The Audit
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November 06, 2009 08:06 PM
Friday Links: A Contrite Banker, Pay to Play, Gutting SOX
Bloomberg finds a contrite banker, John Reed the former CEO of Citigroup who merged it with Sandy Weill's Travelers in the late 1990s to create a financial supermarket, one that a decade later would have the distinction of being a third-owned by Uncle Sam. Reed calls for the reinstatement of the Glass-Steagall division of banking and trading.
— Couldn't get to this yesterday, but JPMorgan Chase will pay $75 million and give up a claim to $650 million in fees for paying to play county officials in Alabama to buy its derivatives, something that eventually pushed the county to the brink of bankruptcy. Seems like a big story to me. The New York Times thought so, as did Bloomberg, but The Wall Street Journal stuffed it on C8. These weren't entry-level rogues, apparently. The two accused, one of whom has already served a bit of time for a similar scandal in Philly, headed JP Morgan's municipal derivatives unit for most of this decade.
— The New York Times's Floyd Norris looks at a proposal in Congress to gut Sarbanes-Oxley, the regulation that came out of the accounting scandals of the last crash. "The House Financial Services Committee this week approved an amendment to the Investor Protection Act of 2009 — a name George Orwell would appreciate — to allow most companies to never comply with the law, and mandating a study to see whether it would be a good idea to exempt additional ones as well."
— Finally, Reuters' Rolfe Winkler is provocative here in talking about how there's nowhere to hide these days, investment-wise: "The economy is so over-levered in my estimation, its equity value is probably negative."
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November 06, 2009 03:22 PM
Dow Jones on the Paper-It-Over Economy
Dow Jones Newswires breaks an excellent story on Wells Fargo's efforts to delay its day of reckoning on billions and billions of more mortgage losses, these in ready-to-implode option-ARMs Wells inherited when it bought Wachovia, which inherited them when it bought Golden West, which pioneered the disastrous concept of the "Pick-A-Pay" mortgage.
Now, Wells Fargo is giving its option-ARM borrowers six-to-ten-year interest-only loans to keep them from walking away from their deeply underwater houses with payments that are about to reset much higher. Wells has $107 billion in option-ARM debt and as Dow Jones's Marshall Eckblad writes, it's playing "kick-the-can-down-the-road" with some of those loans and hoping an economic recovery someday bails it out.
But Golden West's loans were concentrated in hard-hit states like California. In order for the median note bought at the peak to get back to even in, say, Southern California, the median price there would have to soar 84 percent from $275,000 to $505,000. Want to bet on that happening over the next six or ten years?
Well Fargo most likely wouldn't but for the fact that doing so allows it to avoid recognizing the hole blown in its side by the massive losses baked in to those loans. The longer it can string this process out, the more time it has to earn money hand over fist in a low-interest-rate environment to patch up its holes. Never mind that this all probably won't work and just delays the necessary reckoning of its balance sheets.
There's another obvious problem with this strategy: If you bought that $505,000 house at the peak, even with this Wells interest-only extension, your payment is still going to be far more than it would to pay the principal and interest in a house selling for $275,000. Even if you can't get that loan, you'd almost surely pay far less less to rent a similar house (to be sure, Wells didn't pay full price for the loan book, as DJN points out. It got a 20 percent discount).
Another problem would be that if you get in trouble doing something, it's probably not a good idea to try to get out of trouble by continuing to do that something. In this case, interest-only or even, probably, negatively amortizing loans have Wells Fargo in trouble, so it's going to combat that by extending new interest-only loans.
Dow Jones does a really nice job of countering Wells Fargo's spin.
"We're banking on the fact the economy will improve and recover over time," Michael Heid, co-president of Wells Fargo Home Mortgage, said in an interview.
Wells Fargo's decision to shoehorn thousands of Pick-A-Pay borrowers into long-term interest-only loans helps the bank avoid taking hefty writedowns on Pick-A-Pays that a wholesale push into foreclosures would likely produce. But the strategy will also leave Wells Fargo holding billions in mortgage debt tied to distressed properties in depressed housing markets, especially California and Florida, where the future for property values is hardly certain. Write-offs from Pick-A-Pays, therefore, could bring the bank years of burdensome costs.
This is in keeping with what has been a two-pronged attempt to gloss over the problems in the financial sector, praying it can earn its way out of its giant hole by letting it quit marking assets to market while reinflating an asset bubble.
The positive here is that it could really help people who want to stay in their homes but are getting swamped. The Wells strategy is accompanied by loan modifications, apparently, meaning getting up to that $505,000 example may not be necessary. For example:
One borrower, Danny Annan, an Orange County, Calif., engineer, just finished weighing one of Wells Fargo's loan modifications. The bank offered to reduce his loan balance by $100,000 and transfer the remaining balance to a six-year interest-only loan with an initial interest rate of about 4.9%, Annan said. The offer will still leave Annan more than $100,000 under water on his home.
