Daily Digest

Daily Digest - November 22

Sunday, November 22, 2009, 11:00 AM
  • Wall Street Raking It In Again At FHA And Taxpayers' Risk
  • The Oil Casino: SEC Heading For Monte Carlo
  • Senate Sets Hearing On Bernanke's Renomination
  • The Keynesian Kool-Aid Drinkers
  • Full Plate: Upcoming Week Stuffed With Economic Data
  • The Emotional Toll Of Job Loss
  • The Debt Bias: How The Tax Code Encourages Debt
  • Citigroup Holding Its Customers Hostage
  • Riding The Waves
  • The Key Question No One Asked Geithner
  • A Goldman Shareholders Revolt?
  • The Truth Behind China's Currency Peg
  • Detroit: A City In Ruins
  • "Free" Energy from Heat Reclaimation? 
  • How Iceland's Meltdown Helped Creativity Flourish
  • Drought Poses Obstacle For Chinese Dam


Wall Street Raking It In Again At FHA And Taxpayers' Risk (M.W.)

Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. As part of these deals, the mortgages are being refinanced through lenders that work with the FHA. This enables the funds to pocket sizable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors.The arrangement shifts nearly all the risk for the loans to the federal government — and, ultimately, taxpayers.

The Oil Casino: SEC Heading For Monte Carlo (M.W.)

My purpose is to alert you to the revision of SEC Regulation S-K and Regulation S-X effective January 1, 2010. Concealed in a handful of benign new regs is a financial truck bomb that's going to blow away "proved reserves" as a meaningful metric of oil company assets.

Senate Sets Hearing On Bernanke's Renomination (M.W.)

The Senate Banking Committee said on Friday it will hold a hearing on Federal Reserve Chairman Ben Bernanke's renomination to a second term on December 3, putting the central bank chief under scrutiny at a time when the Fed is facing intense criticism in Congress.

The Keynesian Kool-Aid Drinkers (M.W.)

As if they didn't cause enough damage by espousing theories that failed to account for the inefficiencies and irrationalities of the real world, many economists are advocating aggressive spend-and-borrow policies to revive the financial crisis-hit U.S. economy that reflect an astonishing degree of naïveté and ivory tower hubris.

Full Plate: Upcoming Week Stuffed With Economic Data (M.W.)

By midday Wednesday, 15 different reports will have been issued in just three days, including an important updated look at how the economy did during the turn-around third quarter. Just about every aspect of the economy will be covered in 3 days with data on new and existing home sales, home values, consumer confidence, personal income and weekly jobless claims. Here are the key numbers to watch.

The Emotional Toll Of Job Loss (M.W.)

Three in 10 Americans in the latest ABC News/Washington Post poll say they or someone in their household has lost a job in the past year -- a new high. And the impacts can be devastating.

The Debt Bias: How The Tax Code Encourages Debt (M.W.)

Individuals are able to write off all their mortgage interest, up to a million dollars, and companies can write off all the interest on their debt, but not things like dividend payments. This gives the system what economists call a “debt bias.”

Citigroup Holding It's Customers Hostage (M.W.)

Across the nation, Citibank credit card holders are receiving what pretty much amounts to a ransom note: We're going to raise your rates, says the letter, in so many words, but if you spend more money, we won't.

Riding The Waves (M.W.)

Believers in financial-market cycles can seem a little nutty. That doesn't mean they're wrong.

The Key Question No One Asked Geithner (M.W.)

A key and fundamental question was not broached during the fierce interrogation of Treasury Secretary Geithner during Thursday's hearings before Congress's Joint Economic Committee.

A Goldman Shareholders Revolt? (M.W.)

Huge bonuses inspire grumbling. Oftentimes, when we hear that a public company's first responsibility is to its shareholders, this is used as an excuse to shaft workers.

The Truth Behind China's Currency Peg (M.W.)

The focal problem is the Chinese government's policy of fixing the value of the renminbi against the U.S. dollar. While many correctly perceive that this 'peg' has contributed greatly to the current global imbalances, few fully comprehend the ramifications should that peg be discarded.

How Iceland's Meltdown Helped Creativity Flourish (M.W.)

