Posts Tagged ‘President Barack Obama’
Monday, December 19th, 2011
Bill Gates, Sr., a retired attorney in Washington state, supports a ballot initiative that would require the state’s highest earners — including himself and his son — to pay an income tax. Currently, the state does not collect personal income taxes.
The father of billionaire Microsoft founder Bill Gates, Jr., believes that the poor pay too much tax, and that the rich don’t pay enough. Washington’s school system, which is a catalyst for future economic growth in the high-tech state, suffers from too little funding because the wealthy aren’t paying their fair share, according to Gates. His 1098 initiative — an income tax on adjusted earnings that exceed $400,000 a year per couple or $200,000 for an individual — is drawing protest from Washington business leaders, as well as anti-tax groups.
Initiative 1098 would give tax credits to approximately 80 percent of Washington-based businesses and slash the state share of property taxes by 20 percent for businesses and homeowners. According to critics, the legislation would harm the economy by taxing the earnings of people who own the businesses — money that would be used to put people back to work. The opposition’s Defeat 1098 campaign believes that an income tax on 38,400 of the state’s highest earners would take away vital competitive advantages and drive away entrepreneurs. Even Governor Chris Gregoire’s Commerce Department has publicized Washington’s lack of an income tax in statements about the state’s business climate.
Gates considers Washington state’s tax system to be “dramatically regressive”, something that was proved in 2002 when he led a commission created by the Legislature to study the state tax system. The commission recommended replacing the sales tax or property tax with an income tax that would rebalance the load. Gates cited data gathered by the national Institute on Taxation and Economic Policy that show Washington’s poorest 20 percent pay 17 percent of their income in sales, property and other taxes. By contrast, the wealthiest one percent pays less than four percent.
The initiative would impose a state income tax on individuals earning more than $200,000 and couples earning upwards of $400,000. In other words, single people would pay a five percent tax on income over $200,000 and nine percent tax if they earn more than $500,000. Couples would pay five percent over $400,000 and nine percent if they earn a combined income that exceeds $1 million.
“It’s not a matter of picking on someone,” Gates said. “It’s a matter of correcting to some extent a bad historic situation and arguing — I think absolutely persuasively — that this is a proper source for a serious financial shortfall in our operations, namely the public education system.”
Gates’ proposal also has met opposition from Steve Ballmer, Microsoft CEO, and Jeff Bezos, President of Amazon.com, both of whom donated $100,000 to anti-tax groups.
Another voice of opposition is Stephen Moore, who wrote in the Wall Street Journal, “I wish I had a dollar for every time a wealthy liberal has declared he thinks he should pay more taxes. That list includes Warren Buffett, George Soros, Bill Gates Sr., Mark Zuckerberg and even Barack Obama, who now says that not only should rich people like him pay more taxes, they want to pay more.”
Gates is joined by Berkshire-Hathaway CEO Warren Buffett in calling for higher taxes on the wealthy. President Obama supports “the Buffett Rule”, a guiding principle to ensure that the rich pay as large a percentage of their income as the middle class. Some millionaires insist that Buffett doesn’t speak for them. “There is more of a difference between my financial position as a multi-millionaire and Buffett’s than there is between mine and a guy that makes minimum wage,” one CNN Money reader said. “Why am I grouped with him and why does he feel he can speak for me?”
Just 24 percent of millionaires said higher taxes on large incomes is the optimal solution, according to a survey from Spectrem Group, a research firm specializing in the finances of affluent Americans. The largest group of millionaires, 44 percent, believe that a flat-rate tax across all income brackets is the fairest system.
Tags: 1098 solution, Amazon.com, Berkshire Hathaway, Bill Gates, Defeat 1098, Flat-rate tax, George Soros, Institute on Taxation and Economic Policy, Jeff Bezos, Jr., Mark Zuckerberg, Microsoft, Personal income tax, President Barack Obama, Sr., Steve Ballmer, Taxes, The Buffett Rule, Warren Buffett, Washington
Posted in Economics, Financing, General | No Comments »
Monday, December 12th, 2011
Former Illinois governor Rod Blagojevich became the state’s second chief executive in a row to be sentenced to federal prison for corruption. Blagojevich, who – among other charges was convicted of attempting to sell President Barack Obama’s Senate set to the highest bidder – was sentenced to a stiff 14-year sentence in a federal prison. He must report to the Federal Bureau of Prisons on February 16, 2012.
Blagojevich’s predecessor, George Ryan, is currently serving a 6 ½-year sentence at a federal prison in Terre Haute, IN, also for corruption.
“The governor was not marched along this path by his staff. He marched them,” Zagel said before he imposed the sentence. Blagojevich governed the fifth-most populous state from January 2003 until his impeachment and removal from office in January of 2009. He had been arrested the previous month for what Chicago U.S. Attorney Patrick J. Fitzgerald called “a political corruption crime spree.” Blagojevich was convicted on 17 counts in a trial that ended in June. An earlier jury deadlocked on 23 of the 24 counts it considered, but found the ex-governor guilty of lying to federal agents.
Blagojevich admitted to the judge that he made “terrible mistakes” and acknowledged that he broke the law in his attempt to sell the Senate seat. His attorneys admitted for the first time that Blagojevich is guilty of corruption. The defense also presented sincere appeals from Blagojevich’s family, including letters from his wife Patti and one of his two daughters, that pleaded for mercy. But the judge made it clear that he believed that Blagojevich had lied on the witness stand when he tried to explain his scheming for the Senate seat, and he did not believe defense suggestions that the former governor was duped by his advisers.
