Monday, June 30, 2008

Finally...June is Over!!

U.S. MARKETS
Finally, June's over
Mixed session ends worst June since Great Depression, with Dow eking out a small gain. S&P 500 ends on upbeat note, but Nasdaq loses 1%. | • No rebound
Month
Dow
S&P 500
Nasdaq

-10.4%
-8.6%
-9.1%

Quarter
Dow
S&P 500
Nasdaq

-7.4%
-3.3%
+0.6%

Year to date
Dow
S&P 500
Nasdaq

-14.4%
-12.9%
-13.6

Preview Audio
Stock watch
IPOs dip 69%

The worst market crisis in 60 years

By George Soros

The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years.

However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.

Boom-bust processes usually revolve around credit and always involve a bias or misconception. This is usually a failure to recognise a reflexive, circular connection between the willingness to lend and the value of the collateral. Ease of credit generates demand that pushes up the value of property, which in turn increases the amount of credit available. A bubble starts when people buy houses in the expectation that they can refinance their mortgages at a profit. The recent US housing boom is a case in point. The 60-year super-boom is a more complicated case.

Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit.

Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced. The US current account deficit reached 6.2 per cent of gross national product in 2006. The financial markets encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk. Since 1980, regulations have been progressively relaxed until they have practically disappeared.

The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.

Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks' commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever b efore. That made the crisis more severe than any since the second world war.

Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an en d.

Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.

The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse.

The writer is chairman of Soros Fund Management

The Financial Times Article -- Published: January 23 2008

"Batten down the hatches" says Siemens CEO

Company Profiles | 29.06.2008

Siemens Faces Major Restructuring, Job Cuts

The head of German engineering group Siemens has confirmed that a major restructuring is in the works, after media reports said the firm wanted to lay off 17,000 workers.

Referring to the state of the world economy and the rising oil price, Siemens chief executive Peter Loescher said it was time for Germany's biggest engineering company to act.

"We have to batten down the hatches," before Siemens caves in under the pressure, the CEO said.

In the comments which are set to be published in full on Monday, Loescher said Siemens needed to reach a target saving of 1.2 billion euros (1.9 billion dollars) by 2010 to remain competitive.

Job cuts imminent

Over the weekend reports were leaked that Siemens planned to cut more than 17,000 jobs from its 400,000 global workforce, including some 6,450 jobs in Germany. The amount -- nearly four percent of the workforce -- was considerably more than the 10,000 anticipated by trade union IG Metall as part of a broad revamp of the company's operations.

The scale of the cuts, which are expected to mainly affect administrative positions, is unprecedented in the 160-year history of the German company. According to the Sueddeutsche Zeitung, the German cuts would be spread over two years and are due to be announced officially in the fall.

Peter Löscher took over as CEO in 2007Bildunterschrift: Großansicht des Bildes mit der Bildunterschrift: Peter Löscher took over as CEO in 2007 In a letter to the employees, Loescher called the restructuring plans the most "extensive in the last 20 years." He added that he hoped the job cuts would be as "socially acceptable as possible."

Siemens, which manufactures everything from hearing aids to nuclear power stations and trains in some 190 countries, posted worldwide sales last year of more than 70 billion euros. But after problems with a range of major projects were uncovered in the early part of the year, the company has been struggling for ways to reform and streamline its production.

Peter Loescher took the helm of the company in 2007 after allegations of bribery on a huge scale forced the resignation of his predecessor Klaus Kleinfeld and the chairman of the board Heinrich von Pierer.

