Citigroup Plutonomy Report Part 1.pdf
Citigroup Plutonomy Report Part 2.pdf

Thank you Bill.

Bill Moyers: Plutocracy is not an American word but it’s become an American phenomenon. Back in the fall of 2005, the Wall Street giant Citigroup even coined a variation on it, plutonomy, an economic system where the privileged few make sure the rich get richer with government on their side. By the next spring, Citigroup decided the time had come to publicly “bang the drum on plutonomy.”

And bang they did, with an “equity strategy” for their investors, entitled, “Revisiting Plutonomy: The Rich Getting Richer.” Here are some excerpts:

“Asset booms, a rising profit share and favorable treatment by market-friendly governments have allowed the rich to prosper…[and] take an increasing share of income and wealth over the last 20 years…”

“…the top 10%, particularly the top 1% of the US– the plutonomists in our parlance– have benefited disproportionately from the recent productivity surge in the US…[and] from globalization and the productivity boom, at the relative expense of labor.”

“…[and they] are likely to get even wealthier in the coming years. [Because] the dynamics of plutonomy are still intact.”

And so they were, before the great collapse of 2008. And so they are, today, after the fall. While millions of people have lost their jobs, their homes, and their savings, the plutonomists are doing just fine. In some cases, even better, thanks to our bailout of the big banks which meant record profits and record bonuses for Wall Street.

Now why is this? Because over the past 30 years the plutocrats, or plutonomists — choose your poison — have used their vastly increased wealth to capture the flag and assure the government does their bidding. Remember that Citigroup reference to “market-friendly governments” on their side? It hasn’t mattered which party has been in power — government has done Wall Street’s bidding.

Don’t blame the lobbyists, by the way; they are simply the mules of politics, delivering the drug of choice to a political class addicted to cash — what polite circles call “campaign contributions” and Tony Soprano would call “protection.”

This marriage of money and politics has produced an America of gross inequality at the top and low social mobility at the bottom, with little but anxiety and dread in between, as middle class Americans feel the ground falling out from under their feet. According to a study from the Pew Research Center last month, nine out of ten Americans give our national economy a negative rating. Eight out of ten report difficulty finding jobs in their communities, and seven out of ten say they experienced job-related or financial problems over the past year.

So it is that like those populists of that earlier era, millions of Americans have awakened to a sobering reality: they live in a plutocracy, where they are disposable. Then, the remedy was a popular insurgency that ignited the spark of democracy.

Now we have come to another parting of the ways, and once again the fate and character of our country are up for grabs.

Via, http://www.pbs.org/moyers/journal/

On this Patriots day (the start of the Revolutionary war) Massachusetts (and other groups) leads the way for the rest of the states to send a strong message to those greedy (to big to fail) banks.

Via Huffingtonpost
Chants of “move those dollars” and “move that money” rang out last week in the Hart Senate Office Building during an event for supporters of the Metro Industrial Areas Foundation. The group is spearheading a 10 Percent Is Enough campaign to fight usury, the practice of charging excessive interest rates and fees. They had reason to celebrate, with the announcement that Massachusetts would move nearly a quarter of a billion dollars away from banks that refused to cap their interest rates to meet a state guideline of 18%.

There has been a lot of talk about the financial crisis over the past year and a half, and I obviously think that will remain an important subject, at least until we have a truly reformed financial system. Preventing the next financial crisis should be high on our society’s priority list. But as the months and years wear on, I suspect we will see more articles like Don Peck’s recent 8,000-word article in The Atlantic, “How a New Jobless Era Will Transform America.”

Peck’s article is not about what caused the recent crash and recession, but what its societal consequences will be. And the article is almost unremittingly bleak. Even before 2008, we had already lived through a decade of stagnant median income and sluggish job growth; the recession pushed some unemployment levels, such as the underemployment rate (people out of work, working part-time for economic reasons, or too discouraged to look for work) to levels not seen since the Great Depression. It’s not particularly clear where growth will come from, as manufacturing remains in decline, services are becoming increasingly outsourceable, and other countries take the lead in the most plausible major new industry (alternative energy). According to Nobel laureate Edmund Phelps, “the new floor for unemployment is likely to be between 6.5 percent and 7.5 percent (for several reasons, including “a financial industry that for a generation has focused its talent and resources not on funding business innovation, but on proprietary trading, regulatory arbitrage, and arcane financial engineering”).