Assistant U.S. Attorney Reid Schar wasn’t impressed by Blagojevich’s emotional plea. “He is incredibly manipulative and he knows how to be,” Schar said. “To his credit he’s clever about it. Judge, the defendant is corrupt, he was corrupt the day he took office, he was corrupt until the day he was arrested,” Schar said. “Judge, the people have had enough. They have had enough of this defendant. They have had enough of people like him.” The lengthy legal ordeal began when President Obama’s U.S. Senate seat became available upon his election. Wiretaps of Blagojevich were recorded saying that Obama’s seat was “f — ing golden” and that it wouldn’t go “for f — ing nothing.”
So now what does Blagojevich do? He’ll spend the holidays with his family. Next, his legal team will ask Judge Zagel to choose a prison, preferably in the Midwest, said Kent College Law professor Richard Kling. Because the sentence is more than 10 years, he’ll be classified in a low-security prison with double-fence razor wire.
Judge Zagel sternly told Blagojevich that “abuse of the office of governor is more damaging than the abuse of any office in the United States except for president. “I cannot comprehend that even if you are guilty,” Zagel said. “You don’t think you caused harm to Illinois.”
“Blagojevich betrayed the trust and faith that Illinois voters placed in him, feeding great public frustration, cynicism and disengagement among citizens,” Fitzgerald said. “People have the right to expect that their elected leaders will honor the oath they swear to, and this sentence shows that the justice system will stand up to protect their expectations.” “This sentence sends a clear message that public officials cannot engage in corruption for personal benefit in exchange for political favors,” said James Vanderberg, special agent-in-charge of the Chicago Regional Office of Inspector General.
If Judge Zagel has any second thoughts about the sentence, he can take satisfaction in the fact that some of the jurors from the corruption trials approve of the 14-year sentence. James Matsumoto, the jury foreman from the first trial, said he and other jurors were “satisfied” by the sentence. John McParland, a juror at the second trial, saw a less-cocky Blagojevich today but wasn’t certain the former governor in fact apologized for his actions. “He’s like two different men,” McParland said. “His apology was a little circumspect,” according to Matsumoto.
Under federal sentencing guidelines, Blagojevich won’t be eligible for release until early 2024 when he will be 67 years old. Additionally, Blagojevich is planning to appeal his sentence, a process that could take years.
Tags: 14-year sentence, Corruption conviction, Governor George Ryan, Governor Patrick J. Quinn, Illinois, impeachment, Judge James Zagel, Patti Blagojevich, President Barack Obama, Reid Schar, Rod Blagojevich, Senate seat, U.S. Attorney Patrick J. Fitzgerald, Wiretaps
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Monday, November 7th, 2011
Are Americans shopping until they drop again? It could be, judging by the latest government report showing that consumer spending rose by a surprisingly vigorous 0.6 percent in September, even as personal incomes barely grew. Adjusting for inflation, after-tax income declined slightly by 0.1 percent, according to the Department of Commerce. The bottom line is a sharp drop in the saving rate in September, to just 3.6 percent. That’s the lowest level since 2007 and a drop from a healthy five to six percent during most of the last two years.
Scott Hoyt, who studies consumer spending for Moody’s Analytics, says it’s possible that the September numbers may have been inflated by spending for repairs and other things after Hurricane Irene. At the same time, other data suggest that people are spending more because lenders are suddenly more willing to give credit and as households — which had deferred buying new cars and other goods — feel more optimistic about the direction of the economy. Consumer spending is perceived as a critical economic component, and is often cited as representing 70 percent of the nation’s GDP.
The improvement in consumer spending helped boost the economy through the 3rd quarter while policymakers ranging from President Barack Obama to the Federal Reserve took additional action to stimulate growth and hiring. Unless paychecks grow, Americans may not be able to continue their spending sprees. “Given the state of consumer sentiment and the savings rate, we should see moderate spending, at best, going forward,” said Sean Incremona, a senior economist at 4Cast Inc., who accurately predicted the consumer spending boom. “The savings rate is just one of those warning signs that says we’re not pulling ourselves out vigorously, so the economy still has a lot of vulnerability.”
Fed policymakers are considering options for additional monetary easing even as the economy improves. Vice Chairman Janet Yellen said that a 3rd round of significant asset purchases “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.”
“Consumers today are still facing inflationary pressures on food, high unemployment, minimal job and income growth and waning consumer confidence,” BJ’s Restaurants, Inc., Chief Financial Officer Gregory Levin said after the chain reported a 6.5 percent increase in sales for the 3rd quarter. “It is difficult to ascertain if the current trends represent the trend we will end up seeing throughout the remainder of this year, or how strong the holiday retail selling season will be.”
“Income growth will have to be watched closely in coming months as the recent trend of spending at the expense of savings is not sustainable,” economists at Nomura Securities wrote. Inflation rose 0.2 percent in September, based on the latest analysis of the personal consumption expenditure price index. The PCE (Personal Consumption Expenditures) grew by 2.9 percent over the past year.
“Sluggish growth in U.S. consumer income in September led households to cut back on saving to increase their spending, casting doubts over the durability of the economy’s third-quarter growth spurt,” Reuters wrote.
According to The Hill, “Purchases of new and used cars drove spending. Clothing sales rose 1.1 percent. Purchases such as utility payments were up 0.2 percent, as consumers paid to cool their homes during a brutally hot summer.
