he wanted complete discretion to act as he chose without any oversight.
American economists of every persuasion signed a joint letter complaining not at the aim of the bail out, which is plainly vital, but for its lack of fairness. Conservative papers and politicians echoed the complaint. Suddenly, Wall Street is coming back to earth. The transactions from which it skims such riches are built on the savings of ordinary Americans to whom it has obligations, as it has to other Wall Street firms. What we know now about the yet to be agreed compromise is that Paulson has accepted Congressional oversight, will offer direct help to distressed US homeowners as well as banks, and will accept some constraints on the worst excesses of executive pay.
But the core proposal remains. The government will buy toxic debt rather than inject government funds into the banks’ capital base, in other words, reject even partially nationalising the entire US banking system as the Swedes had to in 1992. I don’t know - nobody does - whether the Paulson plan would be sufficient or whether ultimately the Americans will have to go for nationalisation. What I do know is that unless there is a radical and government-led change in ownership, structure, regulation and incentives so that the principles of fairness are put at the heart of the Anglo American financial system - proportionality of reward and fair distribution of risk - there is no chance of the return of trust and integrity upon which long-term recovery depends.
The political debate in Britain and America so far little reflects this need - but it will. Barack Obama’s election as President is much more likely. And the discourse in Britain will follow. Brown may be crampingly cautious but, unlike Cameron, he does understand that without government action the restoration of trust and fairness may never happen. This week, I expect the nationalisation of the stricken Bradford & Bingley to join Northern Rock. It is but another in a long sequence of interventions that are imperative to save the system from its own proclivities. Once again, the left is coming to capitalism’s rescue.
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Black Monday? Global Investors vote “No” on Paulson’s Bailout
By Mike Whitney
September 29, 2008
The wrangling continued on the floor of the House of Representatives all weekend, but it is still unclear whether there’s enough support to pass Treasury Secretary Paulson’s $700 billion Emergency Economic Stabilization Act of 2008. Paulson says he has the votes, but Paulson has been wrong before. The bigger question, is whether buying up the illiquid mortgage-backed assets from the nation’s banks will be enough to save the financial system from an impending meltdown. The jury is out on that question, too. Professor Nouriel Roubini, chairman of Roubini Global Economics, summed it up like this, “You’re not resolving the two fundamental issues: You still have to recapitalize the banking system, and household debt is going to stay high”. . A large number of economists believe Roubini is right. The bill will not solve the underlying problems.
Still, senators and congressmen are expected to hold their noses and pass Paulson’s bailout anyway, fearing that if they don’t, the country’s financial system will come crashing down around them. They could be right, too. The banking system is undercapitalized, the credit markets are frozen, and foreign creditors are beginning to slow their purchases of US debt. It’s all bad. At the same time the number of casualties among the financial giants--Bear Stearns, Indymac, AIG, Lehman, Washington Mutual--continues to grow. Three more struggling European banks were added to the list of financial institutions that needed emergency government assistance this past weekend. It’s no wonder Congress feels like they have to do something to stop the bleeding.
Before the stock market opened on Monday, the futures markets had slumped heavily into negative territory, while the TED spread, an indicator of stress in interbank lending, had widened to 3.19, a level that suggests another rocky week of trading ahead. Could this be another Black Monday?
Paulson’s bill is designed to avert a system wide crash by clearing the banks’ balance sheets so they can resume extending credit to consumers and businesses. The hope is that massive infusion of capital will “turn back the clock” to the happy days of low interest speculation and bubble economics. Paulson is a “one trick pony” who firmly adheres to the belief that wealth creation depends on maximum leverage and an ever-weakening currency. But that world view is no longer applicable after reaching Peak Credit, where consumers are no longer able to make the interest payments on their loans and businesses and financial institutions are forced to curb their spending and dump their toxic assets at firesale prices. The system is deleveraging and nothing can stop it. Paulson has yet to accept the new reality.
Besides, there’s no guarantee that the banks will use the money in the way that Paulson imagines. As one Wall Street veteran explained to me, “I don’t see one penny of that $700 billion ending up helping the broader economy. I see it being used to prop up share prices so the insiders can salvage as much as possible when dumping their shares”.
