AT&T, Sprint, T-Mobile, Verizon Still Owe Senator Kohl (And their Customers) Some Explanations
There’s a reason costs for text plans have skyrocketed recently, and it’s not due to increased overhead. From Randall Stross’s What Carriers Aren’t Eager to Tell You About Texting:
“…text messages are not just tiny; they are also free riders, tucked into what’s called a control channel, space reserved for operation of the wireless network. That’s why a message is so limited in length: it must not exceed the length of the message used for internal communication between tower and handset to set up a call. The channel uses space whether or not a text message is inserted.
Senator Herb Kohl would like to talk with the wireless carriers about that.
So far they haven’t been very forthcoming. Stross writes:
The written responses to Senator Kohl from AT&T, Sprint and T-Mobile speak at length about pricing plans without getting around to the costs of conveying text messages. My attempts to speak with representatives of all three about their costs and pricing were unsuccessful. (Verizon Wireless would not speak with me, either, nor would it allow Mr. Kohl’s office to release publicly its written response.)
The carriers will have other opportunities to tell us more about their pricing decisions: 20 class-action lawsuits have been filed around the country against AT&T and the other carriers, alleging price-fixing for text messaging services.
We should All listen to what they have to say.
I wonder if they’ll get around to talking about what Common Carrier means. Does the bus company charge You to use the bus’s rest room while enroute? It’s there, on the bus, whether or not any passenger uses it. And You’ve paid for it in the cost of the ticket.
From Ars Technica Sept 10 Article Senator to cellular carriers: UR TXTS R 2 XPENSIV:
Kohl’s office is asking each carrier to explain the method behind the text message rate madness, including any cost, technical, or other factors that justify the 100 percent increase between 2005 to 2008. Kohl also wants data on how text messages are utilized, comparisons of how text message packages stack up against competitors, and—perhaps most importantly—price comparisons against per-minute charges for voice plans, and per-KB charges for mobile Internet and tethering plans. It should be fun to hear AT&T defend why it charges over $1,300 per megabyte for text messages.
Again, Kohl’s office made it clear that this letter is more of an conversation starter (though a fairly forceful one) in what could turn out to be an embarrassing (for the carriers) discussion over high cost of text messages. The staffer did, however, hold out the possibility of further investigation, and even a request that antitrust regulators to look into the matter, should the situation call for it.
Donald Melanson at Engadget filed this report at the time.
Here is Senator Kohl’s letter:
|
For Immediate Release: 9/9/08
KOHL CALLS ON CELL PHONE COMPANIES TO JUSTIFY RISING TEXTING RATES In Three Years, Text Message Charges Have Doubled for Wireless Customers WASHINGTON, DC — Today, US Senator Herb Kohl (D-WI), chairman of the Senate Antitrust Subcommittee, asked the presidents and chief executive officers of the four largest wireless telephone companies to justify sharply rising rates for its customers to send and receive text messages. In a letter, Senator Kohl requested an explanation from Verizon Wireless, AT&T, Sprint and T-Mobile, which collectively serve more than 90 percent of the nation’s cellular phone users. The text of Senator Kohl’s letter follows below. September 9, 2008 Lowell McAdam President and CEO Verizon Wireless Randall Stephenson Chief Executive Officer AT&T Dan Hesse Chief Executive Officer Sprint Robert Dotson President and Chief Executive Officer T-Mobile Dear Messrs. McAdam, Stephenson, Hesse and Dotson: I am writing to express my concern regarding what appear to be sharply rising rates your companies have charged to wireless phone customers for text messaging. Some industry experts contend that these increased rates do not appear to be justified by any increases in the costs associated with text messaging services, but may instead be a reflection of a decrease in competition, and an increase in market power, among your four companies. Your four companies are the nation’s leading wireless telephone companies, collectively serving more than 90% of the nation’s wireless subscribers. Since 2005, the cost for a consumer to send or receive a text message over each of your services has increased by 100%. Text messages were commonly priced at 10 cents per message sent or received in 2005. As of the end of the month, the rate per text message will have increased to 20 cents on all four wireless