Kim Feraday

Globe editors praise BC budget cuts -- first they should have read -- the G&M

Sometimes I wonder if the Globe editors write their editorials at cocktail hour. It seems to be the only rational explanation. Today's editorial, "Leading on Prudence" is a case in point. They write:

"British Columbia's Speech from the Throne this week provides every politician in Canada with a quick look at what the future holds. It may not be pleasant or popular, but it is certainly necessary. And Premier Gordon Campbell deserves credit for going first."

The editors seem to think that the bad times are pretty much over and that governments now need to focus on getting their books back in order. They praise the Campbell government plan to freeze public sector wages, slash spending at Crown corporations, health authorities and school boards and even lay off employees. And they think Ottawa and the other provinces should follow suit.

That might be fine if we were actually anywhere near a recovery. But with economies still shrinking both here and in the United States. Just two days ago Don Drummond (quoted here in the G&M), TD Bank's chief economist said that we should continue to expect job losses into next year. He goes on to state that the current EI debate should have focused on the length of benefits given the dire employment situation. And this means more government spending. 

One day (also in the G&M) earlier Arthur Donner a Toronto economic consultant and Doug Peters, former chief economist of Toronto-Dominion Bank called on Ottawa to maintain fiscal stimulus to prevent years of Japan style stagnation. They write:

"Canadian and American consumers are sharply increasing the amount they are saving relative to their disposable income. In 2006, for example, the per capita savings rate was 1.6 per cent in Canada and 0.7 per cent in the United States, according to Statistics Canada and the U.S. Bureau of Economic Analysis. In 2008, the amounts rose to 3.7 per cent in Canada and 1.8 per cent in the United States.

Make no mistake: The increased emphasis on consumer saving will make the recession worse and will retard economic recovery. Indeed, this major shift toward frugality is expected to be one of the lasting legacies of this recession.

As well, households in both countries are facing the weakest labour market in decades, making consumers even more cautious about borrowing and spending. The U.S. unemployment rate, now at 9.7 per cent, will likely top out at above 10 per cent before the recession eases. Canada's unemployment rate, 8.6 per cent last month, will likely rise above 9 per cent before turning down. High personal savings rates in both countries will keep a lid on consumer spending and will limit the scope of the economic recovery next year.

Therefore, the need for an expanding government sector to keep Canada's economy on a growth path will be an essential component of a full economic recovery for some time to come.

Bear in mind an important lesson from Japan's lost decade of economic growth: Fiscal stimulus half-measures lead to years of subpar economic activity and make fiscal deficits even larger. Canada's job losses have been brutal in this recession, and a painful and difficult restructuring of our economy has already begun. In this unsettled environment, the federal government will need to sustain its infrastructure stimulus programs to ensure that Canada does not permanently have near-double-digit unemployment rates."

The Campbell government should pay heed to this advice before embarking on a course of action that will likely do further damage to the frail economy and turn the recession in B.C. into a full on depression. The Globe editors would do well to start reading their own publication before writing an opinion. 

WaMu has $3.33B loss, may be cut to "junk"

Washington Mutual has had another miserable quarter. This isn't surprising since a significant portion of their revenues are from mortgage loans. What is surprising is that they haven't undertaken to refinance some of these loans rather than write them down.

The most appalling news is that WaMu reported that CEO Kerry Killinger,

COO

Steve Rotella and CFO Tom Casey will not receive incentive payments they were due to receive under their bonus plan. This is supposed to make their customers who are losing their homes (and shareholders) feel better?

On a more positive note Bush finally caved on the proposed Housing Bill, which will provide support for both homeowners and Fannie Mae and Freddie Mac. The most impressive part of the Bill is the $300B that will be allocated to refinance at-risk loans and convert them to more affordable 30 year loans. Lenders must voluntarily agree to reduce the principal on the loans to 85 percent of their current value. Given the difficulty lenders like WaMu are having they should jump at the opportunity. The fund is expected to help keep up to 400,000 homeowners in their homes which could have a significant impact on the stability of the economy.

Here's the Reuter's news release:

NEW YORK, July 22 (Reuters) - Washington Mutual Inc, the largest U.S. savings and loan, posted a $3.33 billion second-quarter loss on Tuesday as souring mortgages forced it to set aside more money for loan losses.

The thrift's deteriorating health prompted Moody's Investors Service to say it may downgrade Washington Mutual to "junk" status. Shares of Washington Mutual fell in after-hours electronic trading.