Indeed, the $700 billion is just part of a massive “pump and dump” scheme engineered with the tacit approval of the US Treasury and the Federal Reserve. Once the banksters have offloaded their fraudulent securities and crappy paper on Uncle Sam, they will do whatever they need to do pad the bottom line and drive their stocks up. That means they will shovel capital into hard assets, foreign currencies, gold, interest rate swaps, carry trade swindles, and Swiss bank accounts. The notion that they will recapitalize so they can provide loans to US consumers and businesses in a slumping economy is a pipedream. The US is headed into its worst recession in 60 years. The housing market is crashing, securitzation is kaput, and the broader economy is drifting towards the reef. The banks are not going to waste their time trying to revive a moribund US market where consumers and businesses are already tapped out. No way; it’s on to greener pastures. They’ll move their capital wherever they think they can maximize their profits. In fact, a sizable portion of the $700 billion will likely be invested in commodities, which means that we’ll see another round of hyperbolic speculation in food and energy futures pushing food and fuel prices back into the stratosphere. Ironically, the taxpayers largess will be used against him, making a bad situation even worse.
Then again, if the bill isn’t passed, no one can predict with certainty what will happen. Here’s how Tim Shipman summed it up in “Bailout Failure Will Cause US Crash”, in the UK Telegraph:
“Officials close to Paulson are privately painting a far bleaker portrait of the fragility of the global economy than that advanced by President George W Bush in his televised address last week.
One Republican said that the message from government officials is that ‘the economy is dropping into the john.’ He added: ‘We could see falls of 3,000 or 4,000 points on the Dow [the New York market that currently trades at around 11,000]. That could happen in just a couple of days.
‘Whats being put around behind the scenes is that weҒre looking at 1930s stuff. Were looking at catastrophe, huge, amazing catastrophe. Everybody is extraordinarily scared. ItҒs going to be really, really nasty.’
The fear on Capital Hill is palpable, especially among the Democrats who have led the effort to pass Paulson’s boondoggle ASAP. Speaker of the House, Madame Botox, and fellow Democratic Party leaders, Chris Dodd, Harry Reid and the blabbering blowhard from Massachusettes, Barney Frank, have done everything in their power to sandbag dissenters, quash resistance, and rush the bill to a vote without the usual deliberation and debate. Rep. Marcy Kaptur (D-ohio) was one of many angry congressman who lashed out at Pelosi’s highhandedness. It’s all caught on a one minute VIDEO on you tube:
Rep. Marcy Kaptur:
“The normal legislative process that should accompany a monumental proposal to bail out Wall Street has been shelved. Yes, shelved! Only a few insiders are doing the dealing. These criminals have so much power they can shut down the normal legislative process of the highest lawmaking body in this land. All the committees that should be scanning every word that is being negotiated have been benched. And that means the American people have been benched. We are constitutionally sworn to protect this country against all enemies foreign and domestic, and yes, my friends, there are enemies....The people who are pushing this bill are the very same one’s who are responsible for the implosion on Wall Street. They were fraudulent then; and they are fraudulent now.We should say No to this deal”.
Republicans were equally furious at the way the Pelosi Politburo kept the rank and file out of loop as much as possible. Rep. Michael Burgess (R-Texas) summarized the feelings of a great many congressmen who felt they were being railroaded by Pelosi and Co: “We have seen no bill. We have been here debating talking points ...House Republicans have been cut out of the process and derided by the leaders of the House Democrats as “unpatriotic” for not participating in supporting the bill. Mr. Speaker, I have been thrown out of more meetings in the last 24 hours than I ever thought possible as an elected official of 800,000 citizens of N. Texas....Since we didn’t have hearings, since we didn’t have markup, let’s at least put this legislation up on the Internet for 24 hours and let the American people see what we have done in the dark of night. After all, I have never gotton more mail on a single issue than on THIS BILL that is before us tonight.”
Predictably, Rep Dennis Kucinich (D-Ohio) gave the BEST SPEECH of the day railing against the financial industry and defending the interests of working class Americans.
