Tuesday, May 20, 2014 - Protected Species

Protected Species
by Sinclair Noe

DOW – 137 = 16,374
SPX -12 = 1872
NAS – 28 = 4096
10 YR YLD - .02 = 2.51%
OIL + .87 = 102.98
GOLD + 1.70 = 1295.30
SILV + .05 = 19.49

Today is Tuesday and that means that General Motors has announced another recall; this time 2.6 million more cars. Last week, GM recalled 3 million vehicles. So far this year, GM has announced 29 recalls affecting more than 15 million cars globally. The list of recalled vehicles is long. It’s easier to list the vehicles that haven’t been recalled; they have recalled 58 versions of Chevrolet and GMC pickups.

Last week the Dow hit a record high; since then it has been floundering. For the fourth straight session, the Nasdaq Composite has posted more 52-week lows than 52-week highs; 55 lows versus 38 highs. The Russell 2000 Index of small and mid-cap stocks hit a high on March 4^th and since then it has dropped almost 10%.

Meanwhile, interest rates have been moving steadily lower despite winding down of large scale asset purchases under the Fed’s quantitative easing, and the talk about raising interest rates at some point down the road. With yields on the 10-yr Treasury note dipping down around 2.5%, that means somebody is buying Treasuries, but if not the Fed, then who?

Well, it’s certainly not Russia. Putin sold off more than $100 billion in Treasuries in March; he was probably expecting Treasury prices to tumble, but that didn’t happen. The most likely buyer is Belgium; from November of last year through January 2014, Belgium bought approximately $142 billion in US Treasuries, which is quite a bit considering the Belgian GDP is about $480 billion; so their bond buys were equal to about 30% of GDP.

As a member of the Eurozone, Belgium can’t just print new money. So, something is rotten. Or maybe the Fed has opened up a branch office in Antwerp.

Anyway, Putin is in China today to talk up the virtues of Russian natural gas. Putin met with Chinese President Xi Jinping at a start of a two-day meeting on Asian security with leaders from Iran and Central Asia. Putin is hoping to extend his country's dealings with Asia and diversify markets for its gas, which now goes mostly to Europe. Russia has been negotiating for more than a decade on a proposed 30-year deal to supply gas to China. Officials said they hoped to complete work in time to sign a contract while Putin is in Shanghai, but they have not yet announced a signed agreement. Putin told Chinese reporters ahead of his visit that China-Russia cooperation had reached an all-time high.

Russia is worried about its European gas market, seeing lackluster European demand and political efforts, intensified since the Ukrainian crisis, to diversify away from Russian gas constraining future sales to the West. At the same time, the shale gas phenomenon, with possible US and Canadian liquid natural gas exports to come, has Moscow concerned about what prices it can hope to attain from the European market. Developing new, potentially lucrative markets in the east seems to be the answer to Russia’s European gas concerns.

China also feels a new impetus for a deal. Despite a slowing of the domestic economy, future demand for energy, the key to both growth and political stability, will be robust. Efforts to develop China’s domestic shale resources are promising, but are unlikely to produce consequential volumes until the next decade. Meanwhile, China has been meeting growing energy consumption with coal powered plants, and they are literally choking on that decision, as the air quality has been nearly destroyed.

Tomorrow we will get the minutes of the last Federal Reserve FOMC meeting. Today we had Fed heads giving speeches. William Dudley, the president of the New York Fed is saying the Fed will take its time raising interest rates.  Noting both market and Fed expectations that the first hike will come some time near the middle of 2015, Dudley said, “if the economy is stronger than expected, causing the excess slack in the labor market to be absorbed sooner and inflation to rise more quickly than forecasted, then lift-off is likely to be pulled forward in time. If, instead, economic growth disappoints, inflation stays unusually low and the labor market continues to exhibit evidence of considerable excess slack, then lift-off will likely be pushed back in time.”

