Foreclosure reforms could take a year or more

The chief federal regulator for many of the largest financial institutions said reforms to the nation's foreclosure system will take "a year and more" to complete.

Citing pervasive misconduct in the way banks repossessed homes from borrowers, federal regulators ordered the nation's biggest 14 banks to overhaul their procedures and compensate homeowners injured financially by wrongdoing or negligence.

In remarks to the Institute for International Finance in Washington on Friday, acting Comptroller of the Currency John Walsh said that because of the complexity of the reforms needed, the process would not be a fast one.

"I wish it could be completed more quickly, but it’s important that it be done correctly and in a way that assures fair treatment for homeowners who underwent foreclosure proceedings," he said. "That’s the only way to restore confidence in the system, and it is my hope that the assurance that both past errors and future practices are being corrected will restore confidence much sooner."

The details of the independent reviews of each mortgage servicer ordered to reform its practices by the various federal regulators who conducted the probes will be made public shortly, Walsh said. The amount of money that banks will pay to borrowers remains "open-ended and will only be known when the process ends."

Borrowers who were foreclosed on in 2009 and 2010 are allowed to request a review of their case if they feel they have been wronged by banks' practices. The orders signed by the banks in April required them to hire independent consultants to design a process to review each case.

The banks efforts will include a "massive campaign" to contact borrowers through mailing, tracing techniques used in class action filings and through an advertising campaign, Walsh said. His comments came on a day that a separate group of regulators -- a coalition of attorneys general and federal agencies -- held meetings with the nation's largest mortgage servicers in hopes of hammering out a settlement with them over faulty foreclosure practices.

"Any enforcement actions or settlement agreements they undertake will place additional requirements on the servicers, and it is essential that we harmonize the requirements of our orders with those of other regulators if and when they are reached," Walsh said. "It just doesn’t make any sense to have multiple sets of requirements and standards apply to the same servicers operating in the same markets."

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-- Alejandro Lazo

Twitter.com/AlejandroLazo

Photo: An eviction team removes clothing from a foreclosed home this week in Longmont, Colo.

Credit: John Moore/Getty Images

Why America should mind the Bernanke gap

MIND THE GAP! American tourists no doubt grow weary of the constant refrain on London’s Underground. But Federal Reserve chairman Ben Bernanke must have wanted to holler it this week as the central bank embarked on its latest attempt to save the world. Bernanke’s gap – chasm may be a better word – is potentially just as dangerous as any on London’s subway system. It’s the distance between the size of the economic ills the Fed remains tasked with healing and what the central bank has left in the medicine cabinet.

September has provided Americans with a stark illustration of it. Firstly, a couple of the symptoms. Three weeks ago, Wal-Mart said it would be reintroducing layaway plans in the countdown to the Thanksgiving holiday and Christmas, the busiest time of the year for retailers. If you’re not familiar with them, layaway plans allow people to pay a fee and in return pay for goods over a period of time without being charged interest. Wal-Mart, America’s biggest retailer, ditched the plan in 2006 when more and more of its customers were using credit cards.

Then last week, the US Census Bureau published its survey of incomes and poverty for 2010. Amid the reams of statistics, it emerged that the number of households that are “doubling up” has risen sharply since the financial crisis began. These households are defined as those with at least one extra person who is over 18, not at school and neither the spouse or partner of the homeowner. Their number has increased 11pc to 21.8m since 2007 and now account for almost 20pc of all households in the US.

These are just two of the ways in which this crisis has changed daily life for millions of Americans as unemployment rises and incomes are squeezed. And there are plenty more. So it’s little wonder that this week stock markets finally woke up to the Bernanke gap when the Fed chairman gave everyone a peek inside the bank’s arsenal.

Operation Twist, launched on Wednesday, will see dealers at the Fed buy $400bn of longer-dated US government bonds and then sell the same amount in debt maturing in one to three years. The aim is simple: drive yields to such miserably low levels that investors are forced to take more risk to ensure a return that outpaces inflation. Shares, property, private equity – almost anything will do. As Jim Vogel of FTN Financial says “the Fed is turning the screws to make it that much more painful to just leave your money in the Treasury market.”