Tags: 4Cast Inc., After-tax income, BJ’s Restaurants, consumer spending, Department of Commerce, Federal Reserve, GDP, Holiday retail selling season, Hurricane Irene, Inc., inflation, Janet Yellen, Moody’s Analytics, PCE Index, President Barack Obama, Saving rate
Posted in Economics, Financing, General | No Comments »
Monday, October 31st, 2011
President Barack Obama executed an end run around Congress when he announced a significant retooling of a plan designed to help homeowners who are paying their mortgages, but still underwater, refinance their loans at a more affordable interest rate. Administration officials said the changes will streamline the government’s Home Affordable Refinance Program (HARP) and could dramatically increase the number of borrowers who have refinanced their loans under the program past the current 894,000. They did not specify how many borrowers might be eligible or likely to participate. The program, which is voluntary to lenders, will be available only to homeowners whose mortgages were sold to Fannie Mae and Freddie Mac on or before May 31, 2009, and who have a loan-to-value ratio above 80 percent.
The downside is that hundreds of thousands more could not qualify – primarily because of the previous 125 percent loan-to-value limit on the program or because banks refused to take on the risk. Raising the loan-to-value restrictions may help a limited number of borrowers, according to Jaret Seiberg, an analyst for MF Global Inc.’s Washington Research Group, which analyzes public policy for institutional investors. The difficulty is that mortgage holders still must be up-to-date on their payments for the past six months — with no more than one missed payment in the past year. Additionally, they also must qualify for a new loan.
Qualifying homeowners will be able to refinance their mortgages at the current low rates, which are currently near four percent. Obama’s move comes at a time when there is a fast-growing consensus that the nation’s declining housing market is negatively impacting the economic recovery. Home values are at eight-year lows; and more than 10 million people are underwater, meaning that they owe more than their homes are worth. “It’s a painful burden for middle-class families,” Obama said. “And it’s a drag on our economy.” The administration’s proposal underscores the scale of the problem, as well as the limits of public policy in resolving it. By cutting monthly payments, the Obama administration hopes to make cash available for consumers to spend elsewhere.
According to housing regulators, one million borrowers might be eligible to participate in the program. Unfortunately, that is just 10 percent of the number of homeowners who need help. Although the Obama administration’s estimates say the average homeowner could save $2,500 per year, other projections said savings would be in the range of $312 annually. This depends on the upfront fees the borrower pays, which can include thousands of dollars in closing costs.
Obama promoted the plan under his “We Can’t Wait” campaign, in which he will use the executive branch’s existing tools to improve the economy while Congress debates further legislation. “We can’t wait for an increasingly dysfunctional Congress to do its job,” he said. “Where they won’t act, I will.”
“We know there are many homeowners who are eligible to refinance under HARP and those are the borrowers we want to reach,” said Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), which administers Fannie Mae and Freddie Mac. The program expires at the end of 2013. “We believe these changes will make it easier for more people to refinance their mortgage,” DeMarco said. “Breaking this vicious cycle is one of the most pressing issues facing policy makers,” Federal Reserve Bank of New York President William C. Dudley said. The HARP revamp is part of multiple efforts the government is making to boost home prices and consumer spending. “It’s the equivalent of a tax cut for these families,” HUD’s Donovan said.
Mortgage lenders are “particularly gratified” at the revised plan, said David H. Stevens, president and chief executive officer of the Mortgage Bankers Association. “These changes alone should encourage lenders to more actively participate.”
Writing in The Atlantic, Daniel Indiviglio believes that the revised program has potential. “The administration appears to have accounted for all of the major obstacles to refinancing and eliminated them. A home’s value no longer matters. The cost should be less prohibitive to borrowers. Much legal red tape has been cut. Other loans tied to the home won’t stand in the way. Ample time to refinance is provided. This should help to allow at least a million Americans to refinance who haven’t had the opportunity to do so in the past. If this works as hoped, then those consumers will have more money in their pockets each month. Borrowers who see their mortgage interest rates drop from five percent or six percent to near four percent will often have a few hundred dollars more per month to spend or save. If they spend that money, then it will stimulate the economy and create jobs. If they save it or pay down their current debt, then their personal balance sheets will be healthier sooner and their spending will rise sooner than it would have otherwise. The effort may even prevent some strategic defaults, as underwater borrowers won’t feel as bad about their mortgages if their payment is reduced significantly,” Indiviglio said.
Felix Salmon, writing in Reuters, could not disagree more. “For many reasons, it is very difficult to project the number of mortgages that may be refinanced under the enhancements to HARP, including the future path of interest rates, borrower willingness to undertake a refinance transaction and the number of lenders and servicers who choose to offer the program. Given current market interest rates, our best estimate is that by the end of 2013 HARP refinances may roughly double or more from their current amount but such forward-looking projections are inherently uncertain. First, by the end of 2013? Never mind mortgage relief now, we’ll try and get you mortgage relief in two years’ time? Secondly, the current pace of HARP refinancing is pathetic. We’ve been managing to do less than 30,000 HARP refinancing a month. And in the 28-month history of HARP, we’ve managed a grand total of 894,000 HARP refinancing, which works out to about 32,000 per month. The FHFA is projecting that the pace of HARP refinancing won’t increase at all as a result of this plan. We’ll still average out at about 30,000 per month — maybe a bit more, maybe a bit less, but you’re never going to make a dent in the mountain of 11 million underwater mortgages at that rate.”
Tags: congress, Department of Housing and Urban Development, Executive orders, Fannie Mae, Federal Housing Finance Agency, Federal Reserve Bank of New York, foreclosure, Freddie Mac, Gene Sperling, HARP program, Home Affordable Modification Program, Home Affordable Refinance Program, loan-to-value ratio, MF Global Inc.'s Washington Research Group, Mortgage Bankers Association, mortgage modifications, President Barack Obama, Shaun Donovan, underwater, “We Can’t Wait”
Posted in Economics, Financing, General, Residential | 1 Comment »
Wednesday, October 26th, 2011
Federal officials and some of the nation’s largest banks are collaborating on a plan that would make refinancing available to some borrowers whose houses are worth less than their loans, with the caveat that they must be up-to-date on mortgage payments. Typically, these borrowers can’t refinance because they don’t have enough equity in their homes. The plan would apply only to bank-owned mortgages.