There's more here from Dow Jones, including nice context about the negative-equity landscape. Good stuff.
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November 06, 2009 10:45 AM
WSJ Spotlight Helps Get Results on Antitrust
The Wall Street Journal follows up this morning on its report on CVS Caremark's business practices six months ago.
The Federal Trade Commission is investigating the company's doings, which the Journal in May reported include blatantly anticompetitive stuff like raising co-pays for people who shop at non-CVS pharmacies. Caremark is a pharmacy-benefits manager that merged with CVS, the big pharmacy chain. Who could have seen this kind of thing coming in a deal like that?
Apparently not antitrust regulators.
The Journal notes drily in its lede that the investigation, as well as some poor third-quarter results, are "raising questions about the soundness of the $27 billion merger between the giant drug chain and big pharmacy-benefit manager that created the company in 2007."
I'd say so.
Analysts say the loss of business may stem from worries by customers that CVS's PBM might not negotiate as aggressively with its CVS pharmacy chain, and that the merger created a conflict of interest.
While the WSJ didn't exactly dig up the information for its May story—competing pharmacists leaked it just before turning it over to the FTC—it did recognize the import of it and put a thousand words on a section front spelling out the problem.
That kind of thing makes it much harder for regulators to try to ignore an issue or sweep it under the carpet.
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November 06, 2009 09:32 AM
Trivial Pursuit at ProPublica
There is a journalistic school of thought emerging, I fear, that holds that because you went to the trouble of investigating something you publish, whether you find anything worthwhile or not.
This comes to mind after reading a piece by ProPublica on supposed waste in government stimulus spending.
Stimulus for Cotton Candy, Tango and a Fish Orchestra? Wacky, or Actually Worthy?
The questioning headline already indicates there’s not much going on here, and the jokey tone of the piece feels almost like an apology:
Breakfast at Fuddruckers: $19.24.
Snow cone and cotton candy machine: $146.89.
Six extra preview performances of “Little House on the Prairie – the Musical”: $50,000.
Benefit to the economy? According to the recipients of this stimulus money: Priceless.
Of course, no one said the benefits were priceless, or unquantifiable, so the joke doesn’t really work. But I guess it’s the Internet, so whatever.
The piece reminds me of the WSJ’s own once-over-lightly "analysis" of stimulus reporting documents (on which the ProPublica story is also based) that found that the White House may have overstated the number of jobs created by the stimulus by three percent, a rounding error.
But at least the Journal doesn't rely for its lead quote on the media director of some obscure tea-bagging operation((Update: See my mea culpa in comments below):
“This was not what people had in mind when they were talking about job creation,” said Leslie Paige, spokeswoman for Citizens Against Government Waste. “It was a gigantic pork barrel project from the first day out of the box, and it has proven itself to be every bit as swinish as we thought it would be.”
You know you are reaching when.... Everyone is entitled to their own opinion, but this "citizen" is saying here that “it,” the entire stimulus package, was a gigantic pork barrel project from day one. How does that quote even fit this story, which deals, at most, with $1,300,200 and eighty cents, or 0.00016% (fixed to add a couple of zeros), of the $800 billion stimulus bill, if you’re going to get picky about it, which, apparently, this story is. And that’s only if you’re counting $1.25 million…
…to use electric fish from the Amazon to study how animals take in sensory information to move quickly in any direction. (See video.) The research could help in the development of underwater robots to find the source of toxic leaks. Further in the future, it could lead to new, far more agile prosthetics.
So, basic research. The "fish orchestra" in the headline is part of an interactive exhibit meant to get kids interested in science.
The cost of the snow cone machine is revealed to have been donated—so, not the stimulus. The breakfast at Fudruckers was “…an expense for two officers of a Texas business attending a National Science Foundation meeting in Washington, D.C.” Wow.
As for the $50,000 for the play, that’s what it was, $50,000 to pay actors and the rest to put on a play. This reminds me of Obama’s riposte to complaints that this stimulus bill was actually a spending bill. But of course, that’s exactly what it is. It was never meant to be anything else.
I’m all for investigating government operations. Who isn’t?
But I wonder sometimes if the press, perennially worried about being hit with the “liberal” tag, is being Mau-Maued into pouring resources into covering this particular story, whether there’s much to it or not. The Pentagon, meanwhile, spends $500 billion, not once, but every year.
This is about resource allocation and news judgment given an almost limitless array of problems to investigate, including what is shaping up what I suspect even ProPublica knows is the real stimulus story: that it’s probably too small.
ProPublica says it has five staffers on the stimulus story. How much does that cost?
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November 05, 2009 06:33 PM
Thursday Links: Goldie’s Gall, Chait Check, FSA
The Wall Street Journal reported a couple of days ago that Goldman Sachs (an Audit funder) is trying to buy tax credits from Fannie Mae to offset its profits. Take it from here, Floyd Norris:
Goldman, you may recall, was saved with taxpayer money when the panic spread last year. A naïve person might think such a company would see a patriotic virtue in paying taxes.
