US Economy Is 'Grim and Scary'

Following Friday’s report that zero jobs were generated in the month of August, Pimco investment firm CEO Mohamed El-Erian called the condition of the U.S. economy “grim and scary.”

Speaking to Bloomberg Television’s Betty Liu, El-Erian estimated the chance of another recession as at least one-in-three, and possibly as high as one-in-two.

“The downside risk is increasing,” El-Erian, whose company manages a portfolio of over $1 trillion, told Bloomberg. “Now, there is going to be even more attention on what President Obama will say on Thursday. It's a critical speech."

Economists are hoping President Obama’s jobs speech next week will encourage equity markets, which opened sharply lower on Friday following the dismal jobs report.

In addition to a net zero job creation, the report had downward revisions in job-growth estimates for previous months. The average work week dropped from 34.3 to 34.2 hours, which is considered a seriously negative indicator because it affects the income of such a broad swath of workers. And the average hourly wage dropped in August as well.

Mohamed El-Erian (Associated Press photo)

El-Erian pulled no punches in evaluating Friday’s news: “It is grim and scary,” he told Bloomberg Television.

“If you look at the three-month average, we are now down to 35,000 [jobs]. That is too low for job creation and too low for regaining confidence. It is not just levels where we are here at Pimco. It's the composition of unemployment and it is the duration of unemployment. Whatever way you look at it, this is a worrisome report. Hopefully, it will ring alarm bells in Washington.”

El-Erian said the situation calls for “crisis management” that will “lift the structural impediments facing the unemployed.”

“We cannot just rely on the Fed. Its policies are less and less effective,” he said. “You go to Europe. They have a crisis, too. We need holistic approaches rather than these ad hoc tactical ones."

Perhaps the worst news El-Erian delivered is that indicators suggest the economy is getting worse, not better. Europe is “very far away” from solving its debt issues, he says, and “the dynamics of the economy and markets are pushing toward further weakening.”

Asked if a third round of quantitative easing from the Fed would be beneficial, El-Erian said such a policy would carry substantial risks.

“There is a risk that if the Fed goes alone, we commodity prices going up again, that weakens the economy, we see the Fed coming under more attack from the political wing, that will weaken the credibility of the Fed,” he said.

“At the end of the day, we will not be solving anything. We will just be undermining the economy and a critical institution for the wellbeing of America."

Asked the most important thing Washington should do to ease the jobs crisis, El-Erian replied: "Housing is critical. I wouldn't put it as single, but I would encourage the Fed and Washington to be comprehensive to not try to focus on just one issue."

He said that “so far, we have gone in an ad hoc fashion. It is the same thing in Europe as well.”

Jobs Data Show US in a Depression

Bleak unemployment figures would be even bleaker if they reflected the true number of those out of work — and even official rates serve as evidence that the country is falling deeper into a depression, says author, investor and longtime Wall Street observer James Dale Davidson.

The Labor Department reported Friday that the economy added no new nonfarm payrolls in August, leaving the unemployment rate flat at 9.1 percent. It was the first time since World War II that the economy had a net zero jobs created for a month, CNBC reported.

A look at methodology shows that the government tweaks the size of the labor market in order to make unemployment figures look better than they really are, says Davidson, a columnist for Newsmax’s Financial Intelligence Report newsletter.

Furthermore, the economy needs to be adding hundreds of thousands of new jobs each month to really get the country moving along the road to recovery.

"There needs to be, or should be, an increase of 180,000 to 200,000 jobs monthly in order to keep the unemployment rate stable. That hasn't happened, and they're basically disguising that by reducing the labor force through statistical slight-of-hand," Davidson tells Moneynews.

Without such revisions, unemployment rates would find themselves "up much more in the double digits," Davidson says.

Officially, the country has emerged from the recent recession although high unemployment figures and weak economic growth and other indicators have many second-guessing the pace of recovery.

Some say the economy never truly emerged from the recession at all, and most would agree that the economy is not in full recovery mode.

"Normally when you think of recovery, if you think of it in an analogy of someone who is ill, recovery is when you regain your health not when you cease getting worse," Davidson says.

"If you look at the statistics, basically we are sort of bottom-bouncing along a very low level of output," he said.

"I think we are going into a deeper stage of the depression that started back in 2008. I think this is basically a depression."

While August jobs numbers may have been weighed down by a Verizon workers strike, they still paint a picture of an economy that is far from robust and virile than it was just a few years ago.

Businesses aren't going to hire when they don't know where the economy is going, economists say.

"Business confidence surveys have uniformly pointed to businesses who are not laying off workers, but who are holding off on hiring while they wait for a clearer outlook — an outlook that became much cloudier and more volatile" beginning with the debt-ceiling battle in July, says Ellen Zentner, senior United States economist for Nomura Securities, according to the New York Times.

Even if the United States doesn't fall into a recession, sunnier days are still far away.

“We’ve got at least another 12 months of difficulty to go through,” says Steven Ricchiuto, United States economist for Mizuho Securities USA, the New York Times adds.

“I know that doesn’t help politicians who are worried about the elections.”

Reagan Adviser Kotlikoff: US Is Really $211 Trillion in Debt

Boston University economics professor Laurence J. Kotlikoff, who served as a senior economist on President Ronald Reagan's Council of Economic Advisers, says the U.S. debt totals $211 trillion, which is more than 15 times the official figure.
"We have all these unofficial debts that are massive compared to the official debt," Kotlikoff tells National Public Radio. "We're focused just on the official debt, so we're trying to balance the wrong books."

Laurence J. Kotlikoff (Boston University photo)

Kotlikoff explains that when America's "unofficial" payment obligations such as Social Security, Medicare and Medicaid benefits are included, the debt becomes almost exponentially greater.
"If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion,” says Kotlikoff, adding that politicians have chosen their language carefully to keep most of the problem off the books.
“That's our true indebtedness."
Kotlikoff notes that about 78 million baby boomers are poised to collect about $40,000 each in the next 15-20 years. “Multiply 78 million by $40,000 — you're talking about more than $3 trillion a year just to give to a portion of the population," he says.
"That's an enormous bill that's overhanging our heads, and Congress isn't focused on it. "Why are these guys thinking about balancing the budget?" he asks. "They should try and think about our long-term fiscal problems."
Reason.com reports that, according to a recent Reason-Rupe poll, 61 percent of Americans favor reforming Social Security and 59 percent favor reforming Medicare provided they are guaranteed to get back the money they contributed into the system.

Investors See Bull Run Fading Away by Year’s End

Stocks may be rallying right now but today's bull run will fizzle out before the end of the year, investors say.

Badly needed reforms in the United States and Europe won't come in time to make structural improvements to the global economy, which is what markets and pretty much everyone needs these days for the world to see lasting improvement.

"Some grand deal on entitlements in the U.S., moves to bring the 17 countries now part of the EU either fiscally closer together or monetarily further apart, or a more rapid acceleration in the value of China’s currency would all be long-term positives for equities now trading at low levels of valuation despite low levels of inflation and long-term interest rates,” says Jason Trennert, investment strategist and founder of Strategas, according to CNBC

NYSE floor traders (Getty Images photo)

"In the absence of such important secular reforms, investors can only hope for quick liquidity fixes that may mask the global economy’s underlying injuries."

Some want the government stay on the sidelines.

"I want the government to do nothing," says Peter Boockvar, equity strategist at Miller Tabak. "Let the market work. Let it wring out the excess."

While stocks have been volatile this year, gold has become a popular safe haven.

Expectations that the Fed may loosen already loose monetary policy in an effort to get the economy going again could weaken the dollar and fuel more demand for the precious metal.

"The Fed is telling us they are willing to provide more support for the economy," Frank Lesh, a trader at FuturePath Trading in Chicago, tells Bloomberg.

"More free money, the fear of a slowing economy, and a weaker dollar are driving more people into gold."

Fed's Bullard: QE3 Possible, Depending on Data

The Federal Reserve could embark on a third round of quantitative easing depending on upcoming economic data but should first confirm that inflation has eased, a senior Fed official said in the Asahi newspaper on Wednesday.

The Fed will need to confirm whether its economic outlook is still on track at a policy meeting next month and weigh the best options if additional easing is needed, St. Louis Fed President James Bullard said in an interview with the Japanese daily.

Expectations are growing that the central bank could ease policy at its two-day meeting starting Sept. 20 after minutes from last month's gathering showed some policymakers pressed for bold and unconventional steps to shore up a flagging economy.

"Depending on future economic data QE3 is one choice, but we need to gather information about how the economy will perform in the second half of the year," Bullard said in the Asahi, referring to the Fed's quantitative easing program where it buys government debt.

"Before any moves, I would like to confirm that inflation is easing."
The head of the St. Louis branch does not have a vote on the policy-setting Federal Open Market Committee this year.

Bullard reiterated his view that if the Fed were to buy additional government debt it should do so incrementally, on a meeting-by-meeting basis. Bullard is known for his hawkish views on monetary policy.

