Creative Destruction And The Rising Tide of IT Pay Cuts

A rising tide of IT professionals is seeing its annual compensation decline. CIO is asking IT Pay Cuts: Are You Next?

As more companies enforce across-the-board pay cuts and unpaid furloughs, a rising tide of IT professionals is seeing its annual compensation decline and must decide whether to switch employers as a result.

Among the companies that have instituted broad pay cuts this year are National Public Radio, the New York Times, Nucor and the Georgia State government. These organizations are slashing the pay of even their most in-demand IT staff, such as Web developers, information security specialists, enterprise resource planning gurus and IT architects.

For example, one Indiana firm eliminated annual bonuses at the end of 2008 for all of its employees, including the IT staff. A few months later, all employees making more than $90,000 saw their salaries cut by 10%, which impacted two IT managers. Both IT managers left the firm within a few months of the10% pay cut, a knowledgeable source said.

IDG, the parent company of Network World, instituted across-the-board pay cuts of 10% in May. Rob Rebecchi, Manager of Technology Support Services for IDG, says his group of five analysts, who handle tech support calls for the Framingham, Mass., publishing firm, was affected by the pay cut.

Overall, IT pay and perks continues to shrink in 2009. A Janco Associates survey released in June found that total compensation for IT professionals fell an average of 19% between January 2008 and June 2009.

Another factor impacting demand for IT professionals is the fact that many high-tech workers are delaying their retirement or re-entering the workforce post retirement.

"There is now a surplus of seasoned IT professionals available. For the second time in less than 10 years, retirements are being put off because of the downturn in the stock market and the resultant reduction in savings available to support IT professionals as they retire," Janco's report reads. "Added to this is an influx of retirees looking to get back into the job market due to the massive reduction in their investment portfolio."

Boomer Retirement

There is much more in the article including more links. Here is one of them pointing to a misdiagnosed analysis of the situation as it looked in July of 2007.

Please consider IT jobs get hot as baby boomers retire.

While talent pool shrinks, job-seeking IT professionals have the upper hand.

IT professionals could use the inevitable retirement of millions of baby boomers to get higher salaries, better benefits and long-term job security, according to Forrester Research, but at the same time, IT managers will face a skills shortage that could hinder IT's ability to support a business.

With an estimated 25 million Americans set to retire by 2020 across all industries, Forrester Research says IT job seekers will have the upper hand when dealing with hiring managers eager to replenish lost expertise. According to Robert Half Technology's survey of about 1,400 CIOs some 16% planned to hire IT professionals during the first quarter of this year -- a number that represents the largest hiring increase since the fourth quarter of 2001.

"The IT job market is hot once again. High demand for constrained pool has shifted the leverage to candidates," the Forrester report reads

"It professionals have more options and are pickier in their employment choices. Because there is great demand, IT workers, especially those with highly sought after skills, require extra wooing from IT leaders," Forrester says.

Macro Picture Not Pretty

Forrester completely missed the macro call.

Boomers are delaying retirement, competition for jobs is intense, companies are slashing perks and even salaries.

Please Consider

• Over 65 And Needing A Job; Interview Tips For Everyone
• PhD's In Distress and the Unsustainable Cost of Education

Extreme Networks replaces CEO, lays off 70

Perusing around the Network World site I quickly discovered this October 23, 2009 article hot off the presses: Extreme Networks replaces CEO, lays off 70

Ethernet switch vendor Extreme Networks is replacing its CEO and laying off 70 employees in an effort to quickly improve the company's bottom line and set it up to run profitably with lower revenues.

CEO Mark Canepa, who took the position in 2006, has resigned, but will remain for a short period to help recently hired CFO Bob Corey transition to Acting CEO. The company is seeking a permanent replacement. Canepa receives $639,354 severance.

As part of the restructuring, the company also eliminated the job of chief counsel, getting rid of Robert Schlossman, and replacing him with Vice Presideint Diane Honda, according to a filing this week with the Securities and Exchange Commission. Judging from the company Web site, the head of human resources and head software developer are also gone.

The company didn't say where the 70 layoffs would come, but it represents about 9% of Extreme's workforce.

The company's stock prices hit a low of close to a dollar in March, struggled back to just over $3 last month then dipped to about $2.25 over the past weeks.

"They're in a tough spot," says Zeus Kerravala, an analyst with Yankee group. "This is a company that's truly having a hard time finding its way." He says the company is smaller than its main competitors, HP, IBM, Cisco, Juniper and Brocade (which has reportedly put itself up for sale).

"When you look at all the network vendors out there, what problem is it that Extreme is trying to solve that isn't being solved by somebody else?" Kerravala says. "If you look at data centers, all the emphasis is on converged fabric, and they just don't have a roadmap to get there. I think they'll go the route of Enterasys. They'll get smaller and smaller and continue to exist off their installed base until their assets get acquired by somebody else."

