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Detroit in Bankruptcy After Years of Neglect and Lack of Leadership

Back in the last quarter of 2010, as the big three Auto manufacturers lobbied for bail outs, and later filed for bankruptcy, Detroit's fate was all but sealed. Well, the fat lady is singing, and this is a political and public relations mess. There are hints of mismanagement or misappropriation of funds and a fair share of finger pointing - but at the core of the municipality's fiscal crisis are the Pension funds. How will the courts handle retiree payouts: will they remain at par or will they be reduced? The residents of Detroit are in for an interesting turn of events. This is a serious wake up call, to say the least.
How did this filing come about? Well, from what I can tell, Snyder seemed to have been trying to quietly handle the crisis. Seeing the writing on the wall, Governor Snyder wanted to avoid a possible downgrade of Michigan’s credit rating, which is likely following a messy "unmanaged" bankruptcy. The crisis management strategy was to get ahead of the problem, so that the worst case scenario is a "Structured" bankruptcy - thereby minimizing the negative impact on the State's overall credit rating. The Wall St. Journal reported that Snyder brought in Kevyn Orr as an Emergency Money Manager to work aggressively to get Detroit’s fiscal house in order. Snyder's secret weapon, Orr, was apparently granted “dictatorship” style authority, essentially rendering the city’s finance department and controller powerless. Kevyn Orr was the lead attorney handling the Chrysler structured bankruptcy, so it could be construed as a sound decision. However, from another perspective, one might say that hiring a bankruptcy attorney is like appointing a wolf to watch over a hen house.
How serious is it when a city files for Bankruptcy? .

California has probably seen the most cases of bankruptcy than any other state - with city after city filing for bankruptcy protection as a result of the housing crisis and pour money management. The jury is still out as to whether California's troubled counties will recover gracefully. Whatever the case, the road back to solvency is a long and arduous one. As for Detroit, it was clearly heading in the wrong direction prior to the start of Great Recession. In fact, long before the Recession rocked the nation, and later Europe, Detroit was already showing obvious signs of fiscal discord. Their key source of jobs and tax revenue stemmed from the auto industry and ancillary products and services. Although many local businesses and retailers benefited from the economic "trickled down".
In all fairness, we can't place Detroit's troubles entirely on the shoulders of the auto industry. There are multiple factors playing into the city's demise. For example: tax revenues over the past 25 years have been on a steady decline as the population and businesses fled to greener pastures. The City of Detroit, at its peak (1950s), had a population of 1.8 million, but the most recent Census Bureau records illustrate a more than 65% decline. The disturbing reality is that Detroit presently has a population of merely 700 thousand - particularly considering the demographics and socio-economic landscape. Adding insult to injury, over the past 5 to 6 decades the population exodus happen to be primarily the middle class, leaving the city with a disproportionate number of low-income residents. What this boils down to is a dwindling tax revenue base, and increased spending for public assistance, healthcare and other subsidy programs. The economic cycle can only spirals downward from there, unless a drastic changes are made.
The “Economics-101” explanation would be as follows: When you have a predominately low-income or impoverished population, this translates to a largely unskilled and uneducated labor force – which means local-area businesses can’t fill higher paying jobs that require specialized skills or education. This distressed socio –economic environment drives business out. In turn, joblessness decreases consumer spending, which ultimately cause retailers to close down.
High unemployment was not Detroit’s biggest problem. Job creation doesn't help in this scenario unless there’s a strategy implemented to attract businesses and manufacturers with jobs that match the skills of the population. Sheer job creation (in a vacuum)is nothing unless there is also a comprehensive plan to educate or provide training to upgrade the skills of the local workforce.

Years of neglect and misguided development spending has come to a head. There's been ample time (we are talking decades) for anyone from the parade of politicians to step up and show real leadership. It’s hard to believe that none of the government agencies or organizations could have developed a long-term urban renewal strategy to transform Detroit into a thriving economic force. As far back as I can remember, Detroit was known for its high crime, and unemployment, but the combined burden of high unemployment, crime, foreclosures and abandon properties - against the backdrop of diminishing revenues, and $18 billion in debt obligations – you’re looking at a time bomb.
Political fallout is eminent, and everyone will be watching to see if Obama will extend an “bail out” to Detroit, since he was vehemently supportive of the big-3 auto makers in their time of need. With any luck, the people, politicians, unions, educators and activists will be open minded enough to work together and find a common ground for rebuilding Detroit. This may turn out to be for the best in the long run

K. Reilly
The Cohn-Reilly Report
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Dancing with the Devil: A Breach of Trust

Yet again, the Golden Child of Wall St. is revealed as a fox in sheep’s clothing.
I was engaged in a debate about the role Goldman Sachs may have played in the downfall of Greece’s economy with a relative (through marriage) who migrated from Greece to the United States when she was 10. My research on the near collapse of the US financial market clearly points to the gradual deregulation and the unethical banking practices. There are a number of factors that contributed to the fiscal crisis, particularly the securitization of subprime Housing Loans, re-packaged and sold Globally as “A” rated paper. Regardless of the fact that the underlying debt was “C” rated, banks had the audacity to sell the mortgage-backed securities as “A” rated, low risk bonds. Of course, we can’t ignore the rampant Securities and Banking fraud, which generated hundreds of charges and investigations by the SEC against Banks and Hedge Funds.
I’ve written numerous articles about the Euro crisis. Like many economists, I believe the U.S. fiscal crisis precipitated the downward spiral of a number of EU members. This is mainly because of large quantities of foreign investment in U.S. Housing securities, which went sour. Much to my surprise, in the process of gathering data surrounding the global crisis, I learned that EU members; Greece, Italy, Spain and France, carried out non-transparent, accounting practices for over a decade. No doubt the high debt ratios hidden by accounting loop-holes would have eventually brought the weakest EU members to fiscal ruin at some point anyway.Although, our financial calamity accelerated the timeline of the reveal. America's financial troubles was the equivalent of lighter fluid, igniting the masked problems of the EU’s weakest links.

