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Economix: Podcast: Sovereign Debt, Phone Hacking and Law Schools

July 16, 2011 by Leave a Comment

There has been a flurry of headline-grabbing developments in the slow-moving financial and fiscal crises on both sides of the Atlantic.

In Europe, Italy’s cost of borrowing rose to the highest level in many months, as traders worried that Greece’s financial problems might not be contained. In the new Weekend Business podcast, Floyd Norris, chief financial correspondent for The Times, says that while the problems in Europe have roiled the markets, a major financial issue in the United States so far has not. That is the inability of Congress and the White House to agree on an increase in the debt ceiling of the United States. If such an agreement is not in place by Aug. 2, the Treasury secretary has warned that the government could default on its debt, with catastrophic consequences.

So far at least, Treasury yields remain extremely low and prices, which move in the opposite direction, are quite high, a sign that the markets are convinced that this crisis is a nonevent. We shall soon see whether this is true, Mr. Norris says. Other problems — the weakness of the United States economy, high unemployment, and a large and growing debt load — are also looming. For the moment, though, a benign summertime mood has prevailed, and domestic stock and bond markets have remained relatively calm.

In another portion of the podcast, I chat with Mr. Norris about the phone-hacking and bribery scandal that has shaken the Murdoch media empire. It has already led to the shuttering of one newspaper, numerous arrests, top-level executive changes and investigations in London and in New York.

The business of legal education in the United States is the focus of a cover article by David Segal in Sunday Business. In a podcast conversation with David Gillen, Mr. Segal says many law schools have sharply increased their fees, enrollment and capital spending, even as the job market for law school graduates has shrunk.

And in the Economic View column, the economist Richard Thaler revisits the annuity puzzle — the unpopularity of annuities despite their economic advantages. Traditional pensions are a form of annuities, but as working people shift to defined-benefit plans like 401(k)’s, they are faced with a bewildering set of options upon retirement. Yet few of them choose to buy annuities.

As he says in a podcast conversation, Social Security is a form of annuity — and he suggests that by delaying the receipt of benefit checks, people can greatly increase their monthly payouts. This may simplify financial planning. It’s advantageous, of course, only if you live long enough for your increased monthly benefits to offset the loss of the checks you are voluntarily giving up. Social Security could also be modified to allow recipients to “top off” their benefits by purchasing larger annuities, Mr. Thaler suggests.

I also discuss a contest between vice and virtue in mutual fund performance, the subject of my Strategies column in Sunday Business. The second-best performer among all general domestic mutual funds in the second quarter was the Vice fund, which focuses on tobacco, alcohol, gambling and military companies. The best performer, though, was the Virtus Small-Cap Sustainable Growth fund. Virtus is a Latin word for virtue. How virtuous is the Virtus fund? There are some answers in the podcast and in the column.

You can find specific segments of the podcast at these junctures: Floyd Norris on financial crises (38:52); news headlines (28:33); law schools (25:42); the Murdoch empire (18:39); Richard Thaler (11:38); mutual funds and the week ahead (3:57).

As articles discussed in the podcast are published during the weekend, links will be added to this post.

You can download the program by subscribing from The New York Times’s podcast page or directly from iTunes.

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Looking Ahead to Economic Reports This Week

June 13, 2011 by Leave a Comment

CORPORATE EARNINGS Companies reporting results will include Best Buy (Tuesday); Kroger, Pier 1 Imports, and Smithfield Foods (Thursday).

IN THE UNITED STATES A House Judiciary subcommittee will hold a hearing on the merger of NYSE Euronext and Deutsche Börse (Monday); a House Financial Services subcommittee will discuss the effect of the Dodd-Frank Act on the concept of “too big to fail” (Tuesday); Treasury Secretary Timothy F. Geithner is scheduled to testify before the House Financial Services Committee on the state of the international financial system (Wednesday).

IN ASIA The Bank of Japan will conclude a policy-setting meeting, and China is scheduled to release data on inflation, retail sales and factory production (Tuesday).