The U.S. economy is likely to grow 2.5 percent in the second half of the year, the Asahi also quoted Bullard as saying.

The Fed has a $600 billion quantitative easing bond-buying program, known as QE2.

In addition, U.S. interest rates are already near zero and the Fed has signaled it is willing to hold borrowing costs at that level for two years if necessary.

S&P 500 Falls to Reagan Recession Values

Investors are paying less for equities than they have during every recession since Ronald Reagan was president amid growing concern that the economy is on the edge of another recession.

The Standard & Poor’s 500 Index has lost 13 percent in the past five weeks, sending its price-earnings ratio down to 12.9. That’s 3.5 percent less than the average multiple during the 10 contractions since 1949 and a level last reached in 1982, according to data compiled by Bloomberg.

Bears say valuations show the U.S. remains in the slowdown that began in 2007. Unlike under Reagan, when U.S. Federal Reserve Chairman Paul Volcker raised borrowing costs as high as 20 percent to combat inflation, interest rates are already near zero, leaving policy makers fewer tools to boost the economy, they say. Bulls say the ratios are so low because they reflect indiscriminate selling by investors convinced that any slowdown will turn into a repeat of the 2008 credit crisis.

“There are truly some terrific values out there in companies, but it’s a question of timing,” John Massey, a Jersey City, New Jersey-based fund manager who helps oversee $13 billion at SunAmerica Asset Management, said in a telephone interview on Aug. 26. “Right now, the market is very short-term sighted. Every day the market is up or down, and it’s much more of a macro call than anything else.”

$2.3 Trillion Drop

About $2.3 trillion has been erased from the market value of U.S. equities since the S&P 500’s recent high on July 22 after reports on housing and manufacturing trailed estimates, Europe’s debt crisis worsened and S&P stripped the U.S. of its AAA credit rating. The last time stocks in the index were cheaper on average during a recession was the early 1980s, a decade when the index surged 227 percent, or 403 percent including reinvested dividends.

At 1,176.80, the S&P 500 is trading at 10.8 times analysts’ forecast for profits in the next 12 months of $109.12 a share. For the P/E ratio to reach its five-decade average of 16.4 without shares appreciating, earnings would have to fall to about $71.76 a share, 22 percent below the last 12 months, data compiled by Bloomberg show.

Should companies meet analysts’ profit estimates, the S&P 500 must advance to about 1,790 to trade at the average multiple of 16.4 since 1954, according to data compiled by Bloomberg. That’s more than 50 percent above its last close. Futures on the S&P 500 expiring next month gained 1 percent to 1,185.9 at 7:48 a.m. in London today.

Worst Performers

Energy, financial and industrial companies have performed worst out of 10 groups in the S&P 500 in the past month, falling more than 16 percent, as investors fled so-called cyclical stocks that are most tied to economic growth. Utilities and makers of household products posted the smallest losses.

The index rallied 1.5 percent on Aug. 26, for the first weekly gain since July, after Fed Chairman Ben S. Bernanke said Aug. 26 during a speech in Jackson Hole, Wyoming, that the economy isn’t deteriorating enough to warrant any immediate stimulus. Optimism the U.S. will avoid a recession helped offset a Commerce Department report showing gross domestic product climbed at 1 percent in the second quarter, down from a 1.3 percent estimate.

The economy grew at a 0.4 percent annual pace in the first quarter of 2011, the slowest since the second quarter of 2009, when the recession had yet to end, according to data compiled by the National Bureau of Economic Research.

Reagan Inflation

Runaway inflation at the start of Reagan’s presidency in 1981 spurred Volcker to lift the Fed funds rate, pushing the U.S. economy into a recession until November 1982. The S&P 500’s multiple sank to an average of 8 times earnings as record-high interest rates and 10-year Treasury yields above 15 percent reduced the appeal of equities. Rates dropped through the decade, helping fuel the equity rally.

Bernanke has held the target rate for overnight loans between banks near zero since December 2008 and pledged this month to keep it there through mid-2013.

“The Fed’s used up a lot of their big ammunition already,” Bruce Bittles, who helps oversee $85 billion as chief investment strategist at Milwaukee-based Robert W. Baird & Co., said in an Aug. 26 phone interview. “With earnings expectations coming down, P/E ratios are likely to remain lower than anticipated as well.”

Cheaper Valuations

During the credit crisis, the world’s largest economy shrank the most in any recession since the 1930s, according to the Commerce Department. Quarterly earnings among S&P 500 companies have almost doubled since ending an eight-period decline in September 2009. Valuations declined as the stock prices advanced at a slower rate, with the index climbing 11 percent since Sept. 30, 2009, data compiled by Bloomberg show.

For TCW Group Inc.’s Komal Sri-Kumar, valuations must be lower to be attractive because the economy is stagnating. The S&P 500 has declined 10 percent since the start of June, the last month of the Fed’s second program of quantitative easing, known as QE2, data compiled by Bloomberg show.

“Stocks have been at very high levels compared with a very weak economy,” Sri-Kumar, the chief global strategist at TCW, which oversees about $120 billion, said in a phone interview on Aug. 24. “When QE2 was introduced last August, you got a rally in equities prices for several months, but you didn’t get a big push up in economic growth.”

Sri-Kumar recommended defensive stocks in the consumer staples, utility and health-care industries.

Consumer Products

Procter & Gamble Co. (PG), the Cincinnati-based maker of Gillette razors, has slipped 2.6 percent since July 26, compared with a 13 percent decline by the S&P 500. This month, the world’s largest consumer-products company said 2011 revenue topped analysts’ estimates and reported a 15 percent increase in fourth-quarter profit on sales from emerging markets.

For Blackstone Group LP’s Byron Wien and Gamco Investors Inc.’s Howard Ward, the decline in valuations will prove temporary as investors buy back shares they sold in a panic after the U.S. lost its AAA credit rating at S&P.

General Electric Co. (GE) has fallen 15 percent this year even after reporting profits that topped analysts’ estimates in the first two quarters. CEO Jeff Immelt said last month that industrial earnings and sales should increase in the second half of 2011 and accelerate into 2012. While analysts estimate profit at the Fairfield, Connecticut-based company will jump 21 percent this year, shares are trading at their lowest valuation since 2009.

Market Decline

“Too much has been read into the stock market’s decline,” Ward, who helps oversee $35 million in Rye, New York, wrote in an Aug. 24 e-mail.

Corporate earnings are growing fast enough to boost equities, he said. Per-share profit at S&P 500 companies will rise 13 percent in 2012, the fourth straight year of increases, according to analyst estimates compiled by Bloomberg.

Alcoa Inc. (AA), the country’s largest aluminum producer, and Caterpillar Inc. (CAT), the world’s biggest maker of construction and mining equipment, were among the worst performers in the Dow Jones Industrial Average in the last month, falling 25 percent and 19 percent through Aug. 26, respectively. Analysts estimate earnings will jump 21 percent in 2012 at New York-based Alcoa and 33 percent at Peoria, Illinois-based Caterpillar.

“The market’s anticipating economic growth will slow and earnings estimates are going to have to come lower,” Mark Bronzo, who helps manage $26 billion at Security Global Investors in Irvington, New York, said in a telephone interview on Aug. 24. “My gut is the stock market is attractive at these levels and we won’t go into a recession. We’ll be in a sluggish growth environment and eventually stocks will do better.”

Obama 'Unable to Get A Firm Grip' on Economy

President Barack Obama just doesn't get that his lack of leadership has shaped our stalled economy, says U.S. News and World Report editor Mort Zuckerman.
"Mr. Obama seems unable to get a firm grip on the toughest issue facing his presidency and the country—the economy," Zuckerman writes in The Wall Street Journal.
"He now asserts he is going to "pivot" to jobs. Now we pivot to jobs? When there are already 25 million Americans who are either unemployed or cannot find full-time work?"
"Does this president not appreciate what is going on?"
Fewer Americans are working full-time today than when Mr. Obama took office, Zuckerman notes, more than 900,000 full-time jobs were lost in the last four months alone, and long-term unemployment is at a post-World War II high.
Since the president is the one who represents all of America and all Americans, says Zuckerman, the buck stops with him rather than with the Congress.
"It is the president's job to offer a coherent program for the twin threats of a static economy and an unsustainable explosion of our debts and deficits," Zuckerman notes. "But the only core issue on which he took a clear position in the recent debt-ceiling negotiations was that it would have to include new taxes on the wealthy—and he didn't even hold to that."
In its recently issued semiannual report, the Congressional Budget Office projected that unemployment will remain above 8 percent until 2014.

'Black Swan' Author Taleb: Banks Have Hijacked Society

“The Black Swan” author and economist Nassim Taleb says that repeated bailouts have made it possible for banks to hijack society.

"The bad news is not another recession, it's not figuring what got us here and continuing to make the same mistakes," Taleb tells the BBC.

