October 3, 2022

Will Governor Schwarzenegger Trigger 55,000 California Foreclosures?

California’s long running budget crisis has now degraded to the point where Governor Arnold Schwarzenegger has ordered a pay reduction to the minimum wage rate of $7.25 an hour for 200,000 state employees.

The California banking industry, perhaps sensing an opportunity to rebuild their poor public image, has jumped into the budget mess with a plan to rescue beleaguered state employees.   Spearheaded by $7.6 billion asset Golden 1 Credit Union, banks are tripping over themselves to offer “Budget Impasse Loans”, an easy way for over leveraged State workers to tide themselves over until the budget crisis passes.

Bloomberg: The Golden 1 Credit Union, a lender that caters to state workers, will offer zero-interest loans to customers whose pay falls because of the stalled spending plan, according to a July 2 statement.

Golden 1 said as many as 55,000 of its customers may participate this year, if state-employee pay is cut to the federal minimum wage, currently $7.25 an hour. Flyers that tout the program are being distributed in its 84 offices, carrying a message that says “balancing the state’s budget doesn’t have to affect your own.”

“We could survive off our savings for a little while, but it would be a real burden on us,” said Chava Yniquez, a 49- year-old technician in the Senate printing office who has used Golden 1 budget-impasse loans in the past. “It’s a lifeline.”

The California budget crisis and bankers pushing loans are not the issues to ponder here.  Golden 1 Credit Union’s estimate that 55,000 employees will need a loan after seeing their first pay check reduced indicates the very fragile financial condition of 25% of the State’s workforce.  How many more will need a “Budget Impasse Loan” after two weeks, or a month?  Will the first week of the Governor’s budget balancing plan wind up pushing 55,000 home owners onto the path of foreclosure?  Terminator indeed!

The very banks offering “Budget Impasse Loans” may shortly find themselves offering “Loan Modification Plans” if the California budget crisis eventually requires permanent pay concessions from State employees.

Golden 1 Credit Union, which lost $22.6 million in 2008 and $23.1 million in 2009 may be offering a valuable service to strapped State employees, but is a customer one paycheck away from default a solid credit risk?  Golden 1’s website notes that budget impasse loans will be offered with “rates as low as 0% APR”, implying that some borrowers will be paying a “risk adjusted” rate of interest.  Since Golden 1 is offering depositors a whopping .25% on regular savings accounts, even a “low rate” of, say 4%, would still leave them with a very nice spread.

At a time when the universal “solution” for every financial problem is to borrow more money, perhaps the banks should develop a unique “new program” involving financial responsibility, saving and wealth accumulation.

Finally, in the “too ironic not to mention” department, the Press Release issued by Golden 1 immediately prior to the Budget Impasse Press Release reads as follows:

SACRAMENTO, Calif., June 30, 2010—Employees and business partners of The Golden 1 Credit Union participated in the second annual United Way Toilet Paper Drive on June 18 contributing 15,989 rolls of toilet paper to benefit local nonprofits.

Golden 1’s contributions represented 33.5% of the total rolls of toilet paper collected by United Way in this drive. Of these, 10,205 came from the credit union’s employees and 5,784 came from its supportive business partners.

Perhaps soon, California State employees can contribute to this worthy effort by sending Golden 1 their state paychecks.

FDIC Tells Banks California IOU’s Good As Gold

Bank Have Enough Bad Assets

Yesterday, a group of major banks, including Bank of America, Citigroup, JP Morgan and Wells Fargo,  said that they would stop accepting California IOU’s.  The State of California, virtually out of cash, has been issuing IOU’s, known officially as “individual registered warrants” to creditors in lieu of cash.  The State has promised to pay IOU holders 3.75% interest when the warrants mature on October 2.

With Fitch Ratings dropping California’s debt rating to BBB junk status, it is understandable that the banks do not want to cash the IOU’s.  Allowing warrant holders to cash in their IOU’s would effectively transfer the credit risk of the IOU’s to the banks.  Most major banks already have a mountain of non performing assets and, understandably, do not wish to add California IOUs to the list.