The societal implications that Peck sees are worse than the mere numbers would imply. Young people who graduate into recessions never catch up with cohorts around them that graduate into better economic conditions, partly due to risk aversion, partly because they move up more slowly and get tagged as underperformers. Unemployment also changes people:

“Krysia Mossakowski, a sociologist at the University of Miami, has found that in young adults, long bouts of unemployment provoke long-lasting changes in behavior and mental health. ‘Some people say, “Oh, well, they’re young, they’re in and out of the workforce, so unemployment shouldn’t matter much psychologically,”‘Mossakowski told me. ‘But that isn’t true.’”

The effects of unemployment go beyond, and last longer than, not having money.

“Andrew Oswald, an economist at the University of Warwick, in the U.K., and a pioneer in the field of happiness studies, says no other circumstance produces a larger decline in mental health and well-being than being involuntarily out of work for six months or more. . . . Only a small fraction of the decline can be tied directly to losing a paycheck, Oswald says; most of it appears to be the result of a tarnished identity and a loss of self-worth.”

Some of the results show up quickly: “Last March, the National Domestic Violence Hotline received almost half again as many calls as it had one year earlier; as was the case in the Depression, unemployed men are vastly more likely to beat their wives or children.”

I think this means that we need to think of employment not merely as a determinant of GDP, but as an independent good in itself. Furthermore, there are sound economic reasons why we should care not just about the overall unemployment level, but about unemployment levels in specific sub-groups (such as men in inner cities), since unemployment has obvious negative externalities.

The recession may also be reinforcing the long-term trend toward inequality in American society. Recessions typically reduce income inequality in the short term, since the rich gain much of their income from investments, which drop faster than wages in a market crash. But the tougher labor market could increase the advantage that people have coming from the upper class: “Princeton’s 2009 graduating class found more jobs in financial services than in any other industry,” Peck reports.

My initial thought was that the financial crisis and recession might have a salutary effect because the middle class, faced with serious economic insecurity, might start worrying more about economic security (and identifying more with the poor and working class), instead of thinking that individual initiative alone would make them rich. I still think this is possible. Unfortunately, it seems to be unlikely. Peck cites economic historian Benjamin Friedman, who “argues that both inside and outside the U.S., lengthy periods of economic stagnation or decline have almost always left society more mean-spirited and less inclusive, and have usually stopped or reversed the advance of rights and freedoms.” The mechanism for this is simple: although some people may react to economic insecurity by realizing that their interests lie with labor rather than capital, other people will react by blaming their misfortune on immigrants, or minorities, or Jews, or gays, or — this being America — the government.

The only solution, says Peck, is a making “the return to a more normal jobs environment an unflagging national priority.” A more normal jobs environment seems like the bare minimum of a solution to me, and he would probably agree. But even that represents a shift from our current political center of gravity, where people think the medium-term deficit is a bigger problem than jobs.

High-Frequency Distraction

By Ron Insana

Portfolio Manager

7/27/2009 11:40 AM EDT

The New York Times and The Wall Street Journal are taking aim at a new form of computerized trading known as ‘High Frequency’ trading. The algorithm-based trading is allegedly an illegal form of front-running, as high-frequency traders hook into exchange computers and use ‘flash trades’ to suss out incoming order flow and use the lightning speed of their own programs to jump ahead of customer orders. Critics argue that individual investors are at a distinct disadvantage for this reason and a variety of others. The proximity of high-frequency computers, which can be placed next to exchange computers for a fee, allows for an almost-osmotic transfer of information. Senator Charles Schumer (D, N.Y.) is asking the SEC to ban ‘flash trades,’ which are phony orders placed by high-frequency programs that aim to fool market participants into entering orders. The programs jump in front of customer orders and gain a trading advantage. If that is indeed what is happening, it qualifies as ‘front-running,’ an illegal practice on Wall Street. If high-frequency traders are just faster than everyone else and not illegally jumping in front of others or paying off the exchanges to get preferential trading treatment, then this new area of technology-based trading is no less legitimate than the use of the telegraph, the telephone, the ticker, computers, handheld devices or older-style ‘black box’ or ‘dark pool’ programs that give sophisticated traders the ability to simply trade faster. I’d prefer that regulators look into whether a firm like Goldman Sachs (GS) — whose former executives continue to run the New York Stock Exchange (NYX) ; advised on the merger between NYSE and Archipelago, and formerly owned a portion of the combined entity; own Speer, Leeds & Kellogg, the largest specialist firm on the Big Board floor; and control the greatest number of seats in the equity markets — unfairly view order and information flow ahead of its customers and clients. I am far more concerned about that than I am about the emergence of ‘high-frequency’ trading. But the press won’t touch that topic. It’s easier to go after the dreaded speculators and dark pool traders than lose access to the most profitable and prestigious firm on Wall Street.