carriers. Sprint was the first carrier to increase the text message rate to 20 cents last Fall, and now all of its three main competitors have matched this price increase. What is particularly alarming about this industry-wide rate increase is that it does not appear to be justified by rising costs in delivering text messages. Text messaging files are very small, as the size of text messages are generally limited to 160 characters per message, and therefore cost carriers very little to transmit. Text messaging files are a fraction of the size of e-mails or music downloads. Also of concern is that it appears that each of companies has changed the price for text messaging at nearly the same time, with identical price increases. This conduct is hardly consistent with the vigorous price competition we hope to see in a competitive marketplace. What has changed in recent years is the level of consolidation in the wireless telephone industry. The number of major national competitors has declined from six to four. And the large national wireless carriers continue to acquire their smaller, regional competitors, with the announced acquisition of Alltel by Verizon Wireless being just the latest example. As Chairman of the Antitrust Subcommittee, I am concerned with whether this consolidation, and increased market power by the major carriers, has contributed to this doubling of text messaging rates over the last three years. Therefore, I specifically ask each of your companies to explain why text messaging rates have dramatically increased in recent years. Please explain the cost, technical, or any other factors that justify a 100% increase in the cost of text messaging from 2005 to 2008. Please also provide data on the utilization of text messaging during this time period. Please provide a comparison of prices charged for text messaging as compared to other services offered by your companies, such as prices per minute for voice calling, prices for sending e-mails, and prices charged for data services such as internet access over wireless devices, from 2005 to the present. Finally, please state whether your text messaging pricing structure differs in any significant respect from the pricing of your three main competitors. Please provide this information no later than Monday, October 6, 2008. If you have any questions regarding this request, please contact Jeff Miller or Seth Bloom of my Antitrust Subcommittee staff at (202) 224-3406. Thank you for your attention to this matter. ###
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-dcm
By Andrew
McCoy
I have read all I can (Yeesh my head hurts) on the current financial crisis. Especially interesting to me is all the partisans blaming everyone else for it. Here’s my thought’s.
The roots of the issue lie all the way back after the first S&L Crisis in the late 80’s. Fannie Mae and Freddie Mac hired a bunch of people and gave out lots of money to both parties to ensure they had the best possible regulations (for them to make money). They had the best of both worlds, they could loan whatever they wanted, and have very little cash reserves.
Then came the wild 90’s. The Clinton administration decided home ownership was especially important and encouraged banks to make loans to marginal candidates and they would get tax breaks for doing so.
Things were going swimmingly in the late 90’s for the homes market. Inevitably though, a slow down was happening. There is a market saturation point after all.
Then something else was thrown into the mix. Phil Gramm ,as a senator in Dec 2000, put an addendum on a spending bill that allowed companies to package up mortgages and sell them as securities (CDS’s), the best part of this bill (for wallstreet) was that it was a totally unregulated market. This allowed a lot… no, massive amounts of capitol to be injected into the mortgage market.
and not a lot of demand. So interest rates were lowered and people started taking out 2nd mortgages, buying up houses they could barely afford, etc. These were packaged into CDS’s, and since it was an unregulated item, sold as AAA investments. Wall street made billions selling these, banks were rolling in value (not cash, it was lent out).
Sometime, in the 2002 timeframe, state attorney generals started noticing these loans were becoming more and more predatory, so started asking for regulations on these loans. In response US Government (Bush administration) did this
“In 2003, during the height of the predatory lending crisis, the OCC (Office of the Comptroller of the Currency) invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks”. Which by the way all 50 state AG’s and banking superintendents were totally against.
Ensuring that predatory lenders were completely protected from the states.