It’s certainly helped drive down bond yields. Those on the 30-year have tumbled 45 basis points this week, while 10-year yields are close to their lowest since the 1950s. But it’s hard to believe that Bernanke & co believe it will make much difference in an economy where interest rates have been at a record low since December 2008 and are set to stay there until at least 2013.

Operation Twist may make a difference at the margin, which is the space in which any future policy from the Fed is likely to play out in. The Fed will no doubt empty its arsenal further should the economy deteriorate from here. But Bernanke should spell out to Americans even more clearly that these are not magical healers for a country emerging from its worst recession since the 1930s. Failure to do so risks a crisis of confidence in the central bank at a moment when the country can ill-afford it.

It may also provoke some more imaginative thinking in The White House and in Congress about the sorts of policies that might make a difference.

Podcast: On the Fed, Christine Lagarde and China

The Federal Reserve started Operation Twist, but the stock market was unimpressed.

Although the markets stabilized on Friday, global stock prices fell sharply after the Federal Reserve announced on Wednesday that it would shift its bond portfolio toward longer-term maturities, in a reprise of a 1960s maneuver known as Operation Twist. In a conversation on the new Weekend Business podcast, Floyd Norris says that the Fed’s initiative was overshadowed by concern over the Greek debt crisis and its threat to banks in Europe and elsewhere around the world.

The International Monetary Fund has been playing a prominent role in the crisis, with Christine Lagarde, the agency’s new director, openly urging European governments to be much bolder. David Gillen talks to Liz Alderman in Paris about the former French finance minister’s surprisingly independent stand in her first weeks as I.M.F. chief.

The rapid growth of China’s economy has been one of the major developments of the last few decades. David Barboza, a reporter based in Shanghai, says that while China is likely to continue growing at a rate that many other countries would envy, the chances of a major setback appear to be growing as well.

And in a separate conversation in the podcast, Christina Romer, the Berkeley economist and former Obama economic adviser, says that the president’s current jobs plan is sound, though she says it should, perhaps, be even more ambitious.

You can find specific segments of the podcast at these junctures: Floyd Norris on the Fed (36:43); news summary (28:22); Liz Alderman on Christine Lagarde (24:56); David Barboza on China (17:41); Christina Romer on the jobs plan (9:11); the week ahead (1:42).

As articles discussed in the podcast are published during the weekend, links will be added to this post.

You can download the program by subscribing from The New York Times’s podcast page or directly from iTunes.

When Judges Break Their Own Rules

I have a new article online about the ordeal that law students go through if they want to be hired as clerks for federal judges.

The recruiting process is competitive for both students and judges, who are all trying to leapfrog each other to snatch up the best talent before their peers do. That means judges are motivated to make job offers earlier and earlier, extending offers several years before a job’s actual start date, even before students have a full year of grades.

Alex Kozinski, the chief judge of the Ninth Circuit Court of Appeals, joked that he begins recruiting students “at birth.”

CATHERINE RAMPELL

Dollars to doughnuts.

Meanwhile, students know about how early and how quickly the slots go, so they are always pressuring judges to give them the earliest interview slots possible, which effectively moves the entire system even earlier.

Dollars to doughnuts.

It’s basically a collective action problem, like curbing grade inflation (also a problem at law schools): Everybody individually would benefit from offering a position a little early, but when judges all do this at the same time they cancel out one anothers’ efforts. The problem can be solved only if everyone comes together and agrees to a system that forces everyone to do what no one would do unilaterally — that is, to wait to make job offers until a later date when everyone can make informed, thoughtful decisions.

And in the last three decades there have indeed been several attempts — by federal judges — to devise a rule system that is intended to essentially protect judges from themselves.

