An excellent, plain spoken explanation of the problems with financial institutions. Worth a watch.-Lou

States are in BIG trouble. -Lou

California controller: State will run out of cash before April

SACRAMENTO — State Controller John Chiang issued a stern warning Friday about California’s cash reserves, telling legislative leaders and Gov. Arnold Schwarzenegger they must act on nearly $9 billion in budget cuts the governor is seeking by March — or the state will run out of cash to pay its bills.

Without making those cuts — which Chiang says will pump $1.3 billion into the state’s checking account — California would be broke by April 1, no fooling.

The state wouldn’t climb back to what’s considered a safe level of cash on hand, $2.5 billion, until later that month, when tax revenues are expected to begin flowing into Sacramento.

"While our current cash condition is marginally better than it was one year ago," Chiang wrote to leaders, "it is still precarious."

Even with the budget cuts, the state’s cash reserve would still be far below that cushion in March and April.

To that end, Chiang is calling for an additional $2 billion in cash-flow "solutions." Looking at previous cash crunches, that could mean some payments, like income tax refunds, would be delayed for a few weeks to keep the cushion intact.

"Call it overdraft insurance," said H.D. Palmer, spokesman for the state Finance Department. He stressed that officials are still huddling over specific solutions.

If the budget gridlock lingers all the way to July, then IOUs could come back into play.

And because many budget cuts require months of ramp-up to take effect, delaying action on a new budget could inflate the state’s overall $19.9 billion deficit by $2 billion, Palmer warned.

"Inaction ignores the projected cash shortfall which we face in less than 70 days," Chiang wrote. "Only you can prevent history from repeating this year."

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Although the financial media is crowing about how good the economy is, the reality is that most states, cities and towns are broke. Look for major municipal defaults as the year progresses. There is a concerted effort to convince the people that things are getting better when in reality things are getting worse, much worse. Do not believe everything you hear from the media and politicians, it’s propaganda that would make Goebbels blush.-Lou

Pennsylvania Capital Should Weigh Bankruptcy, Controller Says

Jan. 26 (Bloomberg) — Harrisburg, Pennsylvania, the capital of the sixth-largest U.S. state by population, should skip a $2.2 million debt service payment due Feb. 1 and consider bankruptcy, City Controller Dan Miller said.

Harrisburg faces $68 million in payments this year in connection with a waste-to-energy incinerator and should weigh Chapter 9 protection from creditors or state oversight through a program known as Act 47, Miller said today. Chapter 9 bankruptcy allows municipalities to reorganize rather than liquidate.

The alternatives are to sell assets such as an historic downtown market; an island in the Susquehanna River that includes the city’s minor-league baseball stadium; and the city’s parking, sewer and water systems, according to a preliminary 2010 budget and an emergency financial plan submitted yesterday.

“What I’m suggesting is we stop paying the debt service until we have a plan or we decide which way to go, in bankruptcy or Act 47,” Miller, a former city council member who became controller this month, said in a telephone interview. “I think it could save our assets instead of selling them.”

Mayor Linda Thompson, who unseated 18-year incumbent Mayor Stephen Reed in a Democratic party primary last year to lead the city of 47,000, didn’t return a call to her office for comment.

Thompson is scheduled to present her budget proposal to the city council tonight. The council has until Feb. 15 to adopt a final budget.

Asset Sales, Fees

Management Partners Inc. of Cincinnati, a consulting firm hired to study the city’s finances, recommended selling assets, raising city inspection and recreation fees, and reopening city labor contracts.

Harrisburg owes a total of $68 million in payments it guaranteed on bonds issued by the Harrisburg Authority for the incinerator and on a $35 million working capital loan for the project.

The city skipped more than $3.5 million in debt service and swap payments last year, prompting draws on reserves and back-up payments by Dauphin County, where Harrisburg is located, which has sued the city to recover its payments.

Harrisburg’s debt was downgraded to high-yield, high-risk junk status by Moody’s Investors Service in October. Moody’s lowered the city’s rating to Ba2 from Baa2, the second-lowest investment grade.