Rep. Dennis Kucinich:
“The $700 bailout bill is being driven by fear not fact. This is too much money, in too short of time, going to too few people,while too many questions remain unanswered. Why aren’t we having hearings...Why aren’t we considering any other alternatives other than giving $700 billion to Wall Street? Why aren’t we passing new laws to stop the speculation which triggered this? Why aren’t we putting up new regulatory structures to protect the investors? Why aren’t we directly helping homeowners with their debt burdens? Why aren’t we helping American families faced with bankruptcy? Isn’t time for fundamental change to our debt-based monetary system so we can free ourselves from the manipulation of the Federal Reserve and the banks? Is this the US Congress or the Board of Directors of Goldman Sachs?”
There is greater opposition to the Paulson bill than any legislation in the last half century. The groundswell of public outrage is unprecedented, and yet, Congress--completely insulated from the demands of their constituents--continues to blunder ahead following the same pro-industry scriptas their ideological twins in the White House. There’s not a dime’s worth of difference between the two parties. Not surprisingly, neither Pelosi nor any of the Democratic leadership has even met with any of the more than 200 leading economists who have stated unequivocally that the bailout will not address the central problems that are wreaking havoc on the financial system. Instead, they have caved in to Bush’s demagoguery and the spurious claims of G-Sax bagman Henry Paulson, a man who has misled the public on every issue related to the subprime/financial fiasco so far.
There are parts of Paulson’s Emergency Economic Stabilization Act of 2008 that every US taxpayer should understand, even though the media is attempting to keep the details obscured. In sections 128 and 132; the proposed bill will suspend “mark to market” accounting. This means that the banks will no longer be required to assess the worth of their assets according to what similar assets fetched on the open market. For example, Merrill Lynch just sold $31 billion of mortgage-backed securities for $6 billion, which means that similar bonds should be similarly priced. Simple; right? The banks need to adjust the value of those assets on their balance sheet accordingly. This gives investors and depositors the ability to know whether their bank is in bad shape or not. But Paulson’s bill lifts this requirement and allows the banks to assign their own arbitrary value to these assets, which is the same old Enron-style accounting bullsh**.
Paulson’s bill also proposes the “Elimination of FASB 157 and 0% reserves”. This is just as sketchy as it sounds. FASB or Financial Services Regulatory Relief Act reads:
“Federal Reserve Banks are authorized to pay banks interest on reserves under Section 201 of the Act. In addition, Section 202 permits the FRB to change the ratio of reserves a bank must maintain relative to its transaction accounts, allowing a zero reserve ratio if appropriate. Due to federal budgetary requirements, Section 203 provides that these legislative changes will not take effect until October 1, 2011.”
Blah, blah, blah. It’s all legal mumbo jumbo to conceal the fact that the banks can continue to operate with insufficient capital, which is why the system is currently blowing up. It all get’s down to this: The reason the system is exploding is because the various financial institutions have been allowed--via deregulation--to act as banks and create as much credit as they choose without a sufficient capital base. When one reads about massive deleveraging; this relates directly to the fact that under-capitalized businesses were operating with too much debt in relationship to their capital. That’s it in a nutshell; forget about the CDOs, the MBSs, the CDS and the whole alphabet soup of derivatives garbage. They were all inserted into the system so greedy Wall Street landsharks could expand credit without supervision and balance trillions of dollars of debt on the back of a one dollar bill. This is why Paulson wants to suspend the rules which would bring credibility and trust back to the system. After all, that might impinge on Wall Street’s ability to enrich itself at the public’s expense.
Finally, Nouriel Roubini sites a study by Barry Eichengreen, “And Now the Great Depression”, which points out why Paulson’s $700 billion plan is likely to fail:
“Whenever there is a systemic banking crisis there is a need to recapitalize the banking/financial system to avoid an excessive and destructive credit contraction. But purchasing toxic/illiquid assets of the financial system is NOT the most effective and efficient way to recapitalize the banking system....
A recent IMF study of 42 systemic banking crises across the world provides evidence of how different crises were resolved.