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Financial Overhaul Is Mired in Detail and Dissent

June 7, 2011 by Leave a Comment

The delays come as regulators extend public comment periods on the rules, and as some on Wall Street and in Congress resist the changes. One result may be that many new safeguards do not take hold in earnest before the next election, an outcome that could open the door for newly elected officials to back away from the overhaul.

The rules are mandated by the Dodd-Frank financial regulatory law and range from curbs on executive compensation to consumer banking protection provisions to more transparency in the trading of derivatives, those complex financial instruments that contributed to the 2008 financial crisis.

So far, 28 of the financial overhaul rule-making deadlines have been missed, according to Davis Polk, a law firm that is tracking the rules. Of the 385 new rules to be written, the law firm says, regulators have completed only 24 requirements; they were supposed to have taken 41 such actions by now.

“There’s an attempt to kill this through delay,” said Michael Greenberger, a law professor at the University of Maryland and a former official at the Commodity Futures Trading Commission, which is in charge of writing batches of the rules. “The difference between eight or nine months and 24 months could be cataclysmic here.”

The setbacks and resistance extend across many types of new rules, including ones to limit the debit card fees that banks can charge retailers and to require banks to retain more of the risk in certain home loans.

But the efforts were especially apparent at a hearing last month in Washington related to derivatives. Some of the most powerful players in the derivatives market — which is closely controlled by just a small group of banks — argued that the government should allow a slow pace of changes for rewriting derivatives contracts.

On Monday, the Treasury secretary, Timothy F. Geithner, spoke about the Dodd-Frank rules in a speech in Atlanta, warning that there were efforts by groups that oppose the reform to starve regulators of the resources they need to put new rules in place.

“Those in the U.S. financial community who are supporting these efforts to block resources and appointments are looking for leverage over the rules still being written,” Mr. Geithner said.

He specifically focused on derivatives rule-writing, where some financial groups have complained that European rules may differ from the new rules in the United States. He said he hoped regulators in Europe and Asia would create standardized rules to prevent a “race to the bottom.”

Regulators in the United States overseeing the process say it is difficult to tell how many of the concerns that financial executives and their lobbyists raise are valid and which ones are exaggerated. 

“For us, it’s a question of figuring out the legitimate interests of folks who say, ‘Wait a minute, slow down’ because they really want us to get it right, and some of them who really have an ulterior motive of just running the clock out,” said Bart Chilton, one of the three Democratic commissioners of the commodities futures trading agency, which is overseeing most rule-writing for derivatives. “It’s going a lot slower than I had envisioned.”

Financial firms argue that slower deliberations may lead to smarter outcomes. Some lawmakers agree, and some voted in recent weeks in Congressional committees to delay derivatives rules at least a year. Many of those rules were to have been completed by the July anniversary of the Dodd-Frank bill.

Regulators have been swamped by public comments and asked for more funds and personnel to meet the demands. In April, the C.F.T.C. extended all of its derivative comment periods for a month. 

“Right now there’s a tacit truce on the deadlines,” said Margaret E. Tahyar, a partner at Davis Polk, which represents financial institutions. “Really, it’s the right thing to have a little bit more time on this. There really hasn’t been anything like this ever before in terms of rule-makings.”

Perhaps nowhere are the stakes higher for the megabanks than with derivatives, which insure against many different risks in the economy. Some of the Dodd-Frank rules center on increasing security and transparency in this $600 trillion market. For instance, many are related to clearinghouses, which provide a central repository for money backing those wagers. Some of the changes threaten to cut into banks’ lucrative profit margins. 

At the derivatives round table in May, bankers and other representatives of financial firms asked for substantial implementation periods on derivatives rules. For instance, Athanassios Diplas, of Deutsche Bank, said the bank would need 18 to 24 months “simply to sign documentation” related to the new rules because of “bandwidth” issues, according to a transcript from the event.

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U.S. to Sell Its Chrysler Stake to Fiat

June 3, 2011 by Leave a Comment

President Obama plans to announce the deal during a visit to a Chrysler plant in Toledo, Ohio, on Friday.

“As Treasury exits its investment in Chrysler, it’s clear that President Obama’s decision to stand behind and restructure this company was the right one,” the Treasury secretary, Timothy F. Geithner, said in a statement. “Today, America’s automakers are mounting one of the most improbable turnarounds in recent history — creating new jobs and making new investments in communities across our country.”