Apparently the Greek-American community seem to have a different slant on how Greece's economy found itself engulfed in a fiscal and political battle for stability. The lack of transparency and debt-to-revenue ratio was certainly taking its toll on the weakest EU members. This was made worse when changing leadership was blind-sighted by the urgency of country’s debt portfolio – particularly the derivative-structured debt owed to Goldman Sachs. When the housing market collapsed, interest rates increased, drastically increasing the debt service on the Goldman/Sardelis deal
My Greek-American in-law (who shall remain nameless), vehemently contends that Goldman Sachs is the monster that brought her beloved country to its knees. This is hardly the case, since Greece's debt was already 127% of its GDP by 2009. Also, by that time, Greece was seeking a bailout for over 300 billion Euros. Nevertheless, She was referring to a secret transaction between Goldman and the Managing Director of Public Debt Management Agency (Christoforos Sardelis), back in 2001, where a masked loan of $2.8 billion Euros was signed, sealed and delivered. Executed completely under the radar. The loan, which was thought to be earmarked for the preparation of hosting the 2004 Olympics, was later revealed not to be the case. Although I admit, the unholy alliance with Goldman was a financial set back, it was not the smoking gun.

The under-the-radar transaction executed by Sardelis and Goldman was a Currency Swap. Given the variable rate structure, there was mounting debt service, as interest rates increased, making it difficult for Greece to contain. I appears that Greece’s Debt Management Agency didn’t thoroughly analyze the deal to determine the long-term impact of this type of debt structure for Greece, given their compromised economy. A simple “what if” analysis would have helped them to analyze the impact of increasing interest rates. The Currency Swap transaction belongs to the derivative family, which are always complicated to quantify or analyze given the fluctuating market, currency and structure. These are highly risky transactions, and certainly not recommended for unstable municipalities suffering from high debt, declining GDP, and 25% unemployment.

The secret deal between Sardelis and Goldman could be classified as irresponsible given the size of the debt, and the fact that it was tied to fluctuating interest rates. The operative word being, “fluctuating”. Regardless of Sardelis’ good intentions, “it takes two to tango”. Therefore, Sardelis is equally at fault. My Greek-American in-law may be reluctant to accept it, but the blame has to be shared.

Since 2010, when I initially started writing about the Euro crisis, I learned that Sardelis was motivated by the Maastricht Treaty, requiring all EU members to show “improvement” in their public finances. This Goldman swap was a "dance with the devil" and simply a desperate attempt to “hide” the debt from the country’s books to comply with the Maastricht Treaty. These swaps were one of several techniques that European governments used to meet the terms of the treaty. There were certainly alternatives techniques available, so why did Goldman push this particular structure? Whatever the case, Sardelis was out of his element, and out smarted by his trusted Bankers. It was reported in the Wall St. journal that Goldman served up fictitious, historical exchange rates for the transaction, which earned them $760 million in U.S. fees.

Attemps to Implement Austerity Measures Lead to Violent Protests.

By the time Spyros Papanicolaou took over the Public Debt Management Agency in 2005, the loan had ballooned to over 5 billion Euros. Given the role that Goldman played in the fiscal unraveling of the housing market, which sent trimmers across the globe, you would think that their CEO, Blankfein, would consider a forgiveness of some portion of the debt. Goldman and Papanicolaou did get around to restructuring the debt, but I’d be willing to bet there was no forgiveness of debt.

Goldman Sachs may soon be faced with a public image dilemma, but until then I supposed they’ll continue to carryout their Mission to squeeze clients for every possible dollar.

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K Reilly
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Silver Lining for Seniors:Outpacing National Unemployment

Great news for seniors comes as the economy crawls to recovery. At the depths of the recession unemployment was as high as 10%. By the 3rd quarter of this 2012, the national unemployment rate dipped below 8%, to settle at 7.9.
Although, this is a welcome turn of events, there are still millions of people unemployed or under employed. Nevertheless, it’s a positive indication that the long awaited recovery process is at work. Fortunately, seniors are the age group benefiting the most from the jobs surge. A Daily News article by Elizabeth Lazarowitz reported that 70% of the jobs filled since 2010, were fill by candidates over 50. In the past two years nearly 3 million jobs were filled by seniors, which has driven the national unemployment rate for down to 6.7% for people over 50.

We’ve always heard that employers have little use for their senior employees, and instead chase them out for younger, “cheaper” talent. Well…finally, the tables have turned. It took a while, but it appears that wisdom, experience and stability has become much more attractive to companies for the obvious reasons. In the aforementioned Daily News article, Kate Wendleton, president of Five O’Clock Club is quoted as saying “When employers have a choice, they say, ‘I need someone who’s seasoned and who will be up and running” What seemed to be common sense, took decades for HR executives to ascertain: Training, learning curves, and mistakes are eminently more expensive than the higher salaries required for, shall we say, "seasoned " professionals. This is exhilarating news for anyone over 50 seeking to find a job, change jobs or careers. My only question is; Why has it taken so long for companies to appreciate the immense value an experienced, older employee brings to the table?