The problem is that there’s no external enforcement mechanism for this system. Judges have lifetime appointments, and breaking a clerkship recruiting rule doesn’t come with any sanctions the way breaking an N.C.A.A. recruiting rule does. So once one person starts cheating, there’s a strong temptation for others to cheat, too.

“It kind of goes in waves, like financial regulation,” said David Lat, a former clerk and now managing editor of Above The Law, a Web site on legal affairs that has followed the ebbs and flows of the clerkship hiring plan over the years. “The judges try to tighten up the process with some strict rules. In the early years people adhere to it, and then as time goes on fewer and fewer people follow it, since there’s more incentive to cheat, and the whole thing descends into chaos. Then there’s a renewed attempt to tighten things up, until it all descends into chaos all over again.”

Right now, we seem to be in the chaos part of the cycle.

It’s not clear that there’s a better design out there, though, that would fix the system and end the cycle. Any ideas?

Sea Launch bumps back rocket launch a day

Less than a year out of bankruptcy, rocket venture Sea Launch is set to send a 10,141-pound telecommunications satellite into orbit from the middle of the Pacific Ocean on Saturday for Paris-based communications giant Eutelsat. 

The company will webcast the launch live on its website here beginning around 1 p.m. PDT. The launch is scheduled for 1:18 p.m.

Sea Launch had planned on launching Friday, but had to push it back a day because it took longer than expected to reach its launch site in the middle of the Pacific.

The company uses a floating ocean platform near the equator to lift satellites into space. It's located about 3,300 miles southwest of Long Beach and 1,400 miles south of the Hawaiian Islands. The site allows rockets to reach orbit faster while burning less fuel as they use the Earth's rotation for momentum.

When the company isn’t blasting off 20-story rockets, it docks its specially designed ship and a launch platform, made from a modified oil rig, in the Port of Long Beach.

It is the company’s first launch since it emerged from Chapter 11 bankruptcy protection late last year. For a more in-depth look at Sea Launch and its history, take a look here at a story that ran in Thursday’s Times.

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-- W.J. Hennigan

twitter.com/wjhenn

Photo: Sea Launch transfers rocket to launch platform. Credit: Sea Launch

Gold and other metals get pounded

Gold may not be quite the safe haven that some investors had hoped.

The price of gold skidded to its lowest level in almost two months today, and other precious metals such as silver and copper suffered big drops, amid an intense global selloff. Silver endured its worst day since 1979, according to Bloomberg.

The selloff came as U.S. stocks recouped a fraction of their heavy losses from a day earlier. The Dow Jones industrial average rose 37.65 points, or 0.4%, to 10,771.48.

Heavy selling by hedge funds and fear of a global recession prompted a rush out of precious metals, with many investors cashing in the profit they made in their gold portfolios over the last three years.

Hedge funds have been heavy sellers in recent days, as they raise money to offset losses in other assets, such as stocks. In some cases, hedge funds need extra cash as collateral for loans on souring investments.

“It’s a money flow out of commodities in general,” said William O'Neill, a partner at Logic Advisors in Upper Saddle River, N.J. “We’re seeing a lot hedge funds needing to sell winning assets.”

Near-term gold futures in New York plummeted $101.70, or 5.8%, to close at $1,637.50 an ounce, the lowest closing price since Aug. 1.

Silver got hit far worse. Silver futures dived $6.49, or nearly 18%, to end at $30.05, the lowest since February.

The specter of a deeper economic downturn has caused investors to wonder whether demand for industrial metals, such as copper and aluminum, will recede sharply.

Copper futures slid 21 cents to $3.27 a pound, a 13-month low.

For the week, gold plunged almost 10% and silver dived 26%.

Gold and silver have been hurt in part by the rebound of the U.S. dollar, which typically moves in inverse relation to the two metals. But the dollar was down modestly on Friday against many other currencies.

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-- Walter Hamilton

Photo credit: Arnd Wiegmann / Reuters

Gov. Jerry Brown signs Amazon sales tax collection law

Saying it would save existing jobs and create new ones, Gov. Jerry Brown signed into law legislation to require Amazon.com and many other out-of-state Internet retailers to collect sales taxes on purchases by California customers.