Shrinking To Zero

Read that last paragraph carefully. "Extreme Networks will get smaller and smaller and continue to exist off their installed base until their assets get acquired by somebody else."

That is a general condition among the smaller players, not specific to Extreme Networks.

To paraphrase Janice Joplin ...

Zero's just another word for nothin' left to lose
Nothin', don't mean nothin' hon' if it ain't free, no no

Alarm Bells For Brocade?

Alarm bells have to be going off for Brocade employees given this headline - For sale: Cisco data center rival Brocade.

According to the Wall Street Journal, Brocade has enlisted Qatalyst Group to shop the company around. Likely suitors are HP and Oracle, among others, the WSJ reports.

HP, Oracle and Brocade all declined comment for the WSJ story Network Specialist Brocade Up for Sale. Brocade, which told Network World it does not comment on "rumor or speculation," has a market cap of $3 billion. HP also declined to comment to us on the speculation.

Turmoil In Industry

Inquiring minds interested in technology are listening to Denise Dubie of Network World tackle the question What would a Brocade sale mean?

The seven minute podcast is quite interesting as it contains a discussion involving a veritable who's who in the storage industry including IBM, EMC, Cisco, Oracle, Network Appliance, QLogic, Hewlett Packard, and Emulex.

That was a blast from the past for me for sure.

Consolidation Will Cost Jobs

The one question not addressed is what it would mean for jobs. The answer should be clear. Mergers and buyouts are going to cost jobs.

Please consider a slideshow of IT's Most Notable Layoffs 2009

The companies include Sun, Polycom, Sonus, Cisco, Nokia, Citrix, IBM, Sprint, Intel, Microsoft, Sophos, Ericsson, Logitech, Motorola, Lenova, and EMC.

I am quite impressed with the depth of the content at Network World. Those in the IT business (or those following it) may wish to bookmark the previous link.

20 Most Useful Career Sites For IT Professionals

CIO states "A rising tide of IT professionals is seeing its annual compensation decline and must decide whether to switch employers as a result."

I ask "go where?" Even if one could land another job, that person would be low on the totem pole constantly worrying when and if "last hired, first fired" was about to hit.

Nonetheless, those out of a job need to know where to look and even some with a job may be seeking better opportunities.

For those out of a job or looking to switch, Network World has a nice slideshow of the 20 most useful career sites for IT professionals which goes far beyond the obvious Monster, CareerBuilder and HotJobs sites.

Creative Destruction

Layoffs were the story in 2008-2009. Mergers, consolidations, global wage arbitrage, outsourcing, and even bankruptcies will combine to pressure IT salaries and benefits in 2010.

To understand more about what is happening and why please see Creative Destruction

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Twelve Reasons For A Job Loss Recovery

I have been talking about the Job Loss Recovery for quite some time. Here are a few recent examples.

July 14: Bernanke Sees Chance of Jobless Recovery

Given that the Fed's first mission is to delay, confuse, hope, and otherwise attempt to buy time while engaging in wishful thinking along the way, that Bernanke is willing to admit this may be a jobless recovery is a sign that things will likely be at least that bad. In other words, prepare for a job loss recovery.

August 3: Thoughts On The "Recoveryless Recovery"

Most know that I am in favor of an "L shaped recession", but that definition includes a "WW" or even a "WWW" where the economy slips in and out of recession for a decade, as happened in Japan.

August 6: Dismal Unemployment Situation In Chart Form

Job Loss Recovery



The last three recessions are unlike the eight preceding recessions. For numerous reasons described below we are heading for another job loss recovery.

Job Loss Recovery Detail



click on chart for sharper image

If the pattern holds, unemployment will rise until 2011 or beyond.

So while everyone is tooting horns and cheering the end of the end of the recession before it has even ended, those graphs and comments from Bernanke himself will put the pending job loss Recovery into better perspective.

What is bringing this idea to the forefront now is all the enthusiasm over what is destined to be the weakest recovery ever.

Others seem to be catching on.

Rebounding Economy Shedding Jobs

Please consider Experts see rebounding economy shedding jobs.

Forget a jobless recovery. The economy may be entering a recovery with job losses.

Third-quarter estimates this week are expected to show that the economy grew for the first time since the quarter ending in June 2008. Despite the estimated 3 percent expansion and a stock market that has been on a tear since March, hundreds of thousands of people are still being laid off each month.

Eight million jobs have been lost nationwide since the recession began two years ago, and by some measures workers face the worst job market since the Depression. The average laid-off worker has been without a job for 61/2 months, a post-World War II record. Many of those workers will never recover financially.

California's hole, deepened by a state budget mess and volatile tax system, is far worse: Unemployment is at

12.2 percent, third highest in the nation; and adding discouraged and part-time workers puts it over 20 percent.