In these difficult times, companies are forced to go into stealth mode to sustain their profit margins and growth objectives. That entails staff trimming, budget cutting, and closely analyzing the performance data for a more vivid perspective on their bottom line. What do you think that ultimately revealed? New recruits - fresh out of college, usurp far more costs and waste than the tried-and-true “senior” employees. That said, those candidates over fifty, or pushing sixty should carry their experience and grey hairs with pride and confidence – as the short-sighted HR executives have finally seen the light.

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Doin' the Twist: The Federal Reserve Steps in to Spur the Economy

In the beginning of the year, the Federal Reserve indicated their plan was to let the economy stand on its own. By the end of last month, however, the Feds broke down and reduced long-term interest rates in a program they refer to as Operation Twist. In this program, the Feds would drive down interest rates to encourage business activities, such as borrowing and hiring. According to a Wall Street Journal article by Peterson and Hilsenrath, the Federal Reserve officials announced that Operation Twist will be extended through the end of the year, but they’re “poised to do more”.

At the end of the 1st Quarter, the Feds indicated that there was no need for their help. The economic picture appeared brighter following a strong 4^th Quarter, and encouraging jobs report.

By the time the we turned the corner into the 2^nd Quarter, the economic storyline began to change amid heightened pressures from overseas. The market, which had anticipated S&P downgrades for Spain and France, could no longer withstand the push-back stemming from the European Union’s fiscal and political upheaval. Globalization has its rewards, but this isn’t one of them. When the EU sneezes, we are going to get the sniffles, as if the distance were non-existent.

As the Euro fiscal storm brewed, the dismal jobs report and Facebook IPO did its part to shrivel up any confidence Investors might have had left. The market uncertainty lingers, regardless of good economic news. This  depicts the profile of weary investors - possibly suffering from Post-Traumatic Stress Disorder.  Being the eternal optimist, I’m hoping Operation Twist will have us all dancing in the isles by the end of the year.

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K Reilly
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To Be or Not To Be: EU Shows signs of cracking

Twenty years ago, when the idea was circulating about a unified currency in Europe, it seemed like such a brilliant concept, based upon sound economic and political arguments. Today, it almost seems like an impossible dream. Landon Thomas of the New York Times asks in his article "Can they muster the will and resources to keep the euro zone from breaking apart?

As the world looks on, and markets take defensive positions, the Euro crisis unfolds like the climax of a mystery novel. Greece's dramatic elections - where the people ousted Sarkozy, opting for an unlikely candidate, François Holland. The outcome of the election was a clear sign that the people were not ready for the strict austerity measures needed to turn their economy around. Bailout alone was not going to save Greece, it was only expected to buy them time to pull their policies, and fiscal plan together. The political and civil unrest in Greece, gave little hope for a turnaround. Instead the notion of Greece leaving the European Union resurfaced with somber overtones of reality.

By the end of May, Spain had decided to pump 19 billion Euros into its struggling Lender, Bankia, SA, as a strategy to illustrate stability, and quell any notion that the crisis continues for its financial sector, in light of Greece's downward slide. This is a prop-up strategy that is effective in influencing perception, which is crucial in the realm of investors and financial markets. The US equivalent of $24 billion, was a rich injection that is twice the amount Spain spent in the recent past to straighten out the banking sector during US housing market collapse - causing a global rippling affect. Spain is swiftly reacting to mitigate a repeat of the fiscal mayhem stemming from billions of dollars lost in toxic mortgage-backed securities.

Meanwhile, two weeks ago, S&P downgraded Bankia, and several other Spanish Banks, causing worldwide concern. The rating agency made matters worse by painting a gloomy near-term forecast for the region, citing their belief that Spain is heading toward a double dip recession. S&P also noted that there was a reasonable expectation of an increase in troubled assets. On the heels of Frances downgrade, and Spain’s fiscal concerns, the question becomes, was this unified currency such a sound economic and political move in the first place. Friday, the DOW closed 300 points lower, illustrating investor sensitivity to the Euro Crisis - although, it should be noted that market anxiety was further stimulated by the soft jobs report.

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K Reilly
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The Economy and Politics

If the positive momentum of the US economy continues throughout the year, and that’s a big IF, the presumptive GOP nominee Mitt Romney could have a tough time in November.

Let’s look at the current stats: the unemployment rate dropped to a near three-year low of 8.5 percent, with payrolls increasing by 200,000 in December - the biggest rise in three months. The economy added 1.6 million jobs last year, the most since 2006, and the jobless rate, which peaked at 10 percent in October 2009, has dropped 0.6 percentage point in the last four months. Commercial investment is up by 10% and inflation is relatively low.

Could Barack Obama be happier? I don’t think so. He welcomed the news and urged Congress to extend a two-month payroll tax cut through 2012 to help sustain the recovery. "We're moving in the right direction. When Congress returns they should extend the middle-class tax cut for all of this year, to make sure we keep this recovery going," he said.

Still, all is far from perfect: Employment remains about 6.1 million below its pre-recession level and at December's pace of job growth, it would take about 2-1/2 years to win those jobs back. There are roughly 4.3 unemployed people for every job opening.Although construction and Courier jobs increased due to the mild weather and the holidays respectively, those jobs could be lost in January and the unemployment rate might rise as Americans who had abandoned the hunt for work are lured back into the labor market. Still, 23.7 million Americans are either out of work or underemployed.

The jobs data could be overshadowed by Europe's debt crisis. With the labor market far from healthy, the debt crisis in Europe unresolved and tensions over Iran threatening to drive up oil prices, re-election for the current administration is by no means guaranteed.