Siemens plans 17,200 job cuts

German conglomerate trying to lower costs amid economic slowdown
By Alistair Barr, MarketWatch
Last update: 12:52 p.m. EDT June 28, 2008
SAN FRANCISCO (MarketWatch) -- Siemens AG plans to cut 17,200 jobs as the German engineering conglomerate tries to lower expenses in the face of an economic slowdown, according to a report published Saturday.
According to a report in the online edition of the Wall Street Journal, Siemens, which makes trains, computers, cell phones, and light bulbs among other products, has earmarked 6,400 job reductions in Germany, with the rest coming in other parts of the world. Siemens has roughly 400,000 employees and is active in 190 countries.
Most of the jobs eliminated will be managerial, rather than blue-collar, a departure for the company, which has laid off lower-ranking workers in the past, the newspaper said. The planned cuts are in addition to 6,800 job losses at one of its telecommunications-equipment units, which were announced in February.
Siemens (SI
SI
Sponsored by:
SI
)
(XE:723610: news, chart, profile) representatives in Germany and the U.S. didn't immediately respond to an email seeking comment on Saturday.
Chief Executive Peter Löscher, who's been running Siemens for a year, has promised to reduce selling and administrative costs by $1.89 billion, or 10%, by 2010 to try to increase profitability to levels of rivals like General Electric (GE
GE
Sponsored by:
GE
)
, the Journal noted.
Löscher hopes to avoid forced layoffs, and affected employees will be offered financial incentives, the newspaper added, citing an unidentified person familiar with the matter.
The plans are to be detailed at a July 7 meeting with worker representatives, and negotiations should begin shortly afterward, the Journal reported. End of Story
Alistair Barr is a reporter for MarketWatch in San Francisco.

The Carlyle Group, De La Rue and the Amero

My comments: Someone would sure make a killing if you got rid of the dollar and one morning started printing something like the Amero to replace it...........