The deal on Thursday and Fiat’s purchase last week of 16 percent of Chrysler for $1.3 billion, value Chrysler at a little more than $8 billion. The Treasury owns 6 percent of Chrysler, on a fully diluted basis.

Chrysler last week also repaid the $7.5 billion it owed to the United States and Canada.

The sale of Treasury’s stake is subject to regulatory approval and expected to close in one to three months, said two people with direct knowledge of the transaction’s details but who were not authorized to speak publicly about the matter. It will give Fiat majority ownership of Chrysler, which emerged from bankruptcy protection a little more than two years ago.

In addition to buying Treasury’s shares, Fiat also agreed to buy options held by the American and Canadian governments to purchase Chrysler shares held by a United Automobile Workers union trust fund for $5 billion. Treasury will receive $60 million for the options, and $15 million will go to Canada.

The governments were not interested in buying more shares of Chrysler, according to the people who spoke on condition of anonymity. Fiat would then be able to acquire the vast majority of Chrysler outside of an initial public offering.

After the deal closes, Chrysler will have repaid $11.2 billion of the $12.5 billion it received from Treasury in 2008 and 2009 to prevent its collapse.

A report by the White House National Economic Council this week projected that the government will fail to recoup about $14 billion of the $80 billion it put into rescuing the auto industry.

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Economic View: Needed: Plain Talk About the Dollar

May 22, 2011 by Leave a Comment

Listening to that statement, I flashed back to one of my first experiences as an adviser to Barack Obama. In November 2008, I was sharing a cab in Chicago with Larry Summers, the former Treasury secretary and a fellow economic adviser to the president-elect. To help prepare me for the interviews and the hearings to come, Larry graciously asked me questions and critiqued my answers.

When he asked about the exchange rate for the dollar, I began: “The exchange rate is a price much like any other price, and is determined by market forces.”

“Wrong!” Larry boomed. “The exchange rate is the purview of the Treasury. The United States is in favor of a strong dollar.”

For the record, my initial answer was much more reasonable. Our exchange rate is just a price — the price of the dollar in terms of other currencies. It is not controlled by anyone. And a high price for the dollar, which is what we mean by a strong dollar, is not always desirable.

Some countries, like China, essentially fix the price of their currency. But since the early 1970s, the United States has let the dollar’s value move in response to changes in the supply and demand of dollars in the foreign exchange market. The Treasury no more determines the price of the dollar than the Department of Energy determines the price of gasoline. Both departments have a small reserve that they can use to combat market instability, but neither has the resources or the mandate to hold the relevant price away from its market equilibrium value for very long.

In practice, all that “the exchange rate is the purview of the Treasury” means is that no official other the Treasury secretary is supposed to talk about it (and even he isn’t supposed to say very much). That strikes me as a shame. Perhaps if government officials could talk about the exchange rate forthrightly, there would be more understanding of the issues and more rational policy discussions.

Such discussions would start with some basic economics. The desire to trade with other countries or invest in them is what gives rise to the market for foreign exchange. You need euros to travel in Spain or to buy a German government bond, so you need a way to exchange currencies.

The supply of dollars to the foreign exchange market comes from Americans who want to buy goods, services or assets from abroad. The demand for dollars comes from foreigners who want to buy from the United States.

Anything that increases the demand for dollars or reduces the supply drives up the dollar’s price. Anything that lowers the demand for dollars or raises the supply causes the dollar to weaken.

Consider two examples. Suppose American entrepreneurs create many products that foreigners want to buy, and start many companies they want to invest in. That will increase the demand for dollars and so cause the dollar’s price to rise. Such innovation will also make Americans want to buy more goods and assets in the United States — and fewer abroad. The supply of dollars to the foreign exchange market will fall, further strengthening the dollar. This example describes very well the conditions of the late 1990s — when the dollar was indeed strong.

Now suppose the United States runs a large budget deficit that causes domestic interest rates to rise. Higher American interest rates make both foreigners and Americans want to buy more American bonds and fewer foreign bonds. Thus the demand for dollars increases and the supply decreases. The price of the dollar will again rise.