Federal officials have been trying to negotiate a deal with the five largest mortgage servicers – Ally Financial, Inc, Bank of America, Citigroup Inc, J.P. Morgan Chase and Wells Fargo & Co. Officials favor a plan that would break a legal impasse with big banks over alleged foreclosure abuses such as robo signing and ease problems in the housing market. Discussions are still underway and the final outcome is not yet known.
Pressure is building in Washington, D.C., to help underwater homeowners with a generous refinance plan. President Barack Obama told Congress that he wants to help “responsible homeowners” refinance, saying it would “give a lift to an economy still burdened by the drop in housing prices.” A bipartisan coalition of 16 senators wrote to the administration urging swift action on a refinance plan.
“A huge floodgate would open up” if underwater refinancing were broadly available, said Fif Ghobadian, a broker at Guarantee Mortgage in San Francisco. “It would provide the help that lowering interest rates cannot do alone. Someone who’s been making payments at 7.5 percent religiously but cannot qualify to refi – boy, would that four percent make a huge difference in their life.”
A program has existed for some time that provides guidelines to lenders for refinancing some Fannie Mae- and Freddie Mac-backed underwater mortgages. The program is called HARP (Home Affordable Refinance Program), it’s two years old and has resulted in approximately 800,000 refinances, far short of the five million originally envisioned. Only a fraction of those homeowners were deeply underwater. HARP’s main impediment has been the lenders themselves. Concerns about issues such as being forced to take responsibility for refinances that default (known in the industry as “buybacks”) has made lenders reluctant to issue HARP mortgages. The proposed new plan would likely expand HARP to make it more acceptable to lenders and more usable by a broader swath of homeowners. “Changes (being contemplated) would address several HARP obstacles,” said Erin Lantz, director of the mortgage marketplace for Zillow. “The industry now makes it hard for people to qualify. The process would be more streamlined.”
According to a recent Harvard study, approximately 11 million homeowners with mortgages are underwater. This accounts for roughly one-fourth of all homes with mortgages in the nation. An additional five percent have near-negative equity (<five percent home equity).
Writing for Reuters, Felix Salmon doesn’t think much of the potential mortgage plan. “It’s pretty weak tea: under the terms of the deal, if (a) you’re underwater on your mortgage, and (b) you’re current on your mortgage payments, and (c) your mortgage is owned by the bank outright, rather than having been securitized, then you would be given the opportunity to refinance your mortgage at prevailing market rates. It’s worth remembering, at this point, that mortgages are by their nature pre-payable. When you write a fixed-rate mortgage, you make a general assumption that if mortgage rates fall substantially, the borrower is going to pay you off and refinance. The underwater questions we’re talking about here were written during the housing boom, when banks simply assumed that house prices always went up; those banks cared massively about prepayment risk at the time, and spent huge amounts of money and effort trying to hedge it. As it happened, mortgage rates did fall substantially — with the result that the banks’ hedges paid off. But then the banks realized that they could make money on both legs of the deal — that they could collect on their mortgage-rate hedges, without having to worry about prepayment. Because now the borrowers are underwater, they’re not allowed to refinance. So the banks continue to cash above-market mortgage payments every month — something they never expected that they would be able to do.
“It’s not inconceivable at all. In fact, wholesale mortgage refinance for underwater borrowers is a major part of Barack Obama’s jobs bill, and the Congressional Budget Office (CBO) has been costing it in various ways. At heart, it’s a way of rectifying a market failure, and thus makes perfect sense. But that’s precisely why I don’t think that this plan deserves a place in the mortgage-settlement talks. For one thing, it’s downright unfair and invidious to allow 20 percent of underwater homeowners to refinance while ignoring the other 80 percent. More to the point, giving homeowners the ability to refinance their mortgages is what you do, if you’re a bank. It’s not some kind of gruesome punishment.”
Tags: Ally Financial, Bank of America, Citigroup Inc, congress, Congressional Budget Office, Fannie Mae, Fixed-rate mortgage, Freddie Mac, Harvard, Home Affordable Refinance Program, Inc., J P Morgan Chase, Mortgage refinancing plan, President Barack Obama, refinancing, underwater mortgages, Wells Fargo & Co., Zillow
Posted in Economics, Financing, General, Residential | No Comments »
Monday, October 24th, 2011
Federal regulators have requested public comment on the Volcker Rule – the Dodd-Frank Act restrictions that would ban American banks from making short-term trades of financial instruments for their own accounts and prevent them from owning or sponsoring hedge funds and private-equity funds. The Volcker rule, released by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency, is intended to head off the risk-taking that caused the 2008 financial crisis. The rule, which is little changed from drafts that have been leaked recently, would ban banks from taking positions held for 60 days or less, exempt certain market-making activities, change the way traders involved in market-making are compensated and assure that senior bank executives are responsible for compliance.
