Monday, July 25, 2011

Today's links

1--Corporations Ripe for Buybacks, Bloomberg

Excerpt: Corporations are facing “ripe” conditions for buying back shares, pursuing mergers and acquisitions and increasing debt after hoarding cash since 2009, said Barclays Capital’s Jeffrey Meli.

“Conditions will be ripe once macro-volatility settles down in the third quarter for corporations to start getting more aggressive with their balance sheets,” Meli, head of credit strategy at the firm in New York, said today in an interview on Bloomberg Television’s “InBusiness with Margaret Brennan.” “Some of the lessons from 2009 in terms of needing to hoard cash, needing to run very conservative balance sheets, are starting to fade.”

Executives are signaling that they’re gaining enough confidence in the economic recovery to begin deploying some of the record $1.9 trillion in cash they amassed after the 2008 credit crisis. The level of acquisitions and share buybacks, which slowed in the second quarter amid Europe’s sovereign debt crisis and slower-than-expected growth in the U.S., is set to increase through September, Meli said.

“With all-in yields lower, with corporate performance continuing to be strong, the shareholder-friendly activity, M&A and generic re-leveraging will start to increase again” as long as the U.S. resolves its debt ceiling impasse and stability in Europe takes hold, he said....

Since the end of 2010, 53 percent of non-financial companies in Barclays Capital’s U.S. Credit Corporate index have increased total debt, with less than 40 percent reducing, Barclays strategists wrote in a June 3 research note.

2--The Lesser Depression, Paul Krugman, New York Times via economist's view

Excerpt: These are interesting times — and I mean that in the worst way. Right now we’re looking at not one but two looming crises, either of which could produce a global disaster. In the United States, right-wing fanatics in Congress may block a necessary rise in the debt ceiling, potentially wreaking havoc in world financial markets. Meanwhile, if the plan just agreed to by European heads of state fails to calm markets, we could see falling dominoes all across southern Europe — which would also wreak havoc in world financial markets.

We can only hope that the politicians huddled in Washington and Brussels succeed in averting these threats. But here’s the thing: Even if we manage to avoid immediate catastrophe, the deals being struck on both sides of the Atlantic are almost guaranteed to make the broader economic slump worse. ...

The disappearance of unemployment from elite policy discourse and its replacement by deficit panic has been truly remarkable..., the conversations in Washington and Brussels are all about spending cuts (and maybe tax increases, I mean revisions). That’s obviously true about the various proposals being floated to resolve the debt-ceiling crisis here. But it’s equally true in Europe. ...

For those who know their 1930s history, this is all too familiar. If either of the current debt negotiations fails, we could be about to replay 1931, the global banking collapse that made the Great Depression great. But, if the negotiations succeed, we will be set to replay the great mistake of 1937: the premature turn to fiscal contraction that derailed economic recovery and ensured that the Depression would last until World War II finally provided the boost the economy needed.

3--Wall Street and the debt ceiling: Unthinkable?, The Economist

Excerpt: Some fear that a default could cause a 2008-style crunch in repo markets, with the raising of “haircuts” on Treasuries leading to margin calls. The reality would be more complicated. For one thing, it’s not clear that there is a viable alternative as the “risk-free” benchmark. One banker jokes that AAA-rated Johnson & Johnson is “not quite as liquid”. In a flight to safety triggered by a default, much of the money bailing out of risky assets could end up in Treasury debt. Increased demand for collateral to secure loans could even push up its price.

Then there is the impact of a ratings downgrade. Money-market funds, which hold $684 billion of government and agency securities, are allowed to hold government paper that has been downgraded a notch. Other investors, such as some insurers, can only hold top-rated securities but their investment boards are likely to approve requests to rewrite their covenants, especially if a lower rating looks temporary. “It would be a full-employment act for lawyers,” says Lou Crandall of Wrightson ICAP, a research firm. There’s a surprise.