"It's not even a jobless recovery; it's a recovery with more job losses," said UCLA economist Lee Ohanian. "The idea of having essentially no net job creation after a remarkably severe recession is a real pathology for the U.S. economy."

'Painfully weak' job growth

Top White House economist Christina Romer of UC Berkeley told Congress on Thursday that employment growth could remain "painfully weak" through next year, and that the largest effect from the $787 billion stimulus enacted in February, mainly aid to states, is past. By mid-2010, she said, the stimulus will no longer contribute to growth.

Alarms are ringing at the White House and in Congress. But with a mind-boggling $1.4 trillion deficit this year, Democrats have used up their bullets. The word stimulus has such a bad connotation that the term has been banished from new efforts to goose the economy and help workers

Employment mystery

Economists are puzzled as to why job growth has slowed, citing everything from higher health care costs, to higher productivity, to Chinese currency manipulation.

"The answer is, we don't know," said Tim Bartik, a liberal economist with the Upjohn Institute for Employment Research in Michigan who is proposing a tax credit for employers who hire new workers.

There Is No Mystery

Of course we know why job growth has slowed. Here are 12 good reasons.

1. We consumed more than we produced for a decade. Consumers are deep in debt and need to take care of their balance sheets.

2. We built enough houses for 15 years in a 5 year window.

3. People thought home prices would rise forever and borrowed against their homes. They are now underwater and cannot sell or move.

4. There is rampant overcapacity everywhere. We do not need any more Walmarts, Pizza huts, nail salons, Targets, Home Depots, Lowes, gas stations, grocery stores, or anything else.

5. Global wage arbitrage and outsourcing.

6. Boomers heading into retirement are scared half to death. They will not be spending or traveling as much as they thought. Indeed they will be attempting to downsize their lifestyle.

7. Attitudes everywhere have changed. People have finally caught on to the idea that home prices do not always go up. Businesses have caught on to the idea that home prices and commercial real estate does not always go up. Thus banks have tightened lending standards and consumers are reluctant to borrow.

8. "Frugality is the New Reality". Here is a Search for the word "frugality" in this blog.

9. Misguided federal tax policy. The administration plans to raise taxes on the wealthy. On top of that the health care plan is going to be very costly for small businesses. Thus the administration has inadvertently given small businesses two more reasons not to hire. Instead the administration should be slashing corporate tax rates.

10. Government Pension Plans. States are raising property taxes to help fund pension plans that have blown up. This is a drain on the economy. These plans need to be killed. Please see California Treasurer Spanks Legislature Over Pension Reform And Reckless Spending for an interesting rant about the pension mess in California. Most states are in the same boat, although California is the worst of the lot.

11. Stimulus Spending. Japan has already proven that Keynesian and Monetarist solutions cannot and do not work, yet we try anyway. Please see Will Stimulus Take Hold? for details.

12. Deficit spending in general. Spending what you don't have and cannot afford never solves anything. We can no longer afford to be the word's policeman but still attempt to do so at enormous cost. Indeed, there are many things we cannot afford and do anyway. As a result, interest on the national debt is soaring, the dollar is weakening, and this is drain on the real economy regardless of what the stock market thinks about it.

Tax Credits And Other Bad Ideas

Giving tax credits for hiring cannot possibly accomplish anything worthwhile. Businesses are not likely to take on needless expense just for a tax credit. They will just hire who they were going to hire anyway.

Of course the might be exceptions. For example: Give me a big tax credit and I will hire my wife. Our pre-tax household income would not change one iota but our after-tax income would change by the amount of the tax credit. While this would be worthwhile to me, it does not seem to be an effective way to stimulate the overall economy.

Returning to the article for another ill-advised solution....

University of Maryland economist Peter Morici said the administration's efforts to restore growth by directing spending to such things as alternative energy are too expensive for the number of jobs created and ignore larger problems in the economy.

"You can't grow with a huge trade deficit," Morici said. "If you don't revalue the Chinese yuan against the dollar you can't get out of this mess, and if you don't do something about oil imports you can't get out of this mess. Industrial policies won't fix it."

Morici is correct about the Obama Administrations misguided energy plan. However he is wrong about the trade deficit.

According to Rothbard "More nonsense has been written about balances of payments than about virtually any other aspect of economics."

Inquiring minds are reading Does the widening US trade deficit pose a threat to the economy? by Frank Shostak.

Most economists are of the view that the ever-growing US trade deficit and the subsequent expanding foreign debt pose a threat to the well-being of Americans. What is then required, so it is held, is to set in motion policies that will help curtail the widening trade imbalances between the United States and the rest of the world. Focusing on the trade deficit as the supposedly major problem of the US economy only diverts the attention from the real culprit, which is the US central bank.

What matters for the process of wealth formation is the flow of real savings. The balance of payments statement doesn't provide such information. Consequently, it is not possible to determine the implications of a given state of the current account on the well-being of Americans without information regarding the state of the flow of real savings. Therefore various pessimistic assessments regarding the US economy, which are based on the state of the balance of payments, are likely to be without much foundation.