Via fool.com

Historically, the Fool has shied away from options as an investment vehicle, for reasons best stated by people smarter than us. Peter Lynch, a Foolish favorite, urged individual investors to keep away from options. And we’re ever mindful of Warren Buffett’s first rule: ‘Don’t lose money.’ Options, by their very nature, can significantly amplify losses. Then again, as leveraging instruments, they can also amplify gains.

Read the rest of the story

Guest Post: The Perils of Linear Projections?: “Submitted by Leo Kolivakis, publisher of Pension Pulse.

This past Thursday evening I attended the annual forecast dinner of the Montreal CFA Society. I typically avoid these events but I enjoyed meeting some former colleagues and spending time with my new co-workers.

The event was moderated by Jean-Luc Landry, President of Landry Morin, and the panelists were:

Stéfane Marion
Chief economist and strategist
National Bank Financial

Norman Raschkowan
CIO – Mackenzie Financial

Jonathan Passmore
Senior VP & Portfolio Manager
GE Asset Management

Andy Brown
Chief Executive –
Cedar Rock Capital Ltd

The best panelists were Stéfane Marion and Jonathan Passmore, with Norman Raschkowan a close third. Mr. Brown was unwilling to forecast anything which defied the purpose of the evening.

The first question covered what caused the financial crisis. Stéfane, who I used to work with and hold in high esteem, answered ‘fat tails’, meaning that in 2008 you had ten standard deviation moves that risk models were not able to capture.

Mr. Raschkowan blamed the repeal of the Glass-Steagall Act and Alan Greenspan for keeping rates so low for so long.

Mr. Passmore blamed the total lack of regulation governing the credit derivatives that exploded after the tech boom. Mr. Brown just blamed human nature.

In the forecasting section, the panelists were cautiously optimistic on stocks and commodities but much less so on bonds and commercial real estate.

[Note: None of the panelists picked bonds as the asset class that will outperform over the next five years. This might turn out to be the biggest surprise of all.]

On inflation-deflation, Mr. Passmore spoke of the great unwinding and said there are competing forces between higher savings and the flood of liquidity. Others pointed out to the limits of inflating away debt and Stéfane mentioned that politicians and central bankers will play a key role in how this recovery takes shape. If central bankers take away the liquidity too fast, there will be trouble ahead.

[Note: No mention of the global pension crisis and how this is very deflationary.]

On the demise of the U.S. dollar, Mr. Passmore made reference to how the BRIC economies (Brazil, Russia, India and China) are already moving into a wider use of Special Drawing Rights (SDRs) allocated by the International Monetary Fund (IMF).

None of the panelists thought that the USD was going to crash. Stéfane mentioned that currencies are relative calls. He thinks the Euro is hurting an already weak Euzone which having their own crisis right now in Eastern Europe.

At one point, Mr. Landry asked Stéfane of what he thought of Jeff Rubin thesis that peak oil will shrink Asian trade:

A well-known economist and author says the B.C. government is looking in the ‘rear-view mirror’ by spending vast sums of money to become a gateway for more trade with Asia.

In an interview in a downtown Vancouver food court, Jeff Rubin, a former chief economist with CIBC World Markets, told the Georgia Straight that in the coming years, ‘triple-digit’ oil prices will make it far more expensive to ship goods here from Asia.

‘Trade is going to become more and more regional than transoceanic,’ he predicted.

Rubin’s new book, Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization (Random House Canada, $29.95), describes in detail the impact of oil prices on shipping costs. For example, he notes, when oil prices rose from US$30 per barrel to US$100 per barrel, the average daily fuel bill of a cargo ship went from US$9,500 to US$32,000.