The reality of the situation is that California has already defaulted since they have reneged on their obligations to creditors.   I wonder what the State of California’s reaction will be when their citizens adopt the State’s method of bill payment and start sending in IOU’s instead of cash for tax payments due?  Many of California’s citizen have been placed in a horrendous financial situation by California’s “spend and borrow until we are bankrupt” policies.  If the banks won’t cash in the IOU’s, why would an average citizen or business want the IOU’s?   The IOU’s won’t pay for your groceries or rent and they can’t be converted to cash – what does that say about faith in California’s “promises to pay tomorrow what is due today”?

FDIC Issues Statement On California IOU’s

The FDIC today issued the following statement to its member banks regarding the credit worthiness of California’s IOU’s.

California Registered Warrants
Interagency Statement

Summary: The federal financial institution regulatory agencies are jointly issuing the attached supervisory guidance for financial institutions regarding the regulatory capital treatment for registered warrants issued by the State of California as payment for certain obligations.

Highlights:

  • The Attorney General of the State of California has opined that the registered warrants that the State is issuing as a form of payment for certain of its obligations are valid and binding obligations of the State.
  • The banking agencies’ risk-based capital standards permit a banking organization to risk weight general obligation claims on a state at 20 percent. These warrants, which are general obligations of the State, would, therefore, be eligible for the 20 percent risk weight for risk-based capital purposes.
  • Banks should exercise the same prudent judgment and sound risk management practices with respect to the registered warrants as they would with any other obligation of a state.

It would guess that the FDIC’s statement on the soundness of California’s IOU’s was more politically motivated than financially inspired.  If this is all the support that California is going to get from the Federal Government, the citizens of California have much to be concerned about.

The FDIC is telling the banks that the risk of the  California’s warrants is the same as any other state issued general obligation debt.  Nice try, but apparently, the biggest banks in the country, as well as the credit rating agencies, are not buying this line.  If the banks won’t cash the IOU’s and you can’t spend them, they are effectively worthless today.  Those stuck with California IOU’s may be in for a long wait before they can be cashed in.

Disclosures: None

The Economic Collapse Continues – Logical Minds See No Signs Of A Bottom

No Signs Of A Bottom

The market continues its massive sell off in a resounding vote of no confidence on the measures being taken to reverse the economy’s downward spiral.  A contrary investor buying the dips over the past two years has seen nothing but huge losses.  Recent news on the economy continues to indicate that things are getting worse, not better. The impact of estimated losses of over $100 trillion in stocks, bonds and real estate over the past two years will not be offset by stimulus plans.

The trillions of dollars being borrowed to prop up the system are being overwhelmed by a loss of confidence and a loss of wealth that many fear may never be recovered.  The massive deficit in the national budget (12% of GDP) is causing a sell off in the long treasury market, with yields rising above 3% today on the 10 year bond.  The scary question in many people’s minds is how many more trillions of government debt and guarantees will be needed to support a collapsing banking and insurance industry?

Bernanke Confident – Reality Denied

Chairman Bernanke of the Federal Reserve recently expressed his optimistic view that the recession would be over this year – see Do Bernanke and Obama Talk To Each Other? Many others with far superior track records do not agree with Bernanke.

Paul Volcker – former Federal Reserve Chairman – “I don’t remember any time, maybe even in the great depression, when thing went down quite so fast, quite so uniformly around the world”.

George Soros – successful hedge fund investor – the financial system “was placed on life support, and it’s still on life support.  There’s no sign that we are anywhere near a bottom”.

Nouriel Roubini – economist who correctly forecast the financial collapse – “We are still in the third and fourth innings and it’s getting worse”.

Logical minds would have to strongly doubt Bernanke’s optimistic view, especially in view of his previous calls that proved to be ridiculous, such as:

“We will follow developments in the subprime market closely.  However, fundamental factors—including solid growth in incomes and relatively low mortgage rates—should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system.”
—June 5, 2007

Horrific Economic News Continues – Notable Links

California’s Jobless Rate Exceeds 10%

California’s unemployment rate climbed to 10.1% in January, the highest since 1983, as employers in the nation’s most-populous state cut 79,000 jobs in the month.