A string of success stories has transformed a design scene once considered frivolous — back when banking was choice — into one of the few sectors driving Iceland out of its economic quagmire.

Detroit: A City In Ruins (M.W.)

It’s eerily quiet. Driving around in a city that once was among the most productive on the planet, you see endless acres of urban ruin, mile after mile of empty and rotting office buildings, storefronts, hotels, apartment buildings and private homes. It’s a scene of devastation and disintegration that stuns the mind, a city that still is home to 900,0000 people but which looks at times like a cross between postwar Berlin and the ruin of an ancient civilization.


"Free" Energy from Heat Reclaimation? (kelvinator)

Recovered energy generation produces electricity from heat that would otherwise be thrown away. This “geothermal” energy technology would lower carbon emissions on oil fields and from cement makers, two of the three major carbon emitters to be covered by CEJAPA energy legislation. The potential is for 5,000 MW of electricity to be harvested, and CO2 reduced; just from oil drilling operations in this country.


Drought Poses Obstacle For Chinese Dam (M.W.)

In addition to rainfalls that are half normal levels, a growing population, industrialization, pollution and food production have compounded the shortage of water resources. China's breadbasket central provinces this year have seen some grain harvests cut in half, fishing hauls shrink and riverboat shipping lanes dry up.


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Re: Daily Digest - November 22

"Friday, Nov. 20, 2009 | A private task force of prominent local business leaders formed by San Diego Mayor Jerry Sanders is recommending the city file for bankruptcy unless it undergoes a series of urgent and drastic fiscal reforms, according to a draft of the group's report."

......1A) S.D. Faces Record Deficit, Council Slow To Respond

"AUGUST: Just one thing. If they bankrupt, could they get rid of the pension fund? That’s all I want to know. Who can tell me that?

DONOHUE: They’re – they…

YOUNG: Well, there’s a case up in Vallejo, California where that is – they’re – that is the issue at hand and it hasn’t been decided yet. Everybody’s watching to see what happens.

DONOHUE: But the judge – You know, Judge Ryan, who handled the Orange County bankruptcy, very clearly stated that any contract, regardless of what’s state law, when you enter into federal bankruptcy, any contract is on the table, so he was very clearly stating that pension benefits and pension contracts and all that sort of stuff would be on the table.

PENNER: Well, you’ve really made a lot of city workers nervous, especially those who are either in retirement or approaching retirement."

"Municipal bonds are typically issued to allow local governments to borrow money for large capital improvements to bridges, roads, power plants or sewer systems. In Detroit's case, the money would be used to chip away at the city's debt, which is forecast to grow to $480 million by the end of the next fiscal year and to $750 million in fiscal year 2011-12.

Selling deficit bonds is generally frowned upon by Wall Street ratings agencies, which will quickly drop credit ratings and make borrowing costs more expensive -- but because Detroit already has junk bond status, there's less impact, said Joe Harris, the city's former auditor general."

"Collectively, those office towers, hotels, shopping centers and apartment buildings have an assessed value of $21.25 billion - but their owners say they're worth about half that amount. If those claims stand, that could wipe $115.78 million off the property taxes the city collects. Residential appeals could erase another $13.47 million in property tax revenue."

(News from November 19 shows how bad the budget deficit already is in SF)

"Bankruptcy, furlough days, and large class sizes could be the future of Auburn Union schools.

Starting in 2010, Auburn Union teachers will likely get a five-day vacation they don’t really want.

And for the next three years, officials said they are going to have to take even more drastic cuts to keep the school district from declaring bankruptcy."

"A member of the fire department told Volunteer TV News on Tuesday that the city is near bankruptcy and cutes have already been made to both the fire and police departments. On Tuesday night, the city council voted to make operational budget cuts and reduce some employees work weeks by an hour and a half."

"The city's woes are far more urgent. Tax revenues for the current fiscal year were expected to drop 2.5 percent, but instead they've fallen off 18 percent. Last week, City Manager Betsy Fretwell announced 19 layoffs and the elimination of 54 vacant positions. Las Vegas is quickly burning reserves to preserve the rest of its payroll, and is bracing for the possibility of a $40 million budget hole next fiscal year."

