Tuesday, October 18, 2011

Goldman Sachs sees losses for first time since crisis

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Goldman Sachs lost money in the last quarter -– the first time it has experienced quarterly losses since the financial crisis.

Goldman, the most storied and envied Wall Street firm, saw nearly all of its revenue streams hit by the volatile markets and slowing economy. Revenue in the third quarter fell 25% from the same quarter last year, leading to net losses of $393 million, or 84 cents a share, according to financial results announced Tuesday morning. During the same quarter last year the firm had profits of $1.9 billion and $2.98 a share.

"The broader environment served as a significant headwind," the firm’s chief financial officer, David Viniar, said in a conference call. "We are clearly disappointed about our results."

Losses had been expected, but the numbers were even worse than analysts had predicted. In general, while commercial banks have been improving along with the credit profile of ordinary consumers, Wall Street firms have been suffering from the swings in the markets and the uncertain outlook for the global economy.  

The losses mark a stark reversal from the record of the last few years, when Goldman came roaring out of the financial crisis with strong results thanks to support from the government. That fueled anger toward the firm and a perception that it could find a way to profit in any circumstances. Now the firm’s vulnerability to the global economy is showing.

Goldman’s share price has been falling for much of the last year. On Tuesday, shares rose 2.2%, or $2.17 to $99.07 in early trading.

The biggest losses came from investments that Goldman has made with its own money, including a stake in a leading Chinese bank that dropped in value by over $1 billion.

In the traditional business of advising mergers and acquisitions, revenue fell 33% from the same quarter last year, while revenue from its trading division, which has grown in importance in recent years, fell 13%.

The struggles are being felt by the company’s employees. The number of employees fell by 1,300 over the last three months, while the amount of money put aside for compensation dropped 59% from a year ago and 51% from the last quarter.

--Nathaniel Popper

twitter.com/nathanielpopper

Photo: Goldman Sachs Chief Executive Officer Lloyd C. Blankfein testifies on Capitol Hill in Washington in 2009. Credit: Haraz N. Ghanbari / Associated Press

Wholesale prices rise in September on sharp increases in gas, food

Gas-blog

Prices are going up at the wholesale level. Will they go up at the checkout counter too?

Rising gas prices drove up wholesale prices in September by the most in five months, the Labor Department reported Tuesday. The increase was more than economists expected.

The good news is the increase was mainly due to seasonal factors. Overall, inflation remains in check. Wholesale prices rose 0.8% last month, while energy prices climbed 2.3%. That figure includes gas prices, which rose the most since March.

Food prices also rose sharply. Prices for beef, veal and produce all increased.

But economists were pleased to see that core prices, which exclude food and energy costs, rose only  0.2%. 

The Producer Price Index measures price changes before they reach the consumer. On Wednesday, the Labor Department releases the Consumer Price Index, which reports how much prices went up for consumers.

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— Pat Benson

Photo: A gas pump in Brea. Credit: Alex Gallardo / Los Angeles Times

 

24 Hour Fitness faces sexual harassment lawsuit

A male employee has sued 24 Hour Fitness USA Inc., saying his female boss got a little too friendly with him at one of the fitness company’s clubs in Sherman Oaks.

Jonathan Prince says the club's manager invited him out for drinks, asked him to accompany her to Las Vegas and sent him unwanted, suggestive text messages for one month this summer.

In a lawsuit filed in Los Angeles County Superior Court, Prince said he told his boss to “cease her behavior and refused her advances.” Prince said his boss retaliated by falsely criticizing his work performance, diminishing his chances for bonuses and promotion. 
 
Prince said he “suffered and continues to suffer embarrassment, humiliation, emotional distress, mental anguish and severe shock to his nervous system.”

Officials with 24 Fitness declined to discuss the allegations.

“As a matter of practice, we do not comment on pending litigation. Our focus remains on making fitness accessible and affordable to people of all ages,” the company said in a statement.

The lawsuit seeks financial compensation “in excess of $50,000.”

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-- Stuart Pfeifer

Volcker is right: a little inflation is a dangerous thing


Paul Volcker, head of the Federal Reserve

Paul Volcker, chairman of the Federal Reserve


Ouch! It's even worse than we thought – or perhaps that should read what forecasters thought. For most of us, news that CPI inflation last month reached 5.2pc won't come as much of a surprise; it's been obvious from our utility bills and shopping baskets for some time now. The older, RPI measure of inflation is worse still, at 5.6pc.


And still the Bank of England likes to pretend it's trying to meet the inflation target. More monetary stimulus in the form of a further £75bn of "quantitative easing", with the inflation rate at 5.6pc? If the economic bind the country finds itself in were not so serious, it would be almost laughable.


