From Volume 37, Issue 20 of EIR Online, Published May 21, 2010

U.S. Economic/Financial News

N.Y. Attorney General Subpoenas Banks in Widening Probe

May 13 (EIRNS)—In a growing avalanche of investigations of the money-changers on Wall Street, New York Attorney General Andrew M. Cuomo issued subpoenas on May 12 to eight banks, in an investigation of whether they misled ratings agencies about the quality of mortgage securities they were offering. The banks are Citigroup, Credit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, USB, and Merrill Lynch, now part of Bank of America.

The companies that rated the mortgage deals are Standard & Poors, Fitch Ratings, and Moody's Investors Service.

Cuomo is also investigating the revolving door of employees of the rating agencies who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved. For example, the Abacus 2007-AC1 Goldman Sachs deal now being investigated by the Securities and Exchange Commission was devised in part by a former Fitch Ratings employee named Shin Yukawa, whom Goldman recruited in 2005. At the height of the mortgage boom, companies like Goldman offered million-dollar pay packages to workers like Yukawa who had been working at much lower pay at the rating agencies.

Around the same time that Yukawa left Fitch, three other analysts in his unit also joined financial companies, including Deutsche Bank. In the Fall of 2007, the Fitch analyst on a Goldman deal was a friend of Yukawa.

The rating agencies may have facilitated the manipulation of the ratings by publishing their rating models on their corporate websites. One former rating agency employee said: "The models were posted for bankers who develop CDOs to be able to reverse-engineer CDOs to a certain rating."

Probe of Wall Street Banks Expands

May 13 (EIRNS)—The Wall Street Journal reports today that Federal prosecutors, working with securities regulators, are conducting a preliminary criminal probe into whether several Wall Street banks misled investors about their roles in mortgage-bond deals.

The banks under early-stage criminal scrutiny, J.P. Morgan Chase, Citigroup, Deutsche Bank, and UBS, have also received civil subpoenas from the Securities and Exchange Commission (SEC) as part of a sweeping investigating of banks' selling and trading of mortgage-related deals. Under similar criminal scrutiny are Goldman Sachs and Morgan Stanley.

The Manhattan U.S. Attorney's office and SEC are collaborating in the investigation. As part of the joint probe, the SEC has asked the banks for a range of documents, including final and draft prospectuses, final and draft offering documents, and investor lists associated with mortgage-related deals.

TARP Flops as Small Businesses Remain Unaided

May 13 (EIRNS)—The Congressional Oversight Panel, which reviews the Treasury Secretary's use of his authority in the Troubled Asset Relief Program (TARP), today issued its May Oversight Report, titled, "The Small Business Credit Crunch and the Impact of TARP." The Report concludes that TARP is still not meeting the needs of small business, and calls into question some of the new TARP programs proffered to begin meeting those needs. Oversight Panel chairwoman Elizabeth Warren says, in a video introduction on the Panel's website ( 051310-cop.cfm), "So, now that Treasury has made small business lending a priority, how is it doing? The results are so far, not encouraging."

The report states: "Small businesses have long been an engine of economic growth and job creation in America. More than 99 percent of American businesses employ 500 or fewer employees, and together these companies employ half of the private workforce and create two out of every three new jobs. If the Troubled Asset Relief Program (TARP) is to meet its Congressional mandate to promote growth and create jobs, then it clearly must address the needs of small businesses."

"Unfortunately," the report says in its Executive Summary, "small business credit remains severely constricted." Lending plummeted during the 2008 financial crisis and remained sharply restricted throughout 2009.

Warren said, in her video introduction: "Treasury's first attempt to deal with the problem, in 2008, was to lend hundreds of billions of dollars to Wall Street banks, hoping that the money would trickle down to the broader economy. This, unfortunately, was only a hope. Treasury never required the banks to lend their new money, and in fact, Wall Street banks have cut back on small business lending by 9 percent. This is worth noting: the cutback for small business lending is more than double the cutback in overall lending. The big banks pulled back on everyone, but they pulled back harder on small businesses."