Fannie Mae is currently a ward of the government. So this boils down to a proposal to pay Uncle Sam perhaps 15 cents to avoid paying 20 cents to Uncle Sam. The gall involved in even proposing such a thing is awesome.
— The New Republic's Jonathan Chait fact-checks The Wall Street Journal op-ed page, which as he points out, is like shooting fish in a barrel. Which can be fun every once in a while, when in one column, for instance, "out of 1,279 words of mostly ideological blather, there are five actual facts that bear any relation to the thesis. And three of them are false." No correction yet.
— The Journal's David Wessel—who, let's emphasize, is on the the news side of the paper—writes a good column on Adair Turner, head of the UK's Financial Services Authority, who thinks less incrementally than his American counterparts. Some ideas: Finance is altogether too big, and the tax system incentivizes debt rather than equity, things that need to change.
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November 05, 2009 12:15 PM
Regulation: Cool, At Last
We appreciate the bizpress’s newfound attention to Washington political fights over regulatory and economic policy, and we’re not afraid to say so.
Before the crash, as we’ve also said, the Wall Street and Washington press corps might as well have existed on different planets, so little did one understand the other's beat. Apart from close, if narrow and generally supine, coverage of the Fed and its monetary role, regulation was a backwater for the financial press, if not for the financial industry, which knew its way around Washington very well, indeed.
In this 2008 story on pre-crash regulatory failures at the Securities and Exchange Commission, for instance, The New York Times candidly (albeit briefly) turned its notebook on itself and the rest of the press when it noted that no media representative attended the fateful commission meeting of April 28, 2004, when the body voted unanimously to loosen capital requirements for big investments banks.
The proceeding was sparsely attended. None of the major media outlets, including The New York Times, covered it.
After 55 minutes of discussion, which can now be heard on the Web sites of the agency and The Times, the chairman, William H. Donaldson, a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later.
With that, the five big independent investment firms were unleashed.
Happily for the public, the coverage of regulatory plumbing is now officially a hot beat, with bank-regulatory overhaul, very much in the news these days, serving as a good example.
While the MSM has done well generally, the Brits, Financial Times and Reuters, have done especially well tracking the blow-by-blow of proposals coming out key congressional offices and the White House.
The FT’s Tom Braithwaite reported early on Chris Dodd’s intention to push forward with his own bill with or without the White House, and also plumbed Obama's thinking.
Reuters's Kevin Drawbaugh and Rachelle Younglai on Monday hinted via analysts at what was to come:
A bill to create a single bank supervisor, possibly with proposals on handling systemic risk and firms seen as "too big to fail," may come soon from Dodd, analysts said.
The Washington Post's David Cho and Brady Dennis yesterday got a good jump with what turns out to be solid info on what Dodd wants:
The legislation, which is still being finalized, would consolidate federal responsibility for banking oversight, now assigned to four agencies, into a single regulator. And, compared with the plan rolled out by the White House, Dodd's measure would grant less power to the Federal Reserve to curb activities that pose a risk to the entire financial system, the officials said.
And the Journal's Damian Paletta adds some useful analysis this morning, labeling the Dodd proposal “extreme,” which is fair, considering it would strip powerful agencies, notably the Fed and the FDIC, of longstanding supervisory authority. The story also sees a clash looming with plans designed by Obama and the House.
The WSJ also has been buzzed around Dodd’s head for a while, as in this bit from last week relaying Dodd’s dim view of Fed supervisory performance:
Senate Banking Committee Chairman Christopher Dodd doesn't think the Fed "did a particularly good job in using its authority leading into the financial crisis," his spokeswoman said Wednesday. Mr. Dodd is also concerned that if the Fed is stretched too thin, it "won't necessarily focus on monetary policy," she said.
Sure, regulatory overhaul is an obvious story, and no one should get a medal for covering it.
But, then it should have been obvious on past major shifts in regulatory and economic policy, including Glass-Steagall repeal, the Bush tax cuts, the 2005 bankruptcy reform bill, to say nothing of more obscure but nonetheless portentous measures, like the Commodities Futures Modernization Act of 2000 or the SEC move on Wall Street capital requirements mentioned above. And who believes those didn't deserve more scrutiny?
If it took a financial crisis for the press to see regulation as sexy, we’ll chalk that up as subsidiary benefit.
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November 05, 2009 10:25 AM
Bloomberg Examines the Bank Lobby’s Armor
Bloomberg spotlights the Consumer Financial Protection Act and uses it as a jumping-off point for a smart story on the state of the finance-lobby's might.
The theme is that the financial industry is still awfully powerful but—and this is a new thing—not all-powerful anymore, particularly when it comes to consumer-facing businesses.