Analysts say the proposed rule could slash revenue and cut market liquidity in the name of limiting risk. Banks such as JPMorgan Chase & Co. and Goldman Sachs Group Inc., have already been winding down their proprietary trading desks in anticipation of the Volcker Rule kicking in. Banks’ fixed-income desks could see their revenues decline as much as 25 percent under provisions included in a draft, brokerage analyst Brad Hintz said. Moody’s Investors Service said the rule would be “credit negative” for bondholders of Bank of America Corporation, Citigroup, Inc., Goldman Sachs, JPMorgan and Morgan Stanley, “all of which have substantial market-making operations.” The rule, named for former Federal Reserve Chairman Paul Volcker, was included in the 2010 Dodd-Frank Act with the intention of reining in risky trading by firms whose customer deposits are insured by the federal government.
John Walsh, a FDIC board member and head of the Office of the Comptroller of the Currency, said that he was “delighted” that regulators had reached an agreement on the proposed rule, “given the controversy that has surrounded this provision — how it addressed root causes of the financial crisis.” “I expect the agencies will move in a careful and deliberative manner in the development of this important rule, and I look forward to the extensive public comments that I’m sure will follow,” Martin J. Gruenberg, the FDIC’s acting chairman, said. The rule will be open for public comment until January.
Not surprisingly, Wall Street opposes the rule, saying it will cut profits and limit liquidity at a difficult time for the banking industry. Moody’s echoed those concerns, saying the current version of the Volcker rule would “diminish the flexibility and profitability of banks’ valuable market-making operations and place them at a competitive disadvantage to firms not constrained by the rule.” Some Democratic lawmakers and consumer advocates are pushing to close loopholes in the rules, especially the broad exemption for hedging. Supporters of the Volcker rule take issue with a plan to excuse hedging tied to “anticipatory” risk, rather than clear-and-present problems. “Unfortunately, this initial proposal does not deliver on the promise of the Volcker Rule or the requirements of the statute,” said Marcus Stanley, policy director of Americans for Financial Reform, an advocacy group. Additionally, the Securities Industry and Financial Markets Association raised concerns about whether the exemption for trades intended to make markets for customers is too narrow.
According to Moody’s, the large financial firms all have “substantial market-making operations,” which the Volcker Rule will target. The regulations also will recreate compensation guidelines so pay doesn’t encourage big risk-taking. Derivatives lawyer Sherri Venokur said restrictions on compensation are “intended to create a sea change in the mindsets of those who create the culture of our banking institutions — to value ‘safety and soundness’ as well as profitability.”
Equity analysts at Bernstein say that the Volcker Rule — if implemented in its current form – will slash Wall Street brokers’ revenues by 25 percent, and cut pre-tax margin of their fixed income trading businesses by 33 percent. According to Bernstein, the Volcker Rule’s potential limitations are a surprise because it appears to prohibit flow trading in “nonexempt portions” of the bond-trading business. Bernstein says inventory levels – and, in all probability, risk taking – must be based on client demands and not on “expectation of future price appreciation.”
A Bloomberg.com editorial offers support to the Volcker Rule, while admitting it won’t be perfect. According to the editorial, “This week, the first of several regulatory agencies will consider a measure aimed at ending the practice. Known as the Volcker rule, after Paul Volcker, the former Federal Reserve chairman, the measure would curb federally insured banks’ ability to make speculative bets on securities, derivatives or other financial instruments for their own profit — the kind of ‘proprietary’ trading that can lead to catastrophic losses. Whatever form it takes will be far from perfect. It will also be better than the status quo. The bank bailouts of 2008, and the public outrage over traders’ and executives’ bonuses, laid bare a fundamental problem in big institutions such as Bank of America Corporation, Citigroup Inc. and JPMorgan Chase & Co.
“They attempt to combine two very different kinds of financial professionals: those who process payments, collect peoples’ deposits and make loans, and those who specialize in making big, risky bets with other peoples’ money. When these big banks run into trouble, government officials face a dilemma. They want — and in some ways are obligated — to save the part of the bank that does the processing and lending, because those elements are crucial to the normal functioning of the economy. But in doing so, they also end up bailing out the gamblers, a necessity that erodes public support for bailouts and stirs enmity for banks. Separating the bankers from the gamblers is no easy task. Commercial banks’ explicit federal backing — including deposit insurance and access to emergency funds from the Federal Reserve — is attractive to proprietary traders, who can use a commercial bank’s access to cheap money to boost profits. Bank executives like to employ traders because they generate juicy returns in good times that drive up the share price and justify large bonuses. In effect, both traders and managers are reaping the benefits of a government subsidy on financial speculation. The Volcker rule will not — and probably cannot — fully dissolve the union of bankers and gamblers.”
Tags: Americans for Financial Reform, Bank of America Corporation, Bloomberg, Citigroup, derivatives, Dodd-Frank Act, Federal Deposit Insurance Corporation, federal regulators, Federal Reserve, financial crisis, financial regulation, Goldman Sachs, hedge funds, Inc., JP Morgan Chase & Company, Moody’s Investor Services, Morgan Stanley, Office of the Comptroller of the Currency, Paul Volcker, President Barack Obama, Private-equity funds, securities, Securities Industry and Financial Markets Association, Short-term trades, Volcker Rule, Wall Street
Posted in Economics, Financing, General | No Comments »
Monday, October 10th, 2011
Apple’s iconic co-founder and CEO Steve Jobs, who altered the habits of millions by reinventing computing, music and mobile phones, has died at the age of 56. With Jobs’ passing, Apple has lost a visionary leader who inspired personal computing and products such as the iPod, iPhone and iPad. These innovations made Jobs one of his generation’s most significant industry leaders. His death, following a long fight with a rare form of pancreatic cancer and a liver transplant, set off an outpouring of tributes as world leaders, business rivals and customers mourned his early death and celebrated his historic achievements.
