Wednesday, February 06, 2013 - A Trend of Banks Behaving Badly

A Trend of Banks Behaving Badly

by Sinclair Noe

DOW + 7 = 13,986
SPX + 0.83 = 1512
NAS – 3 = 3168
10 YR YLD -.05 = 1.97%
OIL + .20 = 96.84
GOLD + 4.10 = 1678.30
SILV +.03 = 31.95

At last count, 282 companies in the S&P 500 index had reported quarterly earnings and 74% were beating analyst earnings projections. Gas prices are up 7% in the past week. The Federal Reserve confirmed that one of its internal Web sites was hacked into yesterday. You might think the Fed databases are pretty secure. Turns out nothing in cyberspace is secure; just see what happened to the New York Times, the Wall Street Journal and the Department of Energy; and that's just the past couple of weeks. The Congressional Budget office says the US budget deficit this year will hit $845 billion, which sounds like a lot of money, but for the first time in a long time, it won't hit a trillion.

The Justice Department filed a $5 billion civil complaint yesterday accusing McGraw-Hill and S&P of three types of fraud, the first federal case against a ratings company for ratings related to the credit crisis. No surprise.

The transcripts of the Federal Reserve's FOMC meeting in 2007 show the Fed didn't trust the ratings agencies. Fed Chairman Bernanke said: “There is an information fog” that “is very much associated with the loss of confidence in the credit-rating agencies.”And Fed Governor Kevin Warsh said: the firms’ “credibility has been shot” and “it is much harder to see that this market will unwind itself in a rather kind and comforting environment.”

At the Aug. 7, 2007 meeting William Dudley said “disturbing delinquency trajectories” had prompted ratings agencies to downgrade a significant number of assets and that losses had “led to a fundamental reevaluation of what a credit rating means and how much comfort an investor should take from a high credit rating.” Dudley’s remarks sparked an FOMC discussion on the risk to the economy from declining confidence in ratings companies. Five years later, a civil suit is brought, and I'm reminded of an old, forgotten saying about justice delayed.

The Royal Bank of Scotland has become the third global bank to reach a settlement with US and British authorities related to manipulation of Libor, the London interbank offered rate; the interest rates that affect trillions of dollars of, well almost everything. We now have some trends.

The Royal Bank of Scotland agreed to pay criminal fines of $150 million to the Justice Department, and a $325 million civil penalty to the Commodity Futures Trading Commission, the regulatory agency that has taken the lead in these cases. An additional penalty of $137 million, will be paid to the Financial Services Authority in Britain. So, it will pay a total of more than $600 million to resolve the case.

Well, some of this fine might actually be paid by British taxpayers. In 2008, the British government had to bail out the Royal Bank of Scotland after the firm led a consortium to buy ABN Amro for $97 billion. RBS contributed around $37 billion for the ill-advised deal. The government, which plowed roughly $71 billion into the bank in the bailout, now owns 82 percent of RBS.

To help pay for the overall settlement, RBS said it would claw back past and present bonuses totaling $471 million from both the traders implicated in the rate-rigging scandal and from employees in the bank’s operations. Still, this is going to make it tougher for the British government to sell its shares. Since the bailout in 2008, the bank’s shares have plummeted, and are currently trading around 32 percent below the initial purchase price.

The other two banks that settled were Barclays and UBS. Barclays paid about $450 million. UBS paid $1.5 billion. For other banks looking to settle, they should figure on at least $500 million to the Justice Department and Commodity Futures Trading Commission, and the total could easily reach $1 billion if the governments of several nations are involved and the conduct by its employees was particularly problematic.

Barclays and UBS were required to have their Japanese securities operations plead guilty to one count of wire fraud, but it left the parent company untarnished by a criminal conviction. This should largely avoid the so-called Arthur Andersen effect on the bank by limiting the chances a bank will lose its ability to continue in business in the United States because of the conviction. The parent company does have to acknowledge its violations by accepting a statement of facts that describes how it violated the law. For Barclays and UBS, this came as part of a nonprosecution agreement, which means no criminal charges were ever filed against the banks.

