Massive Layoffs Coming in NYC, Nevada, California, Colorado, Arizona, Everywhere

Cities, states, and municipalities are sinking by the minute. And unless unions agree to concessions (which they won't) massive layoffs are coming everywhere you look. New York City is a prime example.

Please consider NYC May Lay Off 19,000 Workers If State Cuts Aid

New York City will have to lay off more than 10,000 public workers, in addition to 8,500 teachers, if the state legislature approves the $1.3 billion of cuts the governor proposed in his deficit-closing budget, Mayor Michael Bloomberg said on Monday.

The mayor, in a speech to the legislature, estimated 3,150 police officers would be cut, reducing the force's "operational strength" to 1985 levels.

About 1,050 firefighters would have to be let go, along with 900 correctional officers, and the city would have to cut its daily inmate population by 1,900, he said. The number of at-risk children that service workers monitor would fall to 2,700 from 9,000, Bloomberg said.

The mayor, an independent, said Governor David Paterson's budget "utterly fails the test of fairness." He told lawmakers: "You can't lose control of the streets in terms of safety or cleanliness. You can't lose control of the streets in terms of an ambulance or a firefighter showing up."

NYC mayor: State budget would force city layoffs

Check out the spin in this version of the same story: NYC mayor: State budget would force city layoffs

The proposed state budget would force thousands of layoffs and could reduce New York City police staffing to the level of 1985, before the city emerged as a terrorism target, Mayor Michael Bloomberg warned legislators Monday.

Gov. David Paterson's proposed 2010-11 budget would cut $1.5 billion in funding to the city, Bloomberg said -- forcing layoffs of 9 percent of the city's police officers; layoffs of 1,050 firefighters and the closing of some firehouses; and 8,500 teachers as part of what Bloomberg says is a $500 million cut in school aid.

In addition, aid for other services such as soup kitchens, homeless shelters and transit cards for students will be sapped with no way for the city to make up the funding.

"This executive budget would have devastating effects on essential services in New York City," Bloomberg said.

Pointing The Finger

It appears mayor Bloomberg does not have the courage to point the finger where it belongs.

Not a single public servant needs to be laid off. All they have to do is take a pay cut like workers at GM, Ford, or anyone in private industry had to do. If there are layoffs, unions are totally responsible.

Bloomberg's Grim Budget

Inquiring minds are reading Bloomberg Unveils a Grim Budget.

Declaring grimly that the city�s finances were �between a rock and a hard place,� Mayor Michael R. Bloomberg unveiled a $63 billion budget proposal Thursday that would eliminate 20 fire companies, increase the cost of truck parking on Manhattan streets by 25 percent and close swimming pools and a 24-hour center for the homeless.

The budget would also slash funding to libraries, reduce the number of caseworkers who deal with H.I.V. and AIDS, and eliminate nurses in elementary schools with fewer than 300 students.

Mr. Bloomberg is proposing that city teachers agree to a much smaller raise in their next contract or face the possibility of 2,500 job cuts. And when asked Thursday whether his position signaled a new era of hard-line bargaining with all unions, Mr. Bloomberg sounded almost exasperated.

�The bottom line is we don�t have any money,� he said. �There isn�t money to continue to employ the people we have. Forget about raises � that is so far down the road, it�s not the right question.�

Then, in a challenge, apparently, to the intelligence of the city�s union leaders, he added: �The union leaders in the city aren�t stupid. They understand the fiscal reality.�

Unions Understand Mayor Bloomberg Is A Pushover

On one hand the mayor says �The bottom line is we don�t have any money. Forget about raises � that is so far down the road, it�s not the right question.�

On the other hand the mayor proposes that city teachers agree to a much smaller raise in their next contract or face the possibility of 2,500 job cuts.

Which is it?

Colorado Springs Cuts Into Basic Services

A battle is brewing in Colorado Springs over job cuts. Please consider Colorado Springs cuts into services considered basic by many.

This tax-averse city is about to learn what it looks and feels like when budget cuts slash services most Americans consider part of the urban fabric.

More than a third of the streetlights in Colorado Springs will go dark Monday. The police helicopters are for sale on the Internet. The city is dumping firefighting jobs, a vice team, burglary investigators, beat cops � dozens of police and fire positions will go unfilled.

The parks department removed trash cans last week, replacing them with signs urging users to pack out their own litter. Neighbors are encouraged to bring their own lawn mowers to local green spaces, because parks workers will mow them only once every two weeks. If that.

City recreation centers, indoor and outdoor pools, and a handful of museums will close for good March 31 unless they find private funding to stay open. Buses no longer run on evenings and weekends. The city won't pay for any street paving, relying instead on a regional authority that can meet only about 10 percent of the need.

"I guess we're going to find out what the tolerance level is for people," said businessman Chuck Fowler, who is helping lead a private task force brainstorming for city budget fixes. "It's a new day."

Voters in November said an emphatic no to a tripling of property tax that would have restored $27.6 million to the city's $212 million general fund budget. Fowler and many other residents say voters don't trust city government to wisely spend a general tax increase and don't believe the current cuts are the only way to balance a budget.

Community business leaders have jumped into the budget debate, some questioning city spending on what they see as "Ferrari"-level benefits for employees and high salaries in middle management. Broadmoor luxury resort chief executive Steve Bartolin wrote an open letter asking why the city spends $89,000 per employee, when his enterprise has a similar number of workers and spends only $24,000 on each.

Businessman Fowler, saying he is now speaking for the task force Bartolin supports, said the city should study the Broadmoor's use of seasonal employees and realistic manager pay.

"I don't know if people are convinced that the water needed to be turned off in the parks, or the trash cans need to come out, or the lights need to go off," Fowler said. "I think we'll have a big turnover in City Council a year from April. Until we get a new group in there, people aren't really going to believe much of anything."

Rather than closing the parks and shutting off services, why not fire all the city workers, privatize the maintenance, and charge enough to recover costs. If that can't be done, then shut down whatever is not profitable.

But once again I am irritated by the way this is presented. Not a single fireman or police office needs to be fired. All the unions have to do is cut wages. If the unions will not agree, then privatize the fire department.

Heck, just do it because the union will not agree.

Then after the fire department is privatized, tell the police department the same is in store for them if they do not agree to massive pension and benefit cuts.

The only thing unions understand is complete annihilation of the union. So, annihilate them, starting with the fire department.

Drastic Cuts In Phoenix

Inquiring minds are reading City of Phoenix details plan for drastic cutbacks.

Phoenix's budget troubles came into sharper focus Thursday as City Manager David Cavazos proposed shutting down senior centers, libraries and sports complexes, and laying off hundreds of police officers and firefighters for the first time in decades.

The plan would help close Phoenix's $242 million deficit, balancing the general-fund budget through fiscal year
2011.

Cavazos' proposal would eliminate 1,379 of the city's 16,000 positions, though a third of the targeted positions are vacant. The Police Department would lose about 353 sworn positions, from patrol officers to assistant chiefs. The Fire Department would cut 144 sworn jobs. The cuts represent about 18 percent of the total sworn police and fire force.

Six of the city's 15 library branches, five of its senior centers and numerous sports complexes and community centers would be shuttered. Funding for the arts and after-school programs would be slashed. And bus routes and light-rail hours would be reduced.

"This is more than an inconvenience," Cavazos said. "When you close someone's senior center, that's their whole life."

"They can't close my library," said Leslie Witt, 54, who waited 75 minutes to use a computer. "This is my library. I come to the library three or four times a week. I come to talk to my neighbors and friends and to socialize. They already cut enough hours that it's hard to get down here."

Added Dorothy Martin, 80, of east Phoenix: "It never occurred to me that we'd be in the mess we're in, firing our police and firemen. It's terrible. It's absolutely devastating."

Those who use the library should pay for it. Moreover, everything above about police and fire fighters in Phoenix is the same as in Colorado Springs.

Sacramento County

Please consider Sacramento County could see $150 million shortfall in 2010-11.

Sacramento County could be facing a $150 million general fund shortfall next fiscal year, according to preliminary county projections obtained by The Bee.

That number is based largely on ongoing shortfalls the Board of Supervisors failed to address at the start of this fiscal year when they instead chose to use more than $80 million in one-time funds such as reserves and inter-fund transfers to cover deficits. Increased labor costs stemming from negotiated contracts are projected to cost the general fund $44.3 million

The increase in labor costs as a result of cost-of-living increases and other negotiated raises is equal to more than 550 jobs, according to county officials.