"Elected and appointed officials will shrug their shoulders and claim their hands are tied by their contracts with bargaining units -- they can't eliminate pay raises, cut salaries or reduce benefits unless the unions agree.

But now they can -- if they file for bankruptcy.

The city of Vallejo, Calif., did just that in 2008 under the very circumstances Las Vegas and Clark County currently face."

"The state's leading business organization has set its sights on the next legislative session ,with the solvency of the state's unemployment trust fund at the top of its list.

The Vermont Chamber of Commerce is calling for a balanced solution to the unemployment trust fund, which is anticipated to run out of money by the end of the year."

"ALBANY -- Lawmakers enjoyed the day off Friday as Governor David Paterson warned of a pending disaster looming over the state: New York will run out of money in December when a huge chunk of the $3.2 billion deficit is due."

"Hundreds of courses have closed, and once-exclusive country clubs have slashed fees or let in the public. Often linked to housing tracts, the greens and fairways have slumped along with real estate."

"From his backyard, Joseph Leggett used to look out over the green, manicured fairways of the Palm Desert Country Club golf course.

Lately, what he saw looked more like weedy vacant lots."

"Insurers blame costs, aging population"

""We're doing everything we can to help control costs," said Michael Giaquinto, senior vice president of general business at HealthNow New York, parent of BlueCross BlueShield of Western New York.

Buffalo-based HealthNow is forecasting an average rate increase of 10.2 percent across its entire commercial book of business for 2010, before plan changes by employer groups.

Univera, which is owned by Excellus BlueCross BlueShield of Rochester, is projecting an average increase of 6.9 percent, but that's after groups change plan features to lower their costs.

Independent Health Association, which released rates several weeks ago, said then that its premiums would rise 10.5 percent, before plan changes.

Those increases are averages across the board, with hikes for particular groups exceeding 20 percent in a some cases. And the averages apply only to commercial plans, not Medicare or federal government employees, which are separate.

For Medicare, HealthNow's plans are rising 8.5 percent in monthly premium, Independent Health's are up an average of 34 percent, or $17.30. One popular Independent Health plan, Encompass 65 Extra, soared 58 percent or $32, to $87 a month."

"But tax revenue hasn't come in as expected, so state bureaucrats have been cutting the state's allocation to schools every month. The budget's still the budget, it just doesn't mean anything, an empty promise made by the leadership of the state.

Last week we learned that the superintendent at one local school district has cut out his entire budget for janitorial services and is cleaning the district's toilets himself.

In Tulsa — which expects to get shorted as much as $10 million this year — substitute teachers have been told not to bother showing up for work. Most administrators and support workers are getting unpaid furloughs and other more drastic steps may be necessary."

"Reading through the Qs for this quarter, a picture starts to emerge of utter chaos when it comes to how banks are implementing -- or not -- the changes by the FASB as to how organizations account for off balance sheet ("OBS") exposures. Let us take two examples: Wells Fargo and PNC Financial.

In the case of WFC, the bank has taken the position that NONE of its conforming residential exposures should be brought on balance sheet despite the FASB rule change. As we discussed in The Institutional Risk Analyst this week, "Why? Because the loans inside these securitization vehicles are insured by FHA, so goes the thinking of WFC and its auditor, thus the bank has no liability to these entities or the securities they have issued to investors. Pretty neat trick, eh?"

Thus WFC is basically saying that none of the bank's $1.1 trillion in conforming OBS exposures need to be represented or reserved against. My problem with this is two-fold: First, the FHA and/or GSEs will return some portion of the securitized loans, so WFC should explicitly disclose this cost and reserve against it. Second, it seems to be pretty arrogant for WFC to take such an aggressive positions with respect to these OBS vehicles, even with a third party guarantee, especially given the intent of the FASB rule change. BTW, WFC has another $0.6 trillion in non-conforming exposures we have yet to hear about. That is next quarter presumably."

"In 2011, employer contributions will have to be raised by 11 percent for state workers, 21 percent for municipal employees, 30 percent for teachers and 31 percent for firefighters. The latter three costs will be borne by property owners and renters.