That's why the CFPA has been pretty much unstoppable, even if it's been watered down by the community-banks lobby, which got all of its members out from under the proposed agency, which means 98 percent of all banks are exempted from its oversight.
Bloomberg opens with an anecdote on how the CFPA came to be so pushed by the Obama administration, which has hardly been hardcore with the banks (a key reason, little-discussed, why its political fortunes have fallen. I'm guessing if there had been a little more kick to the teeth and a lot less slap to the wrist, those polls would be a lot higher now)—it was pushed by the president himself:
During one of his first meetings about overhauling U.S. financial regulations in February, President Barack Obama had a question for his economic advisers, who included Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers.
“What about the families?” Obama asked, according to people familiar with the discussions. He then asked them whether they’d read the work of Elizabeth Warren, a Harvard Law School professor and longtime advocate of a national consumer financial protection agency. Michael Barr, a University of Michigan professor who was a Summers aide at the time, jumped in to say he knew Warren’s work.
“Well, what do you think about it?” asked the president, according to the accounts of the conversation.
“I think it’s a great idea,” Barr, 44, replied. The two debated the merits of such an agency during several meetings over the following three days. Then Obama offered Barr, whose own work included research on the borrowing patterns of low- income households, the job of assistant Treasury secretary for financial institutions.
Now take this anecdote with a grain of salt—it could be self-serving spin intended to attach the president more personally to what's sure to be a popular issue. But it does make a certain amount of intuitive sense. I mean, do you think Larry Summers came up with this idea? If true, it's interesting that Obama had read Elizabeth Warren, one-time scourge of right-thinking folks in the business press. And having read Warren, it's no wonder he supports such a consumer agency.
Bloomberg puts all this in context:
Following the 1999 decision to overturn the Glass-Steagall Act that separated commercial banks from securities firms, bank lobbyists have been able to shoot down virtually any proposed rule they perceived as unfavorable to their industry, lobbyists and politicians say.
And it notes that while the banks lobby is still pretty much getting its way or likely to on non-consumer stuff like pay and derivatives, it has suffered some damage in the consumer area, which Bloomberg is excellent to point out is huge to the too-big-to-fail banks:
Harvard’s Warren says the consumer agency she proposes will affect the larger banks disproportionately: “It may cost the community banks some nickels, but the real impact will be on the big banks’ profit model.”
And Bloomberg is good to note the campaign contributions of the prominent politicians quoted in the story and the revolving door that still spins despite the Obama administration's anti-lobbyist rhetoric:
JPMorgan also added two lobbyists to its Washington staff, which includes former Commerce Secretary William Daley. Jill Blickstein, who was previously chief of staff at the Office of Management and Budget in the Obama administration, was one of the new hires.
But some things really have changed:
The Treasury’s Barr has even appointed a former consumer advocate at the Center for Responsible Lending, Eric Stein, as his deputy in charge of consumer protection.
Lots of journalists will gloss over something that dents their thesis. Bloomberg doesn't do that here, noting at length that the banks have still been able to get their way in some consumer areas, particularly in so-called cramdown legislation that many on the left thought was the only real way to speed the end of the housing crisis.
And it ends on what's an appropriately skeptical note:
While banks’ lobbying efforts may have been weakened, their deep pockets still give them willing listeners on Capitol Hill and in the White House, says Joseph Stiglitz, winner of the 2001 Nobel Memorial Prize in Economics.
“It comes down to the influence of money on our political process,” the Columbia University economics professor says.
Even if Barr levels the playing field and the new agency is created, banks bearing cash still may win the game.
Good work.
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November 04, 2009 06:50 PM
Wednesday Links: Ad Comps, Recovery Engine, Coming Crash
The Wall Street Journal's Nat Worden makes the obvious point—one missed by some, including, apparently, lots of investors—that any potential newspaper recovery depends on print advertising not continuing to decline at 25 percent-plus clips. "Newspaper publishers are running out of costs to cut, and they need to show some real ad-revenue gains soon."
— David Leonhardt makes a good point that the night is always darkest before the dawn as far as the economy goes. But watch him struggle, self-consciously, to figure out how we dig out of this mess and tell me if you'd bet on black.
— And if you're still inclined to make that bet, read Nouriel Roubini's "mother of all carry trades" column in the Financial Times. Basically, the Fed's money printing is pushing down the dollar, allowing people to borrow "at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade." Inevitably, this will crash, he says, in the "biggest co-ordinated asset bust ever." For more on this, read Felix Salmon on "the roots of the coming crash."
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November 04, 2009 02:10 PM
McClatchy: Goldman Laid Down with Dogs
Dean Starkman has been applauding McClatchy's series on Goldman Sachs (an Audit funder) for a couple of days now. Add another Audit appreciation today.