Washington Mutual said its third straight quarterly loss was $3.34 per share, more than triple the $1.09 per share loss that analysts on average expected according to Reuters Estimates. Year-ago profit was $830 million, or 92 cents per share.

The net loss was $6.58 per share including a one-time adjustment tied to the thrift's $7.2 billion capital raising in April from private equity firm TPG Inc and other investors.

Seattle-based Washington Mutual said its retail banking, mortgage and credit card units all lost money in the quarter. The thrift set aside $5.91 billion for loan losses, and said net charge-offs totaled $2.17 billion.

It has been one of the hardest hit among the largest U.S. lenders in the nation's housing and credit crisis.

"We are planning for continued softness in housing for the next several quarters," Chief Executive Kerry Killinger said in an interview. "The capital that we have in place is sufficient to manage through this period. We have no plans at this point to raise additional capital."

Washington Mutual said it expects residential mortgage loan losses through 2011 to be "toward the upper end" of the $12 billion to $19 billion range it had forecast in April. Some analysts had predicted the losses might end up higher.

The thrift expects its reserving for credit losses to peak this year, but cut its 2008 forecasts for growth in deposits and fee income, and boosting projected expenses.

Washington Mutual also said that Killinger, Chief Operating Officer Steve Rotella and Chief Financial Officer Tom Casey will not receive annual incentive payments under a company bonus plan, in light of its performance in 2008.

The thrift has cut 6,205 jobs this year, or 13 percent, leaving it with 43,198 employees. Analysts expect more cuts as Killinger tries to reduce expenses by $1 billion.

Killinger faces pressure to stanch losses and restore profit following an 86 percent plunge in Washington Mutual's stock price in the last year.

Washington Mutual shares fell 21 cents to $5.61 in after-hours electronic trading. They closed regular trading up 34 cents at $5.82 on the New York Stock Exchange.

REDUCED FLEXIBILITY

Moody's said the falling stock price and declines in some deposit categories have resulted in "reduced financial flexibility," making it tougher to raise additional equity.

The credit rating agency also projected "sizable" quarterly losses through 2009 for Washington Mutual.

Meanwhile, WaMu's board, long considered loyal to Killinger, last month stripped him of his chairman's post after shareholders voted at its annual meeting for a replacement.

Killinger has been chief executive since 1990, and became chairman the following year.

In the interview, Killinger said the thrift has a "very strong and very engaged board," including the "welcome additions" of TPG founding partner David Bonderman and Continental Airlines Inc Chief Executive Larry Kellner, as a board observer.

"The board is absolutely committed to returning the company to profitability in as short a time as possible," he said.

He declined to discuss speculation the thrift could be a takeover target. "The board has approved this comprehensive plan and instructed management to execute it," he said.

In a July 22 letter to Chairman Stephen Frank, the employee pension plan of the American Federation of State, County and Municipal Employees demanded the removal of Killinger as chief executive and the resignation of two directors, citing the company's financial performance and falling stock price.

A Washington Mutual spokesman declined immediate comment, saying he hadn't reviewed the letter.

Washington Mutual said its mortgage unit lost $1.35 billion in the second quarter, while retail banking posted a $2.04 billion loss. Credit cards generated a $175 million loss, while profit in commercial banking fell 29 percent to $87 million.

The thrift Mutual said it ended the quarter with $309.7 billion of assets, and operates about 2,239 branches.

India emerges as hub for patent offshoring

When my brother-in-law was starting his first company a decade ago, he outsourced some of the development to India through a friend of his on the east coast. Outsourcing to India had two big advantages -- it significantly cut development costs and it meant the company could run on a 24 hour development cycle which would drastically cut time to market. The jobs he shipped overseas were at the low end of the hierarchy, mostly basic coders and some development managers. He didn't feel confident that any of the architecture work could be moved.

Times have changed. If anyone had any doubts that globalization simply meant that low value jobs in manufacturing and textiles would move overseas those should now be laid to rest.

India in particular has been doing an excellent job of moving up the value chain. It started with software development and consulting. There are now some impressive software products being conceived and manufactured completely in India.

It doesn't stop there. With a rapidly growing pool of highly trained white collar workers graduating from quality universities India is quickly moving into other sectors. Last year SunLife of Canada moved many of its actuarial positions to India. And now it seems legal work is being outsourced. While it is encouraging to see India rapidly emerge as an economic powerhouse, it raises an issue that will have to be addressed sooner than later.