The new law will "create tens of thousands of jobs and inject hundreds of millions of dollars back into critical services like education and public safety in future years," Brown said Friday at a ceremony held at the San Francisco headquarters of clothier Gap Inc. The event was attended by the lawmakers, who sponsored the bill, and and retail industry executives.

Experts predicted that the new law would help bricks-and-mortar stores that have sales staffs compete with e-commerce companies that need fewer people to fill orders. They also predicted that new jobs would flow into the state if Amazon, as expected, opens some large distribution centers to better serve California, which is estimated to represent as much as 20% of the company's market.

Although the bill, AB 155 by Assemblyman Charles Calderon (D-Whittier), takes effect immediately, it doesn't require that sales taxes be collected from Californians until Sept. 15 of next year. The delay was part of a compromise put together by Amazon with representatives of national retailing chains, including Wal-Mart Stores Inc. and Target Corp., as well as local, independent store owners.

As part of the deal, Amazon agreed not to go forward with a planned referendum to ask voters to overturn an earlier sales tax collection law that took effect July 1.

Proponents of the bill argued that Seattle-based Amazon received an unfair competitive advantage over stores because many Internet buyers did not include sales tax on top of the purchase price of the goods.

California law requires consumers to pay a "use tax" that is equal to the sales tax if the merchant doesn't collect the levy for the state. However, tax collectors generally do not enforce that obligation on non-commercial transactions, and less than one-half of 1% of taxpayers voluntarily pay, state officials said.

"The new law is a big victory for Main Street retailers that have battled to close a loophole that gives Amazon and other e-tailers special treatment in the tax code," said the Retail Industry Leaders Assn., a trade group that has lobbied across the country for laws similar to California's, in a statement.

Paul Misener, Amazon's vice president for global public policy, said his firm plans to bring 10,000 new jobs to California and invest $500 million over the next few years.

 

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Gov. Jerry Brown expected to sign Amazon sales tax collection bill

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 --Marc Lifsher

Photo: An Amazon fulfillment center in Phoenix. Credit: Joshua Lott/Bloomberg

Car sales strengthen in September

Despite the European debt crisis, the lack of job growth in the U.S. and other generally depressing economic news, auto sales continue to tick along.

The retail sales rate for new vehicles in the U.S. this month looks “much stronger than in August,” according to J.D. Power & Associates, which gathers sales data from about 8,900 dealers. That's about half of all the dealers selling cars nationally.

“Coming off a solid Labor Day sale, retail sales exhibited unexpected strength in the second week of September, as the recovering inventory levels have helped to bring buyers back into the market,” said Jeff Schuster, executive director of global forecasting at J.D. Power.

The annual sales rate for all vehicles, including the retail segment of the market and what rental car companies, commercial customers and government agencies purchase, will hit 12.9 million this month, up almost 1 million vehicles from August, the auto information company said.

Economists believe a sales rate of at least 13 million will provide support to the struggling economy.

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-- Jerry Hirsch
Twitter.com/LATimesJerry

Photo: A 2012 Volvo S60 is parked and waiting for transport to dealership at the Georgia Ports Authority Colonel's Island auto import and export terminal in Brunswick, Ga. Credit: Bloomberg

Consumer Confidential: Blockbuster, man caves, zodiac salaries

Here's your feelin'-groovy Friday roundup of consumer news from around the Web:

--Heads up, Netflix. Dish Network is announcing an Internet video service that will try to woo away subscribers. The service will be offered through Blockbuster, the video-store chain that Dish Network bought out of bankruptcy court for $321 million five months ago. Netflix's success as a subscription service that mails rented DVDs and streams video over high-speed Internet connections played a pivotal role in Blockbuster's downfall. Now Dish and Blockbuster are apparently hoping for a little payback as Netflix faces a customer backlash triggered by changes to its prices and format. Dish says its Blockbuster service will be "a stream come true." We'll see.

--Good news, guys: A man cave in the basement won't detract from the resale value of your home. "As long as you don't make it too specific, there tends to be a resale market for man caves," said Stephanie Rauterkus, a professor of accounting and finance at the University of Alabama-Birmingham. "No matter how crazy you get, there tends to be at least one or two other people in the world who have that same kind of craziness." Still, she says there are some rules to follow if you want your man cave to be a true real-estate asset: First, stay sane with the cost. Only spend what you can afford. Second, stay sane with the decor -- in case you move or your team preferences change. Finally, stay sane with the decision. Sleep on it as you would for all major purchases.

--Which zodiac signs rake in the biggest bucks? A new survey by CareerBuilder finds that Virgos, Aries and Scorpios tend to score six-figure salaries, while Capricorns and Leos are often vice presidents or higher (although at the highest levels, Capricorns edge them out). Middle management is filled with Aries, while those who fall into the Aquarius category tend to swim at the bottom in entry-level positions. Libras and those born under Taurus are more satisfied on the job than others. Also, first-borns and only children tend to pull in bigger paychecks, and middle children are more likely to hold low-level jobs. Is there anything to this? Post your comments.

-- David Lazarus

Photo: Will Blockbuster get a little payback from Netflix? Credit: Rick Wilking / Reuters

Giving the Fed a Good Grade

It’s been a rough week for the Federal Reserve, as its latest plan to stimulate growth was greeted by the sound of falling stock prices.

But here’s a bit of good news for the Fed: A new study by the Federal Reserve Bank of Cleveland finds that the central bank’s previous effort to push growth, announced in August, has had a positive impact.

The Fed announced after the August meeting of its policy-making committee that it intended to hold short-term interest rates near zero until the middle of 2013. The statement was its latest effort to reduce the cost of borrowing, in this case by giving lenders the confidence that money would remain cheap for another two years.

“The Committee was attempting to alter the expectations of market participants,” the Cleveland Fed said in its report. “It worked. Since the announcement, forecasts for a variety of interest rates have fallen, at least in part due to the lower expectations for future interest rates.”

Central banks generally avoid specific statements about long-term plans, to preserve flexibility and to avoid the need for apologies. But the Fed’s August statement culminated a gradual move in the direction of talking about the future. Beginning in 2009, the Fed said that it would maintain rates near zero for “an extended period,” language it repeated until August. Earlier this year, the Fed’s chairman, Ben S. Bernanke, defined an “extended period” as meaning at least two meetings of the policy-making committee.

Fed officials decided to go even further after concluding that the risk of backtracking was low because there was little prospect the economy would recover sufficiently in the next two years to put significant upward pressure on wages and prices.

The decision was controversial. Three of the 10 committee members dissented, the largest bloc of dissent in almost two decades. They expressed concern that the majority was underestimating the danger of inflation, overestimating the benefits of low interest rates — and that the announcement might persuade some consumers and business to wait before borrowing, in the confidence that rates would remain low and the hope that the economy would improve.

The Cleveland Fed study does not resolve those concerns, but it does point to clear evidence that the announcement has succeeded in reducing interest rates.

Specifically, by convincing investors that short-term rates would remain low, the Fed succeeded in lowering rates on longer-term debt — which are based in large part on expectations about the level of short-term rates throughout the longer period. Rates on the benchmark 10-year Treasury note, for example, declined by about 0.20 percentage points.

Moreover, the study found that the announcement also reduced market expectations about future interest rates for mortgage borrowers and corporations, suggesting that the Fed may succeed in reducing the cost of borrowing across a wide swath of the economy.

Markets now anticipate, for example, that corporations with good credit will be able to borrow at 4.80 percent at the end of 2012, down from an expectation of 5.60 percent before the Fed’s announcement.

Of course, one great caveat looms over all of the Fed’s efforts: Reducing the cost of borrowing does not make loans any easier to get. Federal regulators reported Thursday that mortgage loan originations fell by 12 percent last year, despite the historically low level of interest rates.

Wall Street: Stocks mixed; gold falls again

Gold: Trading now at $1,692 an ounce, down 2.8% from Thursday. Dow Jones industrial average: Trading now at 10676.12, down 0.5% from Thursday.

A bad week. Stocks bounced around uncertainly Friday morning as speculation built that central banks may take stronger action to stimulate the economy. Will it be enough to avoid the worst week on the markets since 2008?

Goldman losses. Some analysts are now predicting that Goldman Sachs will record its first quarterly loss since the financial crisis.

BofA sells pizza. In its effort to slim down and focus, Bank of America is selling a huge stake it holds in a Pizza Hut franchising business.

Can Harvard beat S&P? Would Harvard's vaunted endowment have been better off this year if it had just put its money in an S&P 500 index fund? Looks like it.  

Selling out. You know things are rough when the chief executive of one of the biggest Wall Street banks, Jefferies, is selling millions of shares in his own company.

Rogue traders. A look at the psychology driving rogue traders like the one who lost UBS some $2.3 billion recently.

-- Nathaniel Popper

twitter.com/nathanielpopper

Photo credit: Getty Images/Stan Honda

 

Geopolitical implications of a Greek default: The Greece-Cyprus-Israel nexus

The Gaza flotilla tied Israel and Greece closer together. (Photo: EPA)

One under-discussed area of implications of a Greek default is how it could affect Israel.  Greek default could impose ruinous losses on Cypriot banks – which have balance sheets at positively Icelandic levels of 600 to 900 per cent of Cypriot GDP (depending on definitions).  But, more fundamentally, there is unlikely to be much political desire in Cyprus, given its intimate economic and political linkages to Greece, to continue in the euro (and European Union) if and when Greece leaves.

This much is widely known.  What is less widely known is how entangled Israel has recently become with Greece and Cyprus.  Following the deaths in the Gaza flotilla debacle of 2010, leading to tensions with Turkey, and the loss of key ally Egypt in the Arab Spring, Israel has shifted its Eastern Mediterranean focus – building new linkages with Greece and especially Cyprus.

Secular Israelis getting married have for many years used Cyprus as a sort of Vegas of the Eastern Mediterranean – civil (non-religious) weddings in Cyprus are recognised in Israel, where there is no domestic equivalent.  There are also significant real estate ties.  But more recently economic ties have accelerated.

These have included in particular the establishment of a Greco-Cypriot-Israeli Exclusive Economic Zone, in which there is drilling for oil and gas.  Indeed, the expected early 2012 announcements of the results of drilling constitute a joker in the pack of the Eurozone crisis – Israel's 2009 discovery of the large Tamar gas reserve (potentially worth $60 billion) materially shifted the outlook for its energy trade balance.  There is speculation that the Cypriot finds could be larger, and in an economy the GDP of which is only around $20 billion, a find on this scale could be transformative.  Exploitation of these fields has been threatened by the well-known tensions between Greece, Cyprus and Turkey.  But whilst Cyprus remains in the EU, that provides very significant protection, allowing investors and developers confidence to press ahead.

Through 2011, there has been a back-and-forth flurry of diplomatic exchanges between Cyprus and Israel.  To some extent, Israel has attempted to get in ahead of the rush.  Syria and Egypt also perceive Cyprus as a bridge into the EU.  Greek and consequent Cypriot exit from the euro and thence the EU, potentially leading on to internal political turmoil and certainly the loss of the EU shield from Turkey, could destablise these developments.  There could even be large real estate and mining company losses for Israeli firms.

Israel being sucked in to these events could be geopolitically significant.  An Israeli economic downturn could introduce a new and dangerous factor into turmoil in Syria and the delicate balance in Egypt, as well as creating further misery for Palestinians dependent on jobs in and commerce with Israel.

Behind the scenes, Washington could (or perhaps should) be almost as nervous about this aspect of the situation as about more widely-discussed global financial linkages.