‘As oil climbed to [US]$100 per barrel, fuel costs became almost half the total cost of shipping something by sea,’ Rubin writes.

As the Straight went to press, oil was selling at US$71 per barrel. It has swung from a high of US$147 to a low of US$33.87 over the past year.

Rubin said he became interested in the theory of peak oil several years ago when he met petroleum geologist Colin Campbell, who cowrote a landmark article on oil supplies in Scientific American in 1998. Campbell suggested that major oil producers such as Iran, Saudi Arabia, Iraq, and the United Arab Emirates inflated their ‘proven reserves’ even though they hadn’t made any significant new discoveries.

Campbell also predicted that oil prices would rise sharply in the early part of the 21st century because demand would outstrip supply. ‘He had a huge influence on me,’ Rubin said. ‘The traditional way of looking at this from an economist’s standpoint is every scarcity is self-correcting because higher energy prices will bring forth new supplies.’ He noted, however, that this isn’t the case if the supply doesn’t exist.

Rubin’s book chronicles depletion of global oil reserves at the same time as demand has increased sharply in oil-producing countries. He notes that Russia has helped fill a growing gap in supply in recent years but claims that its production has peaked.

‘If we can’t grow world production above 86 million barrels a day, we may not be able to grow world GDP [gross domestic product],’ Rubin said. ‘The single most important thing to prevent peak oil from becoming peak GDP is to go back to local economies.’

That’s because producing goods locally will reduce shipping costs. But the B.C. government’s Gateway Program is based on the belief that trade with Asia will continue to expand. It includes a new Port Mann Bridge, widening Highway 1 from Vancouver to Langley, a new four-lane South Fraser Perimeter Road, and the North Fraser Perimeter Road project.

According to a Metro Vancouver report, the B.C. Ministry of Transportation and Infrastructure has secured 110 hectares of agricultural land for the South Fraser Perimeter Road and the Golden Ears Bridge projects.

Rubin, however, said that there will be greater demand for farmland because soaring fuel costs will make food from China far more expensive. ‘Don’t expect the politicians to get it before you get it,’ he said. ‘Triple-digit oil prices will be a wake-up call to people who are otherwise deaf.’

To answer this question, Stéfane brought out that slide above on the perils of linear projections (click to enlarge). He was saying how back in 1898, they had predicted that horse droppings would rise to Manhattan’s third story windows.

Of course, that never happened. By 1912, there were more automobiles than horses in New York.

Stéfane’s point was that it is dangerous to forecast things based on linear projections. As the global population grows, so will our energy demands, but it is possible that alternative forms of energy will (hopefully) displace previous ones.

Consider this article written back in October in AmericanSolarEconomy blog:

This is assuming that the Market survives. I’m sorry that I have to preface this way.

This is a rare chance for ‘the little guy’ to buy in BEFORE ‘the big guy.’ We KNOW how big the totality of the various alternative Energies are striving for, and it’s as big or bigger than the totality of today’s Coal and Oil Industries. That’s freakin’ big.

So, today’s big money, that is invested in yesterday’s technology, is looking at a situation where they are simply unable to take part in the presently tiny alt-Energy industry with any significant portion of their vast wealth, without creating an incredible bubble.

On the other hand, they are also looking at a situation where that tiny industry is going to replace them, unless they own it, and they simply cannot let that happen.

Therefore, they will have to buy in at some point, bubble or not, and the advantage goes to the little guy, as he can put a huge portion of his total wealth into this industry without moving the dial at all. The little guy can wait till the big guy comes looking for shares in final desperation for ownership of future productive capacity.

Now, this is always the game, right? Everybody is trying to get in before everybody else. The trick is to be right about where the big guy is going, beforehand. Why am I so confident? Because we’re talking about Energy.

There is no Economy without Energy. That’s a basic physical fact, and not even the most powerful equations of Economists can supersede it. The Economic Powerhouse that gives value to the present set of World Currencies, demands an incredible amount of Energy.