Taleb says there's a tumor in the center of the financial system that has not been removed, one he calls "an agency problem." This happens when people make money they receive bonuses, but when they lose money, taxpayers and future generations pay the price.

Nassim Taleb (Getty Images photo)

"The core of the problem is that asymmetry in payoff socializing losses and privatizing gain and the generator of that inequity is still there, worse than ever."

(Banks) got us here, and they’re reaping the benefits,” says Taleb. “As an industry, they have not suffered” and the Federal Reserve is “doing everything it can to finance these bonuses.”

“I’m outraged. Banks should be something other than machines that generate themselves bonuses. Today, banks are vastly more centralized than they were before the crisis … much more powerful than they were before (and) they have an incredibly sneaky lobby in Washington.”

Morgan Stanley Asia non-executive chairman Stephen Roach says debt forgiveness by banks should be a part of economic rebalancing.

"If you come up with ways to forgive the excesses of mortgage, installment and revolving credit as was done in the 1930s, that will help consumers get through the pain of balance deleveraging sooner rather than later," Roach tells CNBC.

Moody's Zandi: Stocks Could Throw US Back Into Recession

The United States is teetering on the edge of recession and further drops in stock prices could prove to be the tipping point, experts say.

So far, the country remains in growth mode, but economists keep slashing their forecasts, which is leaving many worried that the economy is slowing to stall speed.

"I think we're right on the edge," says Mark Zandi of Moody's Economy.com, according to CNBC.

"I think confidence is extraordinarily fragile, and consumer and businesses are frozen in place. The numbers going into Q3 are tracking less than 1 percent. It's still early but the debt ceiling drama, the S&P downgrade and what's going on in Europe have done serious damage on the collective psyche."

Consumer confidence remains weak, and further stock-market declines could damage confidence even further and send the economy shrinking even though companies aren't announcing widespread layoffs.

"We haven't seen deterioration in jobless claims," which is positive, says Credit Suisse economist Jonathan Basile, CNBC adds.

However, the expectations from the latest University of Michigan consumer sentiment survey shows a big jump in unemployment expectations to 46 percent from 31 percent.

"When you get really sharp moves, that's always like a red flag," Basile says.

Even talk of recession may be enough to spook consumers some economists say, including David Kelly, chief market strategist for J.P. Morgan Funds.

"Overall, the chorus of economists and strategists predicting recession has grown louder in recent days and the withering impact of these pronouncements on confidence is sadly boosting the chances that they could be right," according to Kelly, MarketWatch reports.

Buffett’s Berkshire Hathaway to Invest $5 Billion in Bank of America

Bank of America Corp. (BAC), the biggest U.S. lender, said Warren Buffett’s Berkshire Hathaway Inc. will invest $5 billion to bolster the company after losses tied to subprime mortgages drained capital. Bank of America surged in New York trading.

Berkshire will get cumulative perpetual preferred stock paying a 6 percent dividend, the Charlotte, North Carolina-based bank said today in a statement. Omaha, Nebraska-based Berkshire also gets warrants to buy 700 million shares at $7.14 each.

The deal aids Bank of America Chief Executive Officer Brian T. Moynihan, 51, who is cutting jobs and selling assets to help restore investors’ confidence. Bank of America lost almost half its value on the New York Stock Exchange this year through yesterday as investors speculated the lender would have to access the public markets to raise capital.

One expert not surprised by the Oracle of Omaha’s move was well-known Buffett watcher and editor of Newsmax’s investing newsletter The Dividend Machine, Bill Spetrino. “Buffett knows an incredible bargain when he sees one,” he says.

Spetrino has been urging investors to consider BofA stock all summer, seeing what he called “irrational market fear” pushing down the price to bargain-basement levels. In an email release to Dividend Machine subscribers earlier this week, Spetrino pointed out that investing whales like John Paulson, David Tepper and Doug Kass were targeting BofA.

“That’s because they know misguided fear is rampant,” he wrote. “They see the investing herd panicking, and selling their shares of valuable banks for ridiculously low prices.”

He went on to point out that BofA’s tangible book value was $12.65 per share, meaning that on Tuesday, when it languished as low as $6.01, is represented, as he put it, “a half-off sale on a $62 billion company, the largest bank in the U.S.!”

The lender jumped $1.03, or 15 percent, to $8.02 in New York Stock Exchange composite trading at 10:25 a.m., leading the KBW Bank Index higher. Berkshire fell less than 0.1 percent.

“This is a tremendous vote of confidence in the U.S. banking industry as well as Bank of America,” said Anthony Polini, an analyst with Raymond James Financial Inc. “Bank of America was being punished or victimized as one of the weakest U.S. banks that could be in financial distress. For Buffett to step up like this for BofA has implications for all the other banks.”

‘Acting Aggressively’

Buffett conceived of the investment while in the bathtub yesterday morning and had his assistant contact Moynihan’s to get the banker’s private number, CNBC reported, citing an interview with Buffett.

“Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest,” Buffett said in the statement. “I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them.”

Berkshire’s warrants may be exercised at any time in a 10- year period, according to the statement. Bank of America can redeem the preferred stock at any time for a 5 percent premium.

Buffett helped prop up Goldman Sachs Group Inc. during the credit crisis in 2008 with a $5 billion investment that was repaid this year. The Goldman Sachs investment paid a 10 percent dividend. Berkshire is the largest stock investor in Wells Fargo & Co., the only U.S. home lender larger than Bank of America.

‘Plenty Profitable’

Banking can “still be plenty profitable,” Buffett told Bloomberg Television’s Betty Liu on the “In the Loop” program on July 8.

The cost to protect against a default by Bank of America plunged. Credit-default swaps on the bank, which surged to a record this week, dropped 65 basis points to 308 basis points as of 10:43 a.m. in New York, according to data provider CMA.

Bank of America’s trading floor in New York erupted in cheers and applause when the news was announced this morning, said a person at the company who witnessed the reaction but who wasn’t authorized to speak publicly.

Moynihan agreed to sell the bank’s Canadian card unit, with about $8.6 billion in loan balances, and plans to leave the U.K. and Irish card markets, Bank of America said this month. The bank has been forced to write down credit-card and mortgage units acquired by Moynihan’s predecessor, Kenneth D. Lewis. Bank of America has sold more than 20 assets or units since Moynihan took over last year.

Job Cuts

The bank will eliminate about 3,500 jobs this quarter to focus “on what we can control” amid market turmoil, Moynihan said last week. Some workers already were informed of the dismissals, which are in addition to 2,500 reductions made this year, Moynihan said in a memo to senior managers.

Berkshire sold a stake in Bank of America last year and Buffett has publicly criticized Lewis, for missteps including the purchase of Merrill Lynch & Co., a deal struck the same day Lehman Brothers Holdings Inc. filed for bankruptcy in 2008.

Lewis “paid a crazy price, in my view,” Buffett said in remarks released Feb. 10 by the Financial Crisis Inquiry Commission. “He could have bought them the next day for nothing.” Moynihan became CEO early last year.

While the company suffered from errors, its reach among consumers are a source of strength, Buffett told CNBC in 2009.

“One thing about Bank of America,” Buffett said. “It has a wonderful deposit-gathering system.”

Wall Street Aristocracy Got $1.2 Trillion in Secret Loans

Citigroup Inc. and Bank of America Corp. were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.
By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.
Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages.

The largest borrower, Morgan Stanley, got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