4--Deficit Deal Could Derail Growth, Credit Writedowns

Excerpt: To understand the current state of the economy we again repeat our long-standing view that the main reason why the current recovery is so weak is the lack of consumer ability to spend as households build up their savings and pare down debt after decades of using excessive credit. We have published a number of comments showing how key economic series have undergone the worst declines and the weakest recoveries in the post-war period (see archives). An excellent article in last Sunday's New York Times by David Leonhardt, based on a New York Federal Reserve Bank, explains the nature of the decline in terms of discretionary consumer spending. This is consumer spending excluding outlays on such necessary items such as food, housing and healthcare.

According to the article discretionary spending never fell more than 3% per capita in any recession of the past 50 years, but is now down 7%. As an example the auto industry, even in this year of recovery is on pace to sell 28% fewer vehicles than ten years ago in 2001 when the economy was in recession. Oven and stove sales are at the lowest level since 1992. The article repeats our long-held contention that business is not hiring because of slack consumer demand since households are facing a sharp downturn in wealth and historically high debts. Since 1980 spending has significantly exceeded income and consumers compensated by reducing savings and running up debt through credit cards, mortgages, home equity loans and cash-out refinancing that used the run-up in home prices. Now those sources of cash are gone and consumers are forced to limit spending.

The weak economic recovery was spurred by the most massive government stimulation in history, both fiscal and monetary. However even this weak recovery has faltered in the first half of the year despite QE2 and some fiscal stimulation. Now QE2 has ended while the fiscal stimulus has gradually been turning into restrain.

5--Goldman Sachs Lowers estimate of Excess Vacant Housing Supply, Calculated Risk

Excerpt: The current number of excess vacant housing units is a key piece of data for the housing market. Unfortunately available data is inconsistent.

Today Goldman Sachs lowered their estimate of the excess supply.
While the decennial census data are from the largest sample, we do not believe it is appropriate to ignore the other sources. ...

With the 2010 Census results in hand, we would now say that excess vacancies in the housing market are 1.5 to 3.5 million units—a wide range, reflecting discrepancies in the available data.

Clearly though, the census results suggest the risks to our previous estimate of 3.5 million units are to the downside. ... [A]t the current rate of housing production and with household growth of one million per year, it would take 5.1 years to clear 3.5 million units of excess inventory, but only 2.2 years to clear 1.5 million units of excess inventory.
A range of 2.2 years to 5.1 years to clear the excess inventory? We need better data!

6--Government Considers Ways to Rent Foreclosed Homes, Wall Street Journal

Excerpt: The Obama administration is examining ways to pull foreclosed properties off the market and rent them to help stabilize the housing market, according to people familiar with the matter.

While the plans may not advance beyond the concept phase, they are under serious consideration by senior administration officials because rents are rising even as home prices in many hard-hit markets continue to fall due to high foreclosure levels.

Trimming the glut of unsold foreclosed homes on the market is "worth looking at," said Federal Reserve Chairman Ben Bernanke in testimony to Congress last week.

7--Social Security: Still solvent after all these years, Robert Reich's blog

Excerpt: The very idea that Social Security might be on the chopping block in order to pay the ransom Republicans are demanding reveals both the cravenness of their demands and the callowness of the opposition to those demands.

In a former life I was a trustee of the Social Security trust fund. So let me set the record straight.

Social Security isn’t responsible for the federal deficit. Just the opposite. Until last year Social Security took in more payroll taxes than it paid out in benefits. It lent the surpluses to the rest of the government.

Now that Social Security has started to pay out more than it takes in, Social Security can simply collect what the rest of the government owes it. This will keep it fully solvent for the next 26 years.

8--Jobless Rates Rise in Most U.S. States, Wall Street Journal

Excerpt: The unemployment rate increased in 28 states in June, reflecting the nationwide increase to 9.2% from 9.1% over the month, the Labor Department said. Some 14 states saw their unemployment rate hold steady while eight logged decreases.

The U.S. economy added a paltry 18,000 jobs in June, as measured by a separate national survey, and an average of just 21,500 over the past two months – a disappointing result that has raised big questions about the sustainability of the nation’s economic recovery. The regional unemployment data show that the states that were hardest hit by the recession continue to have the toughest road in recovery....