In 2004, Republicans on the banking committee wanted to look into Fannie and Freddie and the Democrats threatened a filibuster to the discussion so it was tabled. But, the same year, the SEC (bowing to pressure from the republicans) allowed investment companies to have greater than a 12 to 1 debt to cash ration. This means that prior to 2004 if Lehman Bros. had 120 billion in debt, they would have to have 10 billion in cash to cover any shortfalls. After 2004 they could have a 30 to 1 or even 40 to 1 debt to cash ration. So that same 10 billion would allow them to have 300 billion (or 400 billion) in debt. This ensured their competitiveness, really.
So we fast forward a few years and the AAA rated debts (remember, they’re AAA because we said so, no regulation involved) started faltering. Normally the banks and investments houses would have a lot of cash on hand to cover these issues, but now don’t thanks to the SEC, so start taking major losses. They don’t have the cash and when these items hit 50-60% of their previous values they have to revalue them/ sell them for a value much lower than what they said it’s worth (that value set arbitrarily, remember).
My solution is as follows:
The government nationalized fannie and freddie a few months ago. So if we (they) bought all the housing loans under 500k made since 2003, chopped 25% off the amount owed, then made the people pay back the rest at say 4% interest. That would take the “bad debt” out of the CDS’s that were sold and help the banks. It would also help people due to them being able to afford their houses and not defaulting on them. We, the tax payers, would still take a bath financially, but we would do it at least helping people, not just big corporations.
If the treasury secretary and the financial houses don’t like this it’s because they are hiding something other than mortgages on their balance sheets and shouldn’t be bailed out.
Then, the long term fixes. Stop letting corporations pay elected officials, and by that I mean donate to their campaigns, for really good helpful legislation. Second, if you want fannie mae/ Freddie mac to exist, either completely nationalize it, or make it completely private, no in between. Third, don’t let wall street trade in un-regulated items. And fourth, go back to the 12-1 debt to cash ration for Wall Street companies.
Reaffirms America’s Penchant for Change
Ladies and Gentlemen, The President-Elect of the United States …
Well, who could possibly follow that?
Possible Signs of Internal Financial Irregularities
After taking an $85 billion emergency loan from the Fed, and then another $38 billion, A.I.G isn’t being very 
specific on how it has already spent most of the money, according to Mary William Walsh’s article in the New York Times:
(emphasis added)
A.I.G. has declined to provide a detailed account of how it has used the Fed’s money. The company said it could not provide more information ahead of its quarterly report, expected next week, the first under new management. The Fed releases a weekly figure, most recently showing that $90 billion of the $123 billion available has been drawn down.
A.I.G. has outlined only broad categories: some is being used to shore up its securities-lending program, some to make good on its guaranteed investment contracts, some to pay for day-to-day operations and — of perhaps greatest interest to watchdogs — tens of billions of dollars to post collateral with other financial institutions, as required by A.I.G.’s many derivatives contracts.
No information has been supplied yet about who these counterparties are, how much collateral they have received or what additional tripwires may require even more collateral if the housing market continues to slide.
Some industry observers say there must be undisclosed irregular accounting leading up to the bailout for so much of the $123 Billion lifeline to have been used up so fast.
“You don’t just suddenly lose $120 billion overnight,” said Donn Vickrey of Gradient Analytics, an independent securities research firm in Scottsdale, Ariz.
Mr. Vickrey says he believes A.I.G. must have already accumulated tens of billions of dollars worth of losses by mid-September, when it came close to collapse.
The article details indications of a sustained effort on the part of AIG top management to bury any details of an internal debate on how to value it’s derivatives contracts over the past few years. When a former SEC accountant was brought in due to previous irregularities,
He began to focus on the company’s accounting for its credit-default swaps and collided with Joseph Cassano, the head of the company’s financial products division … When the expert tried to revise A.I.G.’s method for measuring its swaps, he said that Mr. Cassano told him, “I have deliberately excluded you from the valuation because I was concerned that you would pollute the process.”
(emphasis added)
Astounding Burn Rate
In the roughly 6 weeks since AIG got the massive government loans they have already used up 90 of an available $123 billion at last reports.