Therefore, since the Rich and Powerful benefit neither from the collapse of the economic system as a whole, nor from the inevitable replacement of the Fossil-based Industries that they currently own, the conclusion of greatest likelihood is that those Rich and Powerful will at some point move to own the future industries. When the move is made, there will be competition between the wealthy, and associated rapidly inflating prices.

I am not able to perfectly forecast the future, but I see a world of opportunity in the solar sector. And I do believe this will be the next bubble, with lots of volatility along the way.

Finally, Jonathan Nitzan and Shimshon Bichler have just published ‘Contours of Crisis III: Systemic Fear and Forward-Looking Finance’. You can click here to read their text in HTML or click here for a PDF version.

Here is something to peak your curiosity:

The current paper takes on the notion of the forward-looking investor. According to the conventional creed, investors are forever looking into the future: they discount not profits that have already been earned, but those that they expect to earn. This forward-looking premise lies at the heart of modern finance, and investors usually follow its rituals with religious zeal.

But not always.

Occasionally, capitalism is struck by a systemic crisis, a period in which the very existence of the system is put into question. And when that happens, all bets are off. Capitalists lose sight of the future, and forward-looking finance suddenly collapses.

Read this paper and keep in mind horse droppings in 1898 and the perils of linear projections.

***Update***

One professor of economics wrote back to me the following comment:

Hi Leo,

Anyone with a Greek background will appreciate how long people have been earning money by selling their vision of the future, without anyone, ever, evolving a methodology for doing anything better than projecting the past. When there are elements not foreseen , the Ancients spoke of the anger of the gods, alumni of the Econometrics class speak of fat tails. What is amazing, but explicable, is that the market for visions of the future continues to prosper.

I wholeheartedly agree which is why I take all Cassandras, and my own projections, with a grain of salt.

“

(Via naked capitalism.)

A. – No, no, no, it’s always demand that raises prices.

Reaction – Yeah, right.

On the “Endless Bid” for Oil: “Are we seeing a rerun of early 2008 in diminished form, as least as far as oil prices are concerned? Reader Michael sent along an article by Dan Dicker that contends that oil prices are well ahead of their fundamentals, and that, as before, the oil bulls are taking considerable cheer from Goldman’s boosterism. A key element that Dicker highlights that too often goes comparatively unnoticed is the small size of the oil market, Hence sudden influxes of funds can have a price impact.

Now some readers will pooh-pooh that notion, saying that prices that are ‘too high’ should lead to hoarding. Well, unlike last time around, there are abundant signs of that, with oil in storage at virtually unprecedented levels, Moreover, regulators are increasingly accepting the view that prices in futures markets can and do drive the physical market. From Dow Jones Newswires:

Until recently, the U.S. Commodity Futures Trading Commission had more limited oversight authority over contracts traded electronically on exempt commercial markets such as IntercontinentalExchange Inc. (ICE). But when energy prices rose to record highs last year, lawmakers expressed fears that traders were affecting prices by using exempt commercial markets to bypass speculative position limits imposed on similar types of energy futures contracts traded on exchanges…’We were told to look at significant price discovery contracts and we have been doing that,’ acting CFTC Chairman Michael Dunn said Wednesday, noting that preliminary reports suggest ‘it was much larger than we originally thought’ and that staff was ‘surprised’ by the preliminary findings.

Notice the key expression, ‘significant price discovery.’ Most economists believe that price discovery takes place in physical markets only. Yet as credit default swaps have shown, supposed derivative markets can not only be the preferred vehicle for price discovery, but actually drive prices of the supposed ‘underlying.’

Now to Dicker via The Street:

Oil has been rallying because of the weakness of the dollar and because of the specter of impending inflation…

Yet in the last several sessions, the dollar has found some amazing strength, and gold, the best proxy for inflation, has come down quite a bit. So what is going on with oil?…

It’s the endless bid.

Goldman Sachs recently revised its oil targets for 2009 and 2010, raising its $52 target price for the near three months to $75. It gets worse, according to Goldman. Year-end targets for the crude barrel in 2009 were revised up to $85 and a $95 target was set for 2010. How do they come up with these figures?

Goldman analysts cite increased demand. Yet there is absolutely no sign that demand is increasing, quite the contrary. Goldman argues that oil is rallying on expectations of increased demand along with similar expectations of recovering economies in the second half of ’09 and into 2010. Even if this gargantuan leap of faith were true, why isn’t natural gas, a perfectly wonderful and plentiful energy source, rallying as well? Why is it languishing at a mere $4s/mmBTU, while crude streaks ever higher?