McClatchy has been doing what Dean has been calling for for a long time now: Looking much more closely at how Wall Street fueled the mortgage crisis and how it was deeply connected to the shadier parts of the housing industry. Or as McClatchy's Greg Gordon puts it:
... one of Wall Street's proudest and most prestigious firms helped create a market for junk mortgages, contributing to the economic morass that's cost millions of Americans their jobs and their homes.
Today, McClatchy examines Goldman's relationship with New Century Financial, a firm that was something of the canary in the coalmine of this financial crisis—it was the second-biggest subprime mortgage lender when it went belly-up in April 2007, which was very, very early. In other words, it was one of the worst actors in the whole mess:
Perhaps no mortgage lender was more emblematic of the go-go atmosphere in the sprouting industry that was seizing an outsize share of the home loan market.
Traversing the country in private jets and zipping around Southern California in Mercedes Benzes, Porsches and even a Lamborghini, New Century executives reveled as the firm's annual residential mortgage sales rocketed from $357 million in 1996 to nearly $60 billion a decade later...
What does that have to do with Goldman Sachs and Wall Street?
For $100 million in mortgages, New Century could command fees from Wall Street of $4 million to $11 million, ex-employees told McClatchy. The goal was to close loans fast, bundle them into pools and sell them to generate money for the next round.
Inside the mortgage company, the former employees said, pressure was intense to increase the firm's share of an exploding market for mortgages that depended almost entirely on Wall Street's seemingly unlimited hunger for bigger, faster returns.
Aha! But wait—why did Wall Street want to buy this trash?
Goldman and other investment banks could put $20 million in the till by taking a 1 percent fee for assembling, securitizing and selling a $2 billion pool of mostly triple-A rated bonds backed by subprime loans — and that was just stage one.
That takes you to "The Giant Pool of Money." And that was far from the only juice being squeezed from these lemons. Goldman et al got servicing fees and the like, plus they "extended lines of credit to New Century — known as "warehouse loans" — totaling billions of dollars to finance the issuance of more home loans to other marginal borrowers. Goldman Sachs' mortgage subsidiary gave the firm a $450 million credit line."
In other words, Wall Street lent the money to the predatory firms to create the shady loans so it could buy them from them, slice them into securities and sell them to the greater fools. This was so profitable there weren't enough decent loans to be made. So to feed the beast, mortgage lenders came up with disastrous inventions like NINJA loans (No Income, No Jobs, No Assets) and Wall Street, ahem, looked the other way.
It was a vicious circle of profit (virtuous—if you were one of those who lined their pockets through it) and was interrupted only when the underlying loans got so bad that borrowers like the ones with no income, no jobs, and no assets in many instances couldn't even make a single payment on the loan. Panic!
McClatchy does well to report on the New Century culture, helpful in illustrating the lie-down-with-dogs-get-up-with-fleas thing, writing about the sexualization of some of the work, something reminds us of BusinessWeek's fascinating story on the subprime industry's descent into decadence (the sub headline on that one should be all that's needed to entice you to read that one: "The sexual favors, whistleblower intimidation, and routine fraud behind the fiasco that has triggered the global financial crisis.")
But it wasn't just sex. New Century was giving kickbacks to mortgage brokers to get their loans, McClatchy quotes a former top underwriter there as saying.
Let's not forget, and McClatchy doesn't, thankfully, that borrowers were the marks here and took it on the chin:
The loans laid out financial terms that protected investors but punished homebuyers. They offered above-market interest rates, typically starting at 8 percent, with provisions that Lee said were "rigged" to guarantee the maximum 3 percent rise in interest rates after two years and almost assuredly another 3 percent increase through ensuing, twice-yearly adjustments.
This is top-notch work by McClatchy. It deserves a wide airing.
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November 04, 2009 12:19 PM
Bloomberg: Moneychangers in the Temples
Bloomberg notices that three prominent bankers in recent weeks have taken to UK churches to make the case that they're not evil. Really, they did that.
The moneychangers/temple headlines write themselves (see above), but Bloomberg being Bloomberg, it goes with its house brand of quirkiness, which in this case works well:
Profit `Not Satanic,’ Barclays Says, After Goldman Invokes Jesus
As if to prove why these kinds of stories aren't a waste of time, Bloomberg reports this eye-popper from Goldman Sachs International (Goldman is an Audit funder) adviser Brian Griffiths:
“The injunction of Jesus to love others as ourselves is an endorsement of self-interest,” Goldman’s Griffiths said Oct. 20, his voice echoing around the gold-mosaic walls of St. Paul’s Cathedral, whose 365-feet-high dome towers over the City, London’s financial district. “We have to tolerate the inequality as a way to achieving greater prosperity and opportunity for all.”
This may be one of the most unintentionally revealing statements to come out of the financial industry in the whole crisis. Only some Wall Street (okay, City) dude , one whom Gawker's John Cook has noted is "quite the Christian apologist for wealthy people" could invoke the whole love-thy-neighbor thing as an "endorsement of self-interest." Did Griffiths think he was talking to an Ayn Rand convention?