A spokesman for the insurer, Nicholas J. Ashooh, said A.I.G. did not anticipate having to use the entire $38 billion facility. At midyear, A.I.G. had a shortfall of $15.6 billion in that program, which it says has grown to $18 billion. Another spokesman, Joe Norton, said the company was getting out of this business. Of the government’s original $85 billion line of credit, the company has drawn down about $72 billion. It must pay 8.5 percent interest on those funds.
…
For $59 billion of the $72 billion A.I.G. has used, the company has provided no breakdown. A block of it has been used for day-to-day operations, a broad category that raises eyebrows since the company has been tarnished by reports of expensive trips and bonuses for executives.
(emphasis, links added)
US Federal Deficit 1989 - 2004
Possible Legal Violations
Rep. Barney Frank, House Financial Service Committee chairman said on Friday in remarks directed at Banks who had received a separate $125 Billion government buy-in, that financial institutions were “distorting” the government’s $700 billion economic bailout plan by using the money for bonuses, dividends and acquisitions. Frank said any uses of that money other than lending were “violation of the terms of the act.”
On 7 October Rep. Henry Waxman’s Committee on Oversight and Government Reform held hearings on the causes of AIG’s need for a bailout. (Full Hearing Video). At the hearing it came out that the week after AIG got an $85 Billion initial govenrment bailout, executives went on a retreat at a luxury resort, spending $443,343.71. Rep. Elijah Cummings (D-MD) said:
Have you heard of anything more outrageous – a week after taxpayers commit $85 billion dollars to rescue AIG, the company’s leading insurance executives spend hundreds of thousands of dollars at one of the most exclusive reports in the nation…Let me describe for some of you the charges that the shareholders, taxpayers, had to pay. AIG spent $200,000 dollars for hotel rooms. Almost $150,000 for catered banquets. AIG spent $23,000 at the hotel spa and another $1,400 at the salon. They were getting manicures, facials, pedicures and massages while American people were footing the bill. And they spent another $10,000 dollars for I don’t know what this is, leisure dining. Bars?
(emphasis added)
AIG Gets Another $25 Billion – Total: $144 Billion (so far…)
On Thursday 30 October, AIG said “it would be able to borrow up to $20.9 billion under the new program, raising its maximum available credit from the Fed to $144 billion under three different programs,” the New York Times reports. And there’s no sign yet that will be enough.
Edward M. Liddy, the insurance executive brought in by the government to restructure A.I.G., has already said that although he does not want to seek more money from the Fed, he may have to do so.
AIG’s unwillingness or inability to place a determinative valuation on their deriviative contracts has poisoned the credit market. As Tavakoli Structured Finance President Janet Tavakoli observes, “When investors don’t have full and honest information, they tend to sell everything, both the good and bad assets. … “It’s really bad for the markets. Things don’t heal until you take care of that.”
The NYT reports “Ms. Tavakoli said she thought that instead of pouring in more and more money, the Fed should bring A.I.G. together with all its derivatives counterparties and put a moratorium on the collateral calls.”
Tavakoli is an expert in derivative and similar financial products, and recently debated “mark to market” options on Bloomberg.
Morningstar Analyst – May be better to let losses be realised
Bill Bergman, Senior Equity Analyst at Morningstar observed, “We may be better off in the long run letting the losses be realized and letting the people who took the risk bear the loss.”
– assembled from various reports by dcm
Today’s global collapse more closely resembles Panic of 1873 than 1929
By Scott Reynolds Nelson
[Occasionally I will invite a Guest to publish at Scribal Thrum - and I'm proud to welcome Scott Nelson, Professor of History at William and Mary College. Thanks for Contributing, Scott.)
As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.
When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany's inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them.
In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls "the real Great Depression." She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis.
The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period.
But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America's heartland, undermining rapeseed, flour, and beef prices. The crash came in Central Europe in May 1873, as it became clear that the region's assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.