Who were the dimwits that agreed to those last wage hikes? Fire them. Then follow the plan outlined above for Colorado Springs and Phoenix.

Drastic Cuts In Nevada

Inquiring minds are pondering the ramifications of Nevada's $900 Million Shortfall

Nevada's budget outlook is so bleak that lawmakers doubt whether state government can remain afloat without drastic cuts to everything from prisons to schools to state parks and services for the poor and elderly.

Legislators met Tuesday with Republican Gov. Jim Gibbons to discuss how they will cope with a short-term deficit of about $900 million during an upcoming special session of the Legislature. Some Democratic lawmakers acknowledge options to bridge the gap probably won't include tax increases.

"It is important for all of us to understand how dire it is," Senate Majority Leader Steven Horsford, D-Las Vegas, said. "The things we attempted to protect are now going to be considered for reduction or elimination."

Assemblyman John Oceguera, D-Las Vegas, said pay cuts and layoffs for state employees are probably inevitable. "These are drastic, drastic cuts. I would be surprised if some folks didn't lose their jobs," Oceguera said.

Mark Taylor, deputy state controller, estimated that saving $1 billion through pay cuts, if implemented in March, would mean reducing salaries of state workers, teachers and university and community college faculty and support staff by 25 percent to 30 percent through June 30, 2011.

Taylor said such a cut would hit lower-wage employees extremely hard, especially because some lower-paying jobs are held by single parents raising children. There had been talks that salary cuts would be made only to employees earning more than $40,000 a year.

Oceguera was uncertain whether it would be considered "a socialist type thing" to tailor pay cuts according to earnings.

"I don't know if it is possible, but I'm open to look at that," he said.

Assembly speaker Barbara Buckley, D-Las Vegas, said the shortfall would take 22 percent across-the-board cuts to overcome and that she and other legislators agreed with Gibbons they should work together to set priorities and ensure a special session lasts no longer than a couple of days.

"What we are facing is nothing short of sobering," Buckley said.

Dennis Mallory, chief of staff of the American Federation of State, County and Municipal Employees Local 4041, expects "massive layoffs" of state employees and pay cuts during the special session.

"Our folks cannot give up anymore," said Mallory, whose association has 4,000 state employee members. "This is terrible."

I am encouraged that Nevada is proposing slashing salaries but the big problem is pension benefits. Those need to go.

Lynn Warne, president of the Nevada State Education Association, said legislators and the governor shouldn't rule out raising new revenue through taxes and fees during the special session in order to prevent cuts to schools.

"I don't have a list of what cuts we would make in education, because I feel we have already been cut to the bone and there is nothing left to cut," Warne said.

There is plenty to cut starting with her salary.

Nevada to borrow up to $1 billion to cover jobless benefits

Adding to already huge fiscal problems, Nevada to borrow up to $1 billion to cover jobless benefits.

The state will borrow between $800 million and $1 billion from the federal government this year to continue paying unemployment benefits to Nevadans. Employers will be saddled with paying off this debt at an interest rate of 4.6 percent.

Cynthia Jones, administrator of the state Division of Employment Security, says it initially predicted it would collect $313 million a year in tax from Nevada employers in the tax they pay. But the state won't reach that figure because of high unemployment.

Jones appeared before the Legislative Commission Thursday to speak on the regulation that would keep the tax rate at 1.33 percent for Nevada employers this year. Jones said she's hoping for some "federal relief" either in forgiving all or part of the debt or lowering the 4.6 percent interest rate. The state has two years to pay off the loan.

If Nevada can't pay it off by the deadline, the federal government will increase the rate it charges Nevada employers.

Nevada's unemployment rate is second highest in the nation, and about to get worse with pending layoffs.

Schwarzeneggers's Bizarre Plan To Outsource Prisoners To Mexico

In the truly bizarre category Schwarzenegger Proposes To Outsource Prisoners To Mexico.

Schwarzeneggers's daily stunts to keep his state afloat are getting more ridiculous.
The governor probably wasn't joking yesterday, when he suggested outsourcing California's overcrowded prison system to Mexico. Specifically, he would send the state's 19,000 imprisoned illegal immigrants to prisons south of the border.

"We pay them to build the prisons down in Mexico and then we have those undocumented immigrants be down there in a prison. ... And all this, it would be half the cost to build the prisons and half the cost to run the prisons," Schwarzenegger said, predicting it would save the state $1 billion that could be spent on higher education.

I have a better idea.

Why don't we just send all of the non-violent illegal alien criminals back to their native country?

Moreover, why don't we release any US citizens held on Marijuana charges and stop prosecuting new cases as well.

If that does not fix the problem, then let's commute sentences of non-violent criminals on a first in first out basis making sure that people spend enough time so that they do not want to go back to prison.

Instead, Schwarzenegger wants to build prisons in Mexico. It is preposterous.

Verizon to cut 13,000 jobs

In the private sector, things do not look so hot either. Please consider Verizon to cut 13,000 jobs.

After posting a fourth-quarter loss, Verizon Communications, Inc. said Tuesday it plans to cut about 13,000 jobs this year.

Verizon recorded a net loss of $653 million, or 23 cents per share, compared with a profit of $1.24 billion, or 43 cents a share, a year earlier. The loss came after the company took a charge of $3 billion for cutting a total of 17,000 jobs last year in both its landline and wireless divisions. Analysts polled by Thomson Reuters had forecast earnings of 54 cents per share.

1,500 job cuts at Ericsson

Please consider Ericsson�s 1,500 job cuts may reach Kansas City area.

The Swedish telecommunications company on Monday reported fourth-quarter earnings of 700 million kronor ($96.8 million U.S.), down 83 percent from 4.1 billion kroner during the same period a year ago. Revenue during the three-month period dropped 13 percent to 58 billion kroner ($8 billion U.S.) as sales in central Europe, Africa and the Middle East slumped.

Company officials, who slashed 5,000 jobs last year, said they would need to eliminate an additional 1,500 positions.

2,000 Meat Sector Layoffs

Please note that US meat sector job cuts to almost 2000 in three days.

In the second shutdown notice by a major US meat company in three days, Tyson Foods said it is going to cut part production of a canning plant.

The move, which will axe almost 500 jobs, follows Smithfield Foods' recent announcement that as of April, it was closing a hog processing plant, also in Iowa. The job loses takes the total jobs lost in less than a week in the US meat sector to 1,930.

Corporate America on a Diet

In a new trend to frugality where less is more, please consider the Wall Street Journal article: Corporate America on a Diet.

Now showing this earnings season: the Incredible Shrinking Corporation.

The signs are everywhere. General Electric Co.'s chief financial officer on Friday referred to the "focused shrinkage" of its financial unit. A day earlier, Target Corp. said it plans to test stores that will have 50% fewer items.

The shrinking has had broad impact. If you're already unemployed, it's harder to find a new job. Nearly 40% of the unemployed have been jobless for 27 weeks or more.

In reaction to a sharp pullback by consumers during the recession, Corporate America clearly has been on a strict no-fat diet, with banks, airlines and manufacturers among the more high-profile industries getting a lot skinnier. The aim is regaining what investors value most: fatter profits.

Jobs That Are Not Coming Back

• Intel's workforce is at 2003 level.
• Airlines have cut capacity, which means fewer routes and fewer flights. Total airline employment was down almost 10% through November from two years earlier, according to the Bureau of Transportation Statistics.
• Citigroup shed one-third of its employees and unloaded $500 billion in assets.
  
• GE is in the process of condensing its capital-finance unit, once the locomotive of its profit. During GE's conference call on Friday, Chief Financial Officer Keith Sherin mentioned the unit's "focused shrinkage." "GE Capital," he said, "will be a smaller but more meaningful contributor in the future."

The above bullet points from the Wall Street Journal.

Layoff stories are endless, and layoffs in the public sector have barely started. Those layoffs are likely to be staggering unless Obama and Congress are willing to go much deeper in debt, specifically to bail out failed states.

The budget deficit religion in Obama's state of the union message will surely be put to the test.

4th quarter GDP numbers will give one last reason to celebrate. However, that will be the last hurrah. The next GDP report will be nothing more than a rear view mirror look of inventory rebuilding, failed stimulus plans like cash-for-clunkers, and housing tax credits.