There were 3.3% fewer jobs in January 2009 compared to January 2008. The report said there were 1,863,000 unemployed Californians in January, up by 754,000 a year earlier.

The first half of 2009 will continue “to be pretty ugly,” said Howard Roth, the chief economist for the state’s finance department.

The state is threatening to pass the 11% jobless rate of late 1982, the highest since the Great Depression. “All we need is another month like this,” Mr. Roth said.

The Dangers Of Turning Inward

Yet if historians look back on today’s severe downturn, with its crumbling markets, rising unemployment and massive government interventions, they could well be busy analyzing how globalization — the spread of trade, finance, technology and the movement of people around the world — went into reverse. They would likely point to the growth of economic nationalism as the root cause.

The last time we saw sustained economic nationalism was in the 1930s, when capital flows and trade among countries collapsed, and every country went its own way. World growth went into a ditch, political ties among nations deteriorated, nationalism and populism combined to create fascist governments in Europe and Asia, and a world war took place.

It’s no accident that the European Union has called an emergency summit for this Sunday to consider what to do with rising protectionism of all kinds.

There are a number of reasons why economic nationalism could escalate.

As happened in the 1930s, economic nationalism is also sure to poison geopolitics. Governments under economic pressure have far fewer resources to take care of their citizens and to deal with rising anger and social tensions. Whether or not they are democracies, their tenure can be threatened by popular resentment. The temptation for governments to whip up enthusiasm for something that distracts citizens from their economic woes — a war or a jihad against unpopular minorities, for example — is great.

Economy In Worst Fall Since 1982

A broad measure of the U.S. economy plummeted in the fourth quarter — to levels far worse than previously thought — underscoring how quickly the economy has soured and casting doubt that things will get better this year.

With falloffs in consumer spending and exports, gross domestic product declined at a 6.2% annual rate in the fourth quarter of 2008, according to a Commerce Department report Friday. The agency’s first estimate for GDP, reported in January, was for a 3.8% decline. GDP is a key measure of a country’s economic performance.

Big Numbers

Does $65.5 trillion terrify anyone yet?

As the Obama administration pushes through Congress its $800 billion deficit-spending economic stimulus plan, the American public is largely unaware that the true deficit of the federal government already is measured in trillions of dollars, and in fact its $65.5 trillion in total obligations exceeds the gross domestic product of the world.

Failure To Save Eastern Europe Will Lead To Worldwide Meltdown

The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point.

If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.

Austria’s finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria’s GDP.

“A failure rate of 10pc would lead to the collapse of the Austrian financial sector,” reported Der Standard in Vienna. Unfortunately, that is about to happen.

Europe’s governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.

The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.

The New Depression

We are living through a crisis which, from the collapse of Northern Rock and the first intimations of the credit crunch, nobody has been able to understand, let alone grasp its potential ramifications. Each attempt to deal with the crisis has rapidly been consumed by an irresistible and ever-worsening reality.

Yet what if such a crisis were to be no longer confined to the peripheries of global capitalism but instead struck at its heartlands? Now we know the answer. The crisis has enveloped the whole world like an uncontrollable virus, spreading from the US and within a handful of months assuming global proportions, at the same time mutating with frightening speed from a financial crisis into a fully fledged economic crisis.

As General Motors Goes, So Goes The Nation

General Motors was founded in 1908 in Flint, Michigan and grew to be the largest corporation in the world. Its market capitalization reached $50 billion in 2000. In the past week its market capitalization dropped below $1 billion to levels last seen during the 1920’s. The story of General Motors is the story of America.

“I think it is important to recognize that General Motors is a canary in this country’s economic coal mine; a forerunner for what’s to come for the broader economy. Their mistakes have resembled this nation’s mistakes; their problems will be our future problems. If the U.S. and General Motors have similar flaws and indeed symbiotic fates, they appear to be conjoined primarily by the un-competitiveness of their existing labor cost structures and the onerous burden of their future healthcare and pension liabilities. Perhaps the most significant comparison between GM and the U.S. economy lies in the recognition of enormous unfunded liabilities in healthcare and pensions.