For a complete rebuttal to the trade deficit myth, please read Shostak's article in entirety.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

An Email from Citi's Vice President of Public Affairs; Dodd introduces bill to freeze credit-card rates.

Early this morning in How The Citi-Grinch Stole Christmas (and Why It's a Good Thing) I wrote "If ever there were screams of "Please Regulate Me" these actions by First Premier and Citigroup must be at the top of the list."

Well, that was fast.

Dodd introduces bill to freeze credit-card rates

Although Dodd has talked about this before, I was amused to see Dodd introduces bill to freeze credit-card rates at 3:16 PM today.

Senate Banking Committee Chairman Christopher Dodd on Monday introduced legislation that would temporarily freeze credit-card interest rates on existing balances, after saying that financial institutions weren't supporting a new credit-card law.

"No sooner had it been signed into law, credit-card companies were looking for ways to get around the protections this Congress and the American people demanded," said the Connecticut Democrat. "This bill would end those abuses and further protect customers today."

Congress in May approved a credit-card law, known as the Credit Card Accountability, Responsibility, and Disclosure Act, to crack down on abusive practices by credit-card issuers. Dodd's legislation would freeze rates on existing balances until the remaining provisions of the CARD act go into effect by February, at the latest.

Specifically, the CARD law would only allow interest rate hikes on existing balances based on limited conditions, such as when promotional rates expire or when a cardholder is late on a payment. The law also bans deceptive practices and includes a number of new transparency measures, including a provision that prohibits interest-rate changes without 45 days of advance notice.

Bankers opposition

A bank-industry group expressed concern about the House legislation, known as the Expedited CARD Reform for Consumers Act of 2009. A senior vice president for the American Bankers Association said it would be "extremely difficult, if not impossible" for them to meet the new Dec. 1 deadline.

"Moving up the implementation date will place additional strain on institutions and is likely to further restrict access to credit at a time when consumers, small businesses and the broader economy need it the most," Dodd said.

What's The Point?

If moving up the legislation will do what Dodd says then what is the point of the legislation?

Citigroup and others have been scrambling to beat the clock, probably well aware of Dodd's legislation in advance.

The only way the legislation will have much meaning is if it is retroactive.

Bear in mind I am in favor of a free market, but we don't have anything approaching that. Banks started extending credit to obvious deadbeats because of the Bankruptcy Reform Act of 2005. The sole intent of that legislation was to make people debt slaves forever.

Rather than calling for rate cap legislation, I am calling for sound money and establishment abolishing the Fed. If we do that, rates will take care of themselves.

By the way, there was an error in one of the emails that I posted.

"MM" writes: ... So, while the default rate is 33%; the loss is $270. [Correction: on one account it would be $70 - Mish]

One More Email for the Road

Steve writes ....

Hi, I just read the article about Citi raising rates. I just got the letter and I do not even have their card.

Steve

It's A Good Thing

Unlike Senator Dodd, I think that if these rate-jacks curtail consumer credit, it will be a good thing, not a bad one.

As I said previously ...

The odds are this will be the final incentive for many to get out of the debt slavery trap they are in. The more people that cut up their cards and tell banks to go to hell, the better off we will all be, and that's a good thing.

Email From Citi's Vice President, Public Affairs

This morning, in response to Citi-Grinch I received the following Email from Citi's Vice President, Public Affairs:

Hi Mr. Shedlock,

I have read your blog posting from Mish's Global Economic Trend Analysis, which appeared earlier today.

I am wondering if we can have a background discussion at your convenience.

Best regards,

Samuel Wang
Vice President, Public Affairs
Citi
153 East 53rd Street
New York, New York 10022

Cordial Conversation

I gave Mr. Wang a call and the conversation was quite cordial. He explained that customers could opt out of the rate hikes, and that in some instances consumers could keep using their card up to the expiration date of the card at their old rate.

What I asked Mr Wang:

• How many total cards do you have?
• How many received the letter?
• What percentage could keep using the card at the old rate until the card expiration date?
• What is the percentage breakdown by FICO score of those those receiving rate hikes or lowered credit limits?
• Is Citigroup setting up to exit the credit card business?

Whatever answers I get, I will post.

It would also be nice to see what Chase, Bank of America, and MNBA are doing with their customers.

Opting Out

CreditCards.Com explains Opt-Out procedures and other information consumers should know in Consumer Q and A: Credit card law, phase 1, debuts.

Q. When can consumers begin to use their opt-out rights for credit card changes?

A. Any notices of changes in terms received on or after Aug. 20, 2009, must contain information about consumers' new right to opt out of (or right to cancel) increases in interest rates, fees, finance charges and certain other changes in credit card agreements.