How do you encourage continued progress in developing countries without significantly eroding the quality of life in the Western world? Corporations are perfectly mobile, they can move anywhere in the world, and are increasingly doing so to reduce costs and increase shareholder value. Longtime employees are victims of this strategy and are increasingly left with only McJobs as an alternative.

Certainly continued and increasing investment in education will help. Government spending tax policies to increase investment in basic R&D and commercialization of discoveries will also help. At some point as well we may want to consider the possibility that rather than fully embracing the mantra that globalization is inevitable and good for everyone, we should be moving to a model of regional economies.

India is no where close to countries like US, Japan and China, when it comes to filing patents. But it still does a significant bit in the IP space. A lot of it’s happening through patent service outsourcing in India. This means, a lot of background work for the numerous patents that are being filed by other countries, are being done out of India.

Experts say, patent services outsourcing, the high value work of legal process outsourcing (LPO) has been a fairly new phenomenon here, hardly four to six years old. According to estimates last year, more than 1.8 million patent applications were filed worldwide.

And the filing costs for these was between $30 billion to $32 billion. But what’s driving growth in the worldwide patent outsourcing market is: Increased off-shoring of R&D activity, lack of manpower and the impact of the US Patent Reform Act of 2007.

A study by ValueNotes, a Pune-based research firm shows, revenues from the Indian patent services offshoring industry are estimated at $46 million for 2007. It’s expected to reach $206 million by end 2012. The study reveals the current addressable value of the patent services offshoring market is estimated at $2.2 billion.

“We believe that the Indian patent offshoring industry will grow 35% per annum over the next four years. As for the number of employees, our estimate is that about 6,950 people will be employed by the end of 2012,” says Subha Kalathur, senior analyst with ValueNotes.

For the rest of this article visit the Offshore Outsourcing World Blog.

An economy in dissonance

You just need to look at the big gainers on the TSX to come to the realization that Canada really has become the tale of two economies. The TSX has gained on 17 of the last twenty session driven by oil prices that can't seem to find a ceiling and commodities prices. Potash has also been a factor, due to escalating demand from China.

The bad news, the really bad news, is that Canada continues to lose high quality manufacturing jobs at an alarming rate. According to a report published yesterday by TD Bank, Canada lost 130,000 manufacturing jobs -- most of which were in Ontario and Quebec. Most of these jobs were high-quality, high-productivity jobs in manufacturing according to Beata Caranci, the bank's director of forecasting.

Flaherty and Harper have been claiming that overall job growth is strong, and that the jobs being lost in manufacturing are being replaced in other areas of the economy. That is simply not the case. Most of the job growth has been in construction, healthcare and the hourly wage market. The construction market has been fuelled by the rapidly cooling housing boom and infrastructure development to support the commodities boom. And while healthcare jobs might pay well they don't produce anything of real value. As for McJobs, well the TD report says on average the displaced workers wind up making about 25 per cent, or about $10,000 a year, less than what they were earning before.

Meanwhile Harper is busy rolling out his "law and order" program, and Flaherty is busy defending his pork-barrelling and claiming that simply by cutting corporate taxes (specifically business investment taxes) manufacturers would come back like lemmings following the Pied Piper. This one note tax mantra is a riduculous proposition. Meanwhile our increasing dependence on commodities to drive the economy is a recipe for disaster. When the resources are depleted we will be left with nothing, not to mention the environmental damage we will cause by continuing down this path.

We need real leadership to develop policies and programs that will drive new investment and assure the long term viability of our economy. We need to begin to invest heavily in education and R&D to drive innovation and the emergence of new industries. We also need to invest heavily in infrastructure (including high speed train networks) and rationalize our PUBLIC healthcare system to ensure its continuing viability. Then we must sell the benefits of the PUBLIC systems we have put into place that will be a significant benefit to private corporations. Given that healthcare expenses have been a significant factor in undermining profitability of companies like GM and Ford, this is a significant competitive advantage, yet I don't see our politicians out there selling the benefits. Flaherty in particular seems to be limited to a one word vocabulary -- it's all about taxes.

We also need to begin exploring the benefits of developing strong regional economies that will help protect high value jobs and help us to meet our environmental goals. We should be quickly moving towards making it easier for goods and services to move between regions in Canada, much as BC and Alberta have done. We should also be looking to create stronger regional ties and trade agreements with proximate regions south of the border -- a Great Lakes Trade Region or a Cascadia Trade Region for example. We should also be evaluating trade with countries that have no labour or wage standards in place.