Cook had some more fun with Griffiths:
But there are many ways to give, and Lord Griffiths of Fforestfach makes a good point when he says that inequality is necessary for prosperity—take for instance, the recent Formula One after-party at the Amber Lounge—"the ultimate VIP experience that follows the Grand Prix series around the world"—in Singapore that a tipster tells us was chock full of Goldman Sachs traders who'd purchased private VIP tables. According to Formula One's web site, tables for eight at the September event went for as high as $22,000, complete with a Jeroboam of Dom Perignon. If those Goldman traders hadn't been paid those bonuses, who would have showered all the women there with cash and champagne? That's how opportunity and prosperity get spread around.
On a somewhat more workmanlike level, Bloomberg, going with "three's a story," notes that Griffiths isn't the only Christian banker to take to the pulpit recently. So did Barclays' CEO John Varley and Lazard International's Ken Costa.
Varley's the one who offered up the red herring (was it a Friday?) on satanic profits. It's quite the PR campaign Bloomberg has picked up on here. Here's why it's underway:
City bonuses may rise by 50 percent to 6 billion pounds this year, according to the Centre for Economics & Business Research Ltd., even after the U.K. economy contracted for six consecutive quarters, driving unemployment to a 14-year high of 7.9 percent. The gap between rich and poor in the U.K. reached its widest in five decades last year, according to the Institute for Fiscal Studies, a non-partisan research group.
God and Mammon. Rich man and camel. Money and root of evil. Etc. etc. Quite the minefield these guys have stepped in. Good for Bloomberg for picking up on it.
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November 04, 2009 07:17 AM
The WSJ’s 3% Solution
A Journal story this morning reports that a White House claim that the stimulus bill saved or created 640,000 jobs is overstated.
The number of jobs the Obama administration credits to federal stimulus money could be overstated by at least 20,000 of the 640,000 claimed, a Wall Street Journal analysis found.
The story appears on A6, so there’s no need to make too much of it, but this is only to note that its findings amount to three percent of the administration’s total claim, more or less a rounding error.
The White House responds predictably:
Ed DeSeve, the senior adviser to President Barack Obama on implementation of the stimulus plan, said Tuesday in a statement responding to questions from the Journal that the administration knew the reports were not "100 percent accurate" but that the plan was supposed "to create jobs, not count them." He said that even the "approximate" total pointed to "tremendous progress."
"We are looking at both overcount reports and undercount reports, and continue to ask questions of recipients to try to fix errors," Mr. DeSeve said. "In the end, we think any adjustments to the direct jobs count will be modest as a percentage of the 640,000 jobs total, either raising it or lowering it slightly."
Sounds about right.To be fair to the story, its anecdotes are better than the quantitative findings highlighted in the lead paragraph:
A Kentucky shoe-store owner claimed to have created or saved nine jobs with an $889.60 contract to supply work boots to the Army Corps of Engineers. The owner said he supplied nine pairs of boots and that the mistake arose from confusion over the government form.
Not boots—jobs! Doh.
And this one:
"Holy moly, that's not right," Teresa Cox, executive director of the Mid-Willamette Valley Community Action Agency in Salem, Ore., said of her organization's report. It indicated that 205 jobs were created or saved with the agency's $397,761 federal grant. The money, she said, was used for pay raises.
Ms. Cox said her agency thought it was supposed to report the number of employees affected by the stimulus money. "And the only way to do that was to create new jobs or retain jobs."
An HHS spokesman, Luis Rosero, said the department had told recipients to report only fractions of a job if the money was being used for bonuses or raises.Whatever that means.
I’ll leave it to others to argue about the effectiveness of the stimulus, though there doesn’t seem to be much dispute outside of tea-bagging circles that it kept the economy from running off a cliff. (For ideological contrast, check out the NYT’s piece today on a how government spending saved Oshkosh Corp.).
What’s notable about this story isn’t the Fox News-y angle, although, sure, you can’t help think about it, and the story does bring to mind the Congressional expenses non-story that got page one play over the summer and then sank without a trace.
The fact is, though, newspapers are supposed to check government claims on things like this.
No, what strikes me about this story is its hurried, hit-and-run feel. The story says it is based on a “Wall Street Journal analysis,” but the “analysis” is later described merely as a “preliminary review.”
Most recipients of stimulus money are required to file quarterly reports on how they used it. The government published more than 150,000 such reports late last week. A preliminary review revealed dozens of recipients claiming to have created or saved at least one job with less than $2,000 in stimulus money, to a total of at least 3,300 jobs.
So, we’re looking at a preliminary review of 150,000 quarterly reports—150,000—published ”late last week." Today is Wednesday. How many reports can you review in that amount of time? It should be no surprise that the paper came back with 700-word story that contains some tantalizing anecdotes but nothing more—heat, no light. If the miscounts throughout the data are anything like the egregious errors contained here, then the Obama administration claim is off by way more than 20,000. But we don’t know that.