Opting out means the consumer can no longer make purchases with the card. Instead, the old, lower interest rate will be applied while the cardholder repays the balance. There are three methods for repaying balances on accounts that have been closed by consumers choosing to reject changes. Issuers can either:

• Collect the balance over at least five years.
• Charge a minimum payment amount that is up to twice the percentage charged before the change in terms.
• Use the same repayment plan used on the account at the time the consumer rejects the change in terms.

Credit card issuers cannot demand payment in full if consumers choose to opt out of changes to their accounts.

Q. Do consumers have the right to opt out of all changes in terms?

A. No. The Federal Reserve has ruled that consumers cannot opt out of increases in , reductions in or interest rate hikes triggered when cardholders are more than 60 days late paying monthly bills. In addition, interest rates increased by virtue of increases in the on variable rate credit cards also are not eligible for opt out.

There is more useful information about your credit card rights in the link.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Over 65 And Needing A Job; Interview Tips For Everyone

Over 65, out of work and desperate for a job? So are record numbers of people who thought they would be retired but now find they cannot afford to.

Please consider 65 and Up and Looking for Work.

It is well known that during the nation�s gale-force recession, many older Americans who dreamed of retirement continued to work, often because their 401(k)�s had plunged in value.

In fact, there are more Americans 65 and older in the job market today than at any time in history, 6.6 million, compared with 4.1 million in 2001.

Less well known, though, is that nearly half a million workers 65 and older want to work but cannot find a job � more than five times the level early this decade and this group�s highest unemployment level since the Great Depression.

The expectation once was to pay off your 30-year mortgage before you retired, or come close. Instead, the level of indebtedness among older Americans has risen faster than in any other age group, partly because so many obtained second mortgages to take money out of their homes.

The unemployment rate for older Americans is still much better than for others � 6.7 percent compared with 9.8 percent in the general population. But 6.7 percent is more than double the level of two years ago � and far higher than the minuscule 1.9 percent rate early this decade.

And unemployed older workers stay out of work longer � 36.5 weeks on average, 40 percent longer than for the unemployed in general.

�I often get told that I�m overqualified,� said Barbara Brooks, 71, who retired in 2003 after 30 years as an administrative assistant at the University of California, Los Angeles. She said being told that is code language for �you�re too old.� But Ms. Brooks said she wanted to work � and needed to � citing her monthly mortgage of $1,500, which eats up half her monthly pension.

65 and Over Unemployment Rate Highest In History



Tables Turned, Former Hirers Can�t Get Hired

Inquiring minds are reading Tables Turned, Former Hirers Can�t Get Hired

NANCY FINK is a career coach for Maryland�s department of labor, running seminars for the most skilled unemployed workers.

For 17 years, she has counseled professionals, business managers, engineers, accountants, scientists � people who are mature, middle-aged, highly motivated, well-educated, well-spoken. But in all that time, she�s never seen so many of the jobless with such impressive skills as this last year. �Last week I had seven lawyers in this room,� she said. �I�ve had lots of folks from TV and The Baltimore Sun. This week I�ve got five human resources directors � I�ve never had that.�

They ask questions young workers don�t. David Kozlowski, 52, a systems vice president laid off in June, wanted to know how far back to go when an interviewer inquires about his work experience in information technology. �I�ve had 30 years in I.T.,� he said.

During a discussion on cover letters, Ms. Fink wondered if the human resources directors in the room had any thoughts. �It can make a big difference,� said Hal Hamil Jr., 56, unemployed since August, but before then, a senior vice president of PNC Bank making $130,000 a year. Mr. Hamil said that last March he posted three openings for tellers paying $10 an hour and got 1,008 applications. �I hired two of them because of their cover letters,� he said.

Ms. Fink warned: �You could find yourself being interviewed by a millennial. As a boomer, you�re thinking that could be my kid. Your instinct is to use their first name. Don�t. They could have an M.B.A. from Wharton. It should be Ms. or Mr.�

They discussed how to respond when an interviewer asked them to describe a weakness.

�Can you say �I don�t have a weakness,� � Ms. James, the contractor said. ��I�m just even-keeled�?�

�No, no,� Ms. Fink said, �you need a weakness that�s not really a weakness � they want to see you dance around the question.�

After the seminar, Ms. Fink said a lot of what she does is therapy � helping worried people feel less isolated.

Her boss, Stephen Gallison, who directs the program for skilled workers known as the Professional Outplacement Assistance Center, said that in the past people typically found jobs within five months, but in this economy that�s not a reliable gauge. Asked if he saw any hopeful signs, he said: �No. Nothing. Not yet.�

Interview Tips From The Article

• Attach a cover letter to your resume.
• Be prepared to mention a weakness.
• Be prepared to answer the question "Tell me about yourself."
• Send a thank you letter after the interview.
• Don't use first names even if the person hiring is half your age and looks like your son or daughter. They could have an M.B.A. from Wharton.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

How The Citi-Grinch Stole Christmas (and Why It's a Good Thing)

Emails are pouring in over Citigroup's "Hail Mary Pass": How To Know Citigroup Is In Serious Trouble.