As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates. This banking crisis hit the United States in the fall of 1873.
Run on the Fourth National Bank, No. 20 Nassau Street New York City, 1873 : WikiMedia Commons
Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing). The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.
The long-term effects of the Panic of 1873 were perverse. For the largest manufacturing companies in the United States — those with guaranteed contracts and the ability to make rebate deals with the railroads — the Panic years were golden. Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller had enough capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices. The Gilded Age in the United States, as far as industrial concentration was concerned, had begun.
As the panic deepened, ordinary Americans suffered terribly. A cigar maker named Samuel Gompers who was young in 1873 later recalled that with the panic, “economic organization crumbled with some primeval upheaval.” Between 1873 and 1877, as many smaller factories and workshops shuttered their doors, tens of thousands of workers — many former Civil War soldiers — became transients. The terms “tramp” and “bum,” both indirect references to former soldiers, became commonplace American terms. Relief rolls exploded in major cities, with 25-percent unemployment (100,000 workers) in New York City alone. Unemployed workers demonstrated in Boston, Chicago, and New York in the winter of 1873-74 demanding public work. In New York’s Tompkins Square in 1874, police entered the crowd with clubs and beat up thousands of men and women. The most violent strikes in American history followed the panic, including by the secret labor group known as the Molly Maguires in Pennsylvania’s coal fields in 1875, when masked workmen exchanged gunfire with the “Coal and Iron Police,” a private force commissioned by the state. A nationwide railroad strike followed in 1877, in which mobs destroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Md.
In Central and Eastern Europe, times were even harder. Many political analysts blamed the crisis on a combination of foreign banks and Jews. Nationalistic political leaders (or agents of the Russian czar) embraced a new, sophisticated brand of anti-Semitism that proved appealing to thousands who had lost their livelihoods in the panic. Anti-Jewish pogroms followed in the 1880s, particularly in Russia and Ukraine. Heartland communities large and small had found a scapegoat: aliens in their own midst.
The echoes of the past in the current problems with residential mortgages trouble me. Loans after about 2001 were issued to first-time homebuyers who signed up for adjustablerate mortgages they could likely never pay off, even in the best of times. Real-estate speculators, hoping to flip properties, overextended themselves, assuming that home prices would keep climbing.
Those debts were wrapped in complex securities that mortgage companies and other entrepreneurial banks then sold to other banks; concerned about the stability of those securities, banks then bought a kind of insurance policy called a credit-default swap, which risk managers imagined would protect their investments. More than two million foreclosure filings — default notices, auction-sale notices, and bank repossessions — were reported in 2007.
By then trillions of dollars were already invested in this credit default swap derivative market. Were those new financial instruments resilient enough to cover all the risk? (Answer: no.)
As in 1873, a complex financial pyramid rested on a pinhead. Banks are hoarding cash. Banks that hoard cash do not make short-term loans. Businesses large and small now face a potential dearth of short-term credit to buy raw materials, ship their products, and keep goods on shelves.
If there are lessons from 1873, they are different from those of 1929. Most important, when banks fall on Wall Street, they stop all the traffic on Main Street — for a very long time. The protracted reconstruction of banks in the United States and Europe created widespread unemployment.
Unions (previously illegal in much of the world) flourished but were then destroyed by corporate institutions that learned to operate on the edge of the law. In Europe, politicians found their scapegoats in Jews, on the fringes of the economy. (Americans, on the other hand, mostly blamed themselves; many began to embrace what would later be called fundamentalist religion.)
The post-panic winners, even after the bailout, might be those firms — financial and otherwise — that have substantial cash reserves. A widespread consolidation of industries may be on the horizon, along with a nationalistic response of high tariff barriers, a decline in international trade, and scapegoating of immigrant competitors for scarce jobs. The failure in July of the World Trade Organization talks begun in Doha seven years ago suggests a new wave of protectionism may be on the way.