California & Congress Implement Discredited Depression Era Policies

Irony Everywhere

Supposedly we learned certain lessons from the depression of the 1930’s.  Experts agree that two of the worst policy decisions during the depression were to raise taxes and erect trade barriers.

Knowing that something is wrong and still doing it are two entirely different matters.

Congress Wants a Trade War

As the world-wide recession deepens, protectionist sentiments are rising. The House of Representatives’ version of the economic stimulus bill contains a provision that only American-made steel and other products be used for the infrastructure projects. Wrapped in the cloak of “Buy American” patriotism, the Senate version of the bill contains even stronger anti-free-trade provisions.

This Buy American momentum is bad economics, and by threatening to destabilize trade and capital flows, it risks turning a global recession into a 1930s-style depression. Asked about Buy American on Tuesday, President Barack Obama told Fox News that “we can’t send a protectionist message.” He said on ABC News that he doesn’t want anything in the stimulus bill that is “going to trigger a trade war.” He’s right.

Hostility has been no less evident in Europe and China. The European Union has said that it will not stand by idly if the U.S. violates its trade agreements and its obligations to the World Trade Organization. The risks of retaliation and a trade war are very real.

In 1930, just as the world economy was sinking as it is today, the U.S. Congress passed the Smoot-Hawley Tariff Act, which essentially shut off imports into the U.S. Our trading partners retaliated, and world trade plummeted. Most economic historians now conclude that the tariff contributed importantly to the severity of the world-wide Great Depression.

Later, as one of his last acts, President Herbert Hoover made the situation even worse by signing a “Buy America Act” requiring all federal government projects to use American materials. (That act is still on the books although it was weakened during the 1980s.) We must avoid repeating the disastrous mistakes of the past.

This is beyond idiocy and provides further proof that whatever action the government takes to “help” us is certain to hurt us.  The president does not want a trade war and he probably knows that trade wars are a bad thing.   Talk is cheap Mr. Obama – show some leadership and DO the right thing; politics as usual will not help us in this crisis.  If there was any intellectual honesty in Washington, a “buy American” provision would have never been added to the stimulus bill.  Political gamesmanship may have won someone a few votes; the economic cost to the Nation could be incalculable.

California to Close Budget Gap (With New Taxes)

Democrat Darrell Steinberg, the state Senate leader, expressed confidence that another Republican senator would join the two who have committed to vote with the Democratic majority in approving a budget that would raise taxes and cut spending.

In addition to the revenue increases, it proposed cutting $15 billion in spending, including $8.6 billion from education and $1.4 billion from payroll costs, to be achieved in part by furloughing 200,000 state workers at least one day a month. The plan also called for $11 billion in borrowing and $700 million in tax breaks for large corporations.

The impasse has revolved around a bill, out of the nearly 30 in the budget proposal, that would generate $14 billion in revenue by temporarily raising the sales tax by one percentage point, increasing the gasoline tax by 12 cents a gallon, and adding a surcharge of up to 5% on income taxes, among other steps.

Despite an unemployment rate approaching 10% California raises taxes and thus implements the same failed tax policies of the 1930’s.   Considering the further impact of job cuts, pay freezes and pay cuts it is no surprise that many people can barely make ends meet.   Washington’s response is a $10 a week tax cut stimulus!  Bizzaro World economics in action here.

California has to take the worst action possible at the worst possible time because they have no options left.   The one positive in the budget bill is that spending cuts covered part of the deficit rather than higher tax increases.  Despite California’s dance on the edge of bankruptcy, few people realize the full impact that deleveraging will have on California and the nation.  It will takes years of reduced spending, higher taxes and plain old fashioned frugality to restore the sound financial footing that is necessary to launch real economic growth.   Politicians promising a quick turnaround based on social spending stimulus programs are apt to shortly discover the ugly side of impatient constituents.