DUE DILIGENCE

De La Rue: the money-making money maker

By Steve Goldstein, MarketWatch
Last update: 3:17 p.m. EDT June 27, 2008
LONDON (MarketWatch) -- Here's a stock that even the most inflation-paranoid investor could love.
If inflation runs so high that people end up carrying their currencies around in wheelbarrows, then there would hardly be a firm better positioned to benefit than De La Rue, the world's leading manufacturer and supplier of banknote printing and banknote paper.
Of course, De La Rue isn't that bleak in its view about the global economy, and more to the point, it says that it doesn't need a worldwide spike in the money supply to prosper.
But at a time when some complain that monetary policy is too loose, it hasn't gone unnoticed that the nearly 200-year-old company offers benefits that the average U.K. midcap stock doesn't provide.
"With a long order book and ever-increasing pricing power, we believe the stock is an excellent inflation hedge and defensive play against the backdrop of a cyclically challenged support-services sector," said Ed Steele, an analyst at Citigroup.
Shatish Dasani, De La Rue's financial controller, made a similar point in an interview with MarketWatch. "It's a tough time for the U.S., the U.K. and other developed countries, but we've got a good market position, and a lot of that is in developing countries where demand is buoyant," he said.
"There're good levels of capacity utilization and the business is doing quite well," he added.
Dasani also pointed out that economic forces aren't the only drivers of the currency business.
With the proliferation of ATMs, central banks have adopted stricter standards on the types of currencies they allow in circulation, which in turn forces them to replace notes more quickly.
Central banks also have demanded tougher new security features to combat counterfeiters.
Plus, politics play a role: When regimes change, countries want to put new heads of state or central-bank governors on their notes.
"A classic example was in Iraq," Dasani said. "That was a really good order for us."
The company last week took a step to be an even purer-play inflation hedge, announcing a deal to sell its banknote-sorting business, a business that makes components for ATMs, to the Carlyle Group for 360 million pounds.
"The remaining core business of banknotes, paper and security documents is a high-quality earnings, cash-generative business with excellent prospects and considerable barriers to entry," according to Andrew Darke, an analyst at Evolution Securities.
The biggest part of the business, representing three-quarters of its business and 66% of its 753 million pounds in annual sales, is banknotes. De La Rue's few competitors include Germany's Giesecke & Devrient and France's Oberthur (FR:012413: news, chart, profile) .
With plants in the United Kingdom as well as Kenya, Malta and Sri Lanka, De La Rue actually makes the money for many countries -- the Bank of England is its most famous customer -- while providing ancillary services for others.
"It's unlikely the Fed or Russia or China will contract out," Dasani commented. "But even the Fed, we sell some security features to them."
The De La Rue executive said that the company is looking out for a plan to open up the euro-printing market in 2012, while questioning why any country would want to print its own currency.
"What is it that central banks can add in terms of printing their own notes?" Dasani asked. "We can make the investment in terms of machinery and printing processes. If you compare it to state printworks, they don't have the capabilities or investment returns."
One of De La Rue's earliest printing projects came in 1813, when Thomas de la Rue published the first edition of Le Miroir Politique newspaper in Guernsey. From there, the company notched many printing-related firsts, from playing cards to perforated adhesive postage and tax stamps for countries all over the world.
De La Rue also introduced the first practical fountain pens in 1881. It recently received accreditation to produce euro-banknote paper.
In the second half of the 20th century, De La Rue acquired several businesses involving document security, ranging from holographics to physical security equipment.
The future? It's likely to involve radio-frequency identification, or RFID, chips to manage the vast amounts of currency going into, through and out of cash centers around the world, as well as biometrics such as finger-vein authentication for ATMs.
Outside of currencies, De La Rue also is involved in other security documents, from producing New York's driving licenses to authentication labels for Microsoft Corp.
It also holds a 20% stake in the British lottery operator Camelot, an investment that Dasani admits holds little strategic value, but one the company said has been a good financial investment.
Chart of UK:DLAR
While the trends are looking good for De La Rue, some investors are starting to question whether it's climbed a bit too much.
The stock has risen about 16% over the past year, significantly outperforming the FTSE 250 index.
"We believe the shares look up with events at current levels," wrote Paul Jones, an analyst at Panmure Gordon, in a recent note arguing for investors to hold, rather than buy, stock in the firm.
UBS analysts also have a neutral rating.
De La Rue's top shareholder, the investment manager Schroders, has pared its position by selling 7.6 million shares, according to data from FactSet Research.
Dasani takes those comments in stride, saying that Schroders has been an investor from years back when De La Rue was issuing multiple profit warnings and that the company is more focused than it was in the early parts of the decade.
"Previously, five shareholders held more than 50%; gradually they have reduced their holding but others have come in," he added.
"It's a great business. You'd be hard-pressed to find another with our prospects on margins, market position and cash flow." End of Story
Steve Goldstein is MarketWatch's London bureau chief.

Thomson Financial Mergers & Acquisitions

Title:Carlyle Group LLC acquires De La Rue Cash Systems from De La Rue PLC through a leveraged buyout (pending)
Price:$36.00
Publication Date:Jun 16, 2008
Abstract:US - Carlyle Group LLC (CG) agreed to acquire De La Rue Cash Systems (DE), a manufacturer of cash handling equipment, from De La Rue PLC (DL), for $706.644 mil in cash, in a leveraged buyout transaction. Originally, in June 2008, DL announced that it was seeking a buyer for its DE unit. CG, KKR, Bain Capital and Wincor Nixdorf were named potential bidders. The transaction was subject to shareholder and regulatory approvals.
Acquirer:Carlyle Group LLC
Acquirer Business Discription:Private eq firm
Acquirer SIC Code:6726 - Investment offices, nec
Target Name:De La Rue Cash Systems
Target Business Description:Dvlp cash handling solutions
Target Ultimate Parent:De La Rue PLC
Target SIC Code:3577 - Computer peripheral equipment, nec
Format:Adobe Acrobat Adobe Acrobat
Free Sample: Click Here to Download

.....and if your interested, click here for a pretty decent lesson about the inevitable demise of fiat currencies............

Sunday, June 29, 2008

House of Cards You thought the housing crisis was bad? You ain’t seen nothing yet.