As for the over $4 trillion worth of bonds on its balance sheet, Dudley expects them to be reduced via “automatic pilot”; in other words, as Treasury securities mature and mortgages are repaid. Dudley offered his two cents on why the housing sector’s contribution to the economy has “stalled out” over the past few quarters.  While he said some decline in activity was to be expected following the jump in mortgage rates last year, “the extent of the slowdown has surprised me given that the recent pace of housing starts, roughly 1 million per year, is far below what is consistent with the economy’s underlying demographics.”

Dudley said mortgage credit is still unavailable to borrowers with lower credit scores. Also, student debt has delayed the entry of new first-time home buyers; that could make it harder even for existing homeowners to sell their homes and trade up, slowing the traditional turnover of the housing market. Dudley said he expects the housing recovery to continue, “the pace will likely be slow, especially relative to past economic recoveries.”

The online real estate site, Zillow reports 18.8% of US homeowners with a mortgage, or 9.7 million households, were underwater on their mortgages at the end of the first quarter. That's an improvement from the end of last year when this figure was 19.4%, and it's a large improvement from a peak of 31.4% in 2012, but it shows that negative equity is still an issue in the housing market.

What's more, there is an additional 10 million households that have 20% or less equity in their homes. For those homeowners, it would be difficult to sell without coming up with some money to cover the broker fees, closing costs and the down payment for the next home.

European Union regulators have charged banks JPMorgan, HSBC and Credit Agricole with colluding to manipulate the price of financial products linked to interest rates.

The European Commission's regulator said the banks will now have a chance to respond to the preliminary findings. If the Commission ultimately concludes they have broken the law, it can impose a fine of up to 10% of their annual revenue. In December 2013, the Commission levied fines totaling $1.4 billion on Barclays, Deutsche Bank, RBS and Societe Generale as part of the same case, which covers financial derivatives linked to a benchmark interest rate called Euribor in the period 2005-2008. Barclays escaped fines for having notified the Commission of the existence of the cartel, and the others were granted a reduction in their fine for cooperating in a settlement.

Late yesterday, Credit Suisse entered a guilty plea for conspiring to help US customers evade taxes, the first such guilty plea by a major financial institution in years. Today Credit Suisse shares rose almost 1%. Apparently a felony conviction is a good thing. And why not? Top bank executives will get to keep their jobs, the bank can pin the whole thing on a handful of underlings, and it won't have to give up a list of client names to the government. Credit Suisse will have to let an independent monitor keep an eye on it, but that's a minor inconvenience at worst. The guilty plea could cost the bank some clients here and there, but investors and analysts are betting there won't be much impact. The most painful part of the deal, the $2.6 billion in fines, is manageable, less than one quarter's revenue.

For the most part, the mainstream media is dutifully accepting the spin of the Department of Justice, that this case is significant by virtue of being the first plea of this sort made by a bank in over two decades. The fact that those intervening years saw regulators generally take a very hands off approach to banks, and that we had a global financial crisis with no measures of this sort taken against the perps somehow escapes mention.

Let me return to one critical issue: why no individuals were prosecuted or even fined. This case, like so many we have discussed, seems ideally made for at least a civil action under Sarbanes Oxley against the CEO and CFO, since they must certify the adequacy of internal controls. The most charitable coloration you can put on what looks an awful lot like obstruction of justice (although Credit Suisse was not charged with that) was that it was a failure of internal controls. And Sarbanes Oxley is designed so that a civil action can easily tee up a criminal case on the same control deficiencies.

Credit Suisse was in many ways the perfect major financial institution from which to demand a guilty plea. Although its investment banking and wealth management operations are global, the commercial banking operation in the United States is largely confined to its New York branch. It does not own a subsidiary in this country providing bank services to local customers, so it really only had to negotiate with the New York authorities and the federal government to resolve the case. That meant the effort to mitigate potential collateral consequences of a guilty plea was confined to just a few agencies. So, if you think the Credit Suisse case will become the template to go after American banks, well, yeah, that’s not going to happen. The banking class remains a protected species. 