Though unemployment rates rose in 28 states, the number of people employed fell in just 24 of 50 U.S. states during June. The biggest decrease in payroll employment occurred in Tennessee, shedding 16,900 jobs, the Labor Department said in new figures Friday. Missouri followed with 15,700 jobs lost and Virginia payrolls fell by 14,600. Twenty-six states saw payrolls increase, led by Texas and California. Unemployment rates can rise despite increases in payrolls when they are offset by a larger number of unemployed people and shifting labor force. Some big companies have announced job cuts. This week, weapons supplier Lockheed Martin made a voluntary-layoff offer to about 6,500 U.S.-based employees.

9--Felix TV: The triple-A bond chart, Felix Salmon

Excerpt: Must see TV --Triple A explosion: the real risks

10--States negotiating immunity for banks over foreclosures, Reuters

Excerpt: State attorneys general are negotiating to give major banks wide immunity over irregularities in handling foreclosures, even as evidence has emerged that banks are continuing to file questionable documents.

A coalition of all 50 states' attorneys general has been negotiating settlements with five of the biggest U.S. banks that would include payment of up to $25 billion in penalties and commitments to follow new rules. In exchange, the banks would get immunity from civil lawsuits by the states, as well as similar guarantees by the Justice Department and Department of Housing and Urban Development, which have participated in the talks.

State and federal officials declined to say if any form of immunity from criminal prosecution also is under discussion. The banks involved in the talks are Bank of America, Wells Fargo, CitiGroup, JPMorgan Chase and Ally Financial.

Reuters reported Monday that major banks and other loan servicers have continued to file questionable documents in foreclosure cases. These include false mortgage assignments, and promissory notes with suspect or missing "endorsements," which prove ownership. The Reuters report also showed continued "robo-signing," in which lenders' employees or outside contractors churn out reams of documents without fully understanding their content. The report turned up several cases involving individuals who were publicly identified as robo-signers months ago.

Reuters found that such activity has continued even after 14 major mortgage lenders signed settlements with federal bank regulators promising to halt such practices and give remediation to some homeowners who were harmed.

11--CNN Poll: Drop in liberal support pushes Obama approval rating down, CNN

Excerpt: President Barack Obama's approval rating is down to 45 percent, driven in part by growing dissatisfaction on the left with the president's track record in office, according to a new national survey.

A CNN/ORC International Poll also indicates that the Republican "brand" is taking a beating in the minds of Americans.
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According to the poll, the president's 45 percent approval rating is down three points from June. Fifty-four percent of people questioned disapprove of how Obama's handling his duties, up six points from last month. His 54 percent disapproval rating ties the all-time high in CNN polling that the president initially reached just before last year's midterm elections.

"But drill down into that number and you'll see signs of a stirring discontent on the left," says CNN Polling Director Keating Holland. "Thirty-eight percent say they disapprove because President Obama has been too liberal, but 13 percent say they disapprove of Obama because he has not been liberal enough - nearly double what it was in May, when the question was last asked, and the first time that number has hit double digits in Obama's presidency."

Obama's approval rating among liberals has dropped to 71 percent, the lowest point in his presidency. And the number of Democrats who want the party to renominate Obama next year, now at 77 percent, is relatively robust by historical standards but is also down a bit since June.

12--Matt Stoller: Dodd-Frank Made No Structural Changes to Banking System, Naked Capitalism

Excerpt: .....After the immediate crisis was contained, losses were socialized, and profits returned to financial executives, Congress had to put together a “solution”. It would have a giant bite at the apple in restructuring our regulatory apparatus. But in order to perpetrate the oligarchic banking structure, it would be important that no structural changes to the industry be implemented. Not one regulator was fired for his or her part in the crisis. The Justice Department adopted a posture of legalizing financial control fraud by refusing to prosecute anyone involved in the meltdown, and continues to allow millions of cases of foreclosure fraud to continue. Ben Bernanke was renominated, and the administration fought a bitter below-the-radar battle to secure his confirmation. With a few modest exceptions, the risk-taking and leverage in our financial markets continues apace, and the deregulatory neoliberal mindset is still dominant. The Federal Reserve has been audited, but the system is now accountability-free for high level operatives in finance and politics. And now that Elizabeth Warren has been thrown overboard by the administration, the lockdown of the financial system is nearly complete.