Here's a sobering thought for all the stock market bulls: The best of this "recovery" is now likely behind us, the official unemployment rate is still over 10%, and massive layoffs are on the horizon for city and state workers across the country.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Pennsylvania Capital Ponders Bankruptcy

Harrisburg City Controller Dan Miller Says Pennsylvania Capital Should Weigh Bankruptcy.

Harrisburg, Pennsylvania, the capital of the sixth-largest U.S. state by population, should skip a $2.2 million debt service payment due Feb. 1 and consider bankruptcy, City Controller Dan Miller said.

Harrisburg faces $68 million in payments this year in connection with a waste-to-energy incinerator and should weigh Chapter 9 protection from creditors or state oversight through a program known as Act 47, Miller said today. Chapter 9 bankruptcy allows municipalities to reorganize rather than liquidate.

The alternatives are to sell assets such as an historic downtown market; an island in the Susquehanna River that includes the city�s minor-league baseball stadium; and the city�s parking, sewer and water systems, according to a preliminary 2010 budget and an emergency financial plan submitted yesterday.

�What I�m suggesting is we stop paying the debt service until we have a plan or we decide which way to go, in bankruptcy or Act 47,� Miller, a former city council member who became controller this month, said in a telephone interview. �I think it could save our assets instead of selling them.�

Management Partners Inc. of Cincinnati, a consulting firm hired to study the city�s finances, recommended selling assets, raising city inspection and recreation fees, and reopening city labor contracts.

Harrisburg owes a total of $68 million in payments it guaranteed on bonds issued by the Harrisburg Authority for the incinerator and on a $35 million working capital loan for the project.

The city skipped more than $3.5 million in debt service and swap payments last year, prompting draws on reserves and back-up payments by Dauphin County, where Harrisburg is located, which has sued the city to recover its payments.

Harrisburg�s debt was downgraded to high-yield, high-risk junk status by Moody�s Investors Service in October. Moody�s lowered the city�s rating to Ba2 from Baa2, the second-lowest investment grade.

The first thing Harrisburg should do is fire Management Partners Inc. of Cincinnati, for poor advice. The only recommendation from Management Partners that made any sense was reopening city labor contracts.

Now is not the time to raises taxes or fees. That will only add pressure on businesses and private citizens. Islands can only be sold once, and selling property now would likely do nothing but cause the unions to delay negotiating labor contracts. Moreover, Management Partners Inc. misses making a recommendation to privatize city services.

Declaring bankruptcy is easily the best option. I commend Dan Miller for making it. But all will be wasted if Harrisburg misses the opportunity to renegotiate labor contracts (preferably void them outright), in bankruptcy court.

As soon as a couple major cities declare bankruptcy to end burdensome union contracts and ridiculous pension promises, the stigma will be off and more cities will do it. Indeed, there will be a mad rush to do so, if the first few instances work out as well as I suspect.

Cities and municipalities that get out from the grip of unions will have a huge competitive advantage over everyone else.

Go for it, Harrisburg.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Miami Faces Financial Meltdown; SEC Investigates "Financial Shell Game" Asks For Records On All Major Bond Deals Since 2006

With most eyes on California, proponents of the Watched Pot Theory likely thought the first major blowup in the US would be someplace else. That someplace might be Miami.

Though the fiscal year has barely begun, Miami leaders are bracing for a budget hole that could nearly wipe out the city's entire reserve.

Inquiring minds are interested to learn Miami leaders fear a financial meltdown.

Facing a widening financial crisis, Miami leaders are already projecting a $45 million budget shortfall this year that could force the city to deplete its reserves and sell key assets to stay afloat.

"We understand the gravity of the situation," said Miami Mayor Tom�s Regalado.

Today, a reserve that brimmed with $141 million in 2003 could plummet to less than $10 million by the time commissioners are finished with this year's budget in September, projections show. If that happens, Miami will break its own financial integrity laws -- prompting some officials to fear another painful state takeover.

"Unbelievable," said County Commissioner Carlos Gimenez, who was Miami's city manager when its reserves peaked in 2003. "They forgot the lessons of the past."

The financial woes come as federal investigators continue a sweeping investigation of Miami's budget practices over the past four years, including questions over whether the city disclosed problems to bond holders.

The U.S. Securities and Exchange Commission has demanded all the city's records, e-mails and shreds of evidence involving more than a quarter of a billion dollars in bond deals for major projects since 2006.

The SEC investigation followed a report by The Miami Herald last summer revealing how top city officials engaged in a financial shell game, moving millions from capital accounts to help the budget stay flush.

William Earle Klay, the director of the Askew School of public administration and policy at Florida State University, said rating agencies closely study reserve funds.

"Tapping into reserve funds, and how much you tap into those funds, is something that rating services look at," he said. "Your credit ratings can go down, and if it's a revenue bond, they may have to raise the prices."

Commission Chairman Marc Sarnoff was stunned when the mayor revealed the numbers last week, prompting the commissioner to warn that if spending isn't reined in, the state could step back in and strip the city of its decision-making.

The budget disclosure is the latest blow to a city reeling from financial headaches since last summer.

In July, The Miami Herald investigation found skyrocketing salaries and pension obligations had strangled the city's budget. The quick fix -- transferring millions between capital accounts and the city's general fund -- only raised more questions.

One of the city's major challenges continues to be lowering its worker-friendly pension obligations. Since 2001, those demands have risen by 400 percent, reaching $67 million last year. This year, that number will rise to $101 million.

This year's projections had Sarnoff shaking his head last week. "How could we be so out of budget?" he asked. "We're in crisis mode."

Pensions To Blame

"How could we be so out of budget?"

Ask a question like that and you deserve to be fired or not reelected, whichever applies. Moreover, those who illegally hid deficits by playing shell games should face criminal investigations.

Pension Math

Pension obligations were up a mere 400% since 2001, to $67 million. Backtracking, we see that pension obligations were $13.4 million in 2001. Pension obligation are now $101 million, up 653% in nine years.

Budget Shortfalls

• Overall collections, including property tax receipts, are expected to be $17.8 million below projections.
• Government agencies are on target to overspend by $6.2 million.
• The police department, parks and recreation and risk management face a combined budget shortfall of $15.3 million.

SEC Investigation

Inquiring minds are reading SEC orders Miami to turn over its financial books.

In a sweeping investigation that could impact Miami's public projects for years, the U.S. Securities and Exchange Commission is probing the city's major bond offerings between 2006 and 2009 and questionable financial transfers used to balance the budget.

A confidential SEC letter, FedExed to the city Friday and obtained by The Miami Herald, demands that Miami turn over reams of e-mails and internal documents showing how it was moving money around to shore up its bottom line -- as well as how it represented its financial picture to bondholders.

Now, the city has been ordered to "preserve all computer resources utilized by Miami, or any other persons working on or involved in any of Miami's activities, included but not limited to hard drives, floppy disks, servers, and all other means of storage."

Also sought: internal communications from six high-ranking city officials, including City Manager Pete Hernandez and Chief Financial Officer Larry Spring.

Former Miami Mayor Manny Diaz, who signed off on all the city's bond offerings between the years in question, couldn't be reached Friday.

The practice of transferring funds between capital projects and the city's general fund harkened to Miami's last fiscal crisis, when it was discovered that the city tried to hide a $68 million shortfall by shifting money between hundreds of capital accounts.

"It's d�ja vu 1996," said Miami Mayor Tom�s Regalado, the only elected city leader who was around during the last financial disaster. "I'm not surprised, but I'm very, very disappointed."

The SEC has also demanded documentation between the city and McGladrey & Pullen, the accounting firm that does Miami's Comprehensive Annual Financial Reports.

The notification also comes on the heels of a blistering audit by city auditor Victor Igwe, who said Miami skirted financial integrity rules by using ``inaccurate and misleading'' budgetary practices as it scrambled to fill budget holes.

Miami Mayor Tom�s Regalado was around in the last crisis, and did nothing to prevent this?!

It is amazing the things city officials will do to keep pension scams going, including breaking the law. Let's hope that those who broke securities laws and city covenants face a grand jury investigation, and ultimately a court of law.

I hope this ends up in court, with Miami in default, with pension promises thrown in the fire where they belong. If not, Miami taxpayers are going to take a huge hit on property and other taxes.