Wednesday, December 04, 2013 - The Defining Challenge

The Defining Challenge

by Sinclair Noe

DOW – 24 = 15,889
SPX - 2 = 1792
NAS +0.80 = 4038
10 YR YLD + .05 = 2.83%
OIL + 1.25 = 97.29
GOLD + 19.00 = 1244.30
SILV + .54 = 19.82

December can be a cold, cold month. At least that's how the equity markets are starting the month; four losing sessions. Part of this might be the big institutional investors, the big hedge funds and money managers, looking around and realizing the market is up 30% or so, and that would be a good year, so why no lock in a few profits. No need to worry about the budget battle in Washington; no need to worry about the Federal Reserve surprising people with a premature taper; no need to worry about a strong jobs report on Friday. In this crazy market where good economic news gets traders worried about the Fed taking away the punch bowl, today we had some reasonably decent economic news and another drop in the markets.

Let's start with the economic reports. ADP, the payroll processing firm, has a monthly report on private jobs; they issue the report just before the monthly official government report on jobs, the BLS non-farm payroll report. The ADP report is not great at predicting the government report, but its one of the better guidelines we have. Today, ADP reported companies added to their payrolls by a net 215,000 in November, and they revised the October number higher to 184,000.

Manufacturers, builders and other goods-producing industries increased headcount by 40,000, the most this year. Employment in construction climbed by 18,000. Factories also added 18,000 jobs, the biggest gain since February 2012. Trade, transportation and utility companies created 45,000 jobs last month. Companies employing 500 or more workers added 65,000 jobs. Medium-sized businesses, with 50 to 499 employees, took on 48,000 workers and small companies expanded payrolls by 102,000.

ADP typically underestimates the number of jobs added to the economy. The government jobs report is Friday morning; the average estimate is for 180,000 net new jobs in November.

In a separate report, contracts signed to buy newly built homes jumped 25% in October month to month. Now let's dig into the numbers, because the numbers are a bit unusual. In September, contracts to buy new homes dropped 6% from August. So there was a big drop in September and an even bigger bounce up in October. A couple of theories behind the numbers. First, is the idea of pent-up demand; the government shutdown caused potential buyers to wait, and also interest rates have been climbing, pushing potential buyers to jump now rather than wait for higher rates later. The other theory is that there's a large margin of error in this report and we'll see the number revised next month.

Meanwhile, the Institute for Supply Management's non-manufacturing index dropped to 53.9 in November from 55.4 in October. A reading above 50 indicates expansion in the services sector of the economy, but clearly expanding a little slower. The ISM manufacturing index, released Monday, showed an increase to 57.3 from 56.4.

Meanwhile, the Federal Reserve released its Beige Book this afternoon. The Beige Book is a business survey, which contains anecdotal reports from the 12 Fed district banks, and it's published two weeks before the officials meet to set monetary policy at the FOMC meeting. It's called Beige Book because it has a beige cover, although I suspect it is also descriptive of the writing style.

Anyway, here's the synopsis: consumer spending increased in most of the country, with retailers expressing optimism about holiday sales; hiring showed a modest increase or was unchanged; manufacturing activity continued to expand in most districts, with gains noted in the motor-vehicle and high-technology industries; demand for professional business services experienced stable to moderate growth, especially in computer technologies.

And the Commerce Department reported this morning that the October trade deficit decreased to $40 billion. Total October exports came in at $192 billion compared to imports of $233 billion, resulting in a deficit of $40 billion, down from $43 billion in September. Oil prices were just under $100 in October, down from $102 in September, and prices will likely be down even further in November. The petroleum deficit has generally been declining and is the major reason the overall deficit has declined since early 2012.