An investigation, if you’re going to bother with it, take times, patience, and editorial discipline. Whatever this was meant to be, it isn't that.
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November 03, 2009 11:15 AM
Times Maintains Consumer Credit Drumbeat
The Times has done a really nice job exploring dubious practices in the credit-card industry, not to mention efforts to reform it. These are all subjects close to my heart.
Today it has a new installment in its “Card Game” series with Frontline, this one on the sneaky ways consumer-credit giant Experian and others snooker consumers who are entitled to a free credit report from the government into clicking on freecreditreport.com (don't click!), a lure to get them to buy an unnecessary credit-tracking service.
Yet for the vast majority of consumers whose credit status doesn’t change quickly or drastically, a monitoring service is a waste of money, these critics say. Keeping a close eye on your bills and checking your credit report several times a year is enough. And that can be done without spending a penny because the government requires the three major credit bureaus — Experian, which owns freecreditreport.com, Equifax and TransUnion — to provide one free report annually to consumers.
I didn’t realize the Federal Trade Commission has already locked horns with Experian, to little avail:
So far, the F.T.C. has focused mostly on the free credit report come-on. In the last five years, Experian has paid $1.25 million to settle F.T.C. charges that it misled consumers who may have been seeking their free credit report at AnnualCreditReport.com, but ended up paying for a subscription on the similarly named freecreditreport.com.
The Times focuses nicely on the more insidious dynamics that drive the market for credit-tracking: consumer confusion and anxiety, caused, of course, by arbitrary and opaque practices of companies like Experian.
In many ways, this is the perfect moment for companies like Experian to convince consumers that they need to track their credit closely. Many people who fell behind on bills in the economic maelstrom worry about how their credit report will look to lenders now. A number of employers reject candidates with poor credit, too.
Even millions of the most careful consumers worry that they may not have escaped recent damage to their credit files: card issuers, in an attempt to limit risk, have cut credit limits, canceled dormant accounts and made other moves that can harm credit scores.
I like the way this gets at the informational asymmetries in this murky market, which renders harried amateurs perennially several steps behind the pros who do this all day for a living:Philip Neustrom, a 25-year-old software engineer in San Francisco, canceled the Experian service after paying six months of $14.95 monthly fees and never using the monitoring. “I knew they had roped me into this thing after I started getting these e-mails,” he said. It took him a while to get around to canceling, he added, because he was busy and “there are only so many things you can do in a day.”
Amen.
The graphic is handy, too.
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November 03, 2009 09:09 AM
Foxy Headines in the New Journal
The Murdoch Street Journal has been a slow-motion overhaul, and it takes a minute sometimes to realize that things you skim over today would never have appeared a couple of years ago.
“State Death Taxes Are the Latest Worry”
“Death tax” isn’t a neutral word so it shouldn’t be used in the news columns, particularly when others are available. This isn’t even a close call, and yet this Journal story from a couple days ago uses it seven times, not counting quotes.
With the federal estate tax disappearing for most people, state death taxes have emerged as a surprise new worry. This year, the federal exemption rose to $3.5 million per individual, or as much as $7 million per married couple. At the current level, only 5,500 estates a year are federally taxable.
That is down from the 17,500 estates that would have faced death taxes under the previous $2 million limit, the Urban-Brookings Tax Policy Center estimates.
...Keeping track of the constantly changing landscape in state death taxes can be tricky. Delaware just added an estate tax this year, while the estate taxes in Kansas and Illinois are scheduled to disappear at the end of 2009.
Etc.
These things are called an estate tax, or in some cases, an inheritance tax, and they resemble other taxes on property transfers, like the gift tax. You wouldn’t call that a “life tax." Why go with a tendentious, crude, ideologically loaded word when another is available, and for headline purposes, not even much longer?
Similarly:
”Politicians Butt In at Bailed-Out GM”
The story is actually subtler than the red-meat headline indicates. In one case, GM changed its mind on a dealership closing after politicians pleaded on its behalf. In other cases, the company dissolves a contract in bankruptcy court despite the imprecations of both Montana senators, including Max Baucus, head of the Finance Committee.
A good story: so why use a jackhammer when a chisel will do?
No one accused the old Journal's news department of being a bastion of liberalism. Well, Michael Wolff gave it a try, but he can't be serious. The difference was that it chose words carefully. It didn't hit readers over the head. It used understatement and wit. That's one reason it was so credible, not to mention a pleasure to read.
This is less about ideological creep in the news columns; that’s a whole ‘nother post. It’s more a style question. More is needed.
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November 03, 2009 08:26 AM
As Goldman Turns
For my money, McClatchy’s Goldman series remains the best show these days on business-press Broadway. It’s sort of the “Masterpiece Theater” to Matt Taibbi’s “Monty Python’s Flying Circus.”