This example describes conditions in the early 1980s, when President Ronald Reagan’s tax cuts and military buildup led to large deficits. Those deficits, along with the anti-inflationary policies of the Fed, where Paul A. Volcker was then the chairman, led to high American interest rates. The dollar was very strong in this period.

Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.

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Federal Retreat on Bigger Loans Rattles Housing

May 11, 2011 by Leave a Comment

“We’re looking at more price drops, more foreclosures,” said Rick Del Pozzo, a loan broker. “This snowball that’s been rolling downhill is going to pick up some speed.”

For the last three years, federal agencies have backed new mortgages as large as $729,750 in desirable neighborhoods in high-cost states like California, New York, New Jersey, Connecticut and Massachusetts. Without the government covering the risk of default, many lenders would have refused to make the loans. With the economy in free fall, Congress broadened its traditionally generous support of housing to a substantial degree.

But now Democrats and Republicans agree that the taxpayer should no longer be responsible for homes valued well above the national average, and are about to turn a top slice of the housing market into a testing ground for whether the private mortgage market can once again go it alone. The result, analysts say, will be higher-cost loans and fewer potential buyers for more expensive homes.

Michael S. Barr, a former assistant Treasury secretary, said the federal government’s retrenchment would be painful for many communities. “There’s always going to be a line, and for the person just over it it’s always going to be an arbitrary line,” said Mr. Barr, who teaches at the University of Michigan Law School. “But there is no entitlement to living in a home that costs $750,000.”

As the housing market braces for more trouble, homeowners everywhere have been reduced to hoping things will someday stop getting worse. In some areas, foreclosures are the only thing selling. New home construction is nearly nonexistent. And CoreLogic, a data company, said Tuesday that house prices fell 7.5 percent over the last year.

The federal government last year backed nine out of 10 new mortgages nationwide, and losses from soured loans are still mounting. Fannie Mae, which buys mortgages from lenders and packages them for investors, said last week it needed an additional $6.2 billion in aid, bringing the cost of its rescue to nearly $100 billion.

Getting the government out of the mortgage business, however, is proving much more difficult than doling out new benefits. As regulators prepare to drop the level at which they will guarantee loans — here in Monterey County, the level will drop by a third to $483,000 — buyers and sellers are wondering why they should be punished simply for living in an expensive region.

Sellers worry that the pool of potential buyers will shrink. “I’m glad to see they’re trying to rein in Fannie Mae, but I think I’m being disproportionately penalized,” said Rayn Random, who is trying to sell her house in the hills for $849,000 so she can move to Florida.

Buyers might face less competition in the fall but are likely to see more demands from lenders, including higher credit scores and larger down payments. Steve McNally, a hotel manager from Vancouver, said he had only about 20 percent to put down on a new home in Monterey County.

If a bigger deposit were required, Mr. McNally said, “I’d wait and rent.”

Even those who bought ahead of the changes, scheduled to take effect Sept. 30, worry about the effect on values. Greg Peterson recently purchased a house in Monterey for $700,000. “That doesn’t get you a palace,” said Mr. Peterson, a flight attendant.

He qualified for government insurance, which meant he needed only a small down payment. If that option is not available in the future, he said, “home prices all around me will plummet.”

The National Association of Realtors, 8,000 of whom have gathered in Washington this week for their midyear legislative meeting, is making an extension of the loan guarantees a top lobbying priority.

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Chrysler Expected to Erase Its Debt to Government

April 28, 2011 by Leave a Comment

But on Thursday, the company will announce a milestone in its comeback effort, declaring its intention to repay its $7.5 billion in high-interest loans — $5.8 billion to the United States government and $1.7 billion to Canada’s — as soon as next month by selling new bonds to investors.

Once it pays back the loans, Chrysler can strengthen its ties to Fiat, its Italian partner, and begin adding more fuel-efficient cars to its truck-heavy lineup.