“The world has lost a visionary. And there may be no greater tribute to Steve’s success than the fact that much of the world learned of his passing on a device he invented,” said President Barack Obama. Even Bill Gates, his rival at Microsoft, joined in the laments. “For those of us lucky enough to get to work with him, it’s been an insanely great honor,” Gates said.
With a passion for minimalist design and a genius for marketing, Jobs laid the groundwork for Apple to flourish after his death, according to analysts and investors. A college drop-out, Jobs altered technology in the late 1970s, when the Apple II became the first personal computer to gain a wide following. He repeated his early success in 1984 with the Macintosh, which built on the breakthrough technologies developed partially at Xerox Parc to create the personal computing experience.
“Steve’s brilliance, passion and energy were the source of countless innovations that enrich and improve all of our lives. The world is immeasurably better because of Steve,” Apple said. “His greatest love was for his wife, Laurene, and his family. Our hearts go out to them and to all who were touched by his extraordinary gifts.”
According to Apple co-founder Steve Wozniak, “We’ve lost something we won’t get back,” he said. “The way I see it, though, the way people love products he put so much into creating means he brought a lot of life to the world.” Wozniak said that Jobs told him around the time he left Apple in 1985 that he had a feeling he would not live beyond the age of 40. Because of that, “a lot of his life was focused on trying to get things done quickly,” Wozniak said. “I think what made Apple products special was very much one person, but he left a legacy,” he said. Wozniak hopes the company can continue to succeed despite Jobs’ death.
Computerworld raises the question “Where will that excitement come from now?” When Jobs stepped down as CEO in August, industry analysts said that Apple, with a team of talented, creative employees, will be able to continue his tradition for ingenuity, if not all of his passion, perfectionism and energy. “Steve’s excitement for technology will still come from Apple and from the team that Jobs carefully built that worked with him to give us the iPhone and iPad and many other successful products,” said Carolina Milanesi, a Gartner analyst.
“Jobs didn’t just change mobile phones — he reinvented them,” said Ken Dulaney, an analyst at Gartner. “That was typical Steve.” In another example, the iPad took user-centric values inherent in the touch-screen iPhone and larger-screen laptops, and found a useful compromise — a classic expression of Jobs’ ability to combine technological concepts, art and ideas and deliver a product that was termed “magical,” according to analysts. “Apple, under Jobs’ leadership, focused on the user experience first and the technology second,” said Jack Gold, an analyst at J. Gold Associates. “This focus was groundbreaking in that most tech companies were just the opposite. Apple pioneered hiring many usability specialists, human factor engineers and designers before it was fashionable to do so. Jobs’ vision of technology was to make a smooth intersection into our lives and our work, and that was what put Apple ahead of the pack. He redirected engineering from technical engineering to engineering for usability.”
One question that has industry analysts abuzz is whether Apple will be able to maintain its dominant position now that Jobs is gone. Jobs’ passing and the industry’s mixed response to the recent iPhone 4S model create challenges for Apple in coming quarters,” said Neil Mawston, an analyst with Strategy Analytics. “Industry eyes will inevitably turn to the iPad 3 launch next year to see whether Apple can continue the company’s impressive legacy of innovation created by Steve Jobs,” he said. In a sign of deepening competition, Amazon.com recently unveiled its Kindle Fire tablet at an affordable $199 that could pose a serious threat to the iPad. “Apple is facing a competitive firestorm from not just one company but a coalition of rivals that are trying to beat it, including some of the largest consumer electronics companies on the planet,” said Ben Wood, head of research at British mobile consultancy CCS Insight.
Writing in the Washington Post, Melissa Bell believes that one of Jobs’ longest-standing legacy will be the recognition that his illness and death are bringing to pancreatic cancer. According to Bell, “Steve Jobs knew the art of keeping your cards close to your chest. Though leaks did spring from the closely guarded Apple world, Jobs was a master at unveiling his secrets only when the time was right for him. As with his business ventures, so it was with his cancer. Jobs ‘kept his illness behind a firewall,’ the Associated Press reported. Apple released no more of a statement than that they lost a ‘visionary and creative genius, and the world … lost an amazing human being.’ It was not known whether Jobs died from the rare form of pancreatic cancer that plagued him for seven years, or from complications from a liver transplant two years ago. Despite the lack of details, Jobs’ role as the very public face of Apple put his illness on display along with his products.”
Tags: Amazon.com, Apple, Bill Gates, iPad, iPhone, iTunes, Kindle Fire, Liver transplant, Macintosh, Microsoft, Pancreatic cancer, President Barack Obama, Silicon Valley, Steve Jobs, Steve Wozniak
Posted in Economics, General | No Comments »
Wednesday, September 14th, 2011
Shareholders in American companies can blame Standard & Poor’s for taking $1 trillion of their money after the rating firm downgraded Treasury securities for the first time in American history to AA+ from AAA. Now, some of the most experienced investors say the stock market losses make no sense. While the benchmark index for U.S. equities fell as much as 6.7 percent — or $1.03 trillion — since the downgrade, 10-year Treasuries rallied the most in more than two years and the government financed its quarterly debt obligations at the lowest interest rates ever. Treasuries have returned two percent since the downgrade.
“One of the most perverse things I’ve seen in 25 years of doing this is that S&P downgrades the United States government, and investors’ reaction is to run towards the securities that they downgrade, selling businesses without asking at what price,” said Kevin Rendino, a money manager at BlackRock Inc., which oversees $3.65 trillion. “Equity prices have swung too far.”