And how do those Goldman oil analysts even create these mythical target prices?…

The endless bid is what I’ve begun to call the incessant, unrelenting and often unreasonable desire of investors to have exposure to oil…..there is a renewed interest in having oil as a part of every investor’s portfolio.

The oil market is a delicate market. Even more importantly, it is a relatively puny market….the entire notional value of crude oil traded on the Nymex is a little under $100 billion.

That sounds like a lot. But not if you consider that the notional value (market capitalization) of even one oil company like Chevron(CVX Quote) is 40% more. The market cap for Exxon Mobil(XOM Quote) is 3.5 times more. Intuitively, we can expect that even a relatively little amount of new investment interest in oil futures is going to have a huge impact on the price.

That’s the endless bid.

We saw the endless bid fuel the run-up in oil to $147 in July 2008.

We saw the endless bid withdraw just as quickly in late 2008 and through February of 2009 with a resultant low of $32 a barrel.

And now, it’s baaack .. and makes any estimate of a target price for oil a total shot in the dark, a complete guess, practically unrelated to any economic forecasts or supply/demand estimates.

Before you decide to run out and go short, bear in mind that some technicians think that black gold could run further. While I must note that technical analysis has about as good a reputation as astrology in respectable circles, I have also observed that a lot of investors use it as an input in decisions, and it allegedly works better for commodities than for stocks. That is a long-winded way of saying that if enough people utilize it, it can become a self-fulfilling prophecy.

Nevertheless, consider this chart from Bespoke Investment (hat tip FT Alphaville):

Bespoke’s comment:

The current rally in oil is nearly twice the average bull market gain in nearly half of the average duration.

“

(Via naked capitalism.)

By Edmund L. Andrews

Washington — The Federal Deposit Insurance Corporation indefinitely postponed a central element of the Obama administration’s bank rescue plan on Wednesday, acknowledging that it could not persuade enough banks to sell off their bad assets.

In a move that confirmed the suspicions of many analysts, the agency called off plans to start a $1 billion pilot program this month that was intended to help banks clean up their balance sheets and eventually sell off hundreds of billions of dollars worth of troubled mortgages and other loans.

Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay.

In a statement, the F.D.I.C. acknowledged that it had not been able to get banks interested in its so-called Legacy Loans Program. Scheduled to start later this month, the pilot program was aimed at selling off $1 billion in troubled home mortgages.

F.D.I.C. officials portrayed the change as a sign that banks were returning to health on their own.

“Banks have been able to raise capital without having to sell bad assets through the L.L.P., which reflects renewed investor confidence in our banking system,” said Sheila C. Bair, chairwoman of the F.D.I.C.

But some analysts said the banks’ reluctance to clean up their balance sheets meant they were merely postponing their day of reckoning. Indeed, some analysts said government policies had made it easier for banks to gloss over their bad loans.

“What’s happened is that the government’s programs have addressed the symptoms of the financial crisis, but not the cause,” said Frederick Cannon, chief equity strategist at Keefe, Bruyette & Woods, which analyzes the industry. “The patient feels better, but the underlying cause of the problem is still unaddressed.”

The program was one part of the Treasury Department’s broader Public Private Investment Program to get bad assets off the books of major banks.

The other big component, which Treasury officials say is still being prepared, is aimed at having the government team up with private investors to buy mortgage-backed securities.

No one knows exactly how many losses are buried in the troubled mortgages on banks’ books, but some analysts estimate that the unrecognized losses total more than $1 trillion. Under accounting rules, banks do not have to write down the value of most mortgages unless they sell them or they fall delinquent.

Recent government policies have further reduced the pressure on banks to sell. The Federal Reserve’s “stress tests” on the 19 biggest bank holding companies concluded that only one — GMAC, the former financing arm of General Motors — needed so much additional capital that it would have to turn to the government for a new cash bailout.

In addition, financial regulators relaxed the so-called mark-to-market rules, making it easier for bank holding companies to refrain from writing down the value of assets for which there is no market. That change allowed many big banks to report higher profits, and thus higher capital, for the first quarter of this year.