Everyone expects inflation to come down sharply over the next year, as the current round of fuel price increases and the January hike in VAT work their way out of the index, but then the Bank, the Government and most City analysts have consistently underestimated inflation for the best past of the last three years. What reason do we have to believe them now?


Sir Mervyn King, Governor of the Bank of England, has long argued that to have taken the action necessary to keep inflation on target would have meant inducing a recession and therefore well below target inflation further out. The elevated inflation we are enduring now is framed as part of a necessary adjustment to living standards as the country adapts to its plainly more straitened circumstances.


It is also sometimes argued in justification for the present "blind eye" approach to inflation, though not by the Bank itself, that it provides a way of gently inflating away the country's debt burden. The first argument may hold more water than the second, but both look questionable.


The problem with inflation, repeated historical experience has demonstrated, is that once out of the bag, it is extremely difficult to put back in. There is only so much wage erosion through inflation that people will take before they start to demand compensating pay rises. True enough, fear of unemployment has been sufficient to deter widespread inflationary pay increases so far, but there have been a number of instances of key worker groups managing to obtain them. The danger is that relatively high inflation creates a kind of wage apartheid of those who are able to keep up with inflation and those who can't – mainly the unskilled and those who live off their savings.


It is also impossible to believe that the almost unprecedented amounts of liquidity that have been provided by central banks to western economies over the past three years – and continues to be so – will not in time prove highly inflationary. And even if in the fullness of time it has demonstrably proved only mildly inflationary, as its supporters claim it will, it doesn't necesssarily vindicate the policy.


Here's Paul Volcker, the Federal Reserve chairman credited with finally exorcising the inflation of the 1970s and early 80s from the US economy, writing recently in the New York Times.


My point is not that we are on the edge today of serious inflation, which is unlikely if the Fed remains vigilant. Rather, the danger is that if, in desperation, we turn to deliberately seeking inflation to solve real problems — our economic imbalances, sluggish productivity, and excessive leverage — we would soon find that a little inflation doesn’t work. Then the instinct will be to do a little more — a seemingly temporary and “reasonable” 4 percent becomes 5, and then 6 and so on.


No, inflation is never an economic panacea. Nor does it even help with the debt burden. If wages aren't matching inflation, then it is of no help in eroding the nominal value of household debt, and if taxes aren't keeping pace with inflation, then the same goes for government debt. Worse, many forms of government spending, most notably the bulk of benefit entitlements, are linked to inflation, so that we now have the absurdity of benefit claimants being better protected against price increases than wage earners.


These figures are not just uncomfortable for the Bank of England and the Government. They are a disaster. It took twenty years finally to exorcise the ghost of Britain's post war inflationary past, and to win credibility as a stable, low inflation economy. All that work is in danger of being thrown away



The Tax Reform Act of 1986: Should We Do It Again?

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the forthcoming book “The Benefit and the Burden.”

This Saturday is the 25th anniversary of the Tax Reform Act of 1986, signed into law by Ronald Reagan on Oct. 22, 1986. He called it a “revolution” and “the most sweeping overhaul of our tax code in our nation’s history.”

Today’s Economist

Perspectives from expert contributors.

Reagan was especially pleased that “millions of the working poor will be dropped from the tax rolls altogether” and that rich people and big corporations would “pay their fair share.” The law was indeed a major accomplishment, one that Reagan had every right to be proud of.

Perspectives from expert contributors.

But with the passage of time, it appears far less consequential than it did at the time. Although some aspects of the law remain part of our tax system, others were jettisoned with unseemly haste. The experience raises serious questions about the long-term effects of tax reform that those favoring an overhaul today would do well to learn from.

At least on the Republican side of the political spectrum, there is a widespread belief that tax reform is the key to growth. The Republican leadership also contends that the only reform that really matters is cutting the top tax rate for individuals and corporations. It is practically impossible to find a Republican willing to put a specific tax preference — exclusion, deduction, credit or loophole — on the table for elimination.

Of course, many Republicans will proclaim a willingness to wipe the slate clean and abolish all tax preferences. But they always seem to find a couple of exceptions. Herman Cain, for example, whose 9-9-9 plan I discussed last week, would continue to allow a deduction for charitable contributions. In the Cain plan there is no personal exemption, no child credit, no earned income tax credit or any other provision aiding families or the poor — but museums of modern art, Ivy League universities and public television stations would still be able to receive contributions that were tax deductible.

Historically, wipe-the-slate-clean plans have always foundered when squeaky wheels insisted on one little exception. Mortgage interest is a common one. Homeowners are a major Republican constituency, and even if they might be willing to give up the mortgage interest deduction in return for lower rates, few want to see the value of their principal asset fall further in value.