C. Cohn
Cohn-Reilly Report

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K. Reilly Said.....
I couldn't agree with you more. Although it looks good for the current administration, there are so many variables (mentioned in your article) that could reshape the country's direction and self perception. This will impact voter concerns, and who they believe will make it all better. Welcome back Charlie!

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K. Reilly /Jan 18, 2012 10:46 PM

France's nightmare realized:Is there life after downgrade for the EU

It is likely the one thing that kept France’s Prime Minister up at night. Protecting France’s credit rating was to become Sarkozy’s greatest challenge of the past 4 months, nevertheless, Sarkozy saw it coming. France and the other EU leaders were hoping to slide under the radar for a bit longer, before S&P focused its attention on the financially stressed members.

I’m sure that the historic downgrade of the US’s debt last year, made it all the more realistic for France. Well, last Friday was the day of reckoning for the Euro-zone, as members suffered downgrades on their debt. This was inevitable given the unresolved financial crisis which has consumed the EU in the past 18 months. Standard & Poor’s swooped down and left France and Austria stripped of their pristine Triple-A rating. It did not stop there, seven others EU members were downgraded including Italy, Portugal. Germany is the EU’s # 1 economy, and it was able to retain its triple-A rating. The anticipated, but dreaded downgrade of France’s debt, being EU’s #2 economy, will undoubtedly create a huge dilemma for the EU’s bailout plan.

As the downgrade of the European Union's #2 economy sinks in in the next couple of days, global perception of the European Union’s ability to bail itself out, leaves potential investors concerned. This of course translates to higher cost of borrowing. The entire bailout plan is in hinging on the EU’s ability to bounce back from this downgrade and swiftly move toward executing the bailout plan. The sooner the wheels begin turning toward resolving the issues, the better.

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K. Reilly
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Blue Chips in the Red: Kodak

In the digital world of imaging, the hardest hit in this sector, which should come as no surprise, was Kodak. The Wall Street Journal reported that Kodak may be filing for bankruptcy protection in the months to come. In the past three years, Kodak has incurred losses in 9 out of 12 quarters. For the 3rd quarter of 2011, Kodak's losses were estimated at $222 million, which had investors running for cover. Needless to say, their stock fell sharply last year. Although the company stock began the year trading at $3.00, Kodak's shares are presently fluctuating below .50 cents. Consequently, the New York Stock Exchange warned that they will move to delist Kodak if their stock price remains below $1 for over 6 months. Kodak is not quite in the "red" yet, but if the company continues operating at the same rate of quarterly losses they experienced in the third quarter of 2011, it is only a matter of time.

I remember purchasing stock in the company when I was about 18 years old, and I must have paid over $40 a share. I sold my Kodak shares when the price dipped to $23.00. That's when I realized that I really didn't have the stomach for the trading the market.

The Iconic Blue Chip, which had been a in the forefront of the imaging products and supplies for over 130 years, has lost its grip on the cutting edge. The once stellar company is struggling to reinvent itself in the new age of camera phones, desktop publishing, , and the digital transport, upload and storage of images. Let's face it, when was the last time you bought film, or dropped off film to be developed? The impact of the ever-changing technical environment couldn't be more evident, as Kodak's valuation has suffered an 80 percent loss in the past 52 weeks. Clearly, digital advancements, and steep foreign competition has taken its toll on Kodak, making them look more like a dinosaur than a ever. By June of 2011, the company's year-end target of $1.6 -to- $1.7 billion was revised to $1.3 - to- $1.4 billion, as a reflection of their reduced expectations. The third quarter earnings report was a dismal account of continued losses, shrinking their cash reserves to $862 million, from $957 million in the 2nd quarter. As it stands, Kodak is sitting on only 10% reserves, well below standard practice.

To tell the whole story, or at least put the current events in perspective, the eminent day of reckoning began nearly 12 years ago, as the tides started to shift away of processing, printing and "developing" photo images. Resisting the digital revolution, or buying time, Kodak began giving away Free Film with every film development pick-up. This was a good, albeit temporary strategy to insure repeat business. The disposable cameras was a wonderful product with a short life span,(no pun intended) but it did help to sustain revenues, and as reasonable amount of cash flow while the CEO and the his think-tank tried to come up with new "relevant" products and services. Alas, this is going to be a fight for survival with much at stake, and Kodak was seemingly not up to the challenge - or is it? Whatever the case, in the past decade, Kodak lost 95% of its value to the industry competition which bought new age, digital savvy products to the market.
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K. Reilly
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Europe's Deficit Deal Takes Shape: Uncertainty Lingers

The highly anticipated Euro-zone deal, which we thought would positively impact the market failed to do so. There was a knee-jerk reaction to the news with a slight up-tick in the DOW, which indicates bolstered confidence - but this was short lived. As it turned out, before the end of the trading day the Euro had fallen, along with a tripple digit drop in stocks. Uncertainty rippled through the markets creating a domino effect, that finally resulted in a rise in borrowing costs for Italy and Spain alike. Ultimately, it appears that investors were decidedly unimpressed with the Summit deal to control the Europe's fiscal crisis. Economists believe the market rally was deflated due a resurgence of uncertainty surrounding the bailout pact, as it did not include unlimited backstop for the Euro currency.

As the saying goes; "the devil is in the details". The Euro-zone deficit deal has been structured, but economists, investors and stakeholders know its only the beginning. According to Frances's President, Sarkozy, the legal parameters and compliance for the new accord to reinforce the bailout rules are expected to be worked out before Christmas. The longer it takes to put this put this chapter behind them, the more chance for erosion of confidence, currency, and credit rating.