In the end, the Panic of 1873 demonstrated that the center of gravity for the world’s credit had shifted west — from Central Europe toward the United States. The current panic suggests a further shift — from the United States to China and India. Beyond that I would not hazard a guess. I still have microfilm to read.
Scott Reynolds Nelson is a professor of history at the College of William and Mary. Among his books is Steel Drivin’ Man: John Henry, the Untold Story of an American legend (Oxford University Press, 2006).
Reprinted by Special Arrangement with the Author. A slightly different version of this article appeared in The Chronicle of Higher Education, October 17, 2008 issue, Volume 55, Issue 8, Page B98, and in the Online Edition, here.
Joe Nocera at the New York Times writes that Banks are hoarding their new bailout cash for the onrushing downturn, instead of making loans to free up the credit markets.
He reports that on 17 October, only four days after taking a $25 billion bailout, a JPMorgan Chase executive admitted during an employee-only conference call that there was no intention on the part of management to use the money to make loans.
(emphasis added-dcm)
Question:
“Chase recently received $25 billion in federal funding. What effect will that have on the business side and will it change our strategic lending policy?”
Answer:
“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase … What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”
Yet, here is what Neil Kashkari said to Senator Chris Dodd and the Senate Banking Committee on Thursday, 23 October:
Either somebody’s cribbing, or JPMorgan Chase has plans for the money that the Congress hasn’t.
The problem is the bailout was passed to buy up toxic mortgage debt in the form on credit default swaps of dubious and opaque valuability. But the Fed’s direction changed after they got the money, and realised that the unfreezing of the credit markets through the recapitalisation of the banking system was the way our European Partners had determined to go about this, and we had better follow suit.
The Economist:
In America, where the authorities have helped to shovel failing banks into the hands of bigger ones, the retail-banking landscape now has three towering figures. On September 25th JPMorgan Chase overtook Bank of America as the country’s largest deposit-taking institution by snapping up the assets and deposits, but not the other liabilities, of Washington Mutual (WaMu), a Seattle-based savings-and-loan bank that had been suffocated by bad mortgage loans.
Four days later Citigroup, its risks capped by a loss-protection agreement with the Federal Deposit Insurance Corporation (FDIC), strengthened its domestic deposit base by acquiring the banking operations of Wachovia. Further consolidation is likely. Jim Eckenrode, an analyst at Tower Group, a consultancy, reckons that a top tier of five banks (Wells Fargo and US Bancorp are two other contenders) may end up holding as much as half of America’s deposits.
So now it looks like the credit markets will have to wait, and we must endure the resultant deep wave of medium and small business layoffs and bankruptcies due to a lack of available credit, while the Fed forces a round of bank consolidation with what bailout money they have at the moment.
As Joe Nocera put it:
“Nobody is saying it should make loans that people can’t repay. What I am saying is that [JP Morgan Chase CEO] Mr. Dimon took the $25 billion on the condition that his institution would start making loans. There are plenty of small and medium-size businesses that are choking because they have no access to capital — and are perfectly capable of repaying the money.”
Senator Dodd did press the urgency of lending to Kashkari in Thursday’s hearing:
While JP Morgan Chase may use their $25 Billion as a “backstop” against what’s coming, Bloomberg reports that Goldman Sachs may raise capital to buy assets assuming it finds the right opportunities, according to company spokesman Lucas van Praag: “If we see assets that are attractive, we might raise capital in order to be able to acquire them,” but Goldman has “no immediate plans to raise capital.”
Goldman, now the sixth-largest U.S. bank by market value,
is more interested in buying deposits than in buying entire
banks, according to a person familiar with the firm’s thinking.
- 30 -
It’s been a long day. Looks like the Fed is letting the banks sit on the money for a rainy day, or to buy other banks. Doesn’t look like they’re gonna lend out much, at any kind of decent rates, anytime soon. I hope Senator Dodd can talk some sense into them.
I can’t fix that right now. But I can rest, kick back, crack open a Foster’s, and enjoy Oscar Peterson and Joe Pass show me how a Nigerian Marketplace should work.