In previous episodes, Goldman is seen selling defective securities while shorting them at the same time and chasing harried jewelry entrepreneurs and bartenders out of house and home, or trying to. Today’s installment has the Broad Street Bullies dumping the bad stuff on foreign pension funds through a unit based in the lightly regulated Cayman Islands.
The silence from all of Taibbi’s critics in the conventional business press on this is interesting. They went to great lengths to point out that Taibbi’s was the wrong Goldman story. McClatchy’s may be the right one, the wrong one, the old one, the told one—unclear. It certainly is the long one, four parts, videos, sidebars, the whole package treatment. There must be something in there.
In fact, a lot of the criticism leveled at Taibbi would apply here. What McClatchy has so far laid almost entirely at Goldman’s feet was, with the exception of the adroit shorting of the housing market while hogs like Merrill Lynch and Bear Stearns were doubling down, Wall Street standard operating procedure. That’s the real problem. It was an entire industry, a whole sector of the economy, implicated, and McClatchy should make that much clearer. While Goldman may now be chasing overleveraged bartenders in San Diego, it is no different in that regard from JP Morgan Chase, new owner of Wamu and Bear Stearns, Bank of America and its Countrywide and Merrill Lynch units, the Lehman bankruptcy trustee, etc. An award-winning art exhibit included model of a block in Newark, N.J., with a lender’s flag flying atop ten of the block's 18 houses in foreclosure: Deutsche Bank, Deutsche Bank, Chase, Chase, Wamu, New Century, Countrywide, Lehman, etc.
Why pick on Goldman? I guess that’s the downside of survival. And as Taibbi would say, why not?
Today’s installment is not the strongest and will indeed feel familiar to cognoscenti. A sample:
In all, Goldman sold more than $57 billion in risky mortgage-backed securities during a 14-month period in 2006 and 2007, including nearly $39 billion issued from mortgages it purchased. Meanwhile, the firm peddled billions of dollars in complex deals, many of them tied to subprime mortgages, in the Caymans and other offshore locations.
Many of those securities later soured, but the sales allowed Goldman to become the only major U.S. investment bank to escape the brunt of the subprime meltdown.
Bloomberg's Mark PIttman covered some of this ground last year under a classically weird Bloomberg headline: "Evil Wall Street Exports Boomed With `Fools' Born to Buy Debt"
But the dates, 2006 and 2007, that McClatchy includes are significant since that’s when mortgage-underwriting deterioration became extreme.
McClatchy’s gotchas here are not blockbusters, though they do indicate Goldman chiseling around the edges:
McClatchy also found at least two instances in which Goldman appeared to mislead investors. In one, the firm said that $65.3 million in securities were backed by safe "prime" mortgages when the same loans had been labeled a cut below prime in a U.S. offering. In the other, Goldman listed $10 million as "midprime" loans when the underlying mortgages had been made to subprime borrowers with shaky finances.
[Goldman spokesman Michael] DuVally said that the descriptions were consistent with the standards set by Moody's, the bond-rating agency.
And the news service quotes a bond analyst’s report that, in a way, strengthens Goldman’s contention that sophisticated institutions should be able to look out for themselves:
The offering drew a scornful reaction from the bond analyst who warned investment clients to stay away. The analyst's report, a copy of which was obtained by McClatchy, described Goldman as "a single underwriter solely interested in pushing its dirty inventory onto unsuspecting and obviously gullible investors."
If the analyst knew, why didn’t the people who bought the bonds? But the story does have stats the remind us why those kinds of questions don't end the argument and why this series is needed:
Last spring, the International Monetary Fund projected that global write-downs on "U.S.-originated assets" stemming from the subprime disaster could reach $2.7 trillion.
Not to mention the quote of the day:
Sylvain Raynes, a former analyst for Moody's Investors Service, the largest U.S. rating firm, likened the Wall Street firms' relationships with the rating agencies to hiring "a high-class escort service."
And this strikes me as just flatly important:
McClatchy also learned of a second private Goldman deal, in which it sought in May 2007 via another Cayman company to sell $44.6 million in bonds related to subprime loans written by New Century Financial, a mortgage lender that weeks earlier had careened into bankruptcy after California regulators closed it.
Selling New Century-backed mortgages that late in the game, as cognoscenti should well know, is a serious problem, and a good get from McClatchy.
Audit Feature
Nieman, Galbraith on the Power Problem
Nieman Watchdog asks "Where's the reporting on the fraud that led to the crash?" Funny, The Audit, and especially Audit Lead Prosecutor Dean Starkman, has been wondering that for a long while now. John Hanrahan writes that economist James Galbraith of—I can barely bring myself to write this on such a week—the University of Texas is calling the press on the carpet for not reporting out the crimes associated with the greatest financial crisis in eighty years.
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