Meanwhile, remember the budget negotiations? That's where each political party draws a line in the sand, and a bipartisan committee dances around the line and no later than December 13^th, they are supposed to come up with a deal that nobody could love. There is broad agreement that a portion of the sequester should be replaced with targeted cuts to discretionary spending. But Democrats demand revenues in the mix and Republicans categorically reject new taxes. The dance of legislation is reportedly close to finding some syncopation, which would involve an agreement to set a spending level for the next fiscal year above the $967 billion in place under current law.

Also, it appears that both sides are getting closer to agreement on $80 billion in savings to replace the cuts from sequestration over the next 2 years; shared among defense and non-defense programs alike. Other items being considered to pay for it include selling off the broadband spectrum in auction (essentially a government yard sale), increasing TSA fees (in other words, it'll cost more for an airline flight), plus changes in postal service and some reform to federal pensions but no structural changes to entitlement programs.

If the budget committee can't reach a deal by the December 13 deadline, House Speaker John Boehner has said that he will push for a continuing resolution to fund the government past Jan. 15 at the $967 billion level. Apparently both sides realize that shutting down the government is not a popular idea, but short-term stopgap continuing resolutions are getting a bit stale as well.

Somewhere, in the vague and distant past, I remember hearing something about closing loopholes and reforming the tax code but that would require roll up your shirt sleeves, honest work, and we know that Congress has nasty aversion to that four letter word.

Some things never change.

Banks cheat. They get caught sometimes. They pay a fine. It's the cost of doing business.

EU antitrust regulators have fined six financial institutions including Deutsche Bank, Royal Bank of Scotland, Citigroup, Societe Generale, JPMorgan and brokerage RP Martin a record total of $2.3 billion for rigging financial benchmarks. The penalty is the biggest yet to be handed down to banks for rigging the benchmarks used to determine the cost of lending; the benchmarks involved are the London interbank offered rate, or Libor, the Tokyo interbank offered rate and the euro area equivalents. They are used to price hundreds of trillions of dollars in assets ranging from mortgages to derivatives.

EU Competition Commissioner Joaquin Almunia said in a statement: "What is shocking about the Libor and Euribor scandals is not only the manipulation of benchmarks, which is being tackled by financial regulators worldwide, but also the collusion between banks who are supposed to be competing with each other."

Yes, I'm shocked, shocked to find that gambling is going on in here!

Authorities around the world have so far handed down a total of $3.7 billion in fines to UBS, RBS, Barclays, Rabobank and ICAP for manipulating rates, while seven individuals face criminal charges.

UBS paid a record fine of $1.5 billion late last year to the US Department of Justice and the UK's Financial Services Authority for rate-rigging. EU fines can reach up to 10 percent of a company's global turnover. UBS blew the whistle on the Libor and Tibor cases and will not be fined as a result. Barclays will escape a fine in the Euribor case because it alerted the Commission to the offence.

The European Commission said it would continue to investigate Credit Agricole, HSBC, JPMorgan and brokerage ICAP for similar offenses.

And by the way, I don't know how the regulators come up with the amount they decide to fine the banksters. I guess they pull a number out of the hat. I'll check on that.

Moving on. Now that the government has fixed the healthcare.gov website and Obamacare is experiencing smooth sailing. Huh? What? Squirrel...

Anyway, President Obama turned his focus today to the pocketbook issues that Americans consistently rank as a top concern, arguing that the dream of upward economic mobility is breaking down and the growing income gap is a "defining challenge of our time."

"The basic bargain at the heart of our economy has frayed," the president said in remarks at a nonprofit community center a short drive from the White House in one of Washington's most impoverished neighborhoods.

The president vowed to focus the last three years of his presidency on addressing the discrepancy and a rapidly growing deficit of opportunity that he said is a bigger threat than the fiscal deficit. Obama said increasing income inequality is more pronounced in the United States than other countries. He said Americans should be offended that a child born into poverty has such a hard time escaping it, saying: "It should compel us to action. We're a better country than this." Obama did not propose any new policy initiatives in the speech.