This is not about "saving for a rainy day" as some might think. This is about exponentially rising pension costs that could never be met.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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77 Fraud, Money Laundering, Insider Trading, and Tax Evasion Investigations Underway Regarding TARP

Inquiring minds are reading the SIGTARP Quarterly Report To Congress. The report is a massive 224 pages long. I will do my best to condense it down to the critical highlights involving Fraud, Money Laundering, Insider Trading, etc.

Let's start with the SIGTARP mission, then the findings.

Mission

SIGTARP�s mission is to advance economic stability by promoting the efficiency and effectiveness of TARP management, through transparency, through coordinated oversight, and through robust enforcement against those, whether inside or outside of Government, who waste, steal or abuse TARP funds.

Let's dive into the 224 page report and see how well TARP, and the alphabet soup of lending facilities met their stated goals.

On the positive side, there are clear signs that aspects of the financial system are far more stable than they were at the height of the crisis in the fall of 2008. Many large banks have once again been able to raise funds in the capital markets, and some institutions � including some that appeared to be on the verge of collapse � have recovered sufficiently to repay their TARP investments years earlier than most would have predicted. These repayments and the sales of the warrants associated with them have meant that Treasury (and thus the taxpayer) has turned a profit on some of the individual TARP investments; as a result of these repayments, among other positive developments, it now appears that the ultimate cost of TARP to the American taxpayer, while still substantial, might be significantly less than initially estimated.

Mish: The idea that there are "profits" is fictitious. It's effectively praising making 10 cents on a dollar while not counting hundreds of $billions lost on AIG and Fannie Mae, and ignoring $300 billion worth of loan guarantees at Citigroup still in effect.

Moreover, the only reason banks were able to show a profit and pay back TARP loans is mark-to-market rules were delayed further and banks did not have to bring hundreds of billions of dollars in off balance sheet SIVs back on to bank balance sheets.

Many of TARP�s stated goals, however, have simply not been met. Despite the fact that the explicit goal of the Capital Purchase Program (�CPP�) was to increase financing to U.S. businesses and consumers, lending continues to decrease, month after month, and the TARP program designed specifically to address small-business lending � announced in March 2009 � has still not been implemented by Treasury. Notwithstanding the fact that preserving homeownership and promoting jobs were explicit purposes of the Emergency Economic Stabilization Act of 2008 (�EESA�), the statute that created TARP, nearly 16 months later, home foreclosures remain at record levels, the TARP foreclosure prevention program has only permanently modified a small fraction of eligible mortgages, and unemployment is the highest it has been in a generation. Whether these goals can effectively be met through existing TARP programs is very much an open question at this time.

Mish: Question? There is no question. TARP will do nothing for foreclosures or bank lending, not now, not ever.

The substantial costs of TARP � in money, moral hazard effects on the market, and government credibility � will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years� time.

It is hard to see how any of the fundamental problems in the system have been addressed to date.

� To the extent that huge, interconnected, �too big to fail� institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.

� To the extent that institutions were previously incentivized to take reckless risks through a �heads, I win; tails, the Government will bail me out� mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.

� To the extent that large institutions� risky behavior resulted from the desire to justify ever-greater bonuses � and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions � the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.

� To the extent that the crisis was fueled by a �bubble� in the housing market, the Federal Government�s concerted efforts to support home prices � as discussed more fully in Section 3 of this report � risk re-inflating that bubble in light of the Government�s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

Mish: The Report Blasts Geithner and the NY Fed. I seriously doubt Geithner survives this but the sad thing is Geithner will not end up in prison where he belongs.

SIGTARP�s audit, which was issued on November 17, 2009, found, among other things, that the terms of the original FRBNY financing did not result from independent analysis, but were simply an adoption of the term sheet from an aborted private financing discussion, and those terms, which included an onerous effective interest rate of 11%, made modification of the terms and further Government action inevitable.

The audit also found that, in structuring Maiden Lane III, FRBNY attempted to obtain concessions, or �haircuts� from the CDS counterparties � and one counterparty was prepared to take a modest haircut � but the FRBNY�s negotiating strategy was hampered by a series of policy decisions that severely limited its ability to obtain concessions, including its decision not to accept concessions unless concessions could be obtained from all of the counterparties, its refusal to use its leverage as regulator to some of the institutions involved, and its basic discomfort with interfering with the sanctity of the counterparties� contractual rights. These policy choices led directly to a negotiating strategy with the counterparties that even then-FRBNY President Geithner acknowledged had little likelihood of success. The audit further noted that although Mr. Geithner has denied that his intent was to benefit the counterparties,the overall structure of the AIG bailout resulted in AIG�s counterparties receiving tens of billions of dollars they likely would not have otherwise received had AIG gone into bankruptcy.

Mish: The report also highlights numerous cases of fraud, money laundering, insider trading, and tax evasion . There are 77 active cases are under investigation. Ongoing investigations involve: Omni National Bank, Bank of America, Colonial Bancgroup/Taylor, Bean & Whitaker, AIG, others.

SIGTARP�s Investigations Division has continued to develop into a sophisticated white-collar investigative agency.

Through December 31, 2009, SIGTARP has opened 86 and has 77 ongoing criminal and civil investigations. These investigations include complex issues concerning suspected TARP fraud, accounting fraud, securities fraud, insider trading, bank fraud, mortgage fraud, mortgage servicer misconduct, fraudulent advance-fee schemes, public corruption, false statements, obstruction of justice, money laundering, and tax-related investigations.

While the majority of SIGTARP�s investigative activity remains confidential, developments in several of SIGTARP�s investigations have become public over the past quarter as discussed more fully in Section 1 of this report.

A substantial number of SIGTARP�s ongoing investigations were developed in whole or in part through tips or leads provided on SIGTARP�s Hotline (877-SIG-2009 or accessible at www.SIGTARP.gov). From its inception through December 31, 2009, the SIGTARP Hotline received and analyzed nearly 9,900 contacts, running the gamut from expressions of concern over the economy to serious allegations of fraud.

Mish: Please consider a prime conflict of interest example in regards to PPIP, the Public-Private-Investment-Plan, specifically designed to allow banks to dump their worst assets onto the public (taxpayers) shielding banks from the risk.

Section 5 also provides an update on the issue of imposing conflict-of-interest walls in PPIP, including a discussion of a series of suspect trades that has already occurred within one of the Public-Private Investment Funds (�PPIFs�) in which a portfolio manager directed the sale of a security from a non-PPIF fund under his management to a dealer after the security had been downgraded and then, minutes later, purchased from that dealer the same security at a slightly higher price for the PPIF. SIGTARP is reviewing these trades. The fact that these kinds of issues could arise in the first instance is the direct result of Treasury�s refusal to require information barriers or walls in PPIP, and in an environment in which large portions of the public already view the fairness of Government programs with skepticism, whether fairly or unfairly, the reputational risk associated with this review is a wholly unnecessary cost.

Mish: Note the refutation of the preposterous claims that taxpayers will be made whole.

Contrary to the January 7, 2010, assertion by Treasury that the taxpayer �will be made whole� because the FRBNY loan to Maiden Lane III is on track to being repaid in full, it is clear that any assessment of the costs to the Government and the taxpayer necessarily must look beyond FRBNY�s loan to Maiden Lane III to also take into account both the funds that FRBNY previously loaned to AIG and the subsequent TARP investments. All of these infusions to AIG are linked inextricably: more than half the total amounts paid to counterparties in connection with the CDS portfolio retired through Maiden Lane III did not come about through the Maiden Lane III CDO purchases, but rather from AIG�s earlier collateral postings that were made possible in part by the original FRBNY loan, which was, in turn, paid down with TARP funds. Because of this linkage, the ultimate costs to the Government and the taxpayer cannot be measured in isolation. Stated another way, regardless of whether FRBNY is made whole on its loan to Maiden Lane III, the ultimate value or cost to the taxpayer cannot be calculated until the likelihood of AIG repaying all of its assistance can be more readily determined. Treasury�s recent suggestion to the contrary is, at best, incomplete.

Mish: The report blasts Bernanke's wall of secrecy need. Inquiring minds may also wish to review Secret Deals Involving No One; AIG Coverup Conspiracy Unravels.