The pension system, thanks to an 18 percent drop in investment earnings, is now just 58 percent funded. Its $5 billion in assets aren't enough to pay the benefits due all current retirees, let alone future ones. Worse yet, the problem will continue unless more changes are made."

"Pennsylvania taxpayers are about to get the bill for a 2001 deal hatched by former Gov. Tom Ridge and the General Assembly that granted state workers — including legislators — and public school employees a handsome pension increase.

Two employee retirement systems that oversee state pension funds estimate that the total necessary to cover unfunded pension liabilities could be as high as $5.9 billion in 2012. That would require $536 from every single state resident, including children.

It would be a 600 percent increase from what the state and local school districts are paying now: about $842 million, according to the retirement systems."

"The demographic shift also will squeeze the Florida Retirement System, the $110 billion fund that pays for the retirements of government workers, teachers, police officers and firefighters. Benefits promised to retirees will outpace contributions to the system in coming years, creating an unfunded liability, a preliminary assessment released this month showed.

The state retirement system already has taken a hit during the recession, with the plan about 88 percent funded. That's the first time there's been a shortfall since 1997.

The pension problem exists nationally, from private sector giants like General Motors to the federal government. When Social Security began in 1936, there were 20 workers for every retiree. That nationwide number is now at four workers per retiree and is expected to drop to three as Baby Boomers retire.

"You look at what happens to the Big Three automobile companies, that was one of the things that literally made them financially untenable," said state House speaker-designate Dean Cannon, R-Winter Park. "It could happen in city, county and state governments as well.""

"In fact, although there is a $23 million pool of money in the retiree health-care fund, that account still carries more than a $60 million unfunded liability. And that liability will continue to grow because, for the past two years, the county board has not put anything toward the unfunded portion.

"We are only collecting enough to pay current year bills," said Michael Bosanac of the county finance department. "There is nothing left over to transfer to the trust fund.""

"West Virginia Governor Joe Manchin expects to sign bills giving the state's large cities pension-funding relief and approving the sale of $225 million in stimulus bonds, a spokesman said on Friday."

"One West Virginia city, Huntington, has warned that $125 million in unfunded pension-plan liabilities might force it into insolvency."

"The city sets aside $2.1 million each year to cover retiree health insurance. But the annual insurance liability is estimated at $6 million under current accounting standards."

"As recently as 2007, StanCERA leaders were boasting that their retirement fund was almost fully funded -- in line to meet 96.6 percent of its long-term obligations. By late 2008, it had dropped to 85 percent, and a new forecast shows it will drop to 60 percent funding by 2013."

"Board members of Oregon's Public Employees Retirement System said Friday they are disinclined to change the system's rules to alleviate the impact of skyrocketing employer contribution costs in 2011.

Oregon's $50 billion public employee pension fund lost $17 billion last year. Though financial markets have recovered some this year, PERS still has only 75 cents in assets for every dollar in liabilities, and needs to reset the rates it charges employers to start digging out of that actuarial hole.

Under current rate setting rules, Oregon's public employers face a $1.5 billion increase in their pension costs next biennium -- a 170 percent increase in overall system costs that could rip a hole in the budget of every state agency, municipality and school budget that participates in the system."

  • 21) unemployment insurance funds running out of money

A) Minnesota's unemployment insurance fund remains in a deficit

B) Mass. Unemployment Fund Running Out Of Money

C) Georgia unemployment fund is tapped out

D) High unemployment depletes fund (Florida)

E) Gov. Phil Bredesen says another tax hike to shore up Tennessee's unemployment trust fund appears unavoidable.

F) Montana

"How much wage reduction or how many furlough days would be required to stanch a 26 percent budget deficit? And what do you have left after you do so? To solve the deficit with pay cuts alone would require every employee taking a 41 percent cut. That’s not pain; that’s genocide."


.......Move over for San Francisco, San Diego, New York, Detroit, Las Vegas, California, Florida and all of the others as they race against the U.S. government and hurry towards their destination.

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Re: Daily Digest - November 22

Oil Casino:

This is very remarkable, to me, it is a very good peice of evidence that we don't have enough, else, why would they manipulate definitions so badly.