The Federal Reserve also is pumping hundreds of billions of dollars into mortgage-backed securities, and into other kinds of consumer and business lending. Starting next month, the Fed plans to offer cheap financing for investors who want to buy “legacy” securities backed by mortgages on commercial real estate.

Diane Casey-Landry, chief operating officer for the American Bankers Association, said the lack of interest in selling the assets stemmed from fears that Congress would impose restrictions on executive pay and other issues for banks and investors in the program. “There’s a lot of uncertainty out there in terms of how the program would operate,” she said. “What we would rather see is the market working.”

via (NYtimes.com)

My personal comment: LIARS AND THIEVES LYING AGAIN. WHERE’S THE TRANSPARENCY MR. OBAMA?

UPDATE:

naked capitalism chimes in with their point of view in

MLEC Version 3.0, aka PPIP Legacy Loan Program, Officially Dead on Arrival

Has anyone noticed the release of these stories neatly coincides with our presidents Muslim speech? Coincidence, right?

UPDATE:

The Baseline Scenario has Legacy Loan Program Called Off with comments

Critics argued it was a terrible idea, that banks would come out worse, and that the former owners would make lousy tenant (it appears not to have occurred to them that the now-tenants probably have improvements they made, giving them more attachment to the house than a typical rental).

Well, this obviously stupid idea is taking place full bore in Phoenix, as entrepreneurs find owners facing foreclosure and offer to buy the home if they remain as tenants. That says the economics are at least tantamount to the banks offering the same deal directly. However, in fairness, investors look negatively at banks that carry a lot of REO (real estate owned) so a bank would have to do a great deal of investor education to operate a similar program (and imagine what it would take to get investors in a securitized vehicle to sign off on this approach). And the other reason an idea like this has attracted such a following in Phoenix is a unique combination of a particularly distressed real estate market and a big influx of investment funds. But if other markets continue to swoon,the Phoenix model may become common.

From the New York Times:

With this sweltering desert city enduring one of the largest tumbles in housing prices for any urban area since the Depression, there is an unrelenting stream of foreclosures to choose from. On some days, hundreds are offered for sale at the auctions that take place on the plaza in front of the county courthouse.

There is also a large supply of foreclosed families who can no longer qualify for a loan. And that is prompting a flood of investors like Mr.[Lou] Jarvis, who wants to turn as many of these people as possible into rent-paying tenants in the houses they used to own….

Absentee buyers, who can be either investors or individuals purchasing a vacation property, bought nearly 4 of every 10 homes sold in the Phoenix metropolitan area in April, according to the research firm MDA DataQuick. That is up 50 percent since late 2007, and is nearly the same ratio as at the 2005 peak.

Once again, just about everybody seems to be buying as many houses as they can, positive it will make them rich — or at least allow them to recoup some of their losses….

In January, Mr. Jarvis began working as director of investor relations for Brewer Caldwell, a property management firm that had been approached by the CBI Group, a real estate fund based in Calgary, Alberta. In its first foray into the American market, CBI is buying 175 rental houses in Phoenix.

One of them belonged to Mary Lou and Jorge Aguilar, who purchased it new for $111,000 in 1999. Three years ago, after a series of financial difficulties, they refinanced for $185,000 for reasons they no longer understand. ‘Our lender talked a pretty picture,’ Mrs. Aguilar said bitterly.

When the couple’s mortgage payment adjusted to $1,242 a month, they fell behind and ended up in foreclosure. They now pay $1,014 in rent, which they say is bearable.

Still, their feelings are mixed. ‘It’s not our house anymore; it’s someone else’s,’ said Mrs. Aguilar, who works for the state welfare department.

For CBI, the deal is sweet. At that rent, it would recoup the $52,000 it paid for the house in about five years. ‘This type of deal is absolutely not available in Canada,’ said Jarrett Zielinski, a CBI executive. ‘No city here has fallen by 50 percent, the way Phoenix has.’

However, there is a possible fly in the ointment:

Brewer Caldwell has bought about 125 houses this year for its clients. Only a quarter had owners who were living there already and willing to stay on as tenants. Filling up the rest, and all the other houses the company intends to buy, will depend on a steady supply of people who cannot afford to buy for themselves.