And mostly, that’s what Dodd-Frank accomplished. It rearranged regulatory offices and delivered a new set of mandates, but effected no structural changes to our banking system. Congress never asked what happened, or why, or even, what kind of banking system do we want? And that’s because Obama’s Treasury Secretary already had the answers to these questions.
The one dangling thread, and this is what worries the administration, is the housing market. But we’ll save that problem for another day.

Looking at that figure another way, roughly one in four Americans who disapprove of the president say they feel that way because he's not been liberal enough.

13--Should You Get Only $7000 if Wells Stole Your House? Naked Capitalism

Excerpt: If you are a too big to fail bank like Wells Fargo, the wages of crime look awfully good. RIp off as many as 10,000 people to the point where they lose their homes and your good friend the Fed will let you off the hook for somewhere between $1000 and $20,000 per house. And as we’ll discuss in due course, this deal isn’t just bad for the abused homeowners, it’s also bad for investors and sets a terrible precedent, which means its impact extends well beyond the perhaps 10,000 immediate casualties.

Oh, and how much does the Fed think you should be paid if you were foreclosed upon thanks to Wells? Per the settlement document:

if, primarily as a result of the additional payment obligation on the loan resulting from the altered or falsified documents, on or before the date of this Order, the borrower’s home was foreclosed on or the borrower sold the home in a short sale, Administrator A shall provide an additional amount up to $7,000 in appropriate remedial compensation to reimburse the borrower for any expenses attributable to the foreclosure or short sale;

In other words, as Adam Levitin noted, all the loss of your home is worth according to the Fed is your moving costs and maybe a month or two of rent.....



...We’ve commented repeatedly on this blog as to how Wells continues to maintain that it is a cleaner institution than other mortgage originators and servicers, when the evidence shows there is no basis for its claims. Indeed, Wells is the Lehman of the big four banks, proportionately more heavily exposed to residential real estate than the rest, and particularly aggressive in its accounting (it has been engaging in highly visible underreserving for loan losses since early 2009). As we’ve said before, if Bank of America starts to look like it is in serious trouble, Wells is next in line. And it couldn’t happen to a more deserving bunch.

14--More on the debt ceiling deadline, Naked Capitalism

Excerpt: the average person loses out no matter what happens. Budget trimming in a weak economy will assure flagging growth or a contraction next year. If you have any doubts, debt to GDP ratios have worsened in the European countries that have put on the austerity hair shirt. Cutting Social Security and Medicare is not popular and not necessary (even Ron Paul, who favors extremely aggressive budget measures, pointedly avoided advocating cuts to Medicare and Social Security in an interview today; as we and many others have noted, Medicare is not a “Medicare” problem but a health care cost problem, which the Obama “reforms” will only make worse).

So it isn’t clear why Democrats should sign an Obama suicide pact. Market upheaval, of course, would hit big donors worse than ordinary voters, which is presumably why it should be avoided at all costs. Yet it was the Blue Dog corporate Democrats, and not the progressives, that took it in the chin in the midterms.

The fact that Obama is regularly being compared to Herbert Hoover and now Nixon should give him pause; it’s an indication that he is vulnerable. A bit of upheaval and discomfit to the moneyed classes might be the best thing that could happen to Obama in the very unlikely event Democratic Congressmen prove to be as difficult as their Republican counterparts. But I suspect he’ll get his way and perpetuate the now well honed practice of using crises, whether real or not, to transfer more income to the top of the food chain.

15--Brazil Shouldn't Play Junior Partner to the US, The Occupation of Haiti Must End, Mark Weisbrot, Counterpunch

Excerpt: U.S. diplomatic cables now released from Wikileaks make it clearer than ever before that foreign troops occupying Haiti for more than seven years have no legitimate reason to be there; that this a U.S. occupation, as much as in Iraq or Afghanistan; that it is part of a decades-long U.S. strategy to deny Haitians the right to democracy and self-determination; and that the Latin American governments supplying troops – including Brazil – are getting tired of participating.