SIGTARP�s audit also noted that the now familiar argument from Government officials about the dire consequences of basic transparency, as advocated by the Federal Reserve in connection with Maiden Lane III, once again simply does not withstand scrutiny. Federal Reserve officials initially refused to disclose the identities of the counterparties or the details of the payments, warning that disclosure of the names would undermine AIG�s stability, the privacy and business interests of the counterparties, and the stability of the markets. After public and Congressional
pressure, AIG disclosed the identities of its counterparties, including its eight largest: Soci�t� G�n�rale, Goldman Sachs Group Inc., Merrill Lynch, Deutsche Bank AG, UBS, Calyon Corporate and Investment Banking (a subsidiary of Cr�dit Agricole S.A.), Barclays PLC, and Bank of America. Notwithstanding the Federal Reserve�s warnings, the sky did not fall; there is no indication that AIG�s disclosure undermined the stability of AIG or the market or damaged legitimate interests of the counterparties.

Mish: Inquiring minds note how insurance companies gamed the system.

The audit also noted that the CPP investments in two insurance companies highlight an incongruity in the CPP program design. Hartford and Lincoln were able to obtain CPP funds by buying small thrift savings institutions and becoming thrift/savings and loan holding companies, thereby meeting the technical criteria for receipt of CPP funds. The amount of CPP funds provided, however, was then determined by the assets of the holding company (i.e., the parent insurance company), not just the assets of the much smaller qualifying thrifts. In the case of Lincoln, for example, the company was able to obtain $950 million in TARP funds after it acquired a thrift that, on its own, would have been able to obtain at most $350,000 (if it would have qualified for CPP funding at all). Moreover, in using TARP funds, there was no requirement that TARP funding be used in connection with the subsidiary thrifts� activities. As it happened, the insurance companies reported that they used little (in the case of Hartford) or no (in the case of Lincoln) TARP funds in connection with the subsidiary thrifts� activities but rather used the vast bulk of the funds to support their insurance businesses. Stated another way, simply by purchasing comparatively tiny thrifts, Hartford and Lincoln � companies whose primary businesses (unlike other CPP participants) have little to do with lending to consumers and businesses � gained access to more than $4.3 billion in taxpayer funds, an amount that is many multiples of the thrifts� total assets.

Mish: Please note the following constitutional questions around the Legality of Executive Branch �Czars.�

On October 22, 2009, the Special Master, who was appointed without the advice and consent of the Senate, made determinations concerning executive compensation within AIG, Bank of America, Chrysler Financial, Chrysler, Citigroup, GM, and GMAC.

Following the issuance of the Special Master�s determination, Michael W. McConnell, formerly a judge on the Circuit Court of Appeals for the Tenth Circuit, authored an essay entitled �The Pay Czar Is Unconstitutional� that was published in the Wall Street Journal on October 29, 2009. In his essay, Judge McConnell concluded that �[b]ecause he is not a properly appointed officer of the United States, Mr. Feinberg�s executive compensation decisions were unconstitutional.�

Mish: Here is a table of funds subject to oversight.



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Planned Expenditures Outstanding



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Mish: Looking for institutions in deep financial trouble? You can find them in table 2.10, CCP program missed dividend payments. There are 74 such troubled institutions. Here is a short clip.



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TARP Tutorial: How Taxpayers Lose TARP Money When Banks Fail

The creation of TARP elevated the taxpayers� exposure to bank failures by making them direct investors in more than 700 institutions � generally as preferred shareholders. The recent bankruptcies of CIT , UCBH, and Pacific Coast National Bancorp, all TARP recipients through CPP , are tangible examples of the risk that failing CPP banks pose to the U.S. taxpayer.

It is impossible to predict how many additional banks will succumb over the next
several years. According to the FDI C website, however, the number of institutions on its �Problem List� is at a 16-year high. As of September 30, 2009, there were 552 insured institutions on the list, the largest number of problem institutions since the fallout from the savings and loan (�S&L�) crisis resulted in 575 institutions being placed on the list by December 31, 1993.91 The FDI C does not publish the names of problem banks on its website for fear that disclosing such information would cause a �run� on the bank�s deposits.

As preferred shareholders, U.S. taxpayers fall in the category of shareholder in many of the Government�s TARP investments. If the institutions fail, the taxpayers, like the other shareholders, will typically lose their investment if there are no remaining funds after creditors have been paid.

On December 31, 2008, Treasury invested $2 billion of CPP funds in CIT , a bank holding company with various commercial finance businesses including lending to small and midsize businesses.112 CIT , which was founded in 1908, is a major lender to small businesses, with more than $60 billion in finance and leasing assets supporting more than one million borrowers.

On November 1, 2009, CIT filed Chapter 11 Bankruptcy. Its depository institution,
CIT Bank, however, did not file bankruptcy. December 10, 2009, CIT �s shares and
warrants were extinguished, and former holders of preferred shares received contingent value rights (�CVR s�). Theoretically, CVR s place Treasury in a position to recoup part of its investment in CIT .

If, in the future, the senior and junior debt holders are paid back 100%, then any residuals would go to the CVR holders. At this time, it is unlikely that there will be any residual to pay Treasury for its preferred stock investment; in its TARP Financial Statements, Treasury listed the value of its CIT investment as zero.

Making Home Affordable Program

The Making Home Affordable (�MHA�) program was introduced by the Administration on February 18, 2009, as a collection of three major initiatives: a loan modification program, a loan refinancing program, and additional support for reduced mortgage interest rates.

TARP funds are primarily dedicated to one initiative within MHA, the Home Affordable Modification Program (�HAMP�). According to Treasury, HAMP is a $75 billion program that will lower monthly mortgage payments for homeowners by providing loan modification incentive payments to the servicers and loan holders (lenders or investors � referred to as investors in this section) and by protecting against further loss of collateral value. In addition, the MHA program now includes foreclosure alternatives for those not able to complete a HAMP modification.

Of the $75 billion reserved for HAMP, $50 billion will be funded through TARP and will be used to modify private-label mortgages.

Beyond the TARP support, the additional $25 billion in HAMP funding is provided under the Housing and Economic Recovery Act of 2008 (�HERA�) and will be used to modify mortgages that are owned or guaranteed by the Federal National Mortgage Association (�Fannie Mae�) and the Federal Home Loan Mortgage Corporation (�Freddie Mac�), two of the Government-sponsored enterprises (�GSEs�).

Mish: By now the failures of HAMP are well documented. Modifications are failing at a massive rate and foreclosures keep making new highs. HAMP is a lost cause. More importantly, Congress allocated unlimited funds to Fannie and Freddie even though losses are soaring.



Because Congress have the Fed a blank check, the Fed is immune from losses that will pile up as a result of its bloated balance sheet as shown below.

According to Federal Reserve Vice Chairman Donald L. Kohn, the Federal
Reserve�s announced purchases of GSE-guaranteed MBS, GSE debt, and Treasury
securities �were successful in reducing long-term interest rates� and �increased the
availability of mortgages to households.�

Mish: Kohn failed to mention the cost or what happens to interest rates as soon as the Fed stops the program. However, because Congress was stupid enough to write a blank check for Fannie and Freddie losses, the Fed can and probably will restart purchases as soon as the economy resumes its slide.

Clearly TARP was a complete failure, that is assuming the goals of TARP were as stated.

My belief is the benefits of TARP and the entire alphabet soup of lending facilities was not as stated by Bernanke and Geithner, but rather to shift as much responsibility as quickly as possible on to the backs of taxpayers while trumping up nonsensical benefits of doing so. This was done to bail out the banks at any and all cost to the taxpayers.

Was this a huge conspiracy by the Fed and Treasury to benefit the banks at taxpayer expense? Of course it was, and the conspiracy is unraveling as documented in this report and as documented in AIG Coverup Conspiracy Unravels.

In spite of massive, predicted in advance fraud, the Treasury still refuses to require information barriers or walls in PPIP.

The result was what many of us predicted all along: TARP fraud, accounting fraud, securities fraud, insider trading, bank fraud, mortgage fraud, mortgage servicer misconduct, fraudulent advance-fee schemes, public corruption, false statements, obstruction of justice, money laundering, and tax-related investigations.

No one should be surprised by these investigations. Indeed the real surprise is there are not more of them.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Clinton presses China over Iran nuke sanctions

The war of rhetoric with China continues. Hillary Clinton is again battling China over China's relationship with Iran. Please consider Clinton presses China over Iran nuke sanctions.

U.S. Secretary of State Hillary Rodham Clinton warned China on Friday it risks diplomatic isolation and disruption to its energy supplies unless it helps keep Iran from developing nuclear weapons.