By Danny Schechter

The Mess

28/06/08 "LA CityBeat" -- - Nationwide, two million homes sit vacant. Home sales are at a nine-year low. Former Treasury Secretary Larry Summers says that housing finance has not been this bad since the Depression. We still don’t know the full extent of the colossal subprime rip-off, but a recent Bank of America study did some guesstimating on the scale of the consequences of the “credit crisis.” The meltdown in the U.S. subprime real estate market, the bank said, had led to a global loss of $7.7 trillion dollars in stock market value since October.

While many eyes are focusing on the housing meltdown and its hugely negative effect on an economy clearly moving into recession, few are paying attention to the next bubble expected to burst: credit cards. Combined with the subprime losses, such a credit card nightmare has the potential, experts say, of bringing down the entire financial system and global economy. You and your credit card have become key players in the highly unstable financial crunch. Mortgage lender cupidity and bank credit card greed wedded to financial institution deregulation supported by both political parties, have been made manifestly worse by Bush administration support-the-rich policies. It has brought us to a brink not seen since just before the Great Depression.

While campaigning in Edinburg, Texas, in February, Barack Obama met with students at the University of Texas-Pan American. “Just be careful about those credit cards, all right? Don’t eat out as much,” he said. After the foreclosure crisis, he warned, “the credit cards are next in line.”

The coupling of home equity debt and credit card debt has gone hand in glove for years. The homeowners at risk can no longer use their homes as ATM machines, thanks to their prior re-financings and equity loans, often used in the past to pay off their credit cards. Indeed, homeowners cashed out $1.2 trillion from their home equity from 2002 to 2007 to pay down credit card debts and to cover other costs of living, according to the public policy research organization Demos.

To compound the problem, fewer people are paying their credit card bills on time. And, to flip the old paradigm, more are using high-interest credit card cash to pay at least part of their mortgages instead of the other way around.

How bad is it?

• Financial analysts say that in the U.S. alone more than $850 billion in unpaid credit card balances is at stake and fast approaching $1 trillion, roughly the same amount as in the subprime market.

CNN reports that worldwide, consumers have racked up more than $2.2 trillion in purchases and cash advances on major credit cards in just the last year.

• The unpaid debt portion of this is continuing to pile up, with U.S. consumers last year adding $68 billion against their credit lines, boosting credit card debt by 7.8 percent, the largest increase in seven years, just when the last recession was beginning.

• Even as they spent, consumers have been going into default at a stunning rate. The percentage of people delinquent on their credit cards is soaring, and credit card companies are now writing off somewhere near 5 percent of payments.

• By last fall, the major banks were setting aside billions for loan-loss reserves while anticipating an increase of 20 percent in non-payments over the next two to four quarters.

Capital One, one of the biggest credit card banks, was forced to write off $1.9 billion in bad debt just in the last quarter of 2007.

•By October, according to a survey of only the leading credit card banks by the Associated Press, the value of credit card accounts at least 30 days late was up 26% from the previous year, to $17.3 billion. Serious delinquencies among some of the biggest lenders rose by 50 percent or more in the value of accounts that were at least 90 days delinquent.

• Making matters worse, or more widespread throughout the economy, just as with mortgage debt, credit card debt is put into pools that are then resold to investment houses, other banks and institutional investors. About 45 percent of the nation’s $900-plus billion in credit card debt has been packaged into these pools, and so many companies, not just a few, are at risk of being forced out of business by credit card debt write-offs.

What this adds up to, and what Obama didn’t say, is that we are actually face to face with the results of the most massive failure of our political and economic system since the Depression. Since Ronald Reagan, we have been living in an era in which neither the meltdown of the savings and loan banks in the 1980s nor the Enron-like scandals of the Bush years has stopped the relentless advancement and protection by both parties of the ability of financial institutions to make a buck at any cost to the social good and economic fabric. Which is what you get, of course, when both parties are so dependent on massive financial contributions to get their candidates into office and when the corporate media, heavy with advertising from the FIRE sector – Finance, Insurance and Real Estate – doesn’t warn the public or investigate the egregious fudging, misrepresentation and outright fraud that underpins the subprime and looming credit card crisis.