‘If Phoenix loses population,’ Mr. Jarvis says, ‘then buying houses here is a bad bet.’

Phoenix is geographically dispersed and requires heavy duty air conditioning for a chunk of the year. Will the city lose appeal when energy prices rise?

(Via naked capitalism.)

• Garth Whyte, the executive vice-president of the Canadian Federation of Independent Business, which represents the interests of small and medium-sized business and lobbies on behalf of its 105,000 members at the federal, provincial and municipal levels writes that Canadian taxpayers shouldn’t bailout GM pension plan.
• Insolvent AbitibiBowater Inc. had no right to unilaterally rescind pension benefit improvements that had been negotiated in a collective agreement prior to the newsprint giant entering bankruptcy protection, a judge ruled today.
• Air Canada said on Monday it was seeking support from its unions for ‘a moratorium and other conditions on funding’ its pension deficit, which is more than C$3 billion ($2.5 billion).
• Connecticut Treasurer Denise Nappier said on Monday the state is terminating its investment agreement with Dallas-based private equity firm Aldus Capital LLC, after it was caught up in the criminal and civil probe of the New York State pension fund.
• Teacher pension tsunami is expected across Pennsylvania. A bubble in the number of teachers expected to retire in the next decade and a 30 percent drop in the total value of the Pennsylvania Public School Employees’ Retirement System’s (PSERS) assets last year in the souring economy means districts contribute more to the teachers’ retirement fund.
• Minnesota teachers are asking state lawmakers for a $223 million bailout for their pension fund. The Education Minnesota teachers’ union, their retirement association and other groups are asking the state Legislature for between $207 million and $223 million over four years to put their pension fund on sound footing.
• The protracted economic downturn has chewed up nearly a quarter of the value of Ohio’s five public pension plans, forcing their leaders to more seriously consider unpopular options such as dialing back cost-of-living increases and even raising retirement ages.
• Many Rhode Island cities and towns are struggling with the increasing burden of pension costs. A new study by the business-backed Rhode Island Public Expenditure Council reports that the amount of money communities spend on pensions has increased nearly 50 percent in the past five years, to $149 million in the fiscal year that ends June 30.
• Detroit’s public pension trustees approved trips last year to more than 100 conferences around the globe, even as the city’s two pension funds were losing billions.
• New York City is proposing a Tier 5 pension plan for city employees that would result in an immediate savings of $200 million for the city in the coming year. By 2030, the Tier 5 pension plan would save the city an estimated $7 billion. This pension tier would need to be created through state law.
• More than 100 retired government employees who worked for surrounding cities and Solano County — nearly half of them from Vallejo — are receiving annual pensions of $100,000 or greater.
• Massachusetts Governor Deval Patrick said yesterday that he wants the state to rescind the special pensions given to 10 former legislators because it appeared that those pensions were improperly awarded.
• In Australia, the rich will have their superannuation tax breaks slashed in half to fund the pension increase, with next Tuesday’s Budget expected to boast the largest deficit in Australian history.
• The report on intergenerational solidarity shows that over 80 per cent of both EU and Maltese citizens surveyed agree that government needs to make much more money available for pensions and care for the elderly. Moreover, 58 per cent of those surveyed believe that government will not be able to make these payments in the coming decades, although the rate is just 46 per cent in Malta. Respondents aged between 25 and 54 were those most concerned about the affordability of pensions.
• The deficit in the U.K.’s largest company pension plans almost doubled to 61 billion ($91 billion) in the first quarter as falling stock markets cut the value of their assets, according to Mercer Investment Consulting.
• Longer life expectancy means U.K. taxpayers will have to find billions of pounds more to fund public sector pensions, consultants have warned.
• The Hungarian parliament Monday voted to cut pension benefits and gradually raise the compulsory retirement age from 62 to 65.

That last points should give many who work in the public service some cause for concern. I know many people in the public sector who think their defined-benefit plans are “iron-clad” and that their benefits will never be cut and that they can retire at the age of 60.

They are in for a rude awakening. I can guarantee you that as the pension pandemic continues to wreak havoc on public finances, some very hard choices will be taken, including cutting pension benefits and raising the retirement age. This is why I think people need to start taking matters in their own hands and at the very least educate themselves about their investment choices.

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