First of all only in 32 of the 42 cases there was government financial intervention of any sort; in 10 cases systemic banking crises were resolved without any government financial intervention. Of the 32 cases where the government recapitalized the banking system only seven included a program of purchase of bad assets/loans (like the one proposed by the US Treasury). In 25 other cases there was no government purchase of such toxic assets. In 6 cases the government purchased preferred shares; in 4 cases the government purchased common shares; in 11 cases the government purchased subordinated debt; in 12 cases the government injected cash in the banks; in 2 cases credit was extended to the banks; and in 3 cases the government assumed bank liabilities. Even in cases where bad assets were purchased - as in Chile dividends were suspended and all profits and recoveries had to be used to repurchase the bad assets. Of course in most cases multiple forms of government recapitalization of banks were used.” ( Nouriel Roubini’s GLOBAL EONO MONITOR )
In short, it won’t work. Nor is it designed to work. The bill is just Paulson’s way of carving a silver canoe for he and his brandy-drooling investor buddies so they can paddle away to some island paradise while the rest of us drown in a bottomless ocean of debt.
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The Next Depression Part 11 - Big Bank Failures
In the biggest bank failure in history, JPMorgan Chase will acquire massive branch network and troubled assets from Washington Mutual for $1.9 billion.
By David Ellis and Jeanne Sahadi
CNN
September 26, 2008
JPMorgan Chase acquired the banking assets of Washington Mutual late Thursday after the troubled thrift was seized by federal regulators, marking the biggest bank failure in the nation’s history and the latest stunning twist in the ongoing credit crisis.
Under the deal, JPMorgan Chase will acquire all the banking operations of WaMu, including $307 billion in assets and $188 billion in deposits.
To put the size of WaMu in context, its assets are equal to about two-thirds of the combined book value assets of all 747 failed thrifts that were sold off by the Resolution Trust Corp. - the former government body that handled the S&L crisis from 1989 through 1995.
In exchange for scooping up WaMu, JPMorgan Chase will pay approximately $1.9 billion to the Federal Deposit Insurance Corporation. Separately, JPMorgan announced plans to raise $8 billion in additional capital through the sale of stock as part of the deal.
The acquisition is JPMorgan Chase’s second major purchase this year following the mid-March acquisition of investment bank Bear Stearns, a deal that was also engineered by the government.
“We think it is a great thing for our company,” JPMorgan Chase Chairman and CEO Jamie Dimon said in a conference call with investors late Thursday night.
As a result of the acquisition, the New York City-based JPMorgan Chase will now boast some 5,400 branches in 23 states.
Federal regulators, who helped shepherd the deal, stressed that the transition for WaMu customers would be “seamless.”
“There will be no interruption in services and bank customers should expect business as usual come Friday morning,” FDIC Chairman Sheila Bair said in a statement.
WaMu is the 13th bank to fail so far this year and earns the title of the nation’s biggest bank failure by assets on record, ahead of Continental Illinois, which had about $40 billion in assets ($67.7 billion in 2008 dollars) when it failed in May of 1984.
The FDIC, however, was quick to point out Thursday evening that the WaMu-JPMorgan Chase deal would not have any impact to its insurance fund which covers customer deposits when banks fail.
“WaMu’s balance sheet and the payment paid by JPMorgan Chase allowed a transaction in which neither the uninsured depositors nor the insurance fund absorbed any losses,” Bair said.
The FDIC insures the assets held by 8,451 banking institutions with a total of $13.4 trillion.
A road to collapse
WaMu had been one of the most hard-hit banks during the financial crisis after it bet big, like many of its competitors, on the strength of the U.S. housing market—only to see its fortunes sour as housing prices fell.
Following several ratings agency downgrades this week and a freefall in the company’s stock, many analysts were speculating that the endgame for the embattled savings and loan was imminent.
WaMu shares were close to worthless when markets opened Friday, falling 90% to just 16 cents a share. JPMorgan Chase shares fell 2.5% in morning trading.
In a press conference held late Thursday, Bair said regulators deemed it was necessary to act as the company had come under “severe” liquidity pressure. Regulators said that WaMu was experiencing a “run on the bank”, as roughly 10% of WaMu deposits were pulled on Monday.
As a result, regulators saw the need to act this week, even as Congress and the White House continued to hash out a bank bailout plan.
Bair added that the company was on the FDIC’s latest so-called “problem bank” list for the third quarter, which has yet to be published.
All told, Bair said four banks made bids for WaMu but JPMorgan Chase ultimately won out when the auction was held Wednesday. Several other large institutions, including Wells Fargo, Citigroup and HSBC, were poring over the company’s books, according to news reports last week.
JPMorgan Chase won because they were “the highest bid and the lowest cost resolution,” Bair said.
