CIT and Ford: Two Tales of Economic Recovery
This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.
With two months to go in the year, let's take a deep breath and assess where we stand. The economy is in a bottoming process that is neither smooth nor wildly different from previous economic recoveries. The weekend news of CIT's bankruptcy, 9 more bank failures (that makes it 115 closures for 2009) and this morning's better-than-expected Ford, can sometimes make it seem that recovery from the Great Recession is a fickle as the direction of the wind.
(AP Photo/David Zalubowski)
The CIT bankruptcy was not a surprise, but taxpayers are not too happy to learn that the $2.3 billion infusion will likely vanish. (Jim Cramer's "buy" rec on CIT didn't work out as expected either.) Given the billions of direct government investments into teetering companies, it was expected that some investments might go sour. Other candidates for losers include: AIG, Chrysler, Fannie, Freddie and GMAC.
So too with the continuing sobering news from the FDIC - it's expected that 150 banks will be shuttered by the end of the year. From the clinical point of view, there are too many banks, but on the ground, it's hard to gloss over the loss.
Then there's the good news from the survivors - financial behemoths like Goldman Sachs and JP Morgan Chase delighted their shareholders a few weeks ago with great results and today, we learned that Ford Motor made nearly a billion dollars last quarter. This is not an equal opportunity recovery - there'll be winners and losers, with the government playing a role in determining the outcome in some cases.
In the end, recoveries are painful and ugly. They require patience and some weather the process better than others. Austrian economist Joseph Schumpeter (1883-1950) coined the phrase "" to describe the process whereby economic downturns that result in lost jobs and busted companies, become the necessary ingredients for the next phase of growth. That's cold comfort for those who perish in the process, but it does help explain the process.
In the end, I suspect we are where we should be - in the midst of a long, drawn out process. To see where we stand by the numbers, check out these great charts from NPR's Planet Money. They haven't been updated through the last couple of months, but the trends remain in place.
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(CBS)
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HOW GOLDMAN SACHS SECRETLY BET ON THE US HOUSING CRASH
By Greg Gordon | McClatchy Newspapers
WASHINGTON ? In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.
Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.
Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.
Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.
"The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."
John Coffee, a Columbia University law professor who served on an advisory committee to the New York Stock Exchange, said that investment banks have wide latitude to manage their assets, and so the legality of Goldman's maneuvers depends on what its executives knew at the time.
"It would look much more damaging," Coffee said, "if it appeared that the firm was dumping these investments because it saw them as toxic waste and virtually worthless."
Lloyd Blankfein, Goldman's chairman and chief executive, declined to be interviewed for this article.
A Goldman spokesman, Michael DuVally, said that the firm decided in December 2006 to reduce its mortgage risks and did so by selling off subprime-related securities and making myriad insurance-like bets, called credit-default swaps, to "hedge" against a housing downturn.
DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so ... other market participants had access to the same information we did."
For the past year, Goldman has been on the defensive over its Washington connections and the billions in federal bailout funds it received. Scant attention has been paid, however, to how it became the only major Wall Street player to extricate itself from the subprime securities market before the housing bubble burst.
Goldman remains, along with Morgan Stanley, one of two venerable Wall Street investment banks still standing. Their grievously wounded peers Bear Stearns and Merrill Lynch fell into the arms of retail banks, while another, Lehman Brothers, folded.
To piece together Goldman's role in the subprime meltdown, McClatchy reviewed hundreds of documents, SEC filings, copies of secret investment circulars, lawsuits and interviewed numerous people familiar with the firm's activities.
?Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders that became the subjects of FBI investigations into whether they'd misled borrowers or exaggerated applicants' incomes to justify making hefty loans.
?Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks, often in secret deals run through the Cayman Islands, a British territory in the Caribbean that companies use to bypass U.S. disclosure requirements.
?Has dispatched lawyers across the country to repossess homes from bankrupt or financially struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages anyway because Wall Street made it easy for them to qualify.
?Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several other Goldman alumni.