The speech comes amid growing national and international attention to economic disparities — from the writings of Pope Francis to the protests of fast-food workers across the country. The president cited the pope's question of how it isn't news when an elderly homeless person dies from exposure, but news when stock market loses two points.

Wednesday, June 27, 2012 - To Your Health; Spanish Junk; Barclays Bad; Falcone Flunks; Bhopal Veggie Garden; Goodnight Stockton

To Your Health; Spanish Junk; Barclays Bad; Falcone Flunks; Bhopal Veggie Garden; Goodnight Stockton 
– by Sinclair Noe


DOW + 92 = 12,627
SPX + 11 = 1331
NAS + 21 = 2875
10 YR YLD -.01 = 1.62%
OIL +.27 = 80.48
GOLD + 1.60 = 1575.20
SILV - .17 = 27.04
PLAT – 18.00 = 1415.00


According to the Centers for  Medicare and Medicaid Services, health spending accounts for about 18% of the GDP of the United States. So, tomorrow's ruling by the Supreme Court on President Obama's health care plan is pretty important, but so far the economists can't seem to figure out the implications. This is not to say I have any advance info on the Supreme Court decision. 


They might say the Act is fine as it is, they might say they will eliminate the mandate but leave the rest unchanged, they might throw out the whole thing.  If they vote against Obamacare it will be seen as a highly partisan act. What better way to show the Court’s impartiality than to affirm the constitutionality of legislation that may be unpopular? That might be a stretch; I think I'll stick with the idea that we'll have to wait till tomorrow.


The only safe bet is that there will be unintended consequences. For example, what if the Supremes strike down the mandate portion but leave the rest intact? The Obama administration put a mandate in the Affordable Care Act because the law requires insurers to charge the same premium regardless of health status. Without a mandate, it would make sense for the healthy to drop their insurance until they got sick and needed it. But if only the unhealthy bought insurance, premiums could rise sharply to cover insurance companies’ higher costs. At the extreme, this could blow up the insurance market altogether. 




The National Association of Realtors Pending reports home sales climbed 5.9% in May, with an index reaching 101.1. The index was 13.3% above May 2011 levels. Earlier this week, the Commerce Department reported sales of new homes at two-year highs. Also, S&P/Case-Shiller reported that home prices climbed in April. Also today, the Commerce Department reported durable-goods orders rose a seasonally adjusted 1.1% last month.




Spain is poised for a downgrade to junk by Moody’s Investors Service. Moody's cut  28 Spanish banks yesterday including a two-step cut for Banco Santander and a three-level reduction for BBVA, a week after it lowered Spain’s rating to Baa3, on the cusp of junk. Spain remains on review for another cut by Moody’s after they requested a $125 billion international bailout for its banks and on speculation losses from its real estate industry will worsen. A one-notch move to Ba1 will likely see all the country’s banking system in junk territory, with the possible exception of Santander. Spain’s short-term borrowing costs nearly tripled at auction, underlining the country’s precarious finances as it struggles against depression and juggles with a debt crisis among its newly downgraded banks.


So, it's not just the Spanish banks that are begging for a bailout, it is looking like the nation will also be looking for a bailout. To put it another way; Greece has collapsed; the contagion has spread. Spain is on the edge of collapse. Italy is next.


Oh yeah, French bonds look shaky, and Germany was downgraded yesterday. 


No worries, the Euro-big wigs will have another emergency summit in Brussels starting tomorrow. Maybe it was always a choice between orderly, or disorderly breakup. The idea of European countries working together in harmony sounds good; the idea of European countries bailing out Euro-banks is just stupid. The death certificate for the EU will likely read: “Cause of death: procrastination”. The European Union is crumbling. Have a waffle. 