The city’s credit rating could be lowered further after an analysis of the steps taken to address future payments on debt and two interest-rate swaps that are costing about $800,000 a year, Moody’s said in an Oct. 19 report.

LINK

The chart above is the S&P 500 index. It is clear that the stock market is breaking down and looks like it wants to go much lower. Even with yesterday’s positive news on 4th quarter GDP growth, the market reversed from a 100 point gain to over a 50 point loss. This type of action in the wake of good news is very negative. I have forecasted a test of the March 2009 lows (6500 Dow 666 S&P 500) later this year, it looks like to decline has started. Be very careful if you are heavily invested in the stock market.-Lou

Six more banks were closed Friday night by the FDIC bringing the year total to 15. The pace of closures are begging to accelerate. This week FDIC Chairwoman, Sheila Bair said that there will be more closures in 2010 than 2009 when there were 140 banks seized. This weeks closures are estimated to cost the FDIC insurance fund $1.86 billion. At this pace the fund will be broke again by May. Please stay within FDIC deposit limits at your bank.-Lou

Five banks fail, bringing U.S. tally for 2010 to 14

SAN FRANCISCO (MarketWatch) — The credit crunch continued to take its toll on the banking industry as regulators closed five U.S. banks, bringing the total number of failures for the year so far to 14.

The closures announced late Friday will cost federal deposit insurance fund some $1.8 billion, regulators said.

Immokalee, Fla.-based Florida Community Bank, with $795.5 million in deposits as of Sept. 30, was closed by regulators. Its failure will cost the deposit insurance fund $352.6 million, the Federal Deposit Insurance Corp. said.

Carrollton, Ga., based First National Bank of Georgia, which had $757.9 million in deposits as of Sept. 30, was also closed. Its failure will cost the deposit insurance fund $260.4 million.

Marshall Bank of Hallock, Minn., with $54.7 million in deposits as of Sept. 30, became the 12th bank failure of the year. That will cost the deposit insurance fund $4.1 million, the FDIC said.

Cornelia, Ga.-based Community Bank & Trust became the 13th failure in the U.S. this year, and the second in Georgia. It had $1.11 billion in deposits as of Sept. 30, and its failure will cost the federal deposit insurance fund $354.5 million, the FDIC said.

Meanwhile, Los Angeles-based First Regional Bank was the 14th failure of 2010. It had $1.87 billion in deposits as of Sept. 30, and regulators said its failure will cost the federal deposit insurance fund $825.5 million.

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This is a very disturbing article. This is what happens when your country is hugely in debt to countries that are your enemies. I have always said that the trade deficit with China was a national security issue and it surely is. They can dump our bonds  causing the dollar to crash, interest rates to soar and put us into a hyper inflationary depression.-Lou

Paulson Says Russia Urged China to Dump Fannie, Freddie Bonds

Jan. 29 (Bloomberg) — Russia urged China to dump its Fannie Mae and Freddie Mac bonds in 2008 in a bid to force a bailout of the largest U.S. mortgage-finance companies, former Treasury Secretary Henry Paulson said.

Paulson learned of the “disruptive scheme” while attending the Beijing Summer Olympics, according to his memoir, “On The Brink.”

The Russians made a “top-level approach” to the Chinese “that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies,” Paulson said, referring to the acronym for government sponsored entities. The Chinese declined, he said.

Russia’s five-day war with U.S. ally Georgia started on Aug. 8, the same day as the opening ceremonies of the Beijing Games. Prime Minister Vladimir Putin told U.S. President George W. Bush during those ceremonies that “war has started,” according to Dmitry Peskov, Putin’s spokesman.

“The report was deeply troubling — heavy selling could create a sudden loss of confidence in the GSEs and shake the capital markets,” Paulson wrote. “I waited till I was back home and in a secure environment to inform the president.”