What we can't do is continue down the path we are currently on. What remains to be seen is which political party will rise to the challenge.

Even as they face bankruptcy banks let greed inform decisions

I was watching a report on the mortgage crisis on CNN over the weekend. At one point there was an interview with an elderly woman from California who had refinanced her mortgage through Wells Fargo. As with all subprime mortgages the interest rate escalated very quickly, from about 6% to over 10% in a short period of time. As a result the woman, who had lived in the house for years, is now faced with foreclosure.

If the bank were to consider a refinancing at a lower rate, the woman could continue to make her payments, remain in her home, and the bank would continue to have a paying customer. But rather than pursue this common sense strategy the bank is refusing. Why? In part, because it no longer owns the mortgage but continues to act as the loan servicer. So Wells Fargo says its hands are tied. Since most mortgages are securitized and sold to others, the debt now belongs to other banks (or anyone else) who buys asset backed securities or the more complex derivative products that investment banks like Bear Stearns specialize in.

The fact remains however, that the final purchaser of the debt (the securities that the mortgage loans are attached to) would be willing to reduce their rate of return the mortgage crisis could probably be, in large measure, solved. But that won't happen. Why? According to an investment specialist interviewed by CNN, because they are expecting a return and that's non-negotiable. So in essence the purchaser of these securities are so blinded by greed that they are unwilling to make the common sense decision to accept a lower return. Even if it means their own demise, the destabilization of our financial system and that the economy is sent into a recession.

What we need, is greater regulation of the financial system. Many of these "shadow institutions" are unregulated. This needs to change. More fundamentally, I think we need to rethink how credit (and money) is issued. Clearly leaving this in the hands of private corporations isn't working.

Hey Flaherty do us a favour and shut the **** up!

Is it really too much to ask for our Finance Minister not to invite panic when the markets are on the edge of a wholesale meltdown and our economy is in a somewhat fragile state. Raising the spectre that Ontario, which is still pretty much the engine for the Canadian economy, could become a "have not" province in just a couple of years does nothing to calm the markets frazzled nerves. Instead, maybe he could focus on developing and implementing policies that will help the manufacturing sector regain strength. Otherwise shut up and get out of the way. What an idiot. Really they should start giving these guys a test to make sure that they can meet a minimum intelligence threshold. I don't think Flaherty is qualified to manage a hot dog stand let alone our economy. Even the Republicans are smart enough not to cause further panic. Again, do us a favour and just shut up!

As subprime crisis deepens maybe it's time to rethink banking system

In a move that's unprecedented since the Savings and Loan crisis of the 1980's, the Federal Reserve moved yesterday to prevent a meltdown in the financial markets with a $30 billion risk free credit line to support JP Morgan's take over of Bear Stearns. This move comes less than a week after a $200 billion loan program the Fed initiated to support mortgage-backed securities. Meanwhile, with the housing market in the worst shape in a century (this according to Richard Syron, chief executive of Freddie Mac), there continues to be little help for the real victims of this crisis -- homeowners.

Why is it that government's are so quick to provide corporate welfare but loathe to help the very people they are meant to serve? After all, it was investment banks like Bear Stearns that are largely responsible for creating the very instruments that are causing the widespread panic in global financial markets. Given Bear Stearn's Machiavellian winner-take-all corporate culture, and former chairman Alan Greenberg's penchant for regaling "its partners over lengthy lunches about gambling with the firm’s money in its wood-paneled dining room", can there be a company less worthy of government handouts? It is telling though that Greenberg describes Stearn's business as gambling. In many ways much of investment bankers core business isn't too different than Party Poker.

There may also be a larger message in how quickly Bear Stearn's stock price plummeted. The firm has gone from trading at over $90 a share early this year to just $2 a share at the end of last week. They produce nothing of real value.

This begs the question, why do we (through our governments) give private companies so much power over the creation and supply of money (most of the U.S. money supply is based on interest bearing loans)? Milton Friedman observed that "[a]ny system which gives so much power and so much discretion to a few men, (so) that mistakes -- excusable or not -- can have such far reaching effects, is a bad system." This concentration of economic power in the hands of a few private companies with inadequate regulation is at the least contrary to the social and economic objectives of the countries in which they operate, and in the worst case (such as the current crisis) dangerous to our well being.