“These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.”
(View the Bloomberg interactive graphic to chart the Fed’s financial bailout.)
Foreign Borrowers
It wasn’t just American finance. Almost half of the Fed’s top 30 borrowers, measured by peak balances, were European firms. They included Edinburgh-based Royal Bank of Scotland Plc, which took $84.5 billion, the most of any non-U.S. lender, and Zurich-based UBS AG, which got $77.2 billion. Germany’s Hypo Real Estate Holding AG borrowed $28.7 billion, an average of $21 million for each of its 1,366 employees.
The largest borrowers also included Dexia SA, Belgium’s biggest bank by assets, and Societe Generale SA, based in Paris, whose bond-insurance prices have surged in the past month as investors speculated that the spreading sovereign debt crisis in Europe might increase their chances of default.
The $1.2 trillion peak on Dec. 5, 2008 -- the combined outstanding balance under the seven programs tallied by Bloomberg -- was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010, according to data compiled by Bloomberg.
Peak Balance
The balance was more than 25 times the Fed’s pre-crisis lending peak of $46 billion on Sept. 12, 2001, the day after terrorists attacked the World Trade Center in New York and the Pentagon. Denominated in $1 bills, the $1.2 trillion would fill 539 Olympic-size swimming pools.
The Fed has said it had “no credit losses” on any of the emergency programs, and a report by Federal Reserve Bank of New York staffers in February said the central bank netted $13 billion in interest and fee income from the programs from August 2007 through December 2009.
“We designed our broad-based emergency programs to both effectively stem the crisis and minimize the financial risks to the U.S. taxpayer,” said James Clouse, deputy director of the Fed’s division of monetary affairs in Washington. “Nearly all of our emergency-lending programs have been closed. We have incurred no losses and expect no losses.”
While the 18-month U.S. recession that ended in June 2009 after a 5.1 percent contraction in gross domestic product was nowhere near the four-year, 27 percent decline between August 1929 and March 1933, banks and the economy remain stressed.
Odds of Recession
The odds of another recession have climbed during the past six months, according to five of nine economists on the Business Cycle Dating Committee of the National Bureau of Economic Research, an academic panel that dates recessions.
Bank of America’s bond-insurance prices last week surged to a rate of $342,040 a year for coverage on $10 million of debt, above where Lehman Brothers Holdings Inc.’s bond insurance was priced at the start of the week before the firm collapsed. Citigroup’s shares are trading below the split-adjusted price of $28 that they hit on the day the bank’s Fed loans peaked in January 2009. The U.S. unemployment rate was at 9.1 percent in July, compared with 4.7 percent in November 2007, before the recession began.
Homeowners are more than 30 days past due on their mortgage payments on 4.38 million properties in the U.S., and 2.16 million more properties are in foreclosure, representing a combined $1.27 trillion of unpaid principal, estimates Jacksonville, Florida-based Lender Processing Services Inc.
Liquidity Requirements
“Why in hell does the Federal Reserve seem to be able to find the way to help these entities that are gigantic?” U.S. Representative Walter B. Jones, a Republican from North Carolina, said at a June 1 congressional hearing in Washington on Fed lending disclosure. “They get help when the average businessperson down in eastern North Carolina, and probably across America, they can’t even go to a bank they’ve been banking with for 15 or 20 years and get a loan.”
The sheer size of the Fed loans bolsters the case for minimum liquidity requirements that global regulators last year agreed to impose on banks for the first time, said Litan, now a vice president at the Kansas City, Missouri-based Kauffman Foundation, which supports entrepreneurship research. Liquidity refers to the daily funds a bank needs to operate, including cash to cover depositor withdrawals.
The rules, which mandate that banks keep enough cash and easily liquidated assets on hand to survive a 30-day crisis, don’t take effect until 2015. Another proposed requirement for lenders to keep “stable funding” for a one-year horizon was postponed until at least 2018 after banks showed they’d have to raise as much as $6 trillion in new long-term debt to comply.
‘Stark Illustration’
Regulators are “not going to go far enough to prevent this from happening again,” said Kenneth Rogoff, a former chief economist at the International Monetary Fund and now an economics professor at Harvard University.
Reforms undertaken since the crisis might not insulate U.S. markets and financial institutions from the sovereign budget and debt crises facing Greece, Ireland and Portugal, according to the U.S. Financial Stability Oversight Council, a 10-member body created by the Dodd-Frank Act and led by Treasury Secretary Timothy Geithner.
“The recent financial crisis provides a stark illustration of how quickly confidence can erode and financial contagion can spread,” the council said in its July 26 report.
21,000 Transactions
Any new rescues by the U.S. central bank would be governed by transparency laws adopted in 2010 that require the Fed to disclose borrowers after two years.
Fed officials argued for more than two years that releasing the identities of borrowers and the terms of their loans would stigmatize banks, damaging stock prices or leading to depositor runs. A group of the biggest commercial banks last year asked the U.S. Supreme Court to keep at least some Fed borrowings secret. In March, the high court declined to hear that appeal, and the central bank made an unprecedented release of records.
Data gleaned from 29,346 pages of documents obtained under the Freedom of Information Act and from other Fed databases of more than 21,000 transactions make clear for the first time how deeply the world’s largest banks depended on the U.S. central bank to stave off cash shortfalls. Even as the firms asserted in news releases or earnings calls that they had ample cash, they drew Fed funding in secret, avoiding the stigma of weakness.
Morgan Stanley Borrowing
Two weeks after Lehman’s bankruptcy in September 2008, Morgan Stanley countered concerns that it might be next to go by announcing it had “strong capital and liquidity positions.” The statement, in a Sept. 29, 2008, press release about a $9 billion investment from Tokyo-based Mitsubishi UFJ Financial Group Inc., said nothing about Morgan Stanley’s Fed loans.
That was the same day as the firm’s $107.3 billion peak in borrowing from the central bank, which was the source of almost all of Morgan Stanley’s available cash, according to the lending data and documents released more than two years later by the Financial Crisis Inquiry Commission. The amount was almost three times the company’s total profits over the past decade, data compiled by Bloomberg show.
Mark Lake, a spokesman for New York-based Morgan Stanley, said the crisis caused the industry to “fundamentally re- evaluate” the way it manages its cash.
“We have taken the lessons we learned from that period and applied them to our liquidity-management program to protect both our franchise and our clients going forward,” Lake said. He declined to say what changes the bank had made.
Acceptable Collateral
In most cases, the Fed demanded collateral for its loans -- Treasuries or corporate bonds and mortgage bonds that could be seized and sold if the money wasn’t repaid. That meant the central bank’s main risk was that collateral pledged by banks that collapsed would be worth less than the amount borrowed.
As the crisis deepened, the Fed relaxed its standards for acceptable collateral. Typically, the central bank accepts only bonds with the highest credit grades, such as U.S. Treasuries. By late 2008, it was accepting “junk” bonds, those rated below investment grade. It even took stocks, which are first to get wiped out in a liquidation.
Morgan Stanley borrowed $61.3 billion from one Fed program in September 2008, pledging a total of $66.5 billion of collateral, according to Fed documents. Securities pledged included $21.5 billion of stocks, $6.68 billion of bonds with a junk credit rating and $19.5 billion of assets with an “unknown rating,” according to the documents. About 25 percent of the collateral was foreign-denominated.
‘Willingness to Lend’
“What you’re looking at is a willingness to lend against just about anything,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta and now chief monetary economist in Atlanta for Sarasota, Florida-based Cumberland Advisors Inc.
The lack of private-market alternatives for lending shows how skeptical trading partners and depositors were about the value of the banks’ capital and collateral, Eisenbeis said.
“The markets were just plain shut,” said Tanya Azarchs, former head of bank research at Standard & Poor’s and now an independent consultant in Briarcliff Manor, New York. “If you needed liquidity, there was only one place to go.”
Even banks that survived the crisis without government capital injections tapped the Fed through programs that promised confidentiality. London-based Barclays Plc borrowed $64.9 billion and Frankfurt-based Deutsche Bank AG got $66 billion. Sarah MacDonald, a spokeswoman for Barclays, and John Gallagher, a spokesman for Deutsche Bank, declined to comment.
Below-Market Rates
While the Fed’s last-resort lending programs generally charge above-market interest rates to deter routine borrowing, that practice sometimes flipped during the crisis. On Oct. 20, 2008, for example, the central bank agreed to make $113.3 billion of 28-day loans through its Term Auction Facility at a rate of 1.1 percent, according to a press release at the time.
The rate was less than a third of the 3.8 percent that banks were charging each other to make one-month loans on that day. Bank of America and Wachovia Corp. each got $15 billion of the 1.1 percent TAF loans, followed by Royal Bank of Scotland’s RBS Citizens NA unit with $10 billion, Fed data show.
JPMorgan Chase & Co., the New York-based lender that touted its “fortress balance sheet” at least 16 times in press releases and conference calls from October 2007 through February 2010, took as much as $48 billion in February 2009 from TAF. The facility, set up in December 2007, was a temporary alternative to the discount window, the central bank’s 97-year-old primary lending program to help banks in a cash squeeze.
‘Larger Than TARP’
Goldman Sachs Group Inc., which in 2007 was the most profitable securities firm in Wall Street history, borrowed $69 billion from the Fed on Dec. 31, 2008. Among the programs New York-based Goldman Sachs tapped after the Lehman bankruptcy was the Primary Dealer Credit Facility, or PDCF, designed to lend money to brokerage firms ineligible for the Fed’s bank-lending programs.
Michael Duvally, a spokesman for Goldman Sachs, declined to comment.
The Fed’s liquidity lifelines may increase the chances that banks engage in excessive risk-taking with borrowed money, Rogoff said. Such a phenomenon, known as moral hazard, occurs if banks assume the Fed will be there when they need it, he said. The size of bank borrowings “certainly shows the Fed bailout was in many ways much larger than TARP,” Rogoff said.
TARP is the Treasury Department’s Troubled Asset Relief Program, a $700 billion bank-bailout fund that provided capital injections of $45 billion each to Citigroup and Bank of America, and $10 billion to Morgan Stanley. Because most of the Treasury’s investments were made in the form of preferred stock, they were considered riskier than the Fed’s loans, a type of senior debt.
Dodd-Frank Requirement
In December, in response to the Dodd-Frank Act, the Fed released 18 databases detailing its temporary emergency-lending programs.
Congress required the disclosure after the Fed rejected requests in 2008 from the late Bloomberg News reporter Mark Pittman and other media companies that sought details of its loans under the Freedom of Information Act. After fighting to keep the data secret, the central bank released unprecedented information about its discount window and other programs under court order in March 2011.
Bloomberg News combined Fed databases made available in December and July with the discount-window records released in March to produce daily totals for banks across all the programs, including the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, Commercial Paper Funding Facility, discount window, PDCF, TAF, Term Securities Lending Facility and single-tranche open market operations. The programs supplied loans from August 2007 through April 2010.
Rolling Crisis
The result is a timeline illustrating how the credit crisis rolled from one bank to another as financial contagion spread.
Fed borrowings by Societe Generale, France’s second-biggest bank, peaked at $17.4 billion in May 2008, four months after the Paris-based lender announced a record 4.9 billion-euro ($7.2 billion) loss on unauthorized stock-index futures bets by former trader Jerome Kerviel.
Morgan Stanley’s top borrowing came four months later, after Lehman’s bankruptcy. Citigroup crested in January 2009, as did 43 other banks, the largest number of peak borrowings for any month during the crisis. Bank of America’s heaviest borrowings came two months after that.
Sixteen banks, including Plano, Texas-based Beal Financial Corp. and Jacksonville, Florida-based EverBank Financial Corp., didn’t hit their peaks until February or March 2010.
Using Subsidiaries
“At no point was there a material risk to the Fed or the taxpayer, as the loan required collateralization,” said Reshma Fernandes, a spokeswoman for EverBank, which borrowed as much as $250 million.
Banks maximized their borrowings by using subsidiaries to tap Fed programs at the same time. In March 2009, Charlotte, North Carolina-based Bank of America drew $78 billion from one facility through two banking units and $11.8 billion more from two other programs through its broker-dealer, Bank of America Securities LLC.
Banks also shifted balances among Fed programs. Many preferred the TAF because it carried less of the stigma associated with the discount window, often seen as the last resort for lenders in distress, according to a January 2011 paper by researchers at the New York Fed.
After the Lehman bankruptcy, hedge funds began pulling their cash out of Morgan Stanley, fearing it might be the next to collapse, the Financial Crisis Inquiry Commission said in a January report, citing interviews with former Chief Executive Officer John Mack and then-Treasurer David Wong.
Borrowings Surge
Morgan Stanley’s borrowings from the PDCF surged to $61.3 billion on Sept. 29 from zero on Sept. 14. At the same time, its loans from the Term Securities Lending Facility, or TSLF, rose to $36 billion from $3.5 billion. Morgan Stanley treasury reports released by the FCIC show the firm had $99.8 billion of liquidity on Sept. 29, a figure that included Fed borrowings.
“The cash flow was all drying up,” said Roger Lister, a former Fed economist who’s now head of financial-institutions coverage at credit-rating firm DBRS Inc. in New York. “Did they have enough resources to cope with it? The answer would be yes, but they needed the Fed.”
While Morgan Stanley’s Fed demands were the most acute, Citigroup was the most chronic borrower among the largest U.S. banks. The New York-based company borrowed $10 million from the TAF on the program’s first day in December 2007 and had more than $25 billion outstanding under all programs by May 2008, according to Bloomberg data.
Tapping Six Programs
By Nov. 21, when Citigroup began talks with the government to get a $20 billion capital injection on top of the $25 billion received a month earlier, its Fed borrowings had doubled to about $50 billion.
Over the next two months the amount almost doubled again. On Jan. 20, as the stock sank below $3 for the first time in 16 years amid investor concerns that the lender’s capital cushion might be inadequate, Citigroup was tapping six Fed programs at once. Its total borrowings amounted to more than twice the federal Department of Education’s 2011 budget.
Citigroup was in debt to the Fed on seven out of every 10 days from August 2007 through April 2010, the most frequent U.S. borrower among the 100 biggest publicly traded firms by pre- crisis market valuation. On average, the bank had a daily balance at the Fed of almost $20 billion.
‘Help Motivate Others’
“Citibank basically was sustained by the Fed for a very long time,” said Richard Herring, a finance professor at the University of Pennsylvania in Philadelphia who has studied financial crises.
Jon Diat, a Citigroup spokesman, said the bank made use of programs that “achieved the goal of instilling confidence in the markets.”
JPMorgan CEO Jamie Dimon said in a letter to shareholders last year that his bank avoided many government programs. It did use TAF, Dimon said in the letter, “but this was done at the request of the Federal Reserve to help motivate others to use the system.”
The bank, the second-largest in the U.S. by assets, first tapped the TAF in May 2008, six months after the program debuted, and then zeroed out its borrowings in September 2008. The next month, it started using TAF again.
On Feb. 26, 2009, more than a year after TAF’s creation, JPMorgan’s borrowings under the program climbed to $48 billion. On that day, the overall TAF balance for all banks hit its peak, $493.2 billion. Two weeks later, the figure began declining.
“Our prior comment is accurate,” said Howard Opinsky, a spokesman for JPMorgan.
‘The Cheapest Source’
Herring, the University of Pennsylvania professor, said some banks may have used the program to maximize profits by borrowing “from the cheapest source, because this was supposed to be secret and never revealed.”
Whether banks needed the Fed’s money for survival or used it because it offered advantageous rates, the central bank’s lender-of-last-resort role amounts to a free insurance policy for banks guaranteeing the arrival of funds in a disaster, Herring said.
An IMF report last October said regulators should consider charging banks for the right to access central bank funds.
“The extent of official intervention is clear evidence that systemic liquidity risks were under-recognized and mispriced by both the private and public sectors,” the IMF said in a separate report in April.
Access to Fed backup support “leads you to subject yourself to greater risks,” Herring said. “If it’s not there, you’re not going to take the risks that would put you in trouble and require you to have access to that kind of funding.”