Here is one from "HG" who writes

Hey Mish,

We have a 7 figure net worth, no mortgage debt (we do own our own home), pay credit debt in full each month, and have credit scores of 726 and 702 respectively. We are 56 and 53 years old.

Just got the Citi 29.99 credit card rate increase notice. It's not limited to those who carry a balance like the folks who carry 25k in debt.

Needless to say, I'm cutting it up on principle, but not closing it so that my credit limits don't go down.

Enjoy your posts and look forward to reading them going forward.

HG

Matters of Principle

Want to take it out on Citigroup? If so, then do what "HG" did.

If you have a Citibank credit card just stop using the Citicard to deny Citigroup every cent you can.

It is high time for people to stop buying junk they do not need with money they do not have. Citi's actions help.

Citibank Sends Out 2 Million Letters

Here is an Email from "MJ" who writes

Hi Mish,

I got a Citibank letter last week raising my interest rate to 29.99% from 7.99%. I have a 780 credit score and pay my account off every month. My limit was $18,200. I never made a late payment to Citibank (or anyone else).

When I called them to either maintain my current terms or opt-out, the rep told me she had been getting nothing but complaint calls all day. She said Citibank had sent out 2 million such letters. I was given one choice: accept the new terms or have my account canceled upon its expiration of 12/31/09. I told them to cancel the account.

The �hail Mary� you describe is even larger than you imagined.

MJ

I am hearing many stories about ridiculous rates but this one takes the cake.

First Premier Banks Offers Card With 79.9 Percent Rate

Please consider No, You're Reading That Right

Gordon Hageman couldn�t believe the credit card offer he got in the mail.

"My first thought, it was a mistake," Hageman said.

The wine distributor called the number on the offer, gave them the offer code and verified his information. Sure enough, it was right: the pre-approved credit card came with a 79.9 percent APR.

Yes, 79.9 percent.

The offer is for a Premier card from First Premier Bank, which is based in South Dakota. On its Web site, First Premier says it is the country's 10th largest issuer of Visa and MasterCard credit cards. The site also says it "focuses on individuals who have less than perfect credit but are actually still creditworthy."

According to information on the South Dakota Legislative Web site, there is "no maximum or usury restriction." In other words, the individual bank can set its own interest rate limits.

Several calls made to First Premier for a comment were not returned.

Banks Scream To Be Regulated

If ever there were screams of "Please Regulate Me" these actions by First Premier and Citigroup must be at the top of the list.

Stories like these are piling in from everywhere all over the internet. Yet, it is the Citigroup stories that seem to be jacked up more frequently without reason.

I just checked my United Plus Chase Credit Card and it is 13.15%. I don't carry a balance, except by accident (a bill comes in while on extended vacation). I think 13.15% is high.

29.99% across the board actions is absurd. It is also begging Congress for rate caps.

Some have Emailed me telling me this is nothing but greed. Others said this is nothing but preemptive action by banks to raise rates before new credit card protection laws go into effect.

I am sure there is a lot preemptive action happening. However, Citi's mass sending of 2 million letters, Citi's canceling of Gas-Linked cards and Citi's jacking of rates for virtually no reason on some accounts suggests other problems.

Email From A Collections Specialist

Inquiring minds will wish to consider the following email from "MM" who works in the financial industry. "MM" has a collections background. This Email is also in regards to Citigroup's "Hail Mary Pass": How To Know Citigroup Is In Serious Trouble.

"MM" writes:

Hello Mish

I wanted to clarify Karl Denninger's comments regarding Citigroup's 10% defaults on their credit cards.

I work in the financial industry, and have a heavy collections background. 'Defaults' is a loosely used term. For example, when my company says it has x% defaults, it is in reference to the number of loans. Karl seems to be assuming 10% is measured against fees, or what other people call revenue. This is not an accurate way of measuring true losses.

Here is a practical example to illustrate my point. At my company, if we give out 3 $100 loans and charge $10 per loan, we generate $30 in fees or revenue; However, we still have to get the $300 back we lent.

If one of those loans defaults, that is a 33% default rate, but the practical impact to revenue is a loss of $270.

So, while the default rate is 33%; the loss is $270. [Correction on one account it would be $70 - Mish] Karl is assuming the 10% of defaults is measured against revenue. It could just as easily be calculated against the principal. You have to check their annual report and go through their math, because default is not universally calculated the same way.

Thus, that 10% default could be exponentially much larger than Karl is characterizing. In fact, I would be willing to bet it is, because I have a friend who worked in the credit card industry for 15 years, and he was telling me his company uses the term default the same way we do.

MM

Credit Card Panic

The actions by Citigroup smack of panic. That panic is likely to backfire.