“It was our cheapest option,” she said.
Analysts were largely encouraged by the news even as JPMorgan Chase absorbs WaMu’s toxic subprime and option-ARM mortgages as part of the deal.
“My initial impression is that this deal is ‘generally OK’,” wrote Nancy Bush, managing member at investment advisory firm NAB Research LLC, adding that there would be questions about the loan losses that JPMorgan took as part of the deal would be sufficient.
All told, JPMorgan Chase said it would recognize projected losses on the loan portfolio upfront by marking down the value of the loans by a whopping $31 billion.
Quite possibly the biggest losers in Thursday’s deal, however, are WaMu’s stock and debt holders, who were effectively wiped out.
Among that group was the private equity giant TPG, which was part of a consortium of investors that acquired a stake in WaMu for $7 billion in April.
JPMorgan Chase reportedly had made a previous bid for WaMu around that time for about $8 a share which was snubbed by WaMu, according to news reports at the time.
Tough times for banks
The fall of WaMu is the latest turn in a dizzying two weeks that have seen the bankruptcy of Lehman Brothers, the acquisition of Merrill Lynch by Bank of America and the near collapse of insurance giant AIG.
The widening credit crisis has prompted President Bush to seek from Congress extraordinary authority to spend as much a $700 billion to bail out the nation’s financial system by purchasing toxic assets from banks.
President Bush, in a televised address Friday morning, said the nation’s economy is at risk, adding he believed that Congress will move quickly on a bailout proposal.
“We’ve got a big problem,” he said.
Regulators acknowledged they were encouraged to get a deal done but JPMorgan Chase’s Dimon stressed to investors that a potential bailout by the government was not a factor.
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Citigroup Buys Wachovia Bank Assets For $2.2B
By David Ellis
CNN Money
September 29, 2008
As part of all-stock deal, Citi will acquire deposits, loans from nation’s fourth largest bank. Citi also to raise $10B in stock sale, cuts dividend.
Citigroup will acquire the banking operations of Wachovia for $2.2 billion in an all-stock deal, following much speculation over the weekend about the fate of the nation’s fourth-largest bank.
Citigroup, the nation’s largest bank based on assets, also announced it would raise $10 billion through a sale of common stock and that it would slash its quarterly dividend yet again, cutting it in half to 16 cents a share to preserve capital.
As part of the deal, Citigroup will acquire Wachovia’s massive deposit network, about $53 billion in the company’s debt, as well as more than $300 billion of Wachovia’s loan portfolio.
Following completion of the acquisition, Citigroup will have more than $600 billion in deposits in the U.S., about a 9.8% market share. Total deposits worldwide will be $1.3 trillion.
Citigroup said it will absorb up to $42 billion of losses on those loans, while the Federal Deposit Insurance Corporation will be on the hook for anything beyond that.
The FDIC noted that Wachovia did not qualify as a failed bank, unlike Washington Mutual, which collapsed last Thursday, only to be subsequently purchased by JPMorgan Chase (JPM, Fortune 500).
Regulators also stressed that consumers who bank with Wachovia would not experience any interruption in service and that their deposits remained protected.
“Today’s action will ensure seamless continuity of service from their bank and full protection for all of their deposits,” said FDIC Chairman Sheila Bair.
Citigroup CEO Vikram Pandit called the transaction “extremely attractive” from a strategic perspective, saying it would augment the company’s access to funding and liquidity.
Banking regulators, who helped broker the deal following consultations with President Bush, the Federal Reserve and Treasury Secretary Henry Paulson, viewed the deal as necessary to avoid what could have been a painful fallout for both the economy and the already fragile financial system.
“A failure of Wachovia would have posed a systemic risk,” Paulson said in a statement.
Wachovia plunges but company isn’t completely disappearing
Shares of Wachovia (WB, Fortune 500) were halted when the stock market opened Monday. The stock plunged more than 90% in pre-market trading, to 94 cents a share. Citigroup (C, Fortune 500) shares edged higher in morning trading.
However, Wachovia will remain a publicly traded company—albeit in much smaller form.
The Charlotte, N.C.-based firm will hold onto its massive brokerage business, which grew substantially following its $6.7 billion acquisition of A.G. Edwards last year. Wachovia also owns the Evergreen investment management division, which had more than $245 billion in assets as of June 30.