Russia never approached China about dumping U.S. bonds, Peskov said today. “This is not the case,” he said by phone.

Russia sold all of its Fannie and Freddie debt in 2008, after holding $65.6 billion of the notes at the start of that year, according to central bank data. Fannie and Freddie were seized by regulators on Sept. 6, 2008, amid the worst U.S. housing slump since the Great Depression.

Putin ‘Combative, Fun’

Paulson said he was surprised not to have been asked about the Fannie and Freddie bonds during a trip to Moscow in June. “I was soon to learn, though, that the Russians had been doing a lot of thinking about our GSE securities,” he said of his meeting with Dmitry Medvedev, who succeeded Putin in the Kremlin the previous month.

Putin kept Paulson waiting before their meeting at the government’s headquarters and made the conversation “fun” by being “direct and a bit combative,” Paulson said. “He never took offence and we could spar back and forth,” he said.

Paulson’s book is scheduled to be released Feb. 1, though Bloomberg News bought a copy at a New York bookstore.

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As expected, the economy grew nicely in the 4th quarter as inventory depletion resulted in increased factory production. I expect that this number will be revised lower to around 4%.  First quarter 2010 will most likely show a small gain before GDP turns negative again later this year.-Lou

GDP surges 5.7% on inventory slowdown

Fastest growth in 6 years, but spending, investment still weak

WASHINGTON (MarketWatch) — Coming out of the worst recession in generations, the U.S. economy grew at the fastest pace in six years during the fourth quarter of 2009, even as consumer spending and business investment remained tepid, according to data released Friday by the Commerce Department.

Real gross domestic product increased at a 5.7% seasonally-adjusted annual rate in the final three months of the year, the best quarterly growth since late 2003, the government estimated. The economy grew 2.2% in the third quarter.

The 5.7% increase was in line with the 5.4% gain expected by economists surveyed by MarketWatch. The figures are subject to large revisions in coming months. Read our complete economic calendar and consensus forecast.

Even with healthy growth in the second half of the year, the economy shrank 2.4% in 2009, the worst year for GDP since the 10.9% drop in 1946, when the United States geared back to a peacetime economy. Business investment fell the most since 1942. Read the full report on the government’s website.

In the fourth quarter of 2009, about two-thirds of the growth came via the swing in inventories. Excluding the change in inventories, final sales increased at a 2.2% annual rate, a signal that the economy remained weak despite stellar topline numbers.

Consumer spending increased at a 2% annual rate, down from 2.9% in the third quarter when the government’s so-called cash-for-clunkers program boosted auto sales.

Business investment grew at a 2.9% annual rate, the first increase since the spring of 2008. Investments in equipment and software increased at a 13.3% annual rate, but investments in structures plunged at a 15.4% pace.

Investments in homes increased at a 5.7% pace, the second straight increase after 14 consecutive declines.

Foreign trade added to growth as well, with exports of goods increasing at a 28.1% annual rate, the best in 30 years.

Government spending fell at a 0.2% annual rate.

Most economists believe growth will slow in 2010 to about a 3% pace as the temporary boost from inventories wanes. They expect modest growth in consumer spending and business investment as consumers struggle against high unemployment, flat incomes and the need to pay down debts.

LINK

When is a ceiling not a ceiling?  When it’s the national debt ceiling. Our debt will go higher and higher leading us into the wonderful world of hyper-inflation.-Lou

Senate Democrats Vote to Let Government Go Deeper Into Debt

Washington (AP) – The Senate voted Thursday to allow the government to go a whopping $1.9 trillion deeper in debt, offering a vivid election-year reminder that the government has to borrow 40 cents of every dollar it spends.
 
The measure would put the government on track for a national debt of $14.3 trillion — more than $45,000 for every man, woman and child in the United States. And the debt is increasingly held by foreign nations such as China.
 
The budget for the current year is about $3.5 trillion and the deficit will probably match last year’s $1.4 trillion. The government would have to borrow to cover that $1.4 trillion.
 