Those who have other cards can simply stop using their Citicard as "HG" did. Even those without other cards may simply tell Citigroup to go to hell by stop using the card.

Those in real trouble probably do not care and have no intent to pay anyway.

Add that all up and what you have is a scenario in which Citibank (and anyone else following the same misguided rate-jacking policy) is going to drive good business away while keeping the bad business.

How The Grinch Stole Christmas

Think these rate-jacking actions are going to spur sales at Christmas? I don't. Rising unemployment does not help one bit either.

Many people will look at those jacked-up rates and not buy. Some will not even have a choice because of slashed limits and canceled cards.

This Christmas is setup to be worse than last because of reduced credit lines, canceled cards, and rates that amount to usury. Last year was one of the worst in retail Christmas seasons in history.

Citigroup has no idea what it is doing. It would already be history had it not been for taxpayer bailouts. Yet....

It's A Good Thing

• To the extent that these jacked-up rates cause people to stop buying, it's a good thing.
  
• To the extent that canceled cards cause people to stop buying, it's a good thing.
• To the extent that these actions cause people tell greedy banks where to go, it's a good thing.
• To the extent that these actions cause people just give up, stop paying ridiculous rates, and declare bankruptcy, it's a good thing.

Thank You Citi-Grinch.

The same thanks go to every other bank that jacked up rates. The odds are this will be the final incentive for many to get out of the debt slavery trap they are in. The more people that cut up their cards and tell banks to go to hell, the better off we will all be, and that's a good thing.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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California Treasurer Spanks Legislature Over Pension Reform And Reckless Spending

Inquiring minds are listening to California Treasurer Bill Lockyer who testified at an informational hearing on budget reform on October 22, 2009.



The highlight of his rant is about pension reform.

"It�s impossible for this legislature to reform the pension system, and if we don�t, we bankrupt the state. And I don�t think anybody can do it here, because of who elected you. You�re just captive of the current environment and I don�t see any way out."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Will Stimulus Take Hold?

Timothy R. Homan, writing for Bloomberg says GDP Probably Grew as Stimulus Took Hold

The economy in the U.S. probably grew in the third quarter at the fastest pace in two years as government stimulus helped bring an end to the worst recession since the 1930s, economists said before reports this week.

The world�s largest economy grew at a 3.2 percent pace from July through September after shrinking the previous four quarters, according to the median estimate of 65 economists surveyed by Bloomberg News. Other reports may show sales of new homes and orders for long-lasting goods increased.

Americans flocked to auto showrooms and real-estate offices last quarter to take advantage of government programs such as �cash-for-clunkers� and tax credits for first-time homebuyers. Growing demand caused stockpiles to keep falling, which will prompt companies to rev up assembly lines and help sustain the recovery into 2010 even as unemployment climbs.

�The recovery is off to a decent but unspectacular start,� said Joe Brusuelas, a director at Moody�s Economy.com in West Chester, Pennsylvania. �While another large drawdown in inventories will be a drag on third-quarter growth, it sets the stage for a longer and stronger upturn in manufacturing.�

Consumer spending last quarter probably jumped at a 3.1 percent annual rate from the previous three months, the biggest gain since the first quarter of 2007, the GDP report is also projected to show.

September readings on household purchases, due from the Commerce Department on Oct. 30, may show the quarter ended on a soft note after the Obama administration�s car incentive expired the month before. Spending probably fell 0.5 percent last month as car sales slowed after jumping 1.3 percent in August, the biggest gain since 2001.

The so-called cash-for-clunkers program offered buyers discounts of as much as $4,500 to trade in older cars and trucks for new, more fuel-efficient vehicles. The plan boosted sales by about 700,000 vehicles, according to a Transportation Department estimate.

Homebuyer Credit

The administration�s $787 billion stimulus package, signed into law in February, included an $8,000 tax credit for first- time homebuyers that expires at the end of November.

Take Hold Of What?

If the government gave everyone $4,500 I am sure we would see a fine increase in spending. However, I am equally sure nothing would "take hold" except that the dollar would go into a free-fall, which of course is the opposite of take hold.

Cash for clunkers ended, pushing demand forward. Now what?

Uncle Sam Adds 5% to Prices of Homes

Goldman Sachs says Uncle Sam Adds 5% to Prices of Homes.

Uncle Sam�s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise, Goldman Sachs estimates in a report released late Friday.

The government over the past year has slowed the pace of foreclosures through moratoria and the drive to modify mortgage terms to keep more borrowers in their homes. It also has pumped up demand for housing by giving tax credits to many first-time home buyers and by driving down mortgage interest rates. As a result, home prices in some areas have risen in recent months, particularly for homes that appeal to investors and first-time buyers. Bidding wars for the more attractive bank-owned homes have become common.