Priceless!

The credit card industry (Visa, MasterCard, American Express, etc.) and the 10 banks that dominate the industry as the primary card issuers spend an estimated $2 billion a year in endless marketing worldwide. We are all bombarded with their solicitations and sales tie-ins and gimmicks. They know that they might only have a 2-3 percent return rate, but that more than pays the enormous costs. They have thus succeeded in supplying 1.5 billion cards to 158 million U.S. card holders. That averages to 10 cards per person. In the last few years, retailers, banks, a wide range of companies, sports teams, unions and even universities have launched specialized card programs. Like the car companies that discovered that they made more money on car loans than automobiles, the benefits of what’s been called “financialization” is obvious to more business sectors.

Credit card advertising for new card holders is especially effective now as inflation drives costs up and consumers have less to spend. “Charging it” on yet another new credit card is for many the only option to meet their budgets or maintain their lifestyles, especially as gas prices rise. It’s become habit for many to spend more than they have. As a result, overall U.S. credit card debt grew by 435% from 2002 to year-end 2007, from $211 billion to approximately $915 billion.

The relentless, continuing push by the credit card banks doesn’t target potential customers alone. Constant focus group studies and other research techniques are still being used to persuade retailers to encourage more credit card transactions. Increasingly, businesses simplify their use by “swiping” and other gimmicks, no signed receipt needed.

“More and more sectors of the American economy recognize that their financial success is based on the success of the credit card industry,” explains Robert Manning, the author of the definitive Credit Card Nation and a leading expert who has been sounding the alarm about the consequences of credit card debt.

“Everything is very clearly thought out and premeditated. Whether it’s having conferences and think tank sessions about how to encourage people to accept more debt [or] to work with merchants – for example, to persuade merchants with empirical information that ... if they use a credit card that they’ll buy 20-25 percent more.”

Manning notes that saving and thrift was historically a positive value in the U.S. As recently as the l980s, the national savings rate was 10 to 11 percent. Since 2005, Americans have saved less than 1 percent of their disposable incomes. In fact, the most recent figures from March show that the savings rate is negative, below zero. And also in March the government reported that for the first time since the Depression, Americans owe more on their ≠homes than they have in equity. Essentially, on average, America is broke and its credit cards played a dominant role in getting there.

Manning, who teaches at Rochester Institute of Technology, has taken on the issue with original research and financial literacy courses for students. He found that many of his students already had credit cards before they arrived on campus, some for years.

As we all know, the companies don’t tell about the downside when they are seducing customers. They offer low introductory or teaser rates, in the same way that mortgage brokers enticed sub-prime customers. They offer rewards, frequent flyer miles and other prizes. Students are especially targeted because they have little real-world financial experience. The U.S. Public Interest Research Group, which is campaigning against student debt, says the average is $4,000 per student, but it easily climbs after four years to $15,000 to $20,000.

All of this, in our globalized world, is not unique. Clear across the world and down under, the New Zealand Union of Students’ Associations (NZUSA) and bank workers’ union Finsec are joining forces to try and keep students out of high-interest debt. The amount students owe on credit cards has increased by 32 percent since 2004, according to the NZUSA Income and Expenditure Survey. Credit card debt has increased at a higher rate than low to no interest overdrafts.

Here in the U.S., one mother, Joan E. Lisante, has set up a website targeted at other parents, www.consumeraffairs.com, so they can tell their stories. She wrote recently about what she calls the “plastic prison.”

“My 22-year-old son Jon, a college senior, got 52 credit card offers in the last year. I know this because, like a CIA operative, I intercepted the offers pouring into our mailbox.

“He got 19 from Capitol One, 13 from Providian, six from Washington Mutual, four from Chase, four from eBay and one each from an assortment of lenders ranging from PayPal to First Premier Bank in Sioux Falls, South Dakota (co-capital with “Small Wonder” Delaware of the credit card kingdom).