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Sarkozy's New Challenge: Protecting France's Credit Rating

Given the fact that the European Union's recovery is riding on the full faith and credit of a select few of the strongest union members. Sarkozy ia facing yet another challenge as guardian of France’s credit rating. Particularly in light of fact that France is the primary guarantor for the bailout program.

Hope for an improved fiscal outlook for both Greece and Italy, allowed markets to exhale this month. This was fueled by the progress Greece made toward naming a new president, and the new bail-out plan. Many markets have already made back much of the losses over the past few months, but volatility continues to be a concern. Attention was temporarily transferred away from Greece, and the growing concern about Italy after S&P erroneously issued a warning that they may downgrade France’s rating. In an instant, the overly sensitive market reacted, resulting in higher bond yields for France’s debt, marking a 4 month high.

For the bailout to work, the euro-zone requires other triple -A nations to step up and increase their guarantees. The bailout fund is structured to hold a triple-A-rating, but this is based on the underlying strength of France’s credit rating. France is the second largest economy in the European Union, following German. However, as far as the resolution to the EU fiscal crisis, France is the blue-chip guarantor - representing the Union’s ability to navigate themselves out of the financial hole. Accordingly, a reduced rating France, will undoubtedly have an impact on the firepower of the fund.

Frances President, Sarkozy, has made it his mission to protect France’s credit rating. The Wall Street Journal reported that Sarkozy’s has made guarding their Triple-A credit rating a “battle ground for the coming presidential elections in the spring” Sarkozy unveiled, not one, but two austerity packages since late august in an effort to signal to investors that France can and will meet its deficit targets.

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Corzine's Blind Ambition: The Collapse of MF Global

MF Global is essentially in ICU, and nothing short of a miracle will save the company as we know it. Who was at the wheel when the company crashed and burned last week? Corzine. Corzine, former governor of New Jersey, who was once the head of Goldman Sachs, went back to his roots on Wall Street to head MF Global. As CEO of MF Global, Corzine, built the company to $41 billion business. It sounds like another Wall Street dream, but this success story, quickly turned into a nightmare, for the company and for its CEO.

The announcement came Thursday, November 3rd, that Corzine is stepping down as CEO on the heels of an investigation of the company’s unraveling. Their troubles started when the European crisis began to impact the company’s bottom line, since MF Global was heavily invested in European bonds.

MF Global is the first big financial company to tank at the hands of the Euro -crisis. The company’s Partners pulled back with increased concerns about their Euro bond exposure, which descended into a severe cash deficiency. MF Global’s investment in Spain, Italy and Portugal bonds had amassed to $6 billion in debt. The firm’s stock declined 66% last week when the company reported its worst quarterly losses ever. Meanwhile,the transatlantic continent’s gloomy future is hanging in balance, and sure to bring MF Global to its knees. The swift sell-off of its stock precipitated the company filing for bankruptcy. To put this horror story in perspective according to bankruptcydata.com, the MF Global bankruptcy filing is the 8th-biggest financial institution in the US, placing them over Chrysler, (in 2009), but smaller than Lehman Brothers.

It is beginning to appear that Corzine set out to redefine MF Global's Business Model, and aggressively redirect the company’s focus and trading objectives in an effort to create his own Goldman Sachs. He wanted to build an international empire, only he failed to consider the global economic mayhem, and particularly the crisis unfolding across the Atlantic, where Corzine wanted to heavily invest. The financial discord in Europe was no secret, so what was he thinking? A cocktail of insatiable greed and ambition tends to have a blinding effect on the soul.

Behind the scenes, the Wall Street Journal reported that MF Global was seeking investors or buyers to alleviate the cash crunch. But alas, there were no takers and unfortunately no alternatives emerged before the regulators’ deadline. The company was subsequently delisted. This is a classic case of an overly eager, unethical CEO with his own agenda. The level of ambition and arrogance was so steep, it apparently impaired his ability to lead with the company's best interest at heart. Meanwhile, nearly a thousand people will be out of work in a couple of weeks, just in time for Thanksgiving. The bright side is that many of the employees will continue with their lives and eventually find stability, but Corzine is finished - both politically and professionally.

Given the anti-Wall St. sentiment, I was not surprised to learn that Corzine declined a $12 million severance pay. No matter how you choose to spin this fact, his decision to walk away from millions of dollars he was entitled to, speaks volumes.


K. Reilly
The Cohn-Reilly Report

PM Papandreou: Biting the Hand that Feeds Him

The world collectively let out a sign of relieve when the news broke that an agreement was reached to resolve the faltering Greece economy. The Eurozone Finance Ministers gathered in Brussels to discuss the Greek debt problem, fully aware that the political and economic impact reaches well beyond the Eurozone. The US market responded to the news closing in positive territory after two days of three digit losses. We were barely able to process the news when word began to circulate about the seemingly ungrateful Prime Minister , had decided to conduct a referendum vote for the bailout proposal, and – to add insult-to-injury, the PM George Papandreou was contemplating leaving the Euro zone.

Just days away from defaulting on its debt, at a 160% of its GDP, you can only imagine the what was going through Sarkozy and Merkel’s heads. As was said to be Greece preparing to conduct a vote on the bail-out resolution, the dynamic duo (Sarkozy and Merkel) reacted to the new, and administered intense pressure for PM George Papandreou to make a swift decision as to Greece’s fate with the EU. Political pressure from around the world forced George Papandreou abandon the idea of conducting a bailout vote.