Thanks Oscar, Guys, Joe.
-dcm
Building Asset-Based Market Infrastructure Best Alternative for Global Economy
(Updated 102408 – Formatting)
DJIA 9 October 2008
Few doubt that the collapse of the world economy will be a Game Changer. But the change needed is to a new game – a new infrastructure. Not a set of minor changes to the same game.
What is the “game?” The current model, which has gone down like a house of cards in a stiff breeze, is one tilted towards the interests of corporations, governments, and against those of the Individual. It is based on various gradations of slavery, wage-slavery, consumerism predicated on freely available credit at usurious rates, predatory lending practices against victims disarmed by law, and perpetual debt. We have created a debt-based global political economy, not an asset and equity based model.
Yet a non-debt based economic system is what we, the Individual Humans who collectively comprise the global economy, need the most.
We need to base our 21st Century political economies on equity, and assets. Debt is a tool to grow equity and assets, not a substitute for it. (Unless You are designing a slavery or permanent indentured sort of system. It’s tougher to do that in a civil democracy. And bear in mind the sort of Individually held asset and equities basis of global political economy hypothesised here is not the same as asset-egalitarianism. It merely alludes to a reworking of the global financial system in a way that moves the advantage to the Individual accumulation of wealth over the current emphasis and advantage accorded to the corporate concentration of wealth.)
DJIA 15 October 2008
It is truly ironic that the heedless masters of the universe who invented opaque and impossible to value derivatives, hedges, indices and credit default swaps, and the predatory mortgage instruments they stood upon – It is truly ironic that they have so cannibalised the engine of this debt economy – Consumer Spending – that they have effectively killed this goose that laid such golden eggs for so long.
As Mike Whitney observed in his recent article at CounterPunch,
“No job is safe. American elites and corporate tycoons are loading the boats and heading for foreign shores. The only thing they’re leaving behind is the insurmountable debt that will be shackled to our children into perpetuity and the carefully arranged levers of a modern police-surveillance state.”
The past three weeks have seen the front line dominoes tumble as the jury-rigged infrastructure of perma-debt collapsed before the eyes of those reputed to for years to be the smartest and boldest “risk takers” leading the global economy. The most rabid force for de-regulation, the US Republican Party led by George W. Bush, is winding up its occupation of the Oval Office by nationalising the most pivotal parts of the US Banking System.
One by one, the remaining investment institutions have queued up for a government bailout that gives governments an equity stake.
US - China Trade Deficit Growth Through 2006 : Source - Hoover Institute
Of course, in the US these massive infusions of government cash and guarantees are backed by the Treasury – which means borrowing from other nations, principally China. And the repayment of this new debt will naturally fall on the US taxpayer, absent any serious reform.
LIBOR and the TED Spread are only immediate indicators of the credit market’s liquidity. The larger issue of infrastructure reform needs to consider how to build an asset-based, as opposed to debt-driven, political economy. And that means encouraging the accumulation of assets and equities by Individuals, as opposed to corporations. This impacts the structure and regulation of credit markets.
International leaders participating in the upcoming series of summits need to pay particularly meticulous attention to this.
For unless they obey the current inflection point and switch the game over to an asset-backed model of consumer spending, no amount of government intervention will preserve the current debt-driven model based on cannibalised captive markets.
Bubble Gum, Spit, and String
Such efforts as purchasing toxic assets, and injecting captial into the banks are short term patches of bubble gum, spit and string, and I surely hope our international leaders realise that. There are already signs from the banks such injections, alone, won’t work. The upcoming series of economic summits needs to focus on establishing a long term market model that honestly gives Individual Citizens a fair shake, and a more prominent role as stakeholder in the global system.
In the recent past I have been pessimistic about the real willingness of our leaders to address the root causes of this crisis. On September 26, before the bailout was passed, in an email to Congress, I asked “Where is the call for an international summit with our WTO trading partners, particularly China?”