“Most begged Jon to rip open the envelope and wallow in instant gratification. Capital One, the most persistent suitor, shouted, ‘Offer Status: Confirmed. No Annual Fee!’

“‘16 Card Designs’ (but none that tally the total whenever you use it). You could get a response in as little as 60 SECONDS when you apply online.

“Now this kid has never held a job (yet) for more than one summer. He spent one summer working in the FEMA flood insurance call center, which shows how much expertise you need to work there. Although he is familiar with the inner workings of Blockbusters and Starbucks, Jon’s not yet a member of any corporate elite, prestigious profession or skilled craftsman’s guild. Does this matter? Apparently not.”

“The key for the banks,” Manning says, “is to get them dependent upon consumer credit, shape their attitudes towards savings, consumption and debt and to then multiply the number of financial products that they’re buying from that particular bank so the credit card will lead to the student loan, to the car loan, eventually to a home mortgage and then maybe some insurance products and investment opportunity.

The banks, he says, want students in a condition of dependency. “Young people today that see credit as a social entitlement have no understanding of what it is going to entail to repay those loans back. Once they’re used to living on borrowed money, then the banks realize that they’ll be following that pattern possibly for the rest of their lives. By the time they graduate they’re so indebted, and they’re so dependent upon the use of credit and debt, that it’s already presaged their future. They can’t possibly pursue the kinds of careers that they anticipated.”

Defaults on student loans are climbing. Many students used those loans to pay off credit cards. Military recruiters are now promising to pay off debts to entice enlistments. Other government agencies are also offering funds as part of their head-hunting.

Rise Up

“Many of you have probably forgotten that the American Revolution was largely driven by the great American planners, that were heavily in debt to European banks and they had very onerous terms,” Manning said in a lecture I attended when I was making my film In Debt We Trust. “And they recognized that they could not financially prosper under such outrageous financial demands.”

On the day I visted Manning’s lecture in an alcove literally right next door to the lecture room in the student center, local branches of banks like Chase and HSBC were signing up students for checking accounts and credit cards. Freshmen lined up at the tables to set up accounts. The banks had permission from the same school administration that hires Manning to counsel students to avoid getting into debt.

I listened in at the pitches.

BANK REP: “You don’t need anything for deposit, and we’re giving out free backpacks.”

BANK REP: “You get zero percent on the purchases for the first six months and then it goes to the standard intrest rate.”

QUESTION: “What’s the interest rate?”

BANK OF AMERICA REP: “The interest rate is variable ... to be honest with you, off-hand, I don’t know the interest rate off-hand. Sorry.”

A student is counting out twenties as his first deposit.

BANK REP: “I just need your signature. Right here, please.”

ANOTHER BANK REP: “And it’s free while they’re a student.”

What will happen when they do have to pay it back includes nonstop calls to them and their parents. Credit card collection agencies know how to harass, threaten and then sweet-talk cardholders who are late. They even have a term for people squeezed by debt: “sweatbox.” They also know that the longer the debt goes unpaid, the larger the potential profit for companies, as interest builds up at rates of up to 30 percent. Credit card promoters call people who only pay minimums “revolvers.” Those of us who pay our bills in full? “Deadbeats.”

Recently the companies unilaterally hiked late fees and penalties that compound the debt. A few missing payments can earn you an interest rate hike to 29 to 30 percent. If you are late with a payment on some other debt not related to your credit card, you can readily find your interest fee doubled on your credit card. Some companies make more on fees and penalties than on interest payments. The companies racked up more than $17 billion in 2006, the last year for which records are available.

Like many of the homeowners who accepted subprime mortgages, and like you with your credit cards, youths and adults alike signed dense agreements that are largely unreadable. The credit card banks constantly update these with those small print notices with which you get assaulted in the mail, these drafted by risk-minimizing lawyers. Of course, it’s unlikely you bother to read these. In part of the unread text, the companies give themselves the right to unilaterally change the deal even after it is signed. Other small print insures that consumers cannot sue them over differences. All grievances have to be arbitrated in a process the companies created and control.