Sergio Marchionne, the chief executive of both Chrysler and Fiat, is expected to announce the debt plan Thursday when he welcomes the Treasury secretary, Timothy F. Geithner, for a tour of the company’s Jeep plant on Detroit’s east side.

Although details of the debt offering, to be led by Goldman Sachs, are still being negotiated, Chrysler intends to use the proceeds of the sale to help it pay off all of the government loans, according to people familiar with Chrysler’s plans.

Both Chrysler and the Treasury Department declined to comment on the announcement.

The loans have been a psychological and financial drag on Chrysler’s efforts to revamp its operations and gain market share since emerging from its government-sponsored bankruptcy in 2009.

“They started in a very deep hole after the bankruptcy,” said Dennis Virag, president of the Automotive Consulting Group in Ann Arbor, Mich. “Now they are making progress both in the product area and the financial area.”

Mr. Marchionne has said that interest payments on its government loans were the only obstacle keeping Chrysler from being profitable in 2010, when the company lost $652 million.

Paying off the loans would also free Fiat to raise its ownership stake in Chrysler.

Fiat currently owns 30 percent of Chrysler, a stake it received in stages as part in the United States government’s rescue of the smallest of Detroit’s Big Three. In exchange for the ownership interest, Fiat agreed to provide engines and technology to make Chrysler’s lineup more diverse and fuel-efficient.

Once the government loans are retired, Fiat plans to pay $1.3 billion for newly issued Chrysler shares, raising its ownership stake to 46 percent.

That deal will most likely accelerate the integration of Fiat and Chrysler and speed the arrival of new Fiat-based models for Chrysler to sell in the American market.

The refinancing is also expected to save money overall for Chrysler, which is paying high interest rates on the $5.8 billion it owes to the American government and the $1.7 billion it owes the Canadians.

“It’s great they are tuning up their balance sheet by reducing debt,” said Rebecca Lindland, an analyst with the research firm IHS Global Insight. “That will help them direct more money towards product development.”

Under Mr. Marchionne’s leadership, Chrysler has methodically improved its core products since coming out of Chapter 11. In the last year, Chrysler has introduced new, well-received versions of its Jeep Grand Cherokee sport utility vehicle and the Chrysler 300 flagship sedan.

The company has also benefited from positive reaction to its “Imported from Detroit” ad campaign that promotes its corporate resilience and improved product quality.

So far this year, Chrysler’s sales are up 22 percent — slightly higher than the 20 percent increase in sales for the overall industry. The increase, however, is almost entirely attributable to improved sales of its Jeep models and Dodge trucks. The company’s domestic market share has remained flat at 9 percent.

But the Fiat influence will be felt soon. Chrysler has just started to sell the Fiat 500 minicar in its American dealerships, and more new passenger-car models are in the pipeline.

Chrysler needs a more balanced portfolio to take advantage of the steady rise in popularity of smaller cars. The Ford Motor Company reported a sparkling $2.5 billion first-quarter profit on Tuesday, largely because of the success of its new Fiesta and Focus cars.

“Chrysler is in a better position now than a year ago, but they are still reliant on trucks versus cars,” said Ms. Lindland.

Paying back the government loans will leave the federal government’s ownership stake in Chrysler unchanged at 8 percent. But the new debt structure is considered a vital step toward a public stock offering by the company this year or in early 2012.

The majority owner of Chrysler is the health care trust for retired members of the United Auto Workers union, which has a 55 percent stake.

Chrysler has not suffered the same consumer disapproval that General Motors experienced from its government bailout. That was mostly because of G.M. came out of bankruptcy with the American taxpayer as its majority owner.

But G.M. has mostly shed its dreaded image as “Government Motors” since the federal government cut its stake to 26 percent from 60 percent in G.M.’s stock offering last November.

In Chrysler’s case, its biggest problem was a weak lineup of vehicles and tight constraints on product spending. But it now appears to be gaining momentum with new Fiat models.

Analysts who had written off Chrysler after bankruptcy are now applauding Mr. Marchionne’s slow, steady rebuilding of its product portfolio.

“It’s sort of like the cat with 17 lives,” said Mr. Virag. “They used up their nine, and they apparently still have more.”

Nick Bunkley contributed reporting.

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