This would almost certainly happen if the mortgage interest deduction were abolished, because its value is capitalized into home prices — people are willing to pay higher prices and can afford larger mortgage payments due to interest deductibility. If the deduction were withdrawn, many homeowners would find renting to be more attractive.

But once one makes an exception for mortgage interest or charitable contributions in a radical tax reform plan, how does a politician say no to those who fear they will lose medical insurance if its tax exclusion is abolished, or those who live in high-tax states like New York where the deduction for state and local taxes is critical?

Once politicians make any exceptions to wiping the slate clean, they are on a slippery slope, because those benefiting from the next most popular deduction will be standing in line demanding an exception, too.

For these reasons, all tax reform plans premised on completely throwing out the tax code and starting from scratch are hopelessly utopian, with not the remotest possibility that any of them will ever be enacted. And support for them is not costless. Because so much political energy is channeled into the Fair Tax, the flat tax, the 9-9-9 plan and other proposals, very little is left over for changes that fall short of tearing the tax code out by its roots but are still needed.

The 1986 law was never about starting from scratch. It was about making progress, improving the tax code and accomplishing something at the end of the day that was worth doing. Yet despite the relative modesty of the goal, it was still extraordinarily difficult to accomplish and could easily have fallen apart on many occasions during the process. It succeeded, in large part, because of factors no longer present in our political system.

First, there was a tradition of tax reform, as was accomplished in the tax reform acts of 1969 and 1976, which concentrated on eliminating tax loopholes that only benefited special interests. This was considered a good idea per se, even if tax rates were not cut in the process. Today, such reforms would be viewed as tax increases and impermissible under the “tax pledge” that Republicans are dogmatically committed to.

Second, Republican tax reformers of the 1980s, such as Representative Jack Kemp of New York and Senator Bob Kasten of Wisconsin, were willing to put specific tax preferences on the table for elimination and take the heat for doing so.

Reagan built on their efforts and put forward a very detailed plan for tax reform in May 1985, based on several years of work by the Treasury Department, that identified a long list of tax provisions needing pruning from the tax code, along with supporting analysis and documentation.

Today, Republicans like Mr. Cain put most of their efforts into devising catchy slogans and almost none into providing details of their tax proposals.

Third, bipartisanship wasn’t a dirty word in the 1980s. The 1986 law would have been impossible if the Republican chairman of the Senate Finance Committee, Bob Packwood of Oregon, and the Democratic chairman of the House Ways and Means Committee, Dan Rostenkowski of Illinois, weren’t committed to the effort and willing to work closely, compromising, making deals and splitting differences in a way that Congressional Republicans and Democrats are incapable of doing today.

In the end, the key compromise that made the 1986 law work was Reagan’s willingness to raise the capital gains tax to 28 percent from 20 percent in return for dropping the top income tax rate to 28 percent from 50 percent.

Today, Republicans like Mr. Cain make abolition of the capital gains tax a key element of their tax reform efforts. It’s hard to imagine that they would ever support a deal like the one Reagan took such pride in.

Even so, critical elements of the 1986 law fell apart almost immediately. The top rate was raised to 31 percent in 1990, while the capital gains rate stayed at 28 percent. Thus both liberals and conservatives lost out, and the dream of treating all income the same and taxing it at a low flat rate went up in smoke. According to the Tax Policy Center, the aggregate size of tax expenditures began rising almost as soon as the ink was dry on the 1986 law.

Nevertheless, the fact that the weeds will grow back is no reason to never prune a garden. One has to take a stab at it once in a while or eventually be surrounded by a jungle of ugly plants. That there is no once-and-for-all solution to it, or to the problems of the tax code, is a poor reason not to at least try to clean up from time to time.

Based on the experience of the 1986 law, the essential prerequisite for doing another tax reform like it is for President Obama to put a detailed plan on the table, as Reagan did, backed by extensive research and analysis from the Treasury Department. Reagan kicked off his effort in the 1984 State of the Union address. Obama’s 2012 address would be an appropriate occasion for him to do the same.

Volcker is right; a little inflation is a dangerous thing


Ouch! It's even worse than we thought – or perhaps that should read what forecasters thought. For most of us, news that CPI inflation last month reached 5.2pc won't come as much of a surprise; it's been obvious from our utility bills and shopping baskets for some time now. The older, RPI measure of inflation is worse still, at 5.6pc.


And still the Bank of England likes to pretend it's trying to meet the inflation target. More monetary stimulus in the form of a further £75bn of "quantitative easing", with the inflation rate at 5.6pc? If the economic bind the country finds itself in were not so serious, it would be almost laughable.


Everyone expects inflation to come down sharply over the next year, as the current round of fuel price increases and the January hike in VAT work their way out of the index, but then the Bank, the Government and most City analysts have consistently underestimated inflation for the best past of the last three years. What reason do we have to believe them now?


