Thursday, January 28, 2010

Onion Tax & UPS Steals Packages

Anecdotal evidence of Depression II. All costs are passed on to the customer:

Inside Job @ UPS

A young woman who works in my neighborhood UPS store told me she had two shipped packages stolen by her fellow employees. One was a cell phone she sent out for repair; the other was a purchase from Best Buy. She said 8 people in the UPS hub had been fired for theft since Christmas. “It’s a big problem,” she told me. “The recession.”

Onion Tax

At the Frontier Diner on 39th Street & Third Avenue, I ordered a feta-and-spinach omelette, asking for “Egg whites only, please." The waiter said, "One dollar extra.” “Okay,” I allowed (budget buster balanced by positive health move). “Also I’ll have some tomato and onion.” “A dollar extra. For each item,” he said, pointing to the menu, where sure enough, every additional ingredient was a dollar extra.

This wasn’t a build-your-own-salad bar; this was a diner, f’Chrissakes. What’s next, extra for the fatty substance to cook the omelette in? A rental fee for a porcelain plate & metal utensils instead of paper/plastic? (An extra charge for lightening the carbon footprint. Very green both ways.)

Wednesday, January 27, 2010

Obama Leads Right Wing Takeover

To understand the current mood of the country, all you have to do is visualize a two-column headline:

7 People for Every Job Opening: 16 million People Out of Work

Wall Street to Dole Out $142 Billion in Bonuses This January

I love the way the media categorizes genuine dismay at the gross injustice shown by these two headlines as simply requiring politicians to tamp down populist rage, as though there were no good reason for it. Ergo, if there's no good reason, there's no good solution.

Jason DeParle is a great New York Times reporter. He often writes about ordinary Americans and their needs, something which seems to be considered "far-left" in current political ideology.

Today his article reports that nearly 1 in 5 Americans reported that they lacked the money to buy food at some point in 2009:

More than 38 million Americans--one in eight--now receive food stamps, a record high.

While Obama plays around with deficit-reduction tactics to show he's Republican-lite, people are starving.

Friday, January 15, 2010

TOO HOT TO HANDLE: NYT won't publish my comment

In response to Paul Krugman's column today "Bankers Without A Clue", I wrote the comment below:

Dr. Krugman,

Do you really believe men like Jamie Dimon, John Mack and Lloyd Blankfein are "clueless"? First of all, if they are clueless and the government had to bail them out, why weren't they replaced? To me, they seem to be calculating and devastatingly effective.

1) They now have explicit backing of the Fed and U.S. Treasury. "Privatized profits, socialized losses" should be stamped on our currency under "In God We Trust".

2) They gutted derivatives regulation in the financial reform bill. Derivatives like CDOs and CDSs are at the heart of this man-made crisis.

3) Take Lloyd Blankfein of Goldman Sachs (please). He is the least "clueless", at least according to Greg Gordon's brilliant Goldman series on McClatchy. Just one of many:

Investors Could Only Lose in Goldman's Caymans Deals

GS created extraordinarily complex derivatives they knew would fail because they bet against them with credit default swaps, paid for AAA ratings from compliant credit rating agencies, got investors to buy them, and collected on their bets when the derivatives inevitably failed. So they certainly knew the securitized subprime-backed bonds were no good. As their defense, they claim their investors were too sophisticated not to know what they were buying.

These guys should be prosecuted under the RICO Act. This is not the Pecora hearings. We will not get meaningful regulation, anything like Glass-Steagall or FDIC insurance as reassurance. Instead, we will get cosmetic changes at best. The financial lobbyists are in Congress right now writing the reform bill, just as Lloyd Blankfein huddled with Henry Paulson to decide AIG's fate. We know what happened then: 100 cents on the dollar to Goldman.

Meanwhile, the rightwing populist rage is rising. We can see that in the Senate race in Massachusetts, a true blue state, where Kennedy's seat is in jeopardy. The teabaggers are making inroads everywhere.

Unless the Democrats can do something meaningful or at least show solidarity with the 99% of us who are holding tenuously onto the middle class, they will sweep into power. I'm tired of "liberals" telling progressives that it's our fault because we're not taking to the streets against the Senate filibuster rules. Let's call lobbying what it really is, bribery, and get rid of everyone who accepts it.

The only stated reason for not publishing a comment is if it is abusive or not on topic. Mine was neither. Could it be the NYT is hiding something? A conflict-of-interest? You decide.

Thursday, January 14, 2010

On Wall Street, Main Street is Worth More Dead than Alive

This is the story of YRC , a trucking company with 55,000 employees and revenues of about $9 billion.

YRC got in trouble in 2008, like many, especially the "too big to fail" financial institutions, when the credit market collapsed and they couldn't refinance their debt. They asked their bondholders to swap their debt for equity. In other words, in exchange for being lenders, they'd become owners.