Speaking in Paris, Clinton said she and others who support additional sanctions on Iran for refusing to prove it has peaceful nuclear intentions are lobbying China to back new U.N. penalties on the Iranian government.

The United States is the most visible leader in the new push for U.N. Security Council sanctions, and Clinton spent much of her time in Europe this week lobbying major powers whose support she needs to pass and enforce new economic penalties.

The risks of an Iranian bomb are manifold, Clinton said.

"It will produce an arms race," in the Persian Gulf, and Israel will feel its very existence threatened, Clinton said in response to a question from an audience member during a speech at a French military academy. "All of that is incredibly dangerous."

The United States has cautioned Israel publicly against a pre-emptive strike on Iran's known nuclear facilities, arguing that such an attack would invite an arms race and retaliation.

China has traditionally resisted U.N. Security Council sanctions, saying they are counterproductive and harm efforts to persuade Iran to prove its claim that the nuclear program is peaceful.

The country most responsible for the "Arms Race" is the United States of America. US troops stationed all over the world are a destabilizing force.

We invaded Iraq without justification, blew Iraq to smithereens, and any country in region their right mind would not want that to happen to them.

Indeed, a strong argument can be made that Iran having a nuclear bomb would be a stabilizing force. If Iran could adequately protect itself, the US would think twice about invading.

One can argue this from many points of view, including China's. China has everything to gain, both short and long term, from its policy of assisting Iran. Moreover, threats of "diplomatic isolation of China" are laughable. Think the world would go along with that? Heck, not even the US would.

Earlier today I commented on a huge protest in Japan over US bases. Please see Thousands in Tokyo Protest Against US Troops in Japan for details.

The end of US global dictatorship is nigh. That is a good thing given that we cannot afford the cost.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Thousands in Tokyo Protest Against US Troops in Japan

Inquiring minds are noting increasing resentment against US militarism in places some might least expect. Please consider Thousands protest in Tokyo against U.S. military presence in Japan

Thousands of protesters from across Japan marched today in Tokyo to protest against U.S. military presence on Okinawa, while a Cabinet minister said she would fight to get rid of a marine base Washington considers crucial.



Some 47,000 U.S. troops are stationed in Japan, with more than half on the southern island of Okinawa. Residents have complained for years about noise, pollution and crime around the bases.

Japan and the U.S. signed a pact in 2006 that called for the realignment of American troops in the country and for a Marine base on the island to be moved to a less populated area.

But the new Tokyo government is re-examining the deal, caught between public opposition to American troops and its crucial military alliance with Washington.

On Saturday, labor unionists, pacifists, environmentalists and students marched through central Tokyo, yelling slogans and calling for an end to the U.S. troop presence.

They gathered for a rally at a park - under a banner that read 'Change! Japan-U.S. Relations' - for speeches by civil leaders and politicians.

Prime Minister Yukio Hatoyama has repeatedly postponed his decision on the pact, with members of his own government divided on how to proceed.

over the next few months we must put all of our energy into achieving victory,' Cabinet minister Mizuho Fukushima said at the rally, to shouts of approval from the crowd.

Given that the US can no longer afford to be the world's policeman, this is an extremely welcome event. Let's hope it spreads.

Germany, Turkey, Philippines, and all 150 countries where US troops are stationed, please do us, yourselves, and the world a favor by kicking US troops out. Start the protests please.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Quicker "Non-Judicial" Foreclosures and Evictions Coming to Florida

Inquiring minds are interested in pending legislation to dramatically speed up the foreclosure process in Florida.

If bankers get their way, Floridians facing foreclosure could be kicked out of their homes in as little as three months.

The Florida Bankers Association, the 400-member-strong lenders' lobby, has presented state legislators with a bill to upend decades of Florida law and establish "non-judicial" foreclosures in Florida by July 1.

What's a non-judicial foreclosure? Banks would accelerate foreclosures against defaulting homeowners by bypassing the courts. Judges would no longer rule on foreclosure cases.

Some states � 37 in fact � already grant that fast-track foreclosure authority, including California, Georgia, Alabama and Texas. But Florida, with its plethora of vacation and retiree homes, has always been big on homeowner rights.

Non-judicial foreclosures must conclude in no less than three months and no more than a year. Most Florida foreclosures take a year to 18 months to work through the courts these days, longer if a lawyer fights a successful rear guard action. So in 90 days banks can theoretically auction the home out from under you.

Even after homeowners are evicted, banks can still pursue them for unpaid mortgage debt. But banks will waive that right if homeowners avoid trashing or stripping the house before the new owner takes over.

If banks must waive the right to pursue homeowners for unpaid mortgage debt provided the homeowner does not strip or damage the home, then the bill seems to be fair and balanced. The article does not say happens to second liens, but that debt should be legally discharged as well.

Benefits

• Freeloaders get kicked out of their houses and will then have to buy or rent.
• It will bring some of the shadow inventory on the market where it needs to be.
• The housing bottom will come quicker.
• Homeowners have debt legally discharged.
• Should banks agree to rent until a buyer is found, the banks would have some money coming in monthly instead of none.
• Homeowners are given an incentive to not strip or damage the home.
  

Banks Wise To Rent

Having a tenant may make the houses more salable, especially to would-be landlords. If a buyer wants occupancy or does not want the current tenant for any reason, the tenant would have 30 days to move.

Moreover, until banks can find buyers, the banks would be wise to rent the homes to the current occupants. Otherwise, the homes would be subject to pestilence, mold, vandals, and illegal squatters.

The only open question is whether or not this bill would encourage more to walk away. If so, would that necessarily be a bad thing? The quicker bad debts are written off, and the quicker home prices bottom, the better off everyone will be in the long run.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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US China Relationship Sours Over $6.4 Billion Weapons Sales To Taiwan; China Overtakes U.S. as Largest Saudi Customer

The already strained relationship between US and China is took a turn for the worse when US announced $6.4 billion in arms sales to Taiwan.

The United States is planning to sell $6.4 billion in arms to Taiwan, a move that will infuriate China and test whether President Barack Obama's efforts to improve trust with Beijing will carry the countries through a tense time.

The United States, which told China of the sale only hours before the announcement, acknowledged that Beijing may retaliate by cutting off military talks with Washington, which happened after the Bush administration announced a multibillion-dollar arms sale to Taiwan in 2008.

The U.S. is "obstinately making the wrong decision," China's Foreign Ministry said in a statement Saturday after Vice Foreign Minister He Yafei warned Ambassador Jon Huntsman the sale would "cause consequences that both sides are unwilling to see." The vice minister urged that the sale be immediately canceled, it said.

Despite its size, the U.S. weapons package dodges a touchy issue: F-16 fighter jets that Taiwan covets are not included. Senior U.S. officials said they are aware of Taiwan's desire for F-16s and are assessing Taiwan's needs.

The arms package includes 114 PAC-3 missiles and other equipment, costing more than $2.8 billion; 60 UH-60M Black Hawk helicopters, costing $3.1 billion; information distribution systems and other equipment, at $340 million; two Osprey Class Mine Hunting Ships, at a cost of about $105 million; and other items.

U.S. officials say the Obama administration's China policy is meant to improve trust between the countries, so that disagreements over Taiwan or Tibet do not reverse efforts to cooperate on nuclear standoffs in Iran and North Korea, and attempts to deal with economic and climate change issues.

China aims more than 1,000 ballistic missiles at Taiwan; the U.S. government is bound by law to ensure the island is able to respond to Chinese threats.

Obama's national security adviser, Jim Jones, said Friday that both Washington and Beijing do things "periodically that may not make everybody completely happy."

China Suspends Military Exchanges With The US

China's response was easy to predict: China summons US defence attache over Taiwan deal.

China says it will suspend its military exchanges with the United States over a multi-billion dollar American arms deal with Taiwan. Beijing has now summoned the US defence attache to lodge a 'solemn protest' against the deal.

The last time America sold arms to Taiwan - in October 2008 - China also stopped military relations with the US. Relations between Beijing and Taipei have improved recently and Taiwan insists it will promote peace across the Taiwan Strait.

This can easily blow over as it did in 2008, or it might be the start of increasing military as well as economic strains. For now, I would expect it to blow over.

By the way, China's protest could easily be political posturing. If China and Taiwan unite (which I think is inevitable), look at what China will immediately have access too.