The measure passed 60-39 under ground rules insisted upon by Republicans that required 60 votes to pass it. Democrats and allied independents control 60 seats — for now — and were only able to win the vote because Republican Sen.-elect Scott Brown of Massachusetts has yet to be seated.
 
While Thursday’s vote went smoothly, it came after weeks of difficult negotiations between the White House and both House and Senate Democrats.
 
Moderate House "Blue Dog" Democrats came away with a tough new "pay-as-you-go" budget law to make it harder to run up the deficit with new tax cuts or federal benefit programs. Senate Democrats won a promise from President Barack Obama to name a bipartisan task force to come up with a plan for dealing with the spiraling debt — but one whose recommendations are unlikely to ever see an up-or-down vote.
 
Meanwhile, Obama won symbolic support for his proposal for a partial domestic spending freeze.
 
A 56-strong majority of senators supported a plan, by Sens. Jeff Sessions, R-Ala., and Claire McCaskill, D-Mo., that was strikingly similar to Obama’s freeze on domestic programs annually funded by Congress. It failed because 60 votes were required, but the tally serves as a positive sign that even though there’s significant opposition from Democratic liberals, Obama’s domestic freeze is likely to be adopted when Congress debates its budget.
 
The debt limit increase comes as a relief to Democrats worried about having to cast multiple, bite-sized increases in the debt in the run-up to the critical midterm elections this fall. Instead, the new limit would allow majority Democrats to avoid another vote until after the midterm elections this fall.
 
The House is slated to vote on the debt legislation next week to send it to Obama to be signed into law. The new pay-as-you-go rules, approved by the Thursday on a 60-40 vote, should help House leaders round up the votes, despite the political anxiety caused by Brown’s stunning win in heavily-Democratic Massachusetts last week.
 
The new budget rules are designed to curb the spiraling deficit by requiring spending increases or tax cuts to be "paid for" with cuts to other programs or tax increases. If the rules are broken, the White House budget office would force automatic cuts to programs like Medicare, farm subsidies and veterans’ pensions.
 
The idea is that the threat of cuts to such popular programs would be enough to block Congress’ free-spending ways, but skeptics say lawmakers can find ways around them fairly easily. Weaker pay-as-you-go rules are in place already, but have been routinely waived.
 
The new rules would have the force of law and would make it harder to extend permanently some tax cuts — especially on large estates and middle-class tax filers threatened by the alternative minimum tax — that expire at the end of this year.
 
Lawmakers would be able to extend President Bush’s middle-class tax cuts past their expiration a year from now even though they would add another $1.4 trillion to the debt over the next decade. But the top rate for individuals making more than $200,000 and couples earning over $250,000 would rise from 35 percent to 39.6 percent.
 
More…

A sad state of affairs. This should not be happening in America.-Lou

U.S. households struggle to afford food: survey

WASHINGTON (Reuters) – Nearly one in five U.S. households ran out of money to buy enough food at least once during 2009, said an antihunger group on Tuesday, urging more federal action to help Americans get enough to eat.LINK

"There are no hunger-free areas of America," said Jim Weill of the Food Research and Action Center. Weill said he hoped President Barack Obama would exempt public nutrition programs from a proposed three-year freeze on domestic spending.

Obama has a goal to end childhood hunger by 2015. He backed a $1 billion a year increase in school lunch and other child nutrition programs a year ago.

Nationwide polling found 18.2 percent of households reported "food hardship" — lacking money to buy enough food — in 2009, according to the group. That is higher than the government’s "food insecurity" rating of 14.6 percent of households, or 49 million people, for 2008.

Households with children had a "food hardship" rate of 24.1 percent for 2009 compared with 14.9 percent among households without children. Twenty states had rates of 20 percent or higher. Seven Southern states led the list.

The figures were based on responses to the question, "Have there been times in the past 12 months when you did not have enough money to buy the food that you or your family needed?" The question is similar to one asked by the Census Bureau in collecting data for the annual food-insecurity report.