China May Stop Buying U.S. Debt

China may ease up on buying Treasurys as U.S. growth slows and instead focus on developing internal demand, says Stephen Roach, the non-executive chairman of Morgan Stanley Asia.

China traditionally buys Treasurys to help finance the U.S. economy so Western consumers will buy goods made in China, but less demand here leaves the Asian giant little choice but to do what many say needs to be done anyway: export less and buy more at home.

"This is China's wakeup call," Roach tells CNBC.

China can "no longer afford to stay the course of export-led growth that is hooked on the bandwagon of the American consumer."

A Chinese shift away from U.S. Treasuries could mean Washington would have to pay higher interest rates to attract investors to U.S. debt and make up for any vacancies created by China.

By focusing heavily on exports, China was sitting on "trade surpluses, current account surpluses, and massive accumulations of foreign-exchange reserves, two-thirds of which have to be reinvested in dollar-based assets," Roach says.

But as China boosts internal consumption, domestic savings go down and so does its foreign-exchange accumulation, Roach says.

"And guess what ... they stop buying dollar-based assets, not because they're mad at us...but just because they don’t need to do it," he said.

China has expressed concern in the past over the level of debt the U.S. economy carries and what that means for its investment in U.S. Treasurys.

Vice President Joe Biden tells China's Caijing magazine the administration "is deeply committed to maintaining the fundamentals of the U.S. economy" so as to "ensure the safety, liquidity, and value of U.S. Treasury obligations for all of its investors," Bloomberg reports.

Producer Prices Soar by Most in Six Months, Ignite Inflation Fears

Companies paid higher prices for tobacco, pickup trucks and pharmaceuticals in July, driving underlying wholesale inflation up by the most in six months.

This measure of inflation, which excludes volatile food and energy prices, is known as the core Producer Price Index. It rose 0.4 percent in July — the biggest increase since January.

The overall PPI, which measures all price changes before they reach the consumer, rose 0.2 percent last month, the Labor Department said Wednesday. That follows a 0.4 percent drop in June, the first decline in 17 months.

A key reason for the increase in the core index was a 2.8 percent surge in tobacco prices — the most in more than two years. That accounted for about a quarter of the rise in the core index. Pickup truck prices rose 1 percent.

Gas prices fell for the second straight month. Food costs rose 0.6 percent, the biggest rise since February.

The PPI has increased 7.2 percent in the past 12 months. That's up sharply from earlier this year but below May's rise of 7.3 percent, which was the biggest in two and a half years.

The core index has increased 2.5 percent in the past 12 months, the most since June 2009.

"Modest inflationary pressures are building, although they are likely to recede ... over the balance of the year as last year's energy price surges" taper off, Steven Wood, an economist at Insight Economics, said in a note to clients.

Falling oil and gas prices are reducing inflation pressures. That's a reversal from earlier this year, when food and gas prices spiked and caused the Producer Price Index to jump 1.5 percent in February, after a 1 percent gain the previous month.

Federal Reserve Chairman Ben Bernanke faced criticism that the central bank's policies were contributing to higher inflation. The Fed has kept the short-term interest rate it controls at nearly zero since December 2008.