• UH-60M Black Hawk Helicopters
• Patriot Advanced Capability-3 Missiles
• Osprey Class Mine Hunting Ships
• Information Technology

US would be wise to consider the strong likelihood that whatever military equipment we give Taiwan will eventually fall into the hands of China. All it takes is a vote by the people of Taiwan to bring it about.

Still want to give F-16 fighter jets to Taiwan?

In spite of what China says or how puffy it reacts to these weapons deals, perhaps that is just what China really wants.

China Overtakes U.S. as Largest Saudi Customer

While on the subject of China, please consider Saudi Aramco CEO Says China Overtakes U.S. as Largest Customer.

Saudi Arabian Oil Co., the world�s biggest crude producer, is exporting about 1 million barrels a day to China, more than to the U.S., Chief Executive Officer Khalid al-Falih said.

�We are already exporting more to China than to the U.S.,� he said today in an interview in Davos, Switzerland. �We are prudent and careful about where to invest but our eyes are focused on China and we will continue to look for all opportunities.�

The Saudi company, which owns an interest in a refinery in China�s Fujian province, is in talks with China Petroleum & Chemical Corp. to take a stake in a 200,000-barrel-a-day plant in Shandong. It is also expanding its Ras Tanura refinery on Saudi Arabia�s east coast and the Port Arthur plant in Texas, al-Falih said.

�Long term there will be a lot of consolidation and retirement of old and inefficient refineries,� he said in the interview. �We are building refineries that are going to be the most efficient, well-configured and able to deliver the products and we are comfortable that over their life cycle they will be very profitable. We are not designing them for the markets of 2008, 2009 but we are putting them in place for the next three to four decades.�

Aramco has shut in about a third of its 12 million barrels a day of oil output capacity to prevent a price slump. Crude prices rose to a record in July 2008, before tumbling 69 percent by the end of that year as the recession curbed demand. Oil has since rebounded 65 percent, and traded at $73.43 a barrel at 5:04 p.m. London time today.

While the US is wasting trillions of dollars fighting needless wars, inventing fictional enemies, and keeping troops stationed in 150 countries around the globe (all energy wasting activities), China is quietly building state-of-the-art refinery capacity for the next decade.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Crisis in Spain and Greece: Plan A and Plan B

Credit default swaps and rising interest rates suggest Greece is in serious trouble in spite of the ECB's futile attempts to downplay the situation. Please consider Greek Bonds Show Waning Faith It Can Avoid Bailout.

Greece is losing the confidence of bondholders that it will reduce the largest budget deficit in the European Union amid increased speculation that the country won�t be able to meet its debt obligations.

The nation�s government bonds are the world�s worst performers in January, losing 6 percent in local currency terms and extending their decline over the past three months to more than 11 percent, Bloomberg/EFFAS indexes show. Credit-default swaps tied to Greece trade at about the same levels as Dubai when it got a $10 billion bailout from Abu Dhabi in December. Greek 10-year bonds rebounded today after EU Monetary Affairs Commissioner Joaquin Almunia said the country won�t default.

Investor concern that Greece can�t tackle its budget deficit is hurting the debt of national utility companies and banks, said Philip Gisdakis, head of credit strategy at UniCredit SpA in Munich.

�If you fear a Greek crisis then you should not only avoid government bonds but corporates as well,� Gisdakis said. �And if you fear Greece, you should also fear Portugal and Spain.�

EU policy makers have no �plan B� to help Greece, Almunia said today.

�There is no bailout problem,� the bloc�s top economic official said in an interview with Bloomberg Television at the World Economic Forum�s annual meeting in Davos, Switzerland. �Greece will not default. In the euro area, default does not exist.�

What's Plan A?

Pardon me for asking but precisely what is "Plan A" if interest rates in Greece soar out of control?

Can there be a "Plan C" even if there is no "Plan B"? Are there any plans at all?

While pondering those questions, please consider Deteriorating Greece Situation Could Force EU's Hand.

European Union officials insist there won't be a bailout for Greece, but if the country's borrowing costs continue to climb, the bloc will have to do something to stave off default.

Such a bailout would be unprecedented for a euro-zone country, but would nonetheless be feasible. When Greece's borrowing costs soared last spring, the German finance minister at the time, Peer Steinbrueck, said Germany would have to offer financial help if another euro-zone state faced serious trouble.

European Commissioner for Economic and Monetary Affairs Joaquin Almunia, around the same time, said "there is a plan" for such situations, but never provided details.

EU officials in Brussels stress that any bailout might encourage "moral hazard," allowing yet another Greek government to skirt much-needed reforms.

The bloc's finance ministers and bureaucrats justifiably feel duped. Greece is a serial budget offender and revisions to a decade's worth of data suggest the country shouldn't have been allowed to enter the euro zone in 2001.

"I think the Greeks are very much aware of how serious the situation is and I think they are aware that they need to solve their problems themselves," Dutch Finance Minister Wouter Bos told journalists before a meeting of euro-zone finance ministers on Jan. 18.

There are questions about whether Greece will ask the International Monetary Fund for help. Two EU diplomats say the European Commission wants to avoid such a situation, which might be seen as an embarrassing sign of weakness for the bloc's institutions, including the Eurosystem, the grouping of the European Central Bank and the central banks of all the euro-zone nations.

The Greek government repeatedly has denied it is in bailout talks with the IMF, the commission or individual EU countries. France and Germany on Thursday rejected a report that they are discussing contingency plans for Greece.

Plan Facts

Almunia: "There is a plan" but there are no details.
Almunia: There is no "Plan B"
Almunia: �There is no bailout problem. In the euro area, default does not exist.�
Greece: IMF bailout plans denied
France and Germany: Reject reports of contingency plans

Contagion Fears

Now that we fully understand the plan, please consider Greece, others, move to quash rumors about bailout.

Greek and European officials moved Friday to quash market buzz that Athens could find itself in too deep a financial hole to save itself, potentially saddling European governments with a costly bailout.

Prime Minister George Papandreou and the EU denied reports that European governments had engaged in bailout discussions, stressing that Greece itself must carry through on its plans to cut an alarming deficit.

"Any discussion of a 'Plan B' is simply not in our vocabulary," said Greek Finance Minister George Papaconstantinou at the World Economic Forum in Davos, Switzerland, where he and Papandreou have been giving assurances of their determination to carry through on a difficult plan to get spending under control in the next several years.

European Union officials in public are offering only tough love, stressing that Greece must fix its problems, although economists tend to think that if a bailout were needed it would be forthcoming.

"There's no bailout. There's no way out," French Finance Minister Christine Lagarde said, after a closed-door meeting with European Commissioner Joaquin Almunia and European Central Bank President Jean-Claude Trichet.

Almunia said that Greece had presented a program to rectify the imbalances and called it a "very ambitious" program.

"We are preparing recommendations to help the Greek authorities to implement 100 percent of this program," he said, adding the country would have EU support and faced no risk of being booted from the euro zone.

Dominique Strauss-Kahn, chief of the International Monetary Fund, said Greece has much to do but that institution was ready to intervene, if asked.

"The country is in a difficult situation. The European authorities, including those in Brussels and at the European Central Bank, are working on it," he said. "We at the IMF are ready to intervene if asked, but that is not a forgone conclusion and I think that inside the euro zone, there will be enough solidarity to deal with it."

Though, talk of a bailout has been dismissed, the idea continues to gain increasing traction in the markets.

"I believe Greece will be bailed out if necessary because the implications of not doing so are hard to imagine," said Kit Juckes, chief economist at ECU Group.

It's not just Greece facing the skeptical eye of the markets.

"If fears of contagion become widespread, risk-averse investors could start to gun for even the larger or 'stronger' euro zone economies and their debt," said Geoffrey Yu, a currency strategist at UBS.

"Spain, Italy, Austria and Belgium -- together accounting for more than 35 percent of the euro zone economy versus just over 6 percent for Greece, Portugal and Ireland combined -- may then be next in the firing line," he added.

More Plan Facts

Papaconstantinou: 'Plan B' is simply not in our vocabulary
Jean-Claude Trichet: "There's no bailout. There's no way out"
IMF: Ready and willing to assist if asked

I am sure that further clarifies the situation for everyone.

Euro Tumbles

Please consider Euro Posts Biggest Monthly Decline in Year on Greece�s Turmoil

The euro recorded its biggest monthly drop in a year against the yen and fell versus the dollar as concern Greece won�t be able to meet its debt obligations spurred a retreat from riskier assets.