Even the Federal Reserve Bank condemns some of these practices, noting: “Although profitability for the large credit card banks has risen and fallen over the years, credit card earnings have been consistently higher than returns on all commercial bank activities.”

The Failure Trifecta

Track the subprime and credit card mess back, and you will find its origins in free market policies since Reagan that deregulated banking and much of the oversight that managed for years to keep the greed-meisters on Wall Street in check. The failure of media-lionized Alan Greenspan’s Federal Reserve Bank to pay attention to predatory lenders and sub-prime schemers allowed them to prosper.

Add to these failures a complicit Congress, with Democrats and Republicans alike dependent on donations from the three leaders of the FIRE economy. To assure their freedom to run their businesses their own damn way, the banks in the 1990s persuaded Congress to deregulate the practices of financial service companies. Pro-business Court decisions have allowed them to base their operations in low-tax states like South Dakota and Delaware and to end consumer protections against usury.

This decade, Bush’s tax cuts and his bankruptcy “reform” bill strengthening the power of credit card companies were passed with bipartisan support, including that of Senator Dianne Feinstein. Add major media amnesia to this list and you get a trifecta of failure. The New York Times admitted that advocates warned them that a rise in predatory lending was destroying poor communities in 2001, but they sat on the story for nearly six years.

Neither the politicians nor the media told us that every major brand name banking firm and investment house had its fingers in the juicy pie of pedaling mortgage-backed securities worldwide without disclosing that many of these mortgages were deliberately offloaded on people whom they knew could not afford to pay them. As with the credit card industry, these mortgage borrowers were cleverly given “teaser rates” that would soon reset upwards. The banks then resold the mortgages as “asset-backed paper” even though the assets’ value was so questionable.

Meanwhile, media outlets took in hundreds of millions in ad revenues from deceptive lenders and credit card banks encouraging Americans to shop and charge till we drop. The Super Bowl broadcast ran all those cool but misleading ads by credit card companies and mortgage hustlers. It was, um, “priceless.”

Notes scholar Lionel Tiger: “Those who have been operating the managerial levers of the financial system have failed embarrassingly and massively to comprehend the processes for which they are responsible. They have loaned money avidly and recklessly to people who couldn’t pay it back.

“They fudged data to get loans approved and recalculated. Then they sausaged fragile figments of money reality into new ‘products’ which could be sold around the world to investors eager to enjoy the surprising returns which often accompany theft, managerial incompetence and fraud. When it comes to responsibility for all this, there appears to be no one here but us spring chickens.”

Danny Schechter blogs for Mediachannel.org. His film In Debt We Trust spawned the action website www.StopTheSqueeze.org . He’s written a new book on the crisis called PLUNDER: An Investigation Into Our Economic Calamity. Dissector@mediachannel.org .

This Recession, It's Just Beginning

By Steven Pearlstein

29/06/08 "
Washington Post" -- - Friday, June 27, 2008; D01 - So much for that second-half rebound.

Truth be told, that was always more of a wish than a serious forecast, happy talk from the Fed and Wall Street desperate to get things back to normal.

It ain't gonna happen. Not this summer. Not this fall. Not even next winter.

This thing's going down, fast and hard. Corporate bankruptcies, bond defaults, bank failures, hedge fund meltdowns and 6 percent unemployment. We're caught in one of those vicious, downward spirals that, once it gets going, is very hard to pull out of.

Only this will be a different kind of recession -- a recession with an overlay of inflation. That combo puts the Federal Reserve in a Catch-22 -- whatever it does to solve one problem only makes the other worse. Emerging from a two-day meeting this week, Fed officials signaled that further recession-fighting rate cuts are unlikely and that their next move will be to raise rates to contain inflationary expectations.