But gas prices fell from a peak in early May of nearly $4 a gallon to a nationwide average of $3.59 a gallon on Tuesday. One reason for the decline: Americans are driving less. Drivers have cut back on their gasoline purchases for 21 straight weeks, according to a weekly survey by MasterCard SpendingPulse.

And oil prices, which spiked this spring because of turmoil in the Middle East, dropped to $86.65 a barrel on Tuesday. Concerns about slower global economic growth have pushed oil prices down from about $97 a barrel a month ago.

Bernanke and many private economists have said the price increases would be temporary and inflation would remain muted. High unemployment makes it difficult for workers to press for higher wages, which in turn makes it hard for companies to raise prices on the products they sell.

Lower inflation gives the Federal Reserve more leeway to keep interest rates low and potentially engage in other efforts to boost the economy.

Last week, Fed policymakers said they will keep its benchmark short-term rate at nearly zero at least until mid-2013. Previously, the central bank had never given a clear time frame. It hopes the certainty of low rates will encourage consumers and businesses to borrow and spend more.

"Inflation has moderated as prices of energy and some commodities have declined from their earlier peaks," Fed policymakers said Aug. 9. The central bank forecast in June that inflation will remain within its informal target range of below 2 percent this year and next.

Bernanke Almost 'Treasonous' for Printing Money

Texas Governor Rick Perry, the latest entrant in the fight for the Republican presidential nomination for 2012, said it would be “almost treacherous — or treasonous” for Federal Reserve Chairman Ben S. Bernanke to increase stimulus spending before the 2012 election.

“If this guy prints more money between now and the election, I don’t know what you would do with him,” Perry said yesterday at a backyard appearance in Cedar Rapids, Iowa.

“We would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous — or treasonous — in my opinion.”

Perry, traveling across Iowa, was asked at the fundraiser, what he would do about the central bank.

“We have to learn the lessons of the past three years that they’ve been devastating,” he said. “The president of the United States has conducted an experiment on the American economy for almost the last three years, and it has gone tragically wrong.”

When first questioned about the central bank’s policies, Perry said he would “take a pass on the Federal Reserve.” Asked in a follow-up interview whether he thought the Fed was playing politics to help President Barack Obama win re-election, ABCnews.com reported, he said: “If they print more money between now and this election, I would suggest that’s exactly what’s going on.”

Bad Idea

White House press secretary Jay Carney criticized Perry’s remarks today, saying the governor’s statement “threatening” Bernanke was “not a good idea.”

Carney told reporters traveling with Obama, who is also in Iowa, that any candidate for president should consider the impact of statements about an independent entity such as the Fed. “The Fed’s independence is important,” he said.

Mark Miner, a Perry spokesman, didn’t directly respond to a query for comment on whether his boss was threatening the Fed chairman.

“The governor was expressing his frustration with the current economic situation and the out-of-control spending that persists in Washington,” Miner said in a statement. “Most Americans would agree that spending more money is not the answer to the economic issues facing the country.”

Democrats’ Response

Democrats quickly pounced on Perry’s statement.

“On just day three of his campaign, Rick Perry said he would have allowed the U.S. to default on its debts, and unleashed inflammatory schoolboy taunts at the chairman of the Federal Reserve,” Brad Woodhouse, a spokesman for the Democratic National Committee, said in an statement. “Suddenly, the rest of the Republican field is looking positively thoughtful.”

Cornelius Hurley, a law professor at Boston University who was once an assistant general counsel to the Fed’s Board of Governors, said he was “chilled” by Perry’s remarks.

“You just can’t run around shooting your mouth off and talking about the Federal Reserve and talking about treason and getting ugly,” said Hurley, who called himself a“disenchanted” Obama supporter. “That’s just not appropriate.”

Hurley said there is a long history of tension between politicians and the Fed, although he said Perry has reached new heights.

‘Very Troubling’

“I have never heard the rhetoric ramped up the way Governor Perry did,” he said. “That’s a very troubling development. We expect more of our president and should expect more of our presidential candidates.”

Brian Gardner, senior vice president for Washington research at Keefe Bruyette & Woods Inc., said Perry’s comments were aimed at Tea Party activists who are skeptical of the Fed and would have little impact on investors.

“Investors are focused on things other than the presidential race,” he said. “If it becomes clear that he’s going to be the nominee or if it looks like he could win the general election, then investors will start to pay attention.”

Richard Fisher, president of the Federal Reserve Bank of Dallas, has opposed additional quantitative easing and with two other Fed presidents dissented from a pledge by the Federal Open Market Committee to hold interest rates near zero until at least mid-2013. “We’ve exhausted our ammunition, in my view,” Fisher said on July 13.

James Hoard, a spokesman for the Federal Reserve Bank of Dallas, said the bank declined to comment on Perry’s remarks.

On the Soapbox

Perry, 61, started yesterday at the Iowa State Fair, touting his economic record and fielding reporters’ questions as he sought to distinguish himself from his two leading rivals for the Republican presidential nomination: Representative Michele Bachmann and former Massachusetts Governor Mitt Romney.

In remarks made at the Des Moines Register’s “soapbox” fair stage, Perry also drew an apparent comparison between himself and the president, as he praised military service.

“A guy like me can stand up on a soapbox at the Iowa State Fair and talk freely about freedom and liberty and America and that we are an exceptional country and we’re going to stay an exceptional country,” Perry said. “We don’t need anybody apologizing anywhere in this world about America. I get a little bit passionate about that. That’s OK. I think you want a president that is passionate about America, that’s in love with America.”

Question for Obama

At the event in Cedar Rapids later, a reporter asked Perry whether he was suggesting that Obama doesn’t love America.

“You need to ask him,” Perry responded, according to ABCNews.com. “I’m saying, you’re a good reporter, go ask him.”

Pat Buchanan, a Republican who has sought his party’s nomination for president and is now a commentator on MSNBC’s “Morning Joe” program, said today: “I think Perry has probably made some statements he’s going to have to walk back a bit.”

Buchanan, who ran in Republican primaries in 1992 and 1996, said: “In presidential politics I think you ought not to ask or imply that someone doesn’t love his country, especially the president of the United States.”

Perry, asked at the fair why he would be a stronger opponent for Obama than Bachmann, said: “Our records are pretty easy to find and 10 years of being an executive, running a state the size of Texas, matters. It’s pretty hard to argue that we haven’t created a job-creating machine in the state of Texas and I think that’s what people are looking for.”

‘Apples to Apples’

Questioned on how he is different from Romney, who promotes his private-industry experience that includes helping found the Boston-based venture capital firm Bain Capital LLC, Perry responded: “Check his record in Massachusetts when he was governor, and I think you’ve got some apples to apples.”

Discussing Romney’s private-sector background, Perry said he had some, too, from his time as a rancher before entering full-time elected office. He kept much of his focus on Obama, saying the president had to “get rid of the regulations that are stifling jobs in America.”

Obama was in Iowa yesterday as part of a three-day campaign-style tour through the Midwest, concentrating on his policies for job creation. The president is making another appearance today at a rural economic forum in Peosta, Iowa.

Perry was praising the economic gains of Texas as he sought support in the state that will host the first caucuses for the Republican presidential nomination early next year.

‘Low-Tax, Low-Regulation’

“We can take those same low-tax, low-regulation, low- lawsuit theories and you implement it at the national level,” he said.

Texas added more than 900,000 jobs from December 2000 -- when he became governor -- to December 2010, according to the U.S. Labor Department. It ranked 45th in the country for state and local tax burden on income in fiscal 2009, according to the Tax Foundation, a nonpartisan research program in Washington.

Democrats challenged Perry’s claims, saying many of the jobs have been low wage.

“Governor Perry fits a little bit of the stereotype that some people have of Texas,” Texas Representative Lloyd Doggett told reporters on a conference call. “He’s a little big for his boots, there’s a little swagger and he’s really big on miracles, especially miracles that he thinks that he’s performed.”

Top-Tier Candidates

Perry and Bachmann, 55, are the two candidates best- positioned as alternatives to Romney, 64, who leads in national polls and fundraising among Republicans. Bachmann boosted her prospects by winning the Iowa Straw Poll on Aug. 13, a contest in which Romney didn’t actively compete and Perry’s name wasn’t listed on the ballot.

Perry, the longest-serving U.S. governor and an early Tea Party supporter, formally declared his candidacy Aug. 13 in South Carolina.

He was elected lieutenant governor in 1998 and took over the top job shortly after then-Governor George W. Bush won the presidency in November 2000.

Perry was asked whether another Texan will face difficulties running for president after Bush’s two terms.

“Our records are quite different,” he said. “I went to Texas A&M. He went to Yale.”

FT: SEC Investigating S&P Employees for Insider Trading Over Downgrade of US Debt

The Securities and Exchange Commission has asked Standard and Poor’s to hand over a list of people who knew the agency was going to downgrade U.S. ratings before it was announced to see if possible insider trading took place.

Sources familiar with the issue tell the Financial Times that the SEC’s enforcement division isn't after the S&P nor do they have evidence of specific trading activity that would suggest a leak.

An examination department, which oversees ratings agencies, asked for names.

Should a formal investigation evolve, a bigger issue could arise – Standard and Poor’s license.

The Credit Rating Agency Reform Act of 2006 states that an agency could have its license revoked if it leaks information prior to disclosing a move on a rating public, MarketWatch reports.

The ratings agency must also have policies and procedures to prevent such a disclosure.

“If it is true that they told hedge funds and briefed banks and told a few people ahead of everyone else that would appear to be a clear violation 2006 Act,” says Consumer Federation of America director Barbara Roper, according to MarketWatch.

“Credit rating agencies have to have polices to prevent the dissemination of pending rating action on the Internet.”

Increasing the probe from an inquiry level to an enforcement one may be tough.

“Proving someone leaked information about the downgrade, or traded ahead of it, could be challenging. Many traders anticipated the downgrade and bets could occur across numerous securities or currencies without inside information,” the Times reports.

“In a traditional insider trading case, there is often a more predictable correlation between a company’s stock price and a particular development.”

(Getty Images photo)

Politicians are already all over the downgrade, the first of its kind ever.

The Senate Banking committee said it would look into S&P’s move to knock U.S. credit ratings to AA-plus from AAA, which pummeled stock markets.

Like the SEC, the Senate panel is gathering information on the move and hasn’t opened a formal investigation over any wrongdoing, Reuters reports.
Senate Banking Committee Chairman Tim Johnson has said the downgrade was an "irresponsible move" that could have a far-reaching impact, Reuters adds.

The downgrade may also "have spillover effects that tax the American people by increasing interest rates on home loans, credit cards, and car loans, and by increasing the cost of finance for some state and local governments."

S&P also has come under attack from House of Representatives Majority Leader Eric Cantor, a conservative Republican who has been outspoken in his opposition to tax increases.

In a memo to his fellow Republicans that was made public by his office, Cantor noted that S&P's analysis of the U.S. fiscal situation "is overly focused on resolving the debt crisis in a manner that would greatly worsen the jobs crisis."

He was referring to S&P's contention that "the majority of Republicans in Congress continue to resist any measure that would raise revenues" to help ease the country's fiscal problems.

During the debt limit negotiations, Cantor and fellow Republicans successfully opposed raising taxes on Americans despite Democrats' insistence for more revenue.

The House Financial Services oversight subcommittee, which held a hearing on the credit agencies last month, has no plans for another hearing, a congressional aide said this week.

Meanwhile, Columbia University law professor John Coffee said the fate of future reform efforts for the ratings agencies was uncertain.

Credit rating agencies were widely criticized for fueling the 2007-2009 financial crisis by assigning top ratings to securities that were backed by subprime mortgages, which then plummeted in value as the housing market collapsed.

The new Dodd-Frank regulatory reform law does not include a tough reform amendment offered by Democratic Senator Al Franken of Minnesota, but it did require a two-year study of the credit ratings industry, perceptions that it suffers from an inherent conflict of interest, and what to do about it.

Of particular concern is the fact that companies issuing financial instruments pay the ratings agencies to do the analysis that results in their ratings, Coffee said.

Governments don't solicit or pay credit agencies for ratings.

Meanwhile, a managing director at Standard & Poor's said that he has absolutely no second thoughts about the credit ratings agency's decision to cut the U.S. debt rating.

S&P's David Beers told BC's "Good Morning America" earlier this week that the agency's decision was based on several factors, including damage done to the U.S. reputation over the controversy surrounding the debt ceiling and concerns that underlying public finances are on an unsustainable path.

Asked if he had any second thoughts about the downgrade, Beers said "absolutely not."

While much has been made about the Treasury Department's claim that S&P acted on an analysis that had a $2 trillion error, Beers rebuffed the notion during an appearance on CNN.

"This idea that we made a $2 trillion error is simply a smoke screen for the unhappiness about our decision," he said.

Beers did seem to try to alleviate concern about the downgrade, saying it was "a very small diminution, if you like, in the credit standing of the United States."

"This is not a catastrophic decline in the U.S.'s creditworthiness," he added.

Wharton's Siegel: Fed Has Painted Itself Into a Corner

The Federal Reserve has painted itself into a corner when it announced to the world that interest rates will likely stay low for the next two years, says Wharton School finance professor and economist  Jeremy Siegel.

A lot can happen between now and then, and should economic conditions merit a hike in interest rates, markets will be unpleasantly surprised.

“I don’t think the Fed can forecast two years in advance to know that this is going to be the right policy for the next 24 months. Back in March they were optimistic about growth and now we’re five months later and they’re pessimistic,” Siegel tells CNBC. “I’m worried about that long-run credibility”

Jeremy Siegel(Associated Press photo)

Stock markets, meanwhile, have been enduring some wild swings these days but investors will find some bargains when the dust settles, Siegel adds.

“If you can just grit your teeth and say I’m going to get through this volatility, I think you’re really going to be rewarded in the long run here.”

Many bonds, Siegel says, are due for a breather.

TIPS, the government’s inflation-protected securities, are in such demand that investors have been willing to take a loss for them in exchange for a break in market volatility, Siegel says.

“As you saw, the ten-year TIPS, going into a negative yield is just unbelievable. People are giving their money to the U.S. government for ten years and saying in ten years give it back to me worth less than what I am giving you now.”

“My feeling is the bond market is just grossly overvalued.”

The Wilshire 5000 Total Market Index has lost $2.8 trillion in value since the stock market slide began on July 22, CNNMoney reports.

About $600 billion was wiped out on Wednesday, when the index and the Dow Jones Industrial Average both dropped about 520 points.

Experts say investors are wise to jump on the sidelines until financial seas calm.

"Try to take a step back from the day-to-day," says Chris Philips, senior investment analyst with Vanguard, according to CNNMoney.

"Reacting to these ups and downs and sideways swings can actually do more harm than good for most investors."

Analyst say those nearing retirement age should not be too affected by Wall Street’s wild swings.

"For people who are young, it's a buying opportunity," says Christine Benz, director of personal finance for Morningstar, also tells CNNMoney.

Those who need to cash in the next few years should have too much invested in stocks anyway, Benz says.

S&P Cuts AAA Ratings on Thousands of Municipal Bonds After U.S. Downgrade

Standard & Poor’s lowered the AAA ratings of thousands of municipal bonds tied to the federal government, including housing securities and debt backed by leases, following its Aug. 5 downgrade of the U.S.

The rating company assigned AA+ scores to securities in the $2.9 trillion municipal bond market including school- construction bonds in Irving, Texas; debt backed by a federal lease in Miami; and a bond series for multifamily housing in Oceanside, California. Olayinka Fadahunsi, an S&P spokesman, said he couldn’t provide a dollar figure on the affected debt.

S&P also cut ratings on securities backed by Fannie Mae and Freddie Mac, prerefunded issues and munis repaid by using federal assets, also known as defeased or escrow bonds. No state general-obligation ratings were affected and the company said some may remain unchanged.

“It’s expected, but nobody is happy about it,” Bud Byrnes, chief executive officer of Encino, California-based RH Investment Corp., said in a telephone interview. “No one that I know thinks it was justified to cut the U.S. bonds to AA+. Once that happened, you knew that any prerefunded bonds or escrowed bonds would be downgraded too. It’s a domino effect.”

Byrnes said funds required to invest in AAA bonds would be most affected by the downgrades and may be forced to liquidate some holdings. “They will have a hard time replacing that yield,” he said.

‘Logical and Coherent’

Chris Mier, a managing director at Loop Capital Markets LLC in Chicago who follows the municipal bond market, said the downgrades made sense, given the federal rating cut.

“In order to keep the system logical and coherent, there are going to be a lot of downgrades,” Mier said in a conference call with reporters and clients.

Matt Fabian, a managing director of Concord, Massachusetts- based Municipal Market Advisors, a financial research company, said in a telephone interview that he expected “hundreds and hundreds of municipal downgrades,” which may hurt investor confidence.

“Treasuries may be able to shake off a real impact from the downgrade,” he said. “Munis, I’m less sure about.”

S&P cited politics in negotiations to increase the debt ceiling and said lawmakers failed to reduce spending enough.

‘Least Disruptive’

The company said on July 21 that a U.S. downgrade based on a failure to come up with a “realistic and credible” plan to reduce the budget deficit would be the “least disruptive” scenario for municipal ratings. That’s because it would mean Congress avoided making significant cuts to the funding of municipal credits not directly linked to the federal government, S&P said.

Top-rated state and local governments wouldn’t automatically lose their top scores, the company said. It rates the general-obligation debt of nine states AAA. The country’s “decentralized governmental structure” calls for an independent review of state and local government credits, 3.9 percent of which have AAA ratings, S&P said in a report.

State and municipal governments that depend less on the national government for revenue and that manage their own books well enough to weather declines in federal funding may retain AAA ratings, S&P said. The company didn’t name such states or municipal governments in the report.

Issuance Slows

Municipal issuance has fallen amid the U.S. debt-ceiling impasse. The slump and signs of a slowing economy helped drive tax-exempt yields to the lowest this year. Scheduled debt sales total about $2.8 billion this week, the slowest August week since 2003, according to data compiled by Bloomberg.

For the municipal market, “the key is supply and demand,” more than ratings downgrades, said Ed Reinoso, chief executive officer of Castleton Partners in New York, which manages about $250 million for individuals.

The S&P action itself “was almost cosmetic,” he said in a telephone interview. “It doesn’t seem to have much impact.”

Yields on top-rated 10-year tax-exempt debt fell to 2.39 percent, the lowest since October, according to a Bloomberg Valuation index.

S&P, in lowering the U.S. from AAA on Aug. 5, cited the nation’s political process and said lawmakers failed to reduce spending enough in their deal to raise the debt ceiling. Moody’s Investors Service and Fitch Ratings affirmed their top ratings on Aug. 2, the day President Barack Obama signed the bill raising the debt ceiling and avoiding a default.

Similar to Moody’s

Any state and local government downgrades from S&P may be similar to potential rating cuts Moody’s mapped out last month, DeGroot said in his report. Moody’s on July 13 said a possible U.S. downgrade would affect 7,000 municipal credits totaling $130 billion that are directly linked to U.S. credit.

Moody’s also said it would review indirectly linked debt and last month said it may downgrade five of the 15 states it ranks Aaa because of their vulnerability to cuts in federal spending. The company wound up reaffirming those top ratings last week, assigning a negative outlook.

Officials in Maryland and Virginia, two states with economies tightly bound to the federal government, said they hadn’t heard from S&P since the U.S. downgrade and didn’t think any moves were imminent.

Patti Konrad, the director of debt management for Maryland, said it’s unclear what risks any federal budget cuts would deal to her state’s economy.

“I would think S&P would want to take some time,” she said. “We haven’t heard anything from them.”

Ric Brown, Virginia’s finance secretary, said his office hasn’t spoken to S&P in the wake of the U.S. credit rating cut. He said he anticipates that any move affecting the state would be based on how federal budget cuts would ripple through the economy, rather than any automatic triggers.

“It’s probably going to take a little bit of a while until they know specifically what’s on the table to assess that,” he said.

Aide: Senate Probing S&P Downgrade of US AAA Rating

The U.S. Senate Banking committee has begun looking into last week's decision by Standard and Poor's to downgrade the U.S. credit rating, a committee aide told Reuters.

The aide said the panel was gathering information about the S&P move but no decision had been made on whether it will hold hearings into the downgrade.

While an official investigation has not been launched, the aide said that all options were being weighed.

Late on Friday, S&P said the world's largest economy no longer deserved the top AAA credit rating, cutting it one notch to AA-plus.

The move was driven by concerns over Washington's inability to achieve at least $4 trillion in long-term savings amid a national debt that has climbed above $14.3 trillion.

Instead, after a rancorous fight between Democrats and Republicans, Congress and President Barack Obama recently negotiated a 10-year deficit-reduction plan that could end up saving a little over $2 trillion.

Senate Banking Committee Chairman Tim Johnson, in a statement, called S&P's downgrade an "irresponsible move" that could have a far-reaching impact.

The Democrat said the downgrade may "have spillover effects that tax the American people by increasing interest rates on home loans, credit cards, and car loans, and by increasing the cost of finance for some state and local governments."

S&P also came under attack from House of Representatives Majority Leader Eric Cantor, a conservative Republican who has been outspoken in his opposition to tax increases.

In a memo to his fellow Republicans that was made public by his office, Cantor noted that S&P's analysis of the U.S. fiscal situation "is overly focused on resolving the debt crisis in a manner that would greatly worsen the jobs crisis."

He was referring to S&P's contention that "the majority of Republicans in Congress continue to resist any measure that would raise revenues" to help ease the country's fiscal problems.

During the debt limit negotiations, Cantor and fellow Republicans successfully opposed raising taxes on Americans despite Democrats' insistence for more revenue.

Meanwhile, White House Spokesman Jay Carney told reporters that he was not aware of any administration conversations about clamping down on S&P and other ratings agencies through tougher regulations.

Since S&P's announcement last week, Republicans and Democrats in Congress mostly have been engaged in blaming each other for the government rating downgrade.

And with Congress having just started a month-long recess, legislative activity has mostly ground to a halt as senators and House members are scattered across the country.

One senior House Republican aide told Reuters that he had not heard of any new legislative efforts brewing on rating agency reform.

The House Financial Services oversight subcommittee, which held a hearing on the credit agencies last month, has no plans for another hearing, a congressional aide said late on Monday.

Columbia University law professor John Coffee said the fate of future reform efforts for the ratings agencies was uncertain.

Credit rating agencies were widely criticized for fueling the 2007-2009 financial crisis by assigning top ratings to securities that were backed by subprime mortgages, which then plummeted in value as the housing market collapsed.

The new Dodd-Frank regulatory reform law does not include a tough reform amendment offered by Democratic Senator Al Franken of Minnesota, but it did require a two-year study of the credit ratings industry, perceptions that it suffers from an inherent conflict of interest, and what to do about it.

Of particular concern is the fact that companies issuing financial instruments pay the ratings agencies to do the analysis that results in their ratings, Coffee said.

Governments do not solicit or pay credit agencies for ratings.

Rogers: "Bankrupt" U.S. Will Never Pay Back Its Bills

The U.S. government deserves the downgrade Standard and Poor's slapped on its ratings, because the country has run up so many debts it will never get out of the hole, say famed commodities investor Jim Rogers.

Standard and Poor's cut the country's ratings on Aug. 5 to AA+ from AAA on concerns the government is not doing enough to address its debt burdens.

The agency is being too nice, as Washington probably doesn't even deserve the AA+ rating, Rogers tells CNBC.

"It seems to me it's physically, humanly impossible for the U.S. to ever pay off its debt," he says. "They can roll it over and continue to play the charade, but the U.S. is bankrupt."

Investors should go long on gold and commodities, which will perform well while equities and currency markets digest the extent of the fallout the downgrade will have.

"You should nearly always buy into panic just like you should sell hysteria," Rogers says.

"I own gold, I'm worried about gold, it's going so up so much, I'm not going to sell it but it looks like it's setting itself up for a nice correction. I hope so. Then I can buy more."

Gold has topped $1,700 an ounce for the first time on news of the downgrade.

Gold prices are up 20 percent in 2011, Bloomberg reports, as investors are buying it as a hedge to protect themselves against market volatility.

"In this current macro environment with high risk and uncertainty surrounding the financial markets, gold has boded very well," says Bayram Dincer, an analyst at LGT Capital Management in Pfaeffikon, Switzerland, according to Bloomberg.

"Gold is pricing in the one-notch downgrade as well as a component of lower global GDP growth."

 

U.S. Facing Massive Job Losses

At a time when the American public and global investors are desperate for any sign of economic growth, major U.S.-based companies are eliminating tens of thousands of jobs.

Outplacement firm Challenger, Gray & Christmas is forecasting a loss of 66,414 jobs in coming months.

Companies are shedding jobs for different reasons. Borders, for example, is closing all of its remaining stores, which will put nearly 11,000 people out of work. Lockheed Martin reportedly blames its release of thousands of employees on government spending cuts and a weak economy.
According to a Los Angeles Times article published Aug. 8, many companies are “beginning to give up on the American consumer as a source of future growth.”
The paper says the largest layoff actions last month were accompanied by disclosures that the same companies planned to ramp up their operations — including hiring — in emerging economies.
Merck is one such company. The pharmaceutical giant plans to cut 13 percent of its workforce — or roughly 12,000 to 13,000 jobs — by 2015, according to CNN Money. And between 35 percent and 40 percent of the job cuts will be in the United States. Yet, the company will continue to hire new employees to build the company's presence in emerging markets like China and Brazil.
In addition to the attractive consumer bases abroad, the Los Angeles Times also notes that the U.S. tax system creates very real financial incentives for companies that cut jobs here and replace them with foreign positions. These corporations are earning larger portions of their income abroad, and that money will be heavily taxed if they bring it back home.
Basically, it just makes sense for many companies to use the money where they earn it.
This could result in a self-perpetuating cycle that stifles job creation in the U.S. over the long term. There are already growing middle classes in emerging nations with money to burn. The more jobs that they’re fed, the more money they’ll have, and the more incentive corporations will have to prioritize targeting them. On the contrary, the lack of jobs in the U.S. means consumers will have tighter budgets and will likely be more hesitant to splurge.
“In effect, as many corporate executives look ahead, the United States has a diminishing place in their thinking,” concludes the Los Angeles Times.