Heading into the weekend there was rampant speculation that the Charlotte, N.C.-based Wachovia would be sold to either Citigroup or Wells Fargo (WFC, Fortune 500). Even Spain’s Banco Santander (STD) had been mentioned as a possible bidder. By Sunday evening, a bidding war between the two banking giants was underway, The New York Times reported.
There had also been talk in recent weeks that Morgan Stanley (MS, Fortune 500), which recently converted itself into a commercial bank from a stand-alone investment bank, was discussing a possible merger with Wachovia.
Following a string of high-profile collapses of banks in recent weeks including WaMu and the demise of Lehman Brothers, there has been increasing speculation that Wachovia could be the next one to go.
Like many of its peers, Wachovia bet big on the U.S. mortgage market, which prompted it to suffer losses over the past two quarters.
Some analysts have blamed the company’s ill-timed 2006 acquisition of the California mortgage lender Golden West Financial Corp. for the company’s woes.
Risky move for Citi
At the same time, Citigroup has been no picture of health. The New York City-based financial services giant has posted close to $18 billion in losses over the past three quarters, while taking nearly $50 billion in writedowns on its diverse loan portfolio.
The deal for Wachovia also comes as somewhat of a surprise given recent efforts by Citi’s leadership to shrink the company.
Citigroup’s Pandit, who was installed as the company’s chief executive last December, unveiled plans in May to unload more than $400 billion in assets over the next few years in the hopes of turning the company around.
The deal, which comes ahead of a Congressional vote on a proposed $700 billion bailout for the financial system, marks yet another big shake-up of the nation’s banking industry.
In the past two weeks, the sector has undergone a dramatic transformation, including Lehman’s bankruptcy, the acquisition of Merrill Lynch by Bank of America and the government takeover of insurer AIG.
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50K Jobs
If only I can go back 30 years and take that job as a NYC TRANSIT WORKER.
Here’s some intertesting jobs and numbers:
Accountants and auditors
Annual median income: $57,060*
Projected employment in 2016: 1.5 million
Increase between 2006 and 2016: 18 percent
Audiologists
Annual median income: $57,779**
Projected employment in 2016: 13,000
Increase between 2006 and 2016: 10 percent
Compensation, benefits and job analysis specialists
Annual median income: $52,180*
Projected employment in 2016: 130,000
Increase between 2006 and 2016: 18 percent
Conservation scientists
Annual median income: $56,150*
Projected employment in 2016: 21,000
Increase between 2006 and 2016: 5 percent
Detectives and criminal investigators
Annual median income: $59,930*
Projected employment in 2016: 125,000
Increase between 2006 and 2016: 17 percent
Environmental scientists and specialists, including health
Annual median income: $58,380*
Projected employment in 2016: 104,000
Increase between 2006 and 2016: 25 percent
Insurance appraisers, auto damage
Annual median income: $51,500*
Projected employment in 2016: 15,000
Increase between 2006 and 2016: 13 percent
Insurance underwriters
Annual median income: $51,264**
Projected employment in 2016: 111,000
Increase between 2006 and 2016: 6 percent
Landscape architects
Annual median income: $50,843**
Projected employment in 2016: 32,000
Increase between 2006 and 2016: 16 percent
Librarians
Annual median income: $50,970*
Projected employment in 2016: 164,000
Increase between 2006 and 2016: 4 percent
Sales representatives, wholesale and manufacturing (excluding technical and scientific products)
Annual median income: $50,750*
Projected employment in 2016: 1.69 million
Increase between 2006 and 2016: 8 percent
Subway and streetcar operators
Annual median income: $50,520*
Projected employment in 2016: 7,800
Increase between 2006 and 2016: 12 percent
Surveyors
Annual median income: $51,630*
Projected employment in 2016: 74,000
Increase between 2006 and 2016: 24 percent
Teachers, postsecondary
Annual median income: $56,120*
Projected employment in 2016: 2.05 million
Increase between 2006 and 2016: 23 percent
Urban and regional planners
Annual median income: $53,967**
Projected employment in 2016: 39,000
Increase between 2006 and 2016: 15 percent
Salary and employment figures based on data from the Bureau of Labor Statistics.
Source: JOB SEEKER SPAMMERS
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