Federal Reserve Bank of Chicago President Charles Evans said the U.S. central bank didn’t provide enough stimulus last week and called for new easing including more asset purchases to spur economic growth. Evans said: “We should be doing more accommodation than what was adopted under the Twist.” While the move “has small effects,” Evans said, “its larger effect is that it indicates the Fed is continuing to think more accommodation is important and worthwhile.”


The FOMC expanded Operation Twist, its maturity- extension program, by $267 billion through the end of the year. Chairman Ben S. Bernanke said at a press conference the Fed is prepared to do more. Evans said: “Right off the bat, I’d be willing to do more on the basis of the current data”. He doesn’t vote on policy this year.




Last week Microsoft introduced a new tablet computer, called Surface, it has a kickstand and a cover that folds out to serve as a keyboard. Very clever. It will be available for sale in a couple of months. Today, Google revealed its own tablet and it is priced at a sharp discount compared to Apple's iPad. The new tablet will run on the latest version of Google's operating system Android 4.1, called Jelly Bean. The Nexus 7 will sell for $199 and will be available in mid-July. The line between software and hardware has now been breached in the face of total domination by Apple.  


British bank Barclays says it will pay around $452 million in penalties to US and UK regulators to settle a probe into attempted manipulation and false reporting relating to two global benchmark interest rates that form the basis for hundreds of trillions of dollars of transactions. Libor, or the London Interbank Offered Rate, and Euribor, or the Euro Interbank Offered Rate, are benchmark reference rates that indicate the interest rate that banks charge when lending to each other. Almost all other rates are at least partially based upon the Libor or Euribor as a baseline. The CFTC said that Barclays traders and employees attempted to manipulate and made false reports concerning Libor and Euribor in order to benefit their derivatives trading positions. This misconduct took place on many occasions and sometimes on a daily basis over a period of four years, starting in 2005. What does it take for these people to end up in jail? 


Apparently the trick is to have the backing of a major bank, the individual traders  are easy prey for the regulators, but the traders for the big banks have “Get Out of Jail Free” cards. Phillip Falcone, the founder of hedge fund Harbinger Capital Partners LLC, was sued by the Securities and Exchange Commission. The SEC said in its lawsuit that Falcone misappropriated client assets, favored selected investors and manipulated bond prices. 


Robert Khuzami, the SEC’s enforcement director, said in a statement: “Today’s charges read like the final exam in a graduate course in how to operate a hedge fund unlawfully. Clients and market participants alike were victimized as Falcone unscrupulously used fund assets to pay his personal taxes, manipulated the market for certain bonds, favored some clients at the expense of others and violated trading rules intended to prohibit manipulative short sales.”


The SEC is seeking disgorgement of ill-gotten gains, unspecified financial penalties and a bar prohibiting Falcone, 49, from serving as an officer or director of any public company.




The SEC action is the second blow in less than two months for Falcone, who built a $26 billion hedge fund by 2008 with a successful bet against subprime mortgages. LightSquared Inc., Harbinger Capital’s biggest investment, filed for bankruptcy in May.


Falcone in 2009 took out a $113 million loan from his Special Situations fund to pay personal taxes. The loan was disclosed in the fund’s annual financial statement the following March. At the time he borrowed the money, clients were barred from pulling money from the fund. Falcone subsequently repaid the loan with interest. That same year, with client capital locked up, Harbinger allowed Goldman Sachs Group, which at the end of 2008 had $1 billion invested in two Harbinger funds, to redeem some money from the firm.


Dow Chemical's ’s Union Carbide won dismissal of a lawsuit alleging polluted soil and water produced by its former chemical plant in Bhopal, India, injured area residents, one of at least two pending cases tied to the installation known for the 1984 disaster that killed thousands.


U.S. District Judge John Keenan in Manhattan yesterday ruled Union Carbide and its former chairman, Warren Anderson, weren’t liable for environmental remediation or pollution-related claims made by residents near the plant, which had been owned and operated by a former Union Carbide unit in India. Sure, a chemical spill that killed thousands of people, no need for further cleanup. I'm sure everything is nice and clean. I'm sure that Judge would want his children planting a nice little vegetable garden in the shadows of the Bhopal chemical factory.