As details concerning the highly anticipated bailout program began to emerge, analysts and economist wasted no time weighing in. To attempt an overly simplified description, In order to dig Greece of its financial hole, the member Banks will also have to take on some of the losses, along with bond holders, who will be contacted as to how deep the losses will be. I will research the detail of the bailout plan what is said to aid Greece to reduce its growth-to-debt ratio from 140% to 120% by 2010.

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K. Reilly
The Cohn-Reilly Report

Job Stability & Economic Recovery May be a Long Way Away

The economic uncertainly is beginning to take root, and override any hope we may have had for a full economic recovery. Consumer confidence is at its lowest levels in two years, while corporations sit on their cash. The global financial discord is helping to fuel the fluctuating uncertainly. For the most part, the fiscal and monetary policies implemented to stimulate the economy have been lack luster. The high priced stimulus packages have fizzled out, amounting to inadequate results. What the average American doesn’t know is that these same programs would have worked famously under different economic circumstances.

The Financial crisis in the US and around the world, is far deeper than first realized. Neither the Bush Administration nor the Obama Administration were prepared for what we are facing today. The republicans can use the market fears and crawling economy for their political gain, but I dare say that NO Chief Executive in the white house, Democrat, or Republican, Black or White, would have gotten the U.S. economy moving any faster. What’s worse is that none of the world leaders appear to be willing to admit to their constituents or the world how bad finances are in their country. If the world leaders are not being completely transparent about the extent of their country’s fiscal troubles, we may never really know the depth of the financial crisis, or the optimal approach to repairing it.

Many of the economic indicators appear to be slightly off kilter, and the market seems disconnected to what's going on - particularly when you consider that corporations are reporting historically high profits for this year. All the while, Capitalism is struggling to save face, with an obscene number of fraud investigations and trading scandals coming out of the woodwork. It makes one wonder if capitalism and greed come as a two-for-one package deal, or if it's actually possible to have the presence of capitalism in a low percentage of fraud. The good news is we're not the only continent on the planet threatened with financial discord. The bad news is, we’re not the only continent on the planet threatened with financial discord. This is a complex, unprecedented situation we’re have here. In essence we have a global recession on steroids, so it’s going to take a combination of high octane, super powered fiscal and monetary programs to get the U.S. economy off life support.

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K. Reilly
The Cohn-Reilly Report

Boomerang Economics:the darkside of Globalization

In the past the effects a poor economy in one area, would impact other nearby regions or tri-state area in the case of the U.S.. Globalization, as a result of technological advancements, is a powerhouse game changer. We are no longer autonomous in our successes or failures as a nation. The U.S. financial fallout in of 2008 and 2009, sent trimmers across the Atlantic, as our economies are now more connected that ever. The financial Tsunami that followed the near collapse was powerful enough to shake the fiscal foundation of many other nations. Europe’s financial crisis began to surface in the Fall of 2010, but is now beginning show familiar signs of a near fiscal collapse for a number of its EU members. Our troubles certainly had an impact on the overseas markets, but we are not entirely to blame for the financial crisis which is quickly unraveling before us.

In a boomerang-like cycle, it is possible that the financial discord in Europe, will have a negative impact on the U.S. So much so, it is feared that this Boomerang effect may spur another recession. This was the concern of the IMF yesterday, as they discussed the importance of the EU tackling the debt crisis. If Europe fails to lasso the problem soon, there is a strong possibility that both regions will fall into a recession.

Who would have thought that boomerang economic would become one of the harsh side effects globalization.

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K. Reilly
The Cohn-Reilly Report

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U.S. Economy Stalls as Europe's Fiscal Crisis Worsens

It’s almost certain that the U.S. economy will continue to stagger through the 4th quarter. Budget and economic analysis provided to congress by the CBO (a bipartisan federal agency) supports the theory of continuing slow growth, and an unyielding jobless rate through 2012. I contend that the jury is still out were 2012 is concerned, as there are so many pending elements to the economy that leave room for reasonable doubt. For example, Obama’s jobs creation program, which offers tax cuts and other incentives to corporations has the potential to positively impact the economic picture for 2012. According to a WSJ article by Stacy Curtin, the results of austerity measures implemented in Greece are questionable and may prove to be in large part overated. Nevertheless, the fate of the EU’s financial crisis, has the potential to an impact on the US economy, negatively or positively. Being a generally optimistic person, I’m reluctant to say the idea of the U.S. slipping back into a recession is not out of the question. Meanwhile, Europe is not out of the woods either. In fact, the continent seems to be experiencing a deepening crisis.

The EU crisis has reached a new level, as the alarms are set off concerning the likelihood of Greece defaulting on their debt. Thankfully, for some inexplicable reason, the U.S. financial markets don't appear to be fluctuating as drastically in reaction to bad news from Europe. Nevertheless, the European Union's Fiscal discord is the primary focus of a meeting scheduled for this Friday, as EU Prime Ministers prepare to gather in Poland. Resolving Greece's financial crisis is undoubtedly at the top of the agenda, but the larger economies are also under heavy financial pressure. Angela Merkel, the Chancellor of Germany, took her message to the media in an attempt to diffuse the rising fears of Greece defaulting on its debt. In one radio interview, Merkel emphatically proclaimed that the EU was doing everything in its power to avoid a Greek default.

Echoing my opinion in previous articles concerning the financial crisis, Chancellor Merkel, also stated "We face a completely new challenge - one that has no historic precedent". Speaking of historical precedence, U.S. Treasury Secretary, Timothy Geithner is expected to attend the meeting with the EU Finance Ministers on Friday. This should prove very interesting, and serve to enhance our battered image.