Since last June, we've seen a fairly consistent pattern to the economic mood swings. Every three months or so, there's a round of bad news about housing, followed by warnings of more bank write-offs and then a string of disappointing corporate earnings reports. Eventually, things stabilize and there are hints that the worst may be behind us. Stocks regain some of their lost ground, bonds fall and then -- bam -- the whole cycle starts again.

It was only in November that the Dow had recovered from the panicked summer sell-off and hit a record, just above 14,000. By March, it had fallen below 12,000. By May, it climbed above 13,000. Now it's heading for a new floor at 11,000. Officially, that's bear market territory. We'll be lucky if that's the floor.

In explaining why that second-half rebound never occurred, the Fed and the Treasury and the Wall Street machers will say that nobody could have foreseen $140 a barrel oil. As excuses go, blaming it on an oil shock is a hardy perennial. That's what Jimmy Carter and Fed Chairman Arthur Burns did in the late '70s, and what George H.W. Bush and Alan Greenspan did in the early '90s. Don't believe it.

Truth is, there are always price or supply shocks of one sort or another. The real problem is that the underlying fundamentals had gotten badly out of whack, making the economy susceptible to a shock. The only way to make things better is to get those fundamentals back in balance. In this case, that means bringing what we consume in line with what we produce, letting the dollar fall to its natural level, wringing the excess capacity out of industries that overexpanded during the credit bubble and allowing real estate prices to fall in line with incomes.

The last hope for a second-half rebound began to fade earlier this month when Lehman Brothers reported that it wasn't as immune to the credit-market downturn as it had led everyone to believe. Lehman scrambled to restore confidence by firing two top executives and raising billions in additional capital, but even that wasn't enough to quiet speculation that it could be the next Bear Stearns.

Since then, there has been a steady drumbeat of worrisome news from nearly every sector of the economy.

American Express and Discover warn that customers are falling further behind on their debts. UPS and Federal Express report a noticeable slowdown in shipments, while fuel costs are soaring. According to the Case-Shiller index, home prices in the top 20 markets fell 15 percent in April from the year before, and Fannie Mae and Freddie Mac report that mortgage delinquency rates doubled over the same period -- and that's for conventional home loans, not subprime. United Airlines accelerates the race to cut costs and capacity by laying off 950 pilots -- 15 percent of its total -- as a number of airlines retire planes and hint that they may delay delivery or cancel orders of new jets from Boeing and Airbus. Goldman Sachs, which has already had to withdraw its rosy forecast for stocks, now admits it was also too optimistic about junk bond defaults, and analysts warn that Citigroup and Merrill Lynch will also be forced to take additional big write-downs on their mortgage portfolios.

Meanwhile, General Motors, already reeling from a 28 percent plunge in the pace of auto and truck sales, now confronts the fact that it won't get any help this time from GMAC, its once highly profitable finance arm, which is reeling from an increase in delinquencies on home and auto loans. With the carmaker hemorrhaging cash, whispers of a possible default sent the price of insuring GM bonds soaring on the credit default market.

You know things are bad when middle-class Americans have to give up their boats and Brunswick, the nation's biggest maker of powerboats, is forced to close 10 plants and lay off 2,700 workers.

For much of the year, optimists took comfort in the continuing strength of the technology sector and exports to fast-growing countries around the world. But even those bright spots have dimmed.

Tech stocks got hammered yesterday after software maker Oracle and BlackBerry maker Research in Motion warned that the pace of corporate orders had slowed.

And both India and China raised interest rates and bank reserves sharply in an effort to tame inflation and slow their overheated economies, even as the air continued to rush out of their real estate and stock market bubbles.

Like the rain-swollen waters of the Mississippi River, this sudden surge of downbeat news has now overflowed the banks of economic policy and broken through the levees of consumer and investor confidence. At this point, there's not much to do but flee to safety, rescue those in trouble and let nature take its course. And don't let anyone fool you: It will be a while before things return to normal.

Steven Pearlstein can be reached at pearlsteins@washpost.com.

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