Credit-default swaps insuring Greece�s debt reached a record high of 422.5 basis points on Jan. 28, CMA DataVision prices show.

�If fears of contagion become widespread, risk-averse investors could start to gun for even the larger or stronger euro-zone economies and their debt,� Geoffrey Yu, a currency strategist in London at UBS AG, wrote in a note to clients.

Spain Has A Plan

Inquiring minds are please to hear Spain to Announce Deficit Cut Plan, Seeking to Avoid Greek Fate.

Spanish Finance Minister Elena Salgado presents her plan for slashing the budget deficit by two thirds today, seeking to avoid the punishment investors have meted out to Greece. The Cabinet will discuss spending cuts of as much as 50 billion euros ($70 billion) by 2013 today in Madrid as well as a proposal to tighten pension rules, said an official at the prime minister�s office who declined to be named in line with policy.

To shore up public finances and convince investors it was serious about its deficit pledges, the government raised taxes on income from savings and announced an increase in value-added tax to take effect July 2010.

Spain, heading for a second year of economic contraction, is under scrutiny amid investor concern that it will struggle to pay its debts, like Greece, which has a deficit of 12.7 percent of gross domestic product. Though Spain�s debt is about half of Greece�s, New York University Professor Nouriel Roubini said on Jan. 26 that in some ways the country has �even bigger problems� and poses a larger threat to European monetary union.

The euro has declined to a six-month low, sliding yesterday to $1.3939. The extra interest investors demand to hold Spanish debt rather than German equivalents stood at 99 basis points yesterday, five times the level at the start of 2008. The extra yield that investors demand to hold Greek 10-year securities widened to 395 basis points, the most in more than a decade.

Spain�s budget deficit probably amounted to 11.2 percent of GDP last year, according to the European Commission, which has set a 2013 deadline to cut the shortfall to 3 percent. Its debt is set to double from before the financial crisis.

Portugal Disappoints

Portugal disappointed investors and credit-rating companies with the budget it presented to parliament on Jan. 26. Moody�s Investors Service said the �limited deficit reduction this year means that more ambitious cuts will be needed in 2011-2013� and that its current Aa2 credit rating could be at risk.

�With the discussion on the desolate state of Greece�s public finances, public awareness of these problems has at last risen,� Ralph Solveen, head of economic research at Commerzbank AG in Frankfurt, wrote in a note. �Along with Italy and Portugal, Spain is now regarded as another candidate for a serious crisis.�

Unlike Greece, Portugal, and Italy, Spain appears to have some semblance of a plan. However, that does not mean Spain will actually carry it out. As for Greece, I smell an IMF bailout or an emergency "Plan B" meeting coming soon given the credit markets do not seem to have much faith in "Plan A", whatever it is.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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GDP Mirage - The Last Hurrah

4th quarter GDP came in at 5.7%. Discounting revisions (and probably even counting them), that was the last hurrah. Here is the story from two highly respected analysts.

Dave Rosenberg: The Houdini Recovery

First, the report was dominated by a huge inventory adjustment � not the onset of a new inventory cycle, but a transitory realignment of stocks to sales. Excluding the inventory contribution, GDP would have advanced at a much more tepid 2.2% QoQ annual rate, not really that much better than the soft 1.5% reading in the third quarter.

Second, it was a tad strange to have had inventories contribute half to the GDP tally, and at the same time see import growth cut in half last quarter.

Third, if you believe the GDP data � remember, there are more revisions to come � then you de facto must be of the view that productivity growth is soaring at over a 6% annual rate. No doubt productivity is rising � just look at the never-ending slate of layoff announcements. But we came off a cycle with no technological advance and no capital deepening, so it is hard to believe that productivity at this time is growing at a pace that is four times the historical norm. Sorry, but we're not buyers of that view.

In the fourth quarter, aggregate private hours worked contracted at a 0.5% annual rate and what we can tell you is that such a decline in labour input has never before, scanning over 50 years of data, coincided with a GDP headline this good. Normally, GDP growth is 1.7% when hours worked is this weak, and that is exactly the trend that was depicted this week in the release of the Chicago Fed�s National Activity Index, which was widely ignored. On the flip side, when we have in the past seen GDP growth come in at or near a 5.7% annual rate, what is typical is that hours worked grows at a 3.7% rate.

No matter how you slice it, the GDP number today represented not just a rare but an unprecedented event, and as such, we are willing to treat the report with an entire saltshaker � a few grains won�t do.

Calculated Risk: A Few Comments on Q4 GDP Report

Any analysis of the Q4 GDP report has to start with the change in private inventories. This change contributed a majority of the increase in GDP, and annualized Q4 GDP growth would have been 2.3% without the transitory increase from inventory changes.

Unfortunately - although expected - the two leading sectors, residential investment (RI) and personal consumption expenditures (PCE), both slowed in Q4.

PCE slowed from 2.8% annualized growth in Q3 to 2.0% in Q4.

RI slowed from 18.9% in Q3 to just 5.7% in Q4.

It is not a surprise that both key leading sectors are struggling. The personal saving rate increased slightly to 4.6% in Q4, and I expect the saving rate to increase over the next year or two to around 8% - as households repair their balance sheets - and that will be a constant drag on PCE.

This graphs shows Residential investment (RI) as a percent of GDP since 1947.



Notice that RI usually recovers very quickly coming out of a recession. This time RI is moving sideways - not a good sign for a robust recovery in 2010.

There is more commentary and another chart in the article. It's well worth a look.

Calculated Risk says "Unfortunately - although expected - the two leading sectors, residential investment (RI) and personal consumption expenditures (PCE), both slowed in Q4."

I have a different perspective: I believe it would be unfortunate if consumers started spending. This deleveraging is much needed along with a rise in the savings rate.

Recovery Stalls

Inquiring minds are reading GDP Soars 5.7%, But Here's the Chart You Should Look At

U.S. GDP in the last three months of 2009 soared by 5.7%. That's good news, but the number doesn't tell the whole story.

To get a more complete picture of our economic growth, check out the Chicago Fed National Activity Index (NAI) -- what Barry Ritholz calls "the best economic indicator you've never heard of."

The newest NAI report on 2009's fourth quarter is out, and it's not as sanguine as GDP.

Here's the chart:



What's happening here? The short version is this: The economy started to rally dramatically last summer, but the recovery has stalled since September.

Here's the longer, more informative version. NAI tracks 85 economic indicators, which lumped into four big categories: production and income (P&I); employment, unemployment, and hours (EU&H); personal consumption and housing (C&H); and sales, orders, and inventories (SO&I). The graph below explains how these categories performed in the second half of 2009.



I would be particularly concerned about what the chart says about the consumer and housing markets. The C&H figure barely budged from near recession levels (the NAI considers figures below -0.70 consistent with a recession) in the last six months of 2009. Consumer spending continues to be anchored down by broad unemployment. The housing market had a particularly rough December -- new home sales fells and foreclosures, defaults and delinquencies continued to rise.

Note the concern over residential housing and consumer spending, quite similar to Calculated Risk.

The mainstream media consensus thinks this is a good number.

�The economy is still healing and improving,� said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who projected a 5.6 percent gain in GDP. �I think this is a sustainable recovery.�

�My expectation for 2010 is that we�re going to see robust unit growth,� [Intel] Chief Financial Officer Stacy Smith said in an interview this month. �The consumer segments of the market will stay pretty strong, and I do believe we�re going to see a resurgence in PC client sales.�

�It�s a good number and it shows the economy is getting better, but the market is trying to decide if it�s going to be sustainable going into the next quarter,� said Phil Flynn, vice president of research at PFGBest in Chicago.

Today�s GDP reported gain �was more than what people were looking for and it should stabilize the market and calm some of the stress,� said James Cordier, portfolio manager at OptionSellers.com in Tampa, Florida.

The above quotes courtesy of Bloomberg.

I will take the other side of the bet.

Digging beneath the surface there is nothing to cheer about in the GDP numbers. Moreover, this weakness is in the face of the largest stimulus measures the world has ever seen, not just in the US, but globally. Money supply in China is growing at 30% and housing bubbles are likely to pop in Australia, Canada, and the UK. Problems in Greece, Spain, and Iceland continue to mount.

GDP is a mirage of sand blowing in the wind. So is global growth. It is a mistake to believe government spending can possibly provide a solid foundation for a lasting recovery.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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