The report applies this description to the largest TARP program, the Capital Purchase Program (CPP): Not only did Treasury not require recipients to use the money to improve credit access, it says, but in fact, after receiving the money, most recipients decreased their lending. Another program, the Term Asset-Backed Securities Loan Facility, "helped to restore liquidity to the securitized lending market, but because relatively few small business loans are securitized, the program had little impact on small business lending." Other TARP programs likewise have limited effect on small business because they are not targetted, or cover only a small number of institutions.

The panel's report suggests that even if Treasury succeeds in increasing the supply of credit to small business, it may not succeed, because at heart the problem is lack of demand for the credit. Part of a small business loan is a business that is creditworthy and in need of a loan. "Due to the recession," the report notes, "relatively few small businesses now fit that description. To the extent that contraction in small business lending reflects a shortfall of demand rather than of supply, any supply-side solution will fail to gain traction."

New York State Workers Furloughed

May 11 (EIRNS)—Late last night, a desperate New York State Senate advanced a bill to the governor, allowing him to furlough 100,000 state employees for one day a week. The furloughs amount to a 20% pay reduction (and 20% workforce reduction), and will supposedly save the state $30 million/week. The state is trying to fill a $9.2 billion hole in its $132 billion budget, and the legislature has now passed six weekly extensions since April 1, in order to prevent a complete government shutdown.

The move left many in the Democratic-controlled legislature questioning the legality of the budget shenanigans, but they claimed that Gov. David Patterson left them few options. While Patterson blamed the unions for refusing to forego a 4% pay increase (which he has now unilaterally cancelled), unions note that he had not even begun to negotiate until after the budget deadline, and refused to even consider replacing (more expensive) private contractors with state employees.

Unions have already filed suit, and continue to rally at the capital, sporting the Giant Inflatable Rat, that they normally use to symbolize a non-union shop.

Home Repossessions Reach Record High

May 13 (EIRNS)—Real estate research firm RealtyTrac issued its latest report on home foreclosures today. While the report, and much of the media coverage, focussed on the slight decline in foreclosure filings (notices of defaults, auctions, and bank repossessions) in April, the section on actual property repossessions reported that bank repossessions hit a record monthly high last month.

The new filings for various stages of the foreclosure process were down 9% from March 2010's figures and 2% from April 2009. In contrast, the actual repossessions increased 1% from the previous month and 45% from April 2009. RealtyTrac CEO James Saccacio was quoted in its report, saying that the new numbers "show foreclosure activity has begun to plateau—but at a very high level that will not drop off in the near future." Further, Saccacio said, "We expect a similar pattern to continue for most of this year, with the overall numbers staying at a high level and ripples of activity hitting the various stages of the foreclosure process as lenders systematically work through the backlog of distressed properties."

Stated more plainly, banks appear to be moving to control, at the "front end," the glut of residences coming onto the market and depressing prices, by holding off on making the filings that move the foreclosure process along. Meanwhile, for homes already in foreclosure, the process continues along to its end in repossession.

California: Mammograms Cancelled for Poor Women Under Age 50

May 10 (EIRNS)—It is the stated intent of Gov. Arnold Schwarzenegger's California Department of Public Health to keep some 52,000 women from getting mammograms. The department has "temporarily" banned new enrollments in its Every Woman Counts, and increased the age for women to be eligible for the program from 40 to 50. As the Associated Press reports, "The changes are intended to reduce the number of mammogram recipients to 259,000 this fiscal year from last year's 311,000."

Al Lundeen, spokesman for the department, refuses to report the number of mammograms the state has paid for under the program since new financial cuts were put into place Jan. 1.

Nearly 4,000 women die of breast cancer in California every year. The Every Woman Counts program was established in 1991 to provide free mammograms and diagnostic services, such as ultrasound and biopsies, for low-income women.

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