This admission does, however, subject the banks to additional legal liability in cases file by those that relied on Libor for everything from mortgage rates to derivatives. Plaintiffs in such cases will now be armed with plenty of evidence provided by the government.

In an interesting twist, the Royal Bank of Scotland accepted a deferred prosecution agreement under which federal prosecutors filed a wire fraud charge that will be held in abeyance as long as the bank continues to cooperate.

So a precedent is set; pay a fine; throw a foreign subsidiary under the bus; walk away with a slap on the wrist.

The US Postal Service is cutting back. Beginning in August, there will be no more Saturday delivery of mail. The Postal Service would continue to deliver packages on a six-day schedule, and post offices would continue to be open on Saturdays. Cutting back Saturday mail delivery is expected to save $2 billion per year. Since 2010, the agency has reduced hours at many small, rural post offices and cut staff, and also announced plans to reduce the number of its mail processing plants. Last April, the Senate passed a bill that provided retirement incentives to about 100,000 postal workers, or 18 percent of its employees, and allowed the Postal Service to recoup more than $11 billion it overpaid into an employee pension fund. But post office officials say the cuts and staff reductions are not enough. Last year, the Postal Service had a net loss of $15.9 billion.

The postal unions and some businesses say the move to 5-day delivery is bad; it could be tough for customers, especially those in rural areas, or the elderly, and for many small businesses. The Postal Service continues to suffer losses of $36 million a day and is headed for projected losses of about $21 billion a year by 2016. A major reason for the losses is a 2006 law that requires the agency to pay about $5.5 billion a year into a future retiree health benefit fund; literally paying for benefits for employees that haven't even started work yet.

US corporate profit margins have never been higher. Lately it has been popular to point out that higher corporate profits have come at the expense of falling employee compensation. This might change as the economy improves:  companies might invest more to satisfy greater demand, new intellectual property will spread to competition, and higher employment will increase labor's bargaining ability. 

But how do we speed this up? Corporate investments have become a place to store wealth, as opposed to growing the businesses. The problem with corporations storing wealth is that it isn't nearly as good for most of us as investing in innovation and hiring employees. Some of retained earnings are socked away for tax reasons, some are the collection of high-tech companies that are past their innovative prime, but a lot of earnings are being used to buy back company stock. These stock buy backs sound good to shareholders and corporate executives, but it is a short-term maneuver that doesn't yield any long-term gain in production or profit.

A new report by the Corporation for Enterprise Development shows nearly half of US households  (132.1 million people) don't have enough savings to weather emergencies, or finance long-term needs like college tuition, health care and housing. According to the Assets & Opportunity Scorecard, these people wouldn't last three months if their income was suddenly depleted. More than 30 percent don't even have a savings account, and another 8 percent don't bank at all. 

We're not just talking about people who living people the poverty line, either. Plenty of the middle class have joined the ranks of the "working poor," struggling right alongside families scraping by on food stamps and other forms of public assistance. More than one-quarter of households earning $55,465-$90,000 annually have less than three months of savings. And another quarter of households are considered   net worth asset poor, " meaning that the few assets they have, such as a savings account or durable assets like a home, business or car, are overwhelmed by their debts."

The report shows household median  net worth  declined by over $27,000 from its peak in 2006 to $68,948 in 2010, and at the same time, the cost of  basic necessities like housing, food, and education have soared. Part of the problem is fixed cost, the things that are difficult to "cut back" on. Housing, health care, and education cost the average family 75 percent of their discretionary income in the 2000s. The comparable figure in 1973: 50 percent.

When consumers can't keep up with the costs, they fall into a debt trap. The average borrower carries more than $10,700 in credit card debt, one in five households still rely on high-risk financial services that target low-income and under-banked consumers. 

Tuesday, January 15, 2013 - It's Better Than Nothing

It's Better Than Nothing

by Sinclair Noe

DOW + 27 = 13,534
SPX + 1 = 1472
NAS – 6 = 3110
10 YR YLD - .03 = 1.83%
OIL - .71 = 93.43
GOLD + 12.10 = 1680.90
SILV + .29 = 31.47

Let's start with some economic reports. Consumer spending rose 0.5% in December and sales for October and November were revised slightly higher. It was a pretty good holiday shopping season, but the pace of spending in 2012 failed to equal the gain in the previous year. Retail spending rose an unadjusted 5.2%, down from 7.9% in 2011. And the pace of spending might slow as workers adjust to lower take-home pay as a result of a 2% hike in the payroll tax.

We already know that the expiration of the payroll tax cuts was an especially damaging outcome of the fiscal cliff negotiations. It will total approximately $125bn less in wage-earners’ pockets, and is showing up immediately in reduced paychecks. Average weekly earnings of all employees on private nonfarm payrolls: $818.69 in December. The 2% payroll tax increase clips $16.37 a week from take-home pay. And if weekly earnings held steady in January, at the December level, workers would feel like they earned $802.32 instead. That’s the equivalent of losing all the 2012 gain in weekly earnings in one month.” As a percentage of income it hits the middle class hardest because it applies only to the first roughly $113,000 in wages, effectively a regressive measure that takes money from the people most likely to spend it.

Meanwhile, producer prices, or prices at the wholesale level fell 0.2% on a seasonally adjusted basis. Core producer prices, which exclude the volatile categories of food and energy, rose 0.1% last month, led by cigarettes. So, if you smoke, quit. Food prices at the wholesale level fell 0.9% in December after a 1.3% gain in the prior month that was due, in part, to a severe drought. December’s decline in producer prices for food is the first decrease since May. Meanwhile, energy prices fell 0.3% in December, led lower by gasoline. For all of 2012, wholesale prices increased 1.3%, the smallest growth in a calendar year since 2008. Tomorrow, we'll find out how that equates to prices at the consumer or retail level.

The Census Bureau reports more working families are slipping into poverty; 200,000 more working families, or the working poor, fell into poverty in 2011 compared to 2010. Although many people are returning to work, they are often taking jobs with lower wages and less job security. This means that nearly a third of all working families may not have enough money to meet basic needs. Now, you'll recall that the recession officially ended in the second half of 2009. Maybe we need a better way to measure recessions because the reality that we weren't in a recession, we have been in a small “d” depression, and we haven't really pulled out of it. For many Americans, there hasn't been a real recovery. And for people who have experienced the recovery, it has been concentrated; the top 20 percent received 48 percent of all income while those in the bottom 20 percent got less than 5 percent.

States in the South, such as Georgia and South Carolina, and those in the West, such as Arizona and Nevada, had the greatest increase in the number of working poor. The increase was slower in the Mid-Atlantic and Northeast. In 2011, roughly 23.5 million, or 37 percent, of U.S. children lived in working poor families compared with about 21 million, or 33 percent, in 2007. About 10.4 million such families - or 47.5 million Americans - now live near poverty, defined as earning less than 200 percent of the official poverty rate, which is $22,811 for a family of four. Again, these are working families; people who have jobs but for many families, working hard just isn't enough. They are cashiers and clerks, nursing assistants and lab technicians, truck drivers and waiters. Either they are unable to find good, full-time jobs, or their incomes are inadequate and their prospects for advancement are poor. In many cases, low-wage workers are involuntarily working part-time – often in multiple, temporary jobs. If it remains unaddressed, the trend is likely to continue, pushing more families into economic uncertainty, fueling greater income inequality and dampening national economic growth.

Work is better than not working, a fact that has hit home hard for many veterans. The unemployment rate for veterans of the recent wars has remained stubbornly above that for nonveterans, though it has been falling steadily, dropping to just below 10 percent for all of 2012. That was down from 12.1 percent the year before. The year-end unemployment rate for nonveterans was 7.9 percent in 2012. Today, some good news from Wal-Mart. They will hire veterans, any veteran who wants a job, provided the veterans have left the military in the previous year and did not receive a dishonorable discharge. This represents the largest hiring commitment for veterans in history.

About 100,000 of Wal-Mart’s 1.4 million employees in the United States are veterans. It's pretty simple, Wal-Mart realizes that hiring veterans is a smart move. Veterans are leaders with discipline, training, a dedication to service, a sense of hierarchy, and a willingness to make a commitment to the organization they are in.

Now, it might surprise you to learn that Wal-Mart is taking some flack for this announcement. After all, most of these jobs will not be high paying and Wal-Mart is not known for a great benefits package; some of these veterans will end up among the working poor. Still, a job at Wal-Mart is better than no job; maybe they would like to extend the job offers to veterans who didn't leave the military within the past year. What about the longer-term unemployed vets? Wal-Mart is far from perfect but today I think Wal-Mart should be commended. That doesn't mean we should skip over the concerns, especially while there's a debate raging in Washington about spending. How about making sure the GI Bill is used to educate our veterans and prepare them for better jobs and a better way of life? Since when is the motto of America "it's better than nothing?"

The debt ceiling debate rages, despite the fact that it is an artificial construct. Republicans see the debt-ceiling vote as a way to extract some spending cuts out of Obama. Yesterday, Obama said he would not play that game. Assisting Obama was Fed Chairman Ben Bernanke, who compared refusal to raise the debt ceiling to a family refusing to pay its credit card bill. Bernanke warned: “Default would increase our borrowing costs and damage economic growth and therefore add to future budget deficits, not decrease them.” Republicans probably won't listen to Obama or Bernanke or Tim Geithner, for that matter; yes, Geithner issued his own debt ceiling warning. They might listen to corporate leaders who are growing weary of the political contention following the fiscal cliff fight. The Chamber of Commerce is warning Republicans not to push their luck with the debt ceiling.

Bernanke's analogy of a family not paying its credit card bill might not be the best comparison. Americans have been defaulting at record rates. During the last five years, U.S. individuals have walked away from a staggering $585 billion in mortgages, credit card debts and other personal loans. That works out at about $6,000 per household.

And if the numbers are to be believed, there is probably a lot more to come.

Turn on any news program devoted to the economy and you will doubtless hear some Wall Street blowhard telling you that American households have been “repairing their balance sheets” and paying down their debts. They make it sound so virtuous, and they often then segue into sneering remarks about those degenerate Greeks and other Europeans who don’t behave in the same responsible way.

The truth is very different. According to the Federal Reserve, U.S. household debts peaked five years ago at a gigantic $13.8 trillion. Since then it has declined to $12.9 trillion – a decline of about 7%. To put that in context, household debts today still exceed those seen at the end of 2006, near the peak of the bubble. They are three times what they were in 1998. The total debt reduction from the peak, says the Fed, is $954 billion. Loan write-offs, at $585 billion, account for 60% of that. In other words,  in the last five years Americans have walked away from $3 in debt for every $2 they’ve paid off.In the first quarter of 2010 alone about 13% of all credit card debt was just written off. Households weren’t alone. Corporations have defaulted on $35 billion to $40 billion in debt per year in recent years. It seems individuals have learned a valuable lesson from corporations.

The number of American homeowners who are underwater fell from 12 million to just 7 million; and by underwater, we don't mean Hurricane Sandy underwater, rather they owe more than their house is worth; and when we say just 7 million – well, yes, that is still an absurd number. And that number could fall to just 4 million in a couple of years. According to an analyst with Blackstone: "The housing market is rebounding faster than anyone thought possible," then again, Blackstone would say that: It is aggressively buying single-family houses to try and profit on a housing rebound.

Meanwhile, Facebook CEO Mark Zuckerberg announce something today; the company's first major product launch since it's IPO last Spring. It's a graph search; which basically would allow Facebook users to tailor their searches, such as by specifying music and restaurants that their friends like, or their favorite dentist. The reverse is also possible, such as discovering friends who have an interest in a particular topic. As always, there are privacy concerns. The world's largest online social network, with more than one billion users, Facebook is moving to regain Wall Street's confidence in the wake of a rocky IPO and concerns about its long-term money-making prospects. Central to its efforts is devising new ways to make money from users who are migrating to mobile devices. Unfortunately, they haven't figured out how the graph search will raise revenue.