Sir Mervyn King, Governor of the Bank of England, has long argued that to have taken the action necessary to keep inflation on target would have meant inducing a recession and therefore well below target inflation further out. The elevated inflation we are enduring now is framed as part of a necessary adjustment to living standards as the country adapts to its plainly more straitened circumstances.


It is also sometimes argued in justification for the present "blind eye" approach to inflation, though not by the Bank itself, that it provides a way of gently inflating away the country's debt burden. The first argument may hold more water than the second, but both look questionable.


The problem with inflation, repeated historical experience has demonstrated, is that once out of the bag, it is extremely difficult to put back in. There is only so much wage erosion through inflation that people will take before they start to demand compensating pay rises. True enough, fear of unemployment has been sufficient to deter widespread inflationary pay increases so far, but there have been a number of instances of key worker groups managing to obtain them. The danger is that relatively high inflation creates a kind of wage apartheid of those who are able to keep up with inflation and those who can't – mainly the unskilled and those who live off their savings.


It is also impossible to believe that the almost unprecedented amounts of liquidity that have been provided by central banks to western economies over the past three years – and continues to be so – will not in time prove highly inflationary. And even if in the fullness of time it has demonstrably proved only mildly inflationary, as its supporters claim it will, it doesn't necesssarily vindicate the policy.


Here's Paul Volker, the Federal Reserve chairman credited with finally exorcising the inflation of the 1970s and early 80s from the US economy, writing recently in the New York Times.


My point is not that we are on the edge today of serious inflation, which is unlikely if the Fed remains vigilant. Rather, the danger is that if, in desperation, we turn to deliberately seeking inflation to solve real problems — our economic imbalances, sluggish productivity, and excessive leverage — we would soon find that a little inflation doesn’t work. Then the instinct will be to do a little more — a seemingly temporary and “reasonable” 4 percent becomes 5, and then 6 and so on.


No, inflation is never an economic panacea. Nor does it even help with the debt burden. If wages aren't matching inflation, then it is of no help in eroding the nominal value of household debt, and if taxes aren't keeping pace with inflation, then the same goes for government debt. Worse, many forms of government spending, most notably the bulk of benefit entitlements, are linked to inflation, so that we now have the absurdity of benefit claimants being better protected against price increases than wage earners.


These figures are not just uncomfortable for the Bank of England and the Government. They are a disaster. It took twenty years finally to exorcise the ghost of Britain's post war inflationary past, and to win credibility as a stable, low inflation economy. All that work is in danger of being thrown away



Monday, October 17, 2011

California bond sale draws relatively light demand on first day

Individual investors on Monday placed orders for about 14% of a $1.8-billion sale of tax-free bonds by California, a relatively low turnout for a state debt sale.

Treasurer Bill Lockyer said the state’s brokerage network took in $250 million in orders on the first day of a two-day retail sale period, when the state gives preference to individuals over institutions.

By contrast, Lockyer had $459 million in orders on the first day of last month’s bond sale. That was about 18% of the total offering of $2.5 billion in securities.

The state took in a lower level of orders this time around despite offering significantly higher interest rates on the bonds than at last month’s sale, which was the first offering of 2011.

CaliforniaflagAs bond yields in general have rebounded over the last month, the state was offering a preliminary yield of 2.10% on the five-year bonds in its latest sale, up from 1.61% in the September deal.

The 10-year bonds in the latest sale were offered at a preliminary yield of 3.51%, up from 3.17% at the last sale.

The bonds, known as general obligation issues, are being sold in maturities of three to 30 years.  Interest on the securities is exempt from state and federal income tax for California residents, so the returns can be worth substantially more than similar fully taxable yields, depending on an investor’s tax bracket.

 “We’ve got another day to go. Let’s see where we’re at when it’s all over,” said Tom Dresslar, a spokesman for Lockyer, when asked about Monday’s order level.

California has the lowest credit rating of any state, reflecting the weak economy and the state’s history of budget struggles, but that has been the case for years. The bonds are rated A1 by Moody’s Investors Service and A- by Standard & Poor’s. Those ratings are considered “upper medium grade.”

Proceeds from the bonds will finance a backlog of voter-approved infrastructure projects.

Individual investors can submit orders for the bonds through Tuesday. Orders must be placed with brokers; the state doesn’t sell its bonds directly to investors.

Institutional investors will bid for the remaining bonds on Wednesday, which is when the final yields will be set. Individual investors who don’t like the final yields can cancel their orders.

The bonds are sold in minimum blocks of $5,000. For more information on the sale, go to Lockyer’s website, buycaliforniabonds.

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Investing: Is the bond market at a crossroads?

-- Tom Petruno

Follow me on Twitter: Twitter.com/tpetruno

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