One leaked U.S. document shows how the United States tried to force Haiti to reject $100 million in aid per year – the equivalent of 50 billion reais in Brazil's economy – because it came from Venezuela. Because Haiti's president, Préval, understandably refused to do this, the U.S. government turned against him. As a result, Washington reversed the results of Haiti's first round presidential election in November 2010, to eliminate Préval's favored candidate from the second round. This was done through manipulation of the Organization of American States (OAS), and through open threats to cut off post-earthquake aid to the desperately poor country if they did not accept the change of results. All of this is well-documented.

16--Obama's plan to gut Social Security, Glenn Greenwald, Guardian via Information Clearinghouse

Excerpt: in 2009, clear signs emerged that President Obama was eager to achieve what his right-predecessor could not: cut social security. Before he was even inaugurated, Obama echoed the right's manipulative rhetorical tactic: that (along with Medicare) the programme was in crisis and producing "red ink as far as the eye can see." President-elect Obama thus vowed that these crown jewels of his party since the New Deal would be, as Politico reported, a "central part" of his efforts to reduce the deficit.

The next month, his top economic adviser, the Wall Street-friendly Larry Summers, also vowed specific benefit cuts to Time magazine. He then stacked his "deficit commission" with long-time advocates of social security cuts.

Many progressives, ebullient over the election of a Democratic president, chose to ignore these preliminary signs, unwilling to believe that their own party's leader was as devoted as he claimed to attacking the social safety net. But some were more realistic. The popular liberal blogger and economist Duncan "Atrios" Black, who was one of the leaders of the campaign against Bush's privatisation scheme, vowed in response to these early reports:

The left ... will create an epic 360-degree shitstorm if Obama and the Dems decide that cutting social security benefits is a good idea.

Fast forward to 2011: it is now beyond dispute that President Obama not only favours, but is the leading force in Washington pushing for, serious benefit cuts to both social security and Medicare.

This week, even as GOP leaders offered schemes to raise the debt ceiling with no cuts, the White House expressed support for the Senate's so-called "gang of six" plan that includes substantial cuts in those programmes.

The same Democratic president who supported the transfer of $700bn to bail out Wall Street banks, who earlier this year signed an extension of Bush's massive tax cuts for the wealthy, and who has escalated America's bankruptcy-inducing posture of Endless War, is now trying to reduce the debt by cutting benefits for America's most vulnerable – at the exact time that economic insecurity and income inequality are at all-time highs.....

Obama has continued Bush/Cheney terrorism policies – once viciously denounced by Democrats – of indefinite detention, renditions, secret prisons by proxy, and sweeping secrecy doctrines.

He has gone further than his predecessor by waging an unprecedented war on whistleblowers, seizing the power to assassinate U.S. citizens without due process far from any battlefield, massively escalating drone attacks in multiple nations, and asserting the authority to unilaterally prosecute a war (in Libya) even in defiance of a Congressional vote against authorising the war.

And now he is devoting all of his presidential power to cutting the entitlement programmes that have been the defining hallmark of the Democratic party since Franklin Roosevelt's New Deal. The silence from progressive partisans is defeaning – and depressing, though sadly predictable.

17--Fear in today’s markets shows failure of Dodd-Frank, Repowatch

Excerpt: If the financial crisis in 2007-2008 was fundamentally about mortgages, as many believe, why are we facing a similar financial crisis today?

Here’s the answer: The fundamental problem three years ago was not mortgages. It was the repurchase market and credit default swaps.

Mortgages were simply the collateral on the repurchase market and the instruments being insured by the swaps. Any other collateral, any other instrument, could have caused the same problem. Today it’s Greek and U.S. debt.

The Dodd-Frank Act tried to deal with credit default swaps. It did almost nothing to fix the repurchase market. The act’s failure to stop runs on the shadow banking system, where repos are the main financing, leaves us as vulnerable to a credit panic as we were in 2007.

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