This is common to prevent reorganization (bankruptcy). The business was basically strong. The process of convincing bondholders to forgive about $500 million of debt was long and arduous. But YRC managed to convince most of them. Except $40-50 million worth. YRC couldn't even locate the owners of those bonds. YRC and its advisers were puzzled. Why would a bondholder force them into bankruptcy? Then they'd get nothing.

Enter credit default swaps. Ordinary people (that is, people that have regular lives and no time or patience for arcane jargon designed to obscure), don't run across the concept much. So let me explain.

With CDSs, you can take out insurance that the target will fail, in this case YRC. You can make a lot of money that way. You don't even have to own stock in the company. It's like betting that your neighbor's house will burn down. Maybe your house benefits from not having a smoking pile of bricks next door (helps preserve property values) but you can make lots more burning your neighbor's house down. Who cares if the family's inside?

CDSs are not transparent. In fact, they're opaque. They're not traded on an exchange, prices aren't public and you don't know who holds them or how much. Often they're simply the result of a phone call between two parties.

It turned out that the $40-50 million was held by the NY hedge fund Brigade Capital. Brigade literally held the fate of YRC and its 55,000 employees and $9 billion in revenue in its hands. To some people, you're worth more dead than alive.

Wall Street vs. Main Street: If it weren't for the intervention of the Teamsters and finally, Pennsylvania state treasurer Rob McCord, who invested state pension funds in Brigade, YRC would have been destroyed so the Brigade Capital hedge fund managers could compete as to who could buy a bigger European castle. Ironically, the Pennsylvania pension fund probably held some money from YRC.

Keep your eye on the Financial Reform bill making its way through Congress. I guarantee transparently that CDSs will emerge intact, unregulated, ready to wreak more havoc on Main Street.

That Orange Juice Will Cost You

So there ain't no inflation, eh? As Jerry Seinfeld would say "Did you ever notice..." that government statistics and actual prices are two very different things? In a previous post, No Raises This Year: Seniors Eat Cat Food I made the point that Consumer Price Index calculations were politically calculated.

According to the government, benefits didn't go up for Social Security recipients because the CPI didn't go up. But as I showed, real prices, not models of prices, did go up. And they will hit harder this year as stimulus money fades and people try to do more with less.

The arctic blast up and down the eastern seaboard has wreaked havoc on crops in Florida. It's the coldest it's been there in decades. Despite many protestations to the contrary, prices on fruits and vegetables will skyrocket. In today's NY Times article by Damien Cave:

“Tomatoes were down around $14 for a 25-pound box; now they are up over $20,” said Gene McAvoy, an agriculture expert with the University Florida, who predicted $100 million in vegetable losses. “Peppers — just after New Year’s they were $8 a box; now they’re up around $18.”

Translation: get ready to pay up to an extra dollar a pound at supermarkets in New York and Chicago.

I live in New York City, the Nanny City, where our Mayor Bloomberg exhorts us to eat well. It's kind of difficult when prices for fruits and veggies go up 50% or more. There's real inflation out here. Maybe not in DC theoretical models, which make no sense anyway. Throw away the math (it really helped in modeling future housing risk. Not) and ask someone on the street.

Sunday, January 10, 2010

Private Equity Makes Mr. Potter of It’s A Wonderful Life Look Like FDR

IndyMac was one of the biggest bank failures in history. Its failure provided vivid visuals of anxious depositors standing in line hoping to withdraw their money.

The FDIC (as is its mandate) took it over, cleansed it of bad loans through asset sales and write-downs which shrunk its debt by 27%, then fired 45% of its employees.

It sold it to a private equity club consisting of the hedge funds of some of the biggest names in finance: J. Christopher Flowers, George Soros, John Paulson (famous for making billions betting on the subprime mortgage collapse) and Michael Dell of Dell Computers. The FDIC also agreed to take most of the risk on future loan losses.

This club paid $1.5 billion and renamed it OneWest Bank. In early December it bought another failed bank, the First Federal Bank of California with its profits. With that purchase, OneWest doubled its number of branches to 72, increased its assets to $24 billion and made it the largest bank in southern California.

So what’s the problem with private equity gobbling up all the failed banks, of which there were more than 140 in 2010?

Private equity takes over a company using leverage, pays its owners off the top, piles the debt on top of the company, strips it down (fires everyone and culls expenses), takes it public and leaves it in shambles.

That’s certainly the modus operandi of J. Christopher Flowers, who made a fortune at Goldman Sachs while still in his twenties, founding its financial services merger business. He organized the $62 billion merger of Nationsbank and BankAmerica creating what became Bank of America, among other financial mergers. He left GS in 1998 to start his own business.