Also, see Article citing Soros' views of the EU crisis in the Huffington Post.


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K. Reilly
The Cohn-Reilly Report

Corporations Hoard Cash, Await Signs of Stability

There was reported 1.9 trillion in corporate profits by the end of 2010, and hoarding of cash at record levels. This tells a story of corporate fear and uncertainly when you consider the back drop of a flat job creation report for the month of August, and a S&P downgrade of US debt. I strongly believe that the catalyst for the low hiring rate last month is the S&P downgrade. The S&P downgrade shifted the climate dramatically from hopeful to not sure. Employers seem to have been shaken by the uncertainty and elected to curb their enthusiasm about the Country’s economic future. This sentiment is echoed by Jeffrey Kleintop of LPL Financial, who was quotes in the Associated Press as saying the new job figures are likely skewed by the unusual events that may have made employers reluctant to add jobs in August.

Let’s clarify; there were definitely new jobs created in the month of August (I happen to know of two in particular), but unfortunately there were just as many jobs lost, yielding a net zero for the month. In about 4-6 weeks there will likely be an adjustment made on the August numbers for better or worse. Being of a a glass-half-full mindset myself, I believe the adjustment may prove to be slightly better than the net-zero reported on Friday before the Labor day weekend. Nevertheless, fear of the country dipping back into a recession is having a dramatic impact on the market.

Friday’s New jobs report was disappointing, leaving Investors and economists alike surprised. The expectation was that there would be approximately 93,000 new jobs added, but there was no indication that jobs growth would be completely and utterly flat.. The months of June and July were revised lower, so the overall jobs growth picture for the summer is looking more and more bleak as the U.S. economic drama unfolds.


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K Reilly
Cohn-Reilly Report

EU Financial Crisis: Exotic Financial Maneuvers Likely Cause

Debt deals eyed as foundation of the problems emerging from Europe. For too long, investors took the “don’t ask don’t tell” position with the European governments hard line bookkeeping and accounting, which was aimed at meeting their fiscal ceiling regulations. To circumvent the regs, many Countries across the Continent have used complex financial transactions. These "transactions" were not fully disclosed as to the size of their debts or deficits.

The members of the EU are required to comply with rules concerning debt levels, capped at 60% of their gross domestic product. The members are also required to abide by the strict mandate concerning their annual budget deficits, which should be no more than 3%. According to the Wall Street Journal, these restrictions explain why the Continent has the rich history of exotic financial maneuvers practiced by the EU members. The complex financial transactions were essentially used to camouflage borrowing over the past decade. Making matters worse is the fact that governments were not required to report their Country's military spending, which is not be included in debt-to-GDP ratio calculations. For example: in ‘2000 Greece reported that they spent the equivalent of $1.13 billion on their military, but later admitted that it was closer to 4 billion. Under pressure, Greece disclosed that they under-reported military spending between 1997 and 2003 by €8.7 billion (that's $11.4 billion USD). The European leaders deemed these practices acceptable during the time they were planning the currency union, but of course hindsight is 20/20. Thus the proliferation of Euro-zone countries in crisis is staggering.

Although the United States' financial troubles are not completely behind us, and our economic forecast is still a question mark, the worst appears to be over. I cannot say the same for the European Union, as it is difficult to determine were the bottom actually is.


K. Reilly
Cohn-Reilly Report

Recommended reading: Article by Geoffrey R D Underhill provides an Interesting perspective on Europes Financial Crisis

___________Comments

C. Nireth said...

Yeah, this Eurozone crisis is pretty gloomy, but it puts our troubles in perspective. Wow...I get it! This is a global crisis which seems to escape most people in the US - especially the republicans and the misguided teaparty, who are using the economy as a platform to discredit the democrats and Obama.

Katherine said...

You are exactly right. One of the reasons I think it's important to write about the financial concerns overseas is to broaden our perspective on what's going on domestically. There is certainly enough blame to go around, but for some reason the Obama administration and the democrats are unfairly targeted. We have had over a decade of out-of-control hedge funds, insider trading, portfolios with over-the-limit derivative/high risk securities, sub-prime loans, and ponzo schemes, rancid mortgage-back securities, Hide-and-seek accounting practices ....I could go on and on
Thanks for your coment




K. Reilly
Cohn-Reilly Report

Spain: To Big to Bailout?

This year has been a rude awakening for the European Union, with emergency bailouts for Greece, Ireland, as Belgium and Portugal await a similar fate. The debate is now focused on Spain; to bailout or not to bailout, that is the question. Ted Scott, Director of UK Strategies at F&C Investments, was reported as saying “Spain is too big to bailout”(CityWire, 2010). Now that’s a switch - in this country we’ve heard the phrase “Too big to fail” more often than we wanted to. So what are the factors that render Spain too far gone, or is it? Well for starters, Spain’s economy is the fourth largest in the Union, larger than Greece, Portugal and Ireland put together, representing 11.5 percent of the European Union’s GDP. It has the third largest deficit in the Union, estimated at over 400 billion Euros. which is significant. Increasing fears of instability is reflected in the upward spiraling interest rates investors have imposed on Spain's bonds. Unlike Ireland’s debt crisis, 50% of Spain’s debt is held by international investors, so although the impact of defaulting will send trimmers across the globe, the domestic investors will be more forgiving, and continue to purchase Spain’s bonds.