But these artificial props won�t last forever and may have created a false bottom in the market. �The risk of renewed home-price declines remains significant,� Goldman economist Alec Phillips writes in the report, �and our working assumption is a further 5% to 10% decline by mid-2010.�

False Bottom Indeed

I am and have been in the "false bottom" camp (even calling for a false bottom in advance). The fact remains, homes are still not affordable and inventories are high, yet artificially low. How can that be? Easy. There is a huge amount of shadow inventory as noted in Zombie Subdivisions and "Pig In The Python" Shadow Inventory.

That shadow inventory is poised to come out of the woodwork in the next decline as the pool of early fools dries up. Granted, there are way more bargains than three years ago when there were no bargains at all, but most are jumping the gun and this insane $8,000 tax credit is not helping anything in the long run.

Unfortunately, the tax credit is temporarily inflating home prices that are still out of line with wage and job growth. Once the stimulus ends, prices will resume deflating. Moreover, even if the stimulus does not end, prices will resume deflating (it will just take longer).

Shrinking Pool Of Greater Fools

Once everyone who wants a house and can afford a house has one, price appreciation will stall or go into reverse. The difference between now and 2006 is people are not buying 3 houses and a vacation home. Nor are lenders willing to finance three houses and a vacation home. Nor are lenders willing to do liar loans, pay option ARMs or other toxic financing. Thus, the pool of greater fools is far smaller than in 2006.

UK Stimulus Dies On Vine

Across the Atlantic, things are not looking so hot in the UK. Please consider BOE More Likely to Expand Bond Purchases After GDP Slump.

Britain�s failure to escape the worst recession since World War II may force the Bank of England to increase its bond-purchase plan next month, economists said.

Seven months after Governor Mervyn King�s central bank started a 175 billion-pound ($286 billion) program to rescue the economy, the Office for National Statistics said yesterday gross domestic product unexpectedly shrank 0.4 percent in the third quarter. None of the 33 economists surveyed by Bloomberg predicted a contraction.

The GDP figures �reopen a serious possibility that the Monetary Policy Committee increases its QE target,� said Philip Shaw, chief economist at Investec Securities in London, in a note titled �Champagne Corks Go Back Into Bottles.�

�It seems to me inconceivable that the recession is deepening and the housing market is recovering,� said Steven Bell, chief economist at London-based hedge fund GLC Ltd. and a former U.K. Treasury official. �The last refuge of the failed forecaster is to challenge the statistics, but that�s what I�m left with.�

Illusion of Stimulus

Here is a snip worth rereading from U.S. Faces Second Lost Decade "Because" of Misguided Stimulus written by my friend "HB"

I know Romer best for her misinterpretation of what happened in 1937-38. She believes that the fallback into full-scale depression from 'depression light' (as evidenced by unemployment in 1938 almost returning to the highest levels of the depression trough 32/33) is proof that it was a mistake to tighten policy (fiscal and monetary) too early.

In other words, according to her, if the Fed had continued pumping as furiously as possible, then everything would have been alright.

In reality, the entire inflationary mini-boomlet-within-the-depression was simply an illusion. 'GDP growth' that is bought with monetary pumping and feckless fiscal spending only misdirects and ultimately consumes even more scarce capital.

Fiscal stimulus may temporarily give the impression of a recovery, but it is not a genuine recovery. It makes things worse. The moment the pumping is abandoned, the true state of affairs is simply unmasked. That is what happened in 37/38 - a slight tightening of monetary policy revealed the fact that the mini-boomlet was as unsound as its predecessor boom in the years prior to the '29 crash.

It would not have been possible to hide this reality forever. There is nothing, absolutely nothing, that government intervention can achieve in terms of 'fixing' the economy. The choice was in either abandoning the unsound policy and the unsound investments it produced, or careen toward a complete destruction of the currency system.

Once again, I stand amazed at how people can look at this, and look at Japan, and look at the housing bubble/bust sequence, and still believe that monetary pumping and deficit spending are viable tools of economic policy when a bust occurs. It really boggles the mind, reminding me of Einstein's definition of insanity, 'doing the same thing over and over again and expecting a different result'.

Champagne Corks To Go Back Into Bottles

The hard reality of an "L" shaped recovery or a string of "WWs" looms large, leading indicators be damned. Please see A Look at ECRI's Recession Predicting Track Record for details.

Any celebrating in the US (or Canada, or China, or Australia, or anywhere else) is simply premature.

In the coming months, expect to see more comments like �The last refuge of the failed forecaster is to challenge the statistics, but that�s what I�m left with.�

By the way, that is how the term "stagflation" came about. Under misguided Keynesian logic it was impossible to have a recession and inflation at the same time. We all know how that worked out.

In the US and globally we are in uncharted territory. Odds are we will see many things we have never seen before as stimulus after stimulus fails to produce desired results. Actual results, as in the examples above may very well be unbelievable to all the Keynesian and Monetarist clowns.

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