If you think these views are extreme, I'll leave you with Thomas Jefferson's view of private banks:

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations which grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power of money should be taken from the banks and restored to Congress and the people to whom it belongs. I sincerely believe that banking institutions having the power of Money are more dangerous to liberty than standing armies."

I'm sure that the millions of Americans facing foreclosure would agree with this sentiment. Interestingly Abraham Lincoln held the same view. Perhaps it's time the "power of money" came back to the people so that it can serve their interests.

U.S. Fed bails out bank -- still no help for homeowners

The Federal Reserve Bank of New York stepped in to save Bear Stearns as investors fled the bank largely due to the exposures it had realized through its subprime hedge funds -- apparently the banks speciality. The rationale behind the bailout is to prevent a domino effect if Bear Stearns falls into bankruptcy. But if he bailout fails guess who foots the bill? That's right taxpayers.  So with all of this money for banks (I haven't seen a figure but it's got to be in significant) why can't the American government find some money to help out struggling homeowners many of whom have been the victims of predatory lending practises. All they're getting from Bush is more fumbling and bumbling. Henry Paulson the Treasury secretary said on Thursday, "that it is not too early to suggest appropriate policy responses,” according to they NY Times. Of the three prospective presidential candidates only Hillary Clinton has formulated a comprehensive response calling for a 90 day moratorium on foreclosures, a freeze on adjustable rate mortgages $5 billion in immediate assistance to help homeowners and an additional $1 billion in emergency energy assistance to respond to the dramatic escalation in energy costs this year.

Why is it that governments (both here in Canada and the United States) are more than willing to use taxpayer money to help bail out private corporations when, through their own poor business practises find themselves in dire straits, but are willing to use that same money to help the taxpayers who gave it to them in the first place?

Executive pay Part II

After my last post on WaMu executive bonuses, I noticed both in  the NY Times (and on CNN) that several banking senior executives were hauled in front of Congress today to answer for the obscene bonuses they are receiving even though their companies have lost billions of dollars,  many of their customers have lost their homes and the subprime mess has been a key factor in sending the American economy into recession.

Three executives, Charles Prince, former chief of Citigroup;  E. Stanley O'Neal, former chief of Merrill Lynch; and Angelo R. Mozilo, chief of Countrywide Financial all defended their pay packages, stating that they had worked hard and had each contributed to the success of their companies.

Mr. O'Neil walked away with $161 million when he "retired", following over $10 billion in write downs by Merrill Lynch. Mr. Prince walked away with $110 million following $20 billion in write downs by Citi. For his part Mr. Mozilo has been paid more than $410 million since becoming CEO of Countrywide, and judging from his leathery tan he's spent more time hanging out with George Hamilton than guiding his company. Mozilo also had the balls to complain about his compensation. As for the rest, they all look like petulant private school brats who more than resent having their playtime interrupted by the principal.

For my part I think Elijah Cummings had it exactly right when he said, " We’ve got golden parachutes drifting off to the golf course and have people I see every day who are losing their homes and wondering where their kids will do their homework.”We’ve got golden parachutes drifting off to the golf course and have people I see every day who are losing their homes and wondering where their kids will do their homework.”

The more of this I see the more I believe that the lack of accountability of corporations to the societies in which they operate is the biggest problem with capitalism. If our politicians like Obama and Clinton really want to make our societies better this is ground zero.

WaMu Execs retain big bonuses

Washington Mutual's board of directors decided that its senior executives deserved huge bonuses in spite of the huge losses, layoffs and the devastating impact on their customers. At the end of last year, WaMu announced that it was setting aside $1.6 billion for loan losses in the fourth quarter, closing 190 of its 336 loan centres and sales offices and laying off 3,000 employees. WaMu expects another $1.8 to $2 billion in loan losses this quarter.

And how were executives punished for this dismal performance? Well senior executives including WaMu chief executive Kerry Killinger, chief financial officer Thomas Casey, chief operating officer Stephen Rotella, and retail banking chief James Corcoran had their bonus targets protected by their board of directors. In January WaMu awarded Killinger 3.2 million stock options in order to "provide strong incentive to restore shareholder value."

I for one find this incredible. The only place these guys should be is on the unemployment line with other former WaMu employees. Or better yet in jail. The subprime mess is a case study in why markets must be regulated to protect consumers and the economy from the greed and corruption that cause such devastation. But no. Once again it's regular people pay the price and these criminals get richer still. I wonder if we'll ever learn.