Surprisingly, the government of Spain believes that there will be no need for external assistance. Spain’s Prime Minister, Jose Luis Rodriguez Zapatero, warns international investors that they will lose money betting against his nation’s debt. To his credit, the Prime Minister has implemented aggressive austerity measures in an effort to avoid the need for a bailout, through tax hikes and spending cuts for this year and 2011. Unfortunately analysts are not as confident as the Jose Luis Rodriguez Zapatero, that these measures will be sufficient to ward off IMF intervention.

To stay afloat the government of Spain and its banks have to raise upwards of 300 billion euros. Given the recent Moody’s rating downgrade, prompting steep interest rate increases on Spain's bonds, many analyst believe it’s simply too late for Spain to successfully climb out of the hole. Defiant and independent, Spain is conducting a series of bond auctions, while counting on budget cuts and the continued domestic appetite for its bonds as a firewall against external intervention from the IMF. That sounds good, all tied up into a neat little financial bow, but is it realistic? Given Cohn-Reilly Report's "EU Financial Crisis" article addressing the European Union members' exotic accounting maneuvers to hide borrowing, it is hard to keep a positive outlook on Spain’s ability to emerge from this crisis without external financial help. I wont bet against Spain, but I'm not looking to purchase their bonds either. Nevertheless, I do hope the Prime Minster achieves his objective - against all odds

K. Reilly
Cohn-Reilly Report

___________Comments

sinaj norrab said...

It seem that the eurpoean union have their work cut out them. This is like waht we have been going through for the past two years. One thing after another, with the Bank and auto makers bailouts, followed by housing crisis and foreclosure fallout. it did not help that the finance fraud and scams seemed to be the icing on the cake. Gloabally, we are all in trouble. Is there any hope that 5 years from now everything will be okay?

Ireland Beats Spain to the Bailout Line

Ireland is the latest to lose its financial bearings in the European Union. This comes with distinction, as the government adamantly denied that they had any difficulty this past Summer. With their tail between their legs, the Irish Government is forced to accept the largest international bailout to date. Last Thursday was the first time the finance minister acknowledged needing help. It is widely believed that the sour loans lead to the huge financial losses that nearly toppled the Island.
Much needed help is on the way, amid fierce concerns for the impact it will have on the EU, and Spain in particular. The IMF is prepared to package over €110 billion Euros as bailout for Ireland. Where does that leave Spain? Spain has a greater need for the financial bailout than Ireland or Greece. Here is the dilemma, once the IMF bails out Ireland, the €350 billion Euros needed to salvage Spain’s debt and deficits will exceed what is available. There must be some way to avoid this train wreck. Perhaps the IMF could come up with an alternative; for instance; The bailout could be done on a drawdown schedule. The IMF could provide Ireland with bailout installments over time. This might give them a chance to help Spain, and work toward soliciting additional funds to meet Ireland's bailout installments that are due later in the payment schedule. Just a thought.

In the meantime, in anticipation of the Ireland bailout, Portugal and Spain’s bond yields have increased nearly 12 basis points. That is only the beginning. The list below serves as a reminder as to just how steep these bailouts are for the EU.

-Greece bailout: €110 billion Euro Greece bailout
-Ireland’s bailout: €113 billion Euros
-Spain Needs: €350-billion Euros

Portugal is reportedly the next in line for a bailout, while the IMF is looking at Belgium as another EU member in financial distress. Although, an official from one of the leading EU countries pointed out that Belgium’s debt is largely internal, so it's not at all in the same boat as Ireland or Spain. Belgium’s financial problems will not have as much of an impact on international investors.

The Euro has declined to a two-month low against the dollar, as crisis continues to unfold. I will be closely watching to see what solutions are put forth from the authorities at IMF, and how the EU will wiggles out of this one. America's economic stability is still at large, while economies around globe also struggle to climb out of the valley of a deep recession.

K. Reilly
Cohn-Reilly Report

Greece Recovery: 6-Months After Bailout

Greece’s recovery is likely going to be a long time coming. Last August the jobless rate jumped to 12.2% up 2% from July. With all the Prime Minister’s efforts to reduce the deficit, the government data illustrates slow progress. Reuters reportedly anticipates a contraction of Greece’s GDP by at least 5% over last year. As Greece is expected to report their 3rd quarter GDP on Friday, the Greek Finance Ministry warns that the Country's unemployment could reach 14.5% by next year.

Though a cloud still looms over Greece’s deficit, the Finance Ministry stated that their deficit has declined 30% since last year, which represents $23.8 billion in U.S. dollars, or €17 billion in Euros. This was achieved through drastic spending cuts. Admittedly, 30% off their debt is a substantial chunk off Greece’s deficit, but unfortunately it still came in below the 36.9% target. To compound the disappointment, the Finance Ministry's revenue projections were also thwarted as a result of rebellious tax evaders and weakening demand. As part of this Spring’s €110 billion bailout, agreement the government of Greece pledged to reduce the deficit by 5.5 of the GDP, which would bring the deficit down to 9.5% of the GDP, as opposed to the estimated 15% in 2009. Nevertheless the Prime Minister, George Papandreou confidently expressed that the deficit will be 5.5% lower by year’s end

At the moment the Greece’s quarterly economic hiccups have minimal impact on the European Union in the short-term, since their borrowing needs have been met by the bailout. The European Union will now have to shift it attention to financial problems mounting in Spain.

K. Reilly
The Cohn-Reilly Report

___________Comments


Erin Thak said...
From what I'm reading, there are so many more members of the European Union that are in need of Financial help that Spain may not be the next country to get the attention of the IMF. like the article