Fantastic Read. Thanks for the post M.W.


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SNL - Obama in China

If you haven't seen it, yesterday's SNL opener depicting Obama talking to the Chinese President about our debt to them has a few chuckles in it:


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Posts: 4260
Re: Daily Digest - November 22

 Rising unemployment taxes could hinder hiring (CNBC)

"Behind the trend are widespread layoffs. The number of people claiming jobless aid has tripled since the recession began. The demand has drained the funds that many states use to pay jobless claims. Nearly half the states are borrowing from the federal government.

"Now the bills are coming due. States reset their unemployment insurance taxes at the end of each year, and 33 states will raise them next year, according to the National Association of State Workforce Agencies. The states' tax revenue in the last fiscal year fell $42 billion short of what's needed for unemployment aid."

"Florida's minimum unemployment tax, for instance, will skyrocket next year to $100.30 per employee from $8.40. The maximum will rise to $459 per worker from $378. Like most states, Florida taxes companies more if they've recently laid off workers who draw benefits.

Hawaii will raise its average unemployment tax 10-fold next year, from about $90 per employee to more than $1,000. And Maryland's minimum tax will more than triple from $51 per employee to $187. Its maximum will jump from $765 to nearly $1,150."


 .............Times may change, but the brain power of politicians remains constant:


"The picture's pretty bleak, gentlemen. The world's climates are changing, the mammals are taking over, and we all have a brain about the size of a walnut".

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Re: Daily Digest - November 22
cipher wrote:

Oil Casino:

This is very remarkable, to me, it is a very good peice of evidence that we don't have enough, else, why would they manipulate definitions so badly.

Fantastic Read. Thanks for the post M.W.


And several other items were equally good - M.W. - however you are - you consistantly bring us intriguing pieces. It is very much appreciated!

UselessEater's picture
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Re: Daily Digest - November 22

I have an article I think everyone will enjoy Pay Us Back Goldman Sachs...

Tavakoli: Undo the Goldman "Bailout" Before Bonuses Are Paid


And about those Keynesian Kool Aid Drinkers

Keynes the Man as Rotten as His Economic Theory


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Re: Daily Digest - November 22

Wall Street Finds Profits by Reducing Mortgages


“I couldn’t believe it,” said Mr. Alva, a 62-year-old janitor and father of three. “I kept thinking to myself, ‘Something is wrong, something is wrong. This sounds too good.’ ”

But it was true. The balance on the Alvas’ mortgage was ultimately reduced to $314,000 from $440,000.

The firm behind the reduction remains a mystery. The Alvas’ new loan, backed by the F.H.A., was made by Primary Residential Mortgage, a lender based in Utah. But the letter came from a company called MCM Capital Partners.

“I’m giving money away,” said Mr. Florez, who is a 35-year-old Las Vegas native. “It’s really a feel-good business.”

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Re: Daily Digest - November 22
As US Debt Tops $12 Trillion, Obama Calls for Austerity

By Bill Van Auken

November 21, 2009 "

WSWS" -- 19 November 2009 -- At the end of his visit to China Wednesday, President Barack Obama warned that the US economy faces the threat of a “double-dip recession” unless the government carries out fiscal austerity measures designed to slash the mounting public debt.

Obama’s remarks came just a day after the Treasury Department announced that the US public debt had passed the $12 trillion mark, a record high. The debt has soared from $10 trillion in September 2008, at the outset of the world the financial meltdown. The unprecedented rise reflects above all the massive deficit spending that the government has used to bail out Wall Street and to assume responsibility for the bad debts of major banks and finance houses.

“Our first job was to get the economy to recover. And we’re seeing that,” Obama told Fox News in an interview conducted in Beijing.

He continued, “I think it is important, though, to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the US economy in a way that could actually lead to a double-dip recession.”

In reporting the remarks, the Financial Times noted pointedly that their timing, coming at the end of his three-day trip visit to China, raised the question of whether “his Chinese counterparts delivered stern warnings to Mr. Obama about the consequences of continuing high US budget deficit spending.”

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Re: Daily Digest - November 22

Get ready for your Chinese Overlords...




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