Exxon Mobil Chief Executive Officer Rex Tillerson says supplying electricity to the “billions of people living in abject poverty” is a more important goal than curbing greenhouse-gas emissions. Tillerson says electricity will do more to improve the quality of life for people who still cook food by burning animal dung than trying to prevent climate change, which will be “manageable.” And even if global warming destroys the planet, maybe ExxonMobil can get the same judge that ruled in favor of Union Carbide. 


Stockton is broke. They will file for bankruptcy. Talks with bondholders and unions failed. Stockton California will now become the biggest US city to seek court protection from creditors. The City of  Stockton released a statement yesterday after its council voted 6-1 to adopt a spending plan for operating under bankruptcy protection. The statement says: “The city is fiscally insolvent and must seek Chapter 9 bankruptcy protection. In addition to the bankruptcy petition, the city will file a motion with the courts to share information from the confidential mediation.”


In the past three years, Stockton was slammed by the collapse of the housing market and city officials dealt with $90 million in deficits through a series of drastic cuts. They eliminated one-fourth of the city's police officers, one-third of the fire staff, and 40 percent of all other employees. They also cut wages and medical benefits. To plug next year's anticipated $26 million budget shortfall, they couldn't find more cuts, and so they turned to the courts to avoid chaos. The budget for the fiscal year beginning July 1 calls for defaulting on $10.2 million in debt payments and cutting $11.2 million in employee pay and benefits under union contracts that could be voided by the bankruptcy court. Stockton’s bankruptcy might resemble the 2008 case of another California city, Vallejo, which exited court protection last year. It is expected that Stockton City workers who have retired will see a sit to health care benefits, possibly a cut to zero. Bondholders and current employees will probably also have to take less. 


The Stockton bankruptcy is not expected to create a sell-off in the $3.7 trillion dollar muni-bond market. The BK was anticipated. The average cumulative default rate in the past four decades was 0.13 percent for municipal bonds versus 11.2 percent for corporate debt. The overall default rates in municipal bonds are extremely low and Stockton is a small participant in the $3.7 trillion market.


A taxable Stockton pension bond sold in 2007 and due September 2037 traded June 25 as high as 80.68 cents on the dollar, down from when it traded as high as 102.03 cents on the dollar on Feb. 15. 


Bankruptcy would allow the city to break contracts with creditors without the threat of lawsuits, though it won’t assure the city’s recovery. Chapter 9 BK does not wipe out debts but merely allows for restructuring. In February, the city began a process during which it is required by state law to review its finances with help from a “neutral observer” who is picked in cooperation with creditors. That review is similar to a mediation process in which creditors have a right to participate. Stockton was the first city to test a new state mediation law, Assembly Bill 506, which is less than six months old. The results have been called tedious, at best; policy analysts issued a report on the use of the new law, titled “Death by a Thousand Meetings”.


According to a June 5th fiscal report, the city has cut services so much the past two years that “public safety is at a crisis level”. Unemployment, at 15.4 percent in April, was almost double the national average; Stockton ranked third in murders last year among large California cities, behind Los Angeles and Oakland; One in every 195 homes in Stockton’s metropolitan area received a foreclosure filing in May, the fifth-highest rate in the nation.


When the economy crashed and the construction bubble burst, Stockton was battered by foreclosures and lost income from property taxes and other fees. Multi-year labor contracts for city workers carrying escalating costs and generous retirement plans added to the burden. In addition, expensive city investments - a promenade, sports arena and hotel - failed to produce an economic boon. There is a state investigation into whether Stockton's financial devastation was entirely due to shortsighted optimism or if there was corruption. The state mediation law requires assigning blame. It will make interesting reading, and I'll lay dimes to donuts, the assignment of blame will be misplaced.