In 2000 he bought the failed Long-Term Credit Bank of Japan from the Japanese government, renaming it Shinsei Bank. He made billions when he took it public four years later. The Japanese government never recouped the trillions of yen it spent bailing out the failed bank. Now it’s teetering on the brink again because of bad investments in subprime mortgages and exposure to the bankrupt Lehman Brothers.

Flowers is not shy about his motives. He told an investor forum in New York back in January that “the government has all the downside and we have all the upside.” Bank failures are a golden opportunity for private equity owners like him. “Lowlife grave dancers like me will make a fortune.”

There are several current converging factors: the ineffectual approach to foreclosures by both the Bush and the Obama administration, which led to the acceleration of failed banks; the coming collapse of commercial real estate mortgage backed securities; the FDIC insurance fund is in the red; and private equity is one of the only financial entities with enough cash reserves to infuse money into the banking system. Flowers bragged that he could raise $10 billion in 48 hours.

OneWest protests that its motives are not merely money. It announced the creation of the $10 million OneWest Foundation to support neighborhood activities. Its chairman, Steve Mnuchin, attended a Christmas toy drive at a youth center with Governor Schwarznegger at the same time OneWest was pasting its name on the former First Financial branches.

But its behavior in mortgage modifications was so egregious that a judge in New York cancelled the $525,000 mortgage debt of a Long Island couple it was trying to evict, citing its “harsh, repugnant, shocking and repulsive acts.” Suffolk Judge Jeffrey Spinner chastised OneWest for misleading him about the amounts owed and for its ill-treatment of the couple involved. Spinner wrote that OneWest’s conduct was “inequitable, vexations and opprobrious.” He took the extraordinary step of cancelling the debt because the bank “must be appropriately sanctioned so as to deter it from imposing further mortifying abuse against [the couple].”

OneWest also has garnered bad PR in Oakland, California, where it has tried to foreclose on an 89-year-old woman. Twice, local courts have told the bank to cease and desist. Irene Jones is now suing OneWest for title of her home, plus $350,000 for elder abuse, negligence, distress and suffering. Jones claims the bank’s harassment exacerbated her late husband’s depression and anxiety, helping cause his death.”

J. Christopher Flowers makes Mr. Potter in It’s A Wonderful Life look like FDR. Private equity owners were also among the riskiest speculators precipitating the ongoing economic crisis. Oh brother if they take over all the failed banks, JP Morgan himself would applaud his second coming.

Tuesday, January 5, 2010

No Raises This Year--Seniors Eat Catfood

Social Security benefits did not go up in 2010. To quote from the government:

By law, Social Security benefits increase automatically to keep pace with inflation. When there is a period of no inflation, the law does not permit an increase in benefits. Based on the Consumer Price Index (CPI) published by the Department of Labor, there was no rise in the cost of living during the past year, so your benefit will remain the same in 2010. The CPI is the federal government’s official measure used to calculate cost-of-living increases.

I love that phrase, “the law does not permit...” It’s so passive and denies accountability. It’s the LAW. You can’t argue with the Law. But the law mutates over time.

When Dr. Moreau asked his half-man, half-beast creations in Island of Lost Souls (fabulous 1932 movie, don't see remake), “What is the law?” They answered, the law was “not to eat meat”, “not to go on all fours” and “not to spill blood. Are we not men?” [We are Devo.] We do all these things and we are men. Or women.

Back to no inflation: According to this logic, prices did not go up during 2009. Entirely contradicted by the cost of oil: an increase of 71% during 2009 to close at around $80 a barrel 12/31/09. "Who you going to believe, me or your own eyes?" [Chico Marx, Duck Soup.]

This doesn’t take into account the gradual diminution in the size of grocery staples while retaining the same price tag: a can of tuna went from 6 ounces to 5 ounces.

The Bureau of Labor Statistics reports on 8 categories that make up the CPI:

• FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
• HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
• APPAREL (men's shirts and sweaters, women's dresses, jewelry)
• TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
• MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
• RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
• EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
• OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

I don’t know who compiles this information, but my prescription and energy costs have gone up considerably. I live in New York City. If you want to get to work, you have to take the subway. Or else pay more. You're a captive externality paying the MTA debt service. The price of one trip went from $2 to $2.25.

I have to pay a higher co-pay for medical services. College tuition rose 6.4% for public in-state and 5.9% for private colleges.

This is jive bookkeeping. And it has a direct effect on spending not to mention people's lives. It's plain as the nose on Geithner's face that fixed costs are going up. As Bruce Krasting points out:

Given that fixed costs are actually rising for this group of consumers (the hell with COLA) the 65+ set might not be going to the Wal-Mart in Boca as much as they used to. A year ago we were talking of ‘green shoots’. This ‘shoot’ is decidedly brown.

Maybe government-compiled economic indicators are politically motivated. Gasp! I’m shocked, shocked…