But the pressure on the US by international leaders for it’s participation in a series of summits to address the current crisis in the economy gives me cause to reconsider my cynicism.
Consumer Savings
For this culture of debt, the dead end is clearly visible. In the past 20 years and more Congress has let the Consumer Credit industry run hog wild, more recently letting predatory mortgage instruments do the same. Debt. Not assets. Not equity.
In this sort of environment, consumer spending drives everything. Like Love, it makes the world go ’round. Henry Blodget did a lucid piece the other day on ClusterStock, entitled “US Consumers are Broke.” I highly recommend it.
Equity/Asset Based Games vs Debt Games
If our global economic system threatens to collapse, as it is, and if consumer spending (particularly US consumer spending) is the engine; then we need to pay particularly close attention to the infrastructure changes our international leaders will try to design to address the crisis.
We don’t need to merely patch up the existing debt-based paradigm, except on the shortest term. What we need to do is change the game to an asset and equity basis.
Consumer Debt
Consider: Consumer spending is vital to either game as the driving force, but only in an asset / equity based economy is it guaranteed to grow, because the game is designed to build up the middle class – not hollow it out with predatory, usurious, and perpetual debt.
Consumer Credit should no longer be used as an Orwellian cyber-leash on the populace. Instead, in building an asset-based market, the Individual owns and excercises real and legally enforceable control over their credit and other financial information. The role for reporting agencies are transformed to data services competing to be the delivery agent for the Individual. That means a much more direct relationship with those who would access that information – which would no longer be the sort of commercial product that automatically becomes subject to data mining.
Real protections against predatory lending instruments need to be instituted – that means no more Adjustable Rate Mortgages (ARMs), no more Balloon Payment, or Interest Only, or so-called option-ARMs.
That also means a cap on credit card rates, and a prohibition of unilateral rate changes based on the consumer’s account status with any other lender. So one’s credit card rate doesn’t suddenly jump from 8 to 62 percent because you forgot to pay the electric bill last month – a bill you never pay with that credit card. But the card company data mines your payment stream, sees the omission, and cranks up the rate. Such behavior tends to gut the future ability of the account to maintain a credit relationship, and is thus cannibalistic of it’s own market.
This is what has happened to the US Consumer in this economic game of debt. This is why the US Consumer is broke. This is why the US Consumer is wary of credit, mortgage, and investment instruments tilted against them. Any serious infrastructural reform that will last must address these very real concerns, and not just give them lip service.
Money To Be Made- More Reliably in Asset Based Economy
If US consumer spending has been such a great engine for growth and expansion in international trade, think of what a robust middle class would mean when combining the consumer spending of the US, China, India, and the EU. In an international monetary system driven by the Individual accumulation of wealth, the emergence of a solid middle class would be an increasingly strong economic engine. Perhaps international leaders should consider flattening the economic landscape in their upcoming efforts to build a newer, more resilient global economic system. Rules and regulations should be guided by the express intent to enable and build up individual assets and equities, as opposed to corporate debt.
We must abolish the current idea of “minimum” wage and migrate to the concept of the Living Wage, indexed to the actual cost of living.
We need to encourage the invention of financial instruments for Individuals which give them certain and distinct advantages over existing corporate institutions, as a safeguard of their ability to accumulate wealth and contribute to the engine of asset and equity based consumer spending. Predatory corporate and financial instruments are a certain death to such aims.
This means eliminating all taxes on personal income, personal savings and investments, to encourage and facilitate the accumulation of wealth regardless of class.
This will mean not just more banking regulation and tighter supervision over the mortgage and derivatives markets, but increases in wages across the board, across the world, in all countries participating in this restructuring.
In a global political economy that properly uses debt as just another tool to facilitate the building up of the actual wealth of the People, and not as a centerpiece to drive markets, the health and robust growth of a more reliable form of Consumer Spending is ensured.
That’s all I have time to write for this weekend. More later. Until then, the Fabulous O’Jays!
-dcm
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