The downgrade, which diverged from Moody’s Investors Service and Fitch Ratings, turned investors’ focus from the 10th consecutive quarter in which S&P 500 companies topped analyst earnings forecasts. Per-share profits had climbed 18 percent among companies in the index, with 76 percent topping the average analyst projection, according to data compiled by Bloomberg. Sales grew by 13 percent.
“It did a lot of damage to confidence, which had been shaky anyway,” Liz Ann Sonders, New York-based chief investment strategist at Charles Schwab, said. “We had started to get a sense of a little bit of a lift for the economy in the second half of the year, and you just kind of wiped it out because of the lack of confidence in our political leaders. S&P reflected that with the downgrade, but what it ended up causing was a real confidence crisis, more than an economic crisis.”
Additionally, the Chicago Board Options Exchange volatility index jumped 50 per cent to 48, the highest level in 29 months and the biggest jump in more than four years, the first trading day after the downgrade was announced.
“We’re starting to see real disorderly selling, far more than what we’ve been seeing,” said Matthew Peron, head of active equities at the Chicago-based Northern Trust, which manages approximately $650 billion in assets. At Jersey City-based Knight Capital, senior equity trader Joseph Mazzella said that “It’s scary. It really is. I hate it when the market closes below its low, as it sets the stocks up for a follow-through tomorrow.”
President Barack Obama said that he blames political gridlock in Washington, D.C., for the downgrade. He announced plans to offer recommendations on ways to cut the federal deficit. Agreeing with the president is William Suplee, a financial manager with Structured Asset Management in Paoli, PA. “Almost universally my clients are blaming this on ‘The Government’, this lack of confidence – and that is what it is. This sell-off is uniformly blamed by my clients on the government’s inability to act rationally.
According to Genna R. Miller, Ph.D., Visiting Instructor, Economics Department, Duke University, “In terms of the CPA profession, there may have been some fear that the negative outlook on U.S. sovereign debt, as well as possible increases in interest rates, may have caused a further downturn in the economy. Such a downturn in the economy may have been expected to reduce the demand for accounting services, as clients’ incomes declined. However, as there have only, at this point in time, been minimal impacts on the economy and the accounting profession, this does not appear to be the case. It may be the case that the income elasticity of demand for accounting services may actually be quite inelastic. The income elasticity of demand tells us the percentage change in quantity demanded for accounting services divided by the percentage change in clients’ incomes. Thus, if there is a relatively inelastic income elasticity of demand, then clients who have had accounting services in the past may continue to do so, despite any declines in their own income. On the flip side, some financial planners may have experienced an increase in business as some clients may have needed to re-assess portfolio values from a tax perspective or may have needed to comply with disclosure policies with respect to increased risk.”
Mark Vitner, Managing Director & Senior Economist, Wells Fargo Securities, LLC, offers this perspective. “I think most firms understand that the downgrade does not affect many private businesses. The downgrade and the problems with the federal budget deficit that precipitated it are primarily a problem for state and local governments and government contractors. Businesses and governments that receive a large part of their funding from the federal government will be most impacted by the downgrade and renewed emphasis on deficit reduction.”
Rick Mattoon of the Fed believes the downgrade will affect mostly the secondary markets like municipals funds. Listen to his podcast here.
Tags: AA+, AAA, BlackRock Inc., Bloomberg, Charles Schwab, Chicago Board Options Exchange, Credit downgrade, Duke University, Fitch Ratings, Interest rate increases, Knight Capital, LLC, Moody’s Investors Service, Northern Trust, Political gridlock, President Barack Obama, S&P 500 companies, Shareholders, Standard & Poor’s, Stock market losses, Structured Asset Management, Treasury securities, Wells Fargo Securities, “The Government”
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Thursday, September 1st, 2011
Former Federal Reserve chairman Alan Greenspan says that Italy is the root of most of Europe’s economic problems, as well as our own. In a recent appearance on “Meet the Press”, “It depends on Europe, not the United States,” Greenspan said. “The United States was actually doing relatively well, sluggish but going forward until Italy ran into trouble.” According to Greenspan, 50 percent of American corporations have offices in Europe, and the continent “has been a very important driving force in the overall earnings of U.S. corporations.” Greenspan also noted that S&P’s downgrade “hit a nerve”. The ratings agency said it was reducing the AAA rating to AA+ not only because of the country’s debt load, but because it doesn’t believe that Congress can resolve the country’s debt problems. Mark Zandi, chief economist at Moody’s Analytics, agrees, noting that “There’s a lot of fear and misunderstanding and confusion, and that all could come out in the stock and bond markets. I don’t think it takes much to unnerve investors given the current environment. I think anything could drive investors to sell given how fragile sentiment is.”
At the same time, Greenspan downplayed the risk of a double-dip recession in the United States, noting that the economy is in better shape than its European peers. With all of this bickering going on, the economy is slowing down,” Greenspan said. “You can see it in all the data. I don’t see a double-dip, but I do see it slowing down.” Europe, which purchases 25 percent of American exports and is home to the operations of many American companies, could determine the course of the U.S. economy’s recovery, according to Greenspan. European leaders are working to control a sovereign-debt crisis, which has spread to Italy, the euro zone’s third-largest economy, and is causing chaos in global financial markets.
“When Italy first showed signs of weakness and started selling its bonds — the yield is now over six percent, which is an unsustainable level — it created a massive problem in Europe because Italy is a very large country, cannot be easily bailed out and indeed cannot be bailed out. This is not an issue of credit rating. The United States can pay any debt it has because we can always print money to do that. There is zero probability of default,” Greenspan said.
In the meantime, Fitch Ratings delivered some good news to the U.S. economy when it reaffirmed its AAA credit rating and said it did not anticipate downgrading the nation’s debt in the near future. The firm said the outlook for the rating is stable because the recent deal to raise the debt ceiling and cut the budget deficit proved that the nation’s political leaders are willing to do what’s necessary to cut the nation’s growing debt. The debt-ceiling deal “was a significant positive development that provided a substantive and necessary increase in the federal debt ceiling. It also signaled that there is the political commitment to place U.S. public finances on a sustainable path consistent with the U.S. sovereign rating remaining ‘AAA’,” Fitch said. Fitch’s outlook is the most positive on the U.S. of the primary credit rating agencies. Standard & Poor’s downgraded long-term debt to AA+ after concluding that the planned $2.1 trillion to $2.4 trillion budget cuts over the next 10 years are not large enough to stabilize the nation’s rising debt. Moody’s Investor Services also retained the nation’s AAA rating, but changed its outlook to negative. This means that there’s a possibility of a downgrade.
“The key pillars of the U.S.’s exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base. Monetary and exchange-rate flexibility further enhances the capacity of the economy to absorb and adjust to ‘shocks,’ Fitch said.
“I think they’re looking at a broader perspective than S&P in the global aspects,” Steve Goldman, Weeden & Company market strategist said of Fitch’s decision. “It’s giving a sigh of relief to investors here.”
Tags: AAA credit rating, Alan Greenspan, Austan Goolsbee, Budget deficit, congress, Debt ceiling, default, Euro zone, Federal Reserve, Fitch Ratings, Italy, Mark Zandi, Moody’s Analytics, Moody’s Investor Services, President Barack Obama, Sovereign-debt crisis, Standard & Poor’s, U.S. Treasuries, Unemployment crisis, “Meet the Press”
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Wednesday, August 17th, 2011
Several banks have found a new solution to the glut of foreclosed houses – many of them in poor condition. It’s the bulldozer. Bank of America (BoA) owns a glut of abandoned houses that no one wants to purchase. As a result, the nation’s largest mortgage servicer is bulldozing some of its most uninhabitable inventory. Additionally, Wells Fargo, CitiCorp, JP Morgan Chase and Fannie Mae have been demolishing a few of their repossessed houses. BoA is donating 100 foreclosed houses in the Cleveland area and in some cases will contribute to the cost of their demolition in partnership with a local agency that manages blighted property. The bank has similar plans impacting houses in Detroit and Chicago, and more cities tare expected to be added.
“There is way too much supply,” said Gus Frangos, president of the Cleveland-based Cuyahoga County Land Reutilization Corporation, which works with lenders, government officials and homeowners to salvage abandoned homes. “The best thing we can do to stabilize the market is to get the garbage off.” Detroit mayor Dave Bing is in the process of ” right-sizing” the motor city by razing entire neighborhoods.
BoA plans to donate and bulldoze 100 houses in Cleveland, 100 in Detroit, and 150 in Chicago. The lender will pay up to $7,500 for demolition or $3,500 in areas eligible to receive funds through the federal Neighborhood Stabilization Program. Uses for the land include development, open space and urban farming. “No one needs these homes, no one is going to buy them,” said Christopher Thornberg, founding partner at the Los Angeles office of Beacon Economics LLC. “Bank of America is not going to be able to cover its losses, so it might as well give them away and get a little write-off and some nice public relations.”
Some foreclosed properties are so uninhabitable that the bank is willing pay to have them destroyed. A bank spokesman said some in this category are worth less than $10,000.
Writing in The Atlantic, Daniel Indiviglio says that “The motivation here is pretty straightforward. They get out of ongoing maintenance costs and taxes that they would have to pay as long as the property remains on the market. But the even better news is that the banks can often write-off these properties as a result. In some cases, banks can deduct as much as the homes’ fair market value from their income taxes. From the real estate market’s standpoint this strategy is also positive. With less supply, prices will stabilize more quickly. Disposing of these foreclosures will make the market clear sooner. And yet, the idea of bulldozing homes does seem rather unsavory, does it not? Perhaps some of these homes are condemned and/or beyond repair. In those cases, it might turn out to be more expensive to try to get them back up to code than it would be to knock them down and start over. But does this really describe all of the cases? This is reportedly happening to thousands of homes across the U.S. My concern is that banks are using this as an easy out to minimize their loss with little concern about what’s best for the U.S. economy. If some of these homes could be converted to perfectly adequate rental properties at minimal additional cost at some point in the future, for example, then this would make a lot more sense than knocking them down and building new homes from scratch.”
According to a Time magazine article, “After multi-billion dollar legislative efforts in the form of the Stimulus, Dodd-Frank and stand-alone legislation, President Obama declared failure earlier this month and said he’s going back to the drawing board on a housing fix. Negotiations between the 50 state attorneys general and the big mortgage lenders, rather than clearing the air for banks and borrowers, has become an enormous wet blanket as negotiations drag out and banks refuse to make any move without knowing how much of the reported $20 billion settlement will fall on them. Economists argue that the failure to clear the housing market is a primary cause of the stunted recovery: continued household debt weighs on consumer spending, home ownership and excessive debt puts a drag on labor mobility, and banks fear the consequences of increased lending.”
Tags: Bank of America, Beacon Economics LLC, Chicago, CitiCorp, Cleveland, Cuyahoga County Land Reutilization Corporation, Dave Bing, Detroit, Dodd-Frank Act, Fannie Mae, Foreclosed houses, home ownership, JP Morgan Chase, Mortgage servicer, Neighborhood Stabilization Program, President Barack Obama, Right-sizing, stimulus bill, Wells Fargo